CREDIT TRANSACTIONS
PreMidterm Reviewer
CREDIT TRANSACTIONS - all transactions involving the
purchase or loan of goods, services, or money in the present with a
promise to pay or deliver in the future.
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.
Contracts of security are of 2 Types:
a. Secured transaction / contracts of real security
= those supported by a collateral or encumbrance of property
b. Unsecured transactions / contracts of personal security
= The fulfillment of which by the principal debtor is secured or
supported only by a promise to pay or the personal commitment of
another such as a gurantor or surety
I. BAILMENT - the DELIVERY OF PROPERTY of one person to
another IN TRUST FOR A SPECIFIC PURPOSE, with a
contract, express or implied, that the trust shall be faithfully
executed and the PROPERTY RETURNED OR DULY
ACCOUNTED for when the special purpose is accomplished or
kept until the bailor reclaims it; comes from a French word
“bailer”, which means to deliver
Consideration or cause in bailment of loan:
Insofar as the borrower is concerned: the cause is the acquisition of
the thing
Insofar as the lender is concerned: the right to require the return of
the same thing or its equivalent.
II. PARTIES
Bailor (Comodatario) – the GIVER; the party who delivers the
possession or custody of the thing bailed.
Bailee (Comodante) – the RECIPIENT; the party who receives
the possession or custody of the thing thus delivered.
III.EXAMPLES
CONTRACTUAL BAILMENT
1. Those for the Sole Benefit of the Bailor
Gratuitous deposit and Mandatum
2. Those for the Sole Benefit of the Bailee
Commodatum or Simple Loan (Mutuum)
3. Those for the Benefit of Both Parties
Deposit for Compensation; Involuntary Deposit; Bailments
for Hire
BAILMENT FOR HIRE
1. Hire of Things (location rei) - goods are delivered for the
TEMPORARY USE of the hirer.
2. Hire of Service (locatio operis faciendi) – goods are
delivered FOR SOME WORK OR LABOR UPON IT by the
bailee
3. Hire for Carriage of Goods (locatio operis mercium
vehendarum) – 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) – goods are delivered
FOR STORAGE
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
1 Book
II – LLB, EH405, USC – College of Law
Art. 1933. By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same
for a certain time and return it, in which case the
contract is called a commodatum; or money or
other consumable thing, upon the condition that
the same amount of the same kind and quality
shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a
stipulation to pay interest.
In commodatum the bailor retains the ownership
of the thing loaned, while in simple loan,
ownership passes to the borrower. (1740a)
Art. 1934. An accepted promise to deliver
something by way of commodatum or simple
loan is binding upon parties, but
the commodatum  or simple loan itself shall not
be perfected until the delivery of the object of
the contract. (n) 
I. LOAN – Art. 1933
II. KINDS
a. 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;
b. Mutuum – where the lender delivers to the borrower
MONEY OR OTHER CONSUMABLE THING upon the
condition that the latter shall pay the same AMOUNT OF
THE SAME KIND AND QUALITY.
*Consumable – when it is consumed when used in the manner
appropriate to its purpose or nature.
III. CHARACTERISTICS
a. Real - a loan is perfected by DELIVERY of the thing
loaned.
b. Unilateral – a loan produces OBLIGATIONS ONLY FOR
THE BORROWER. Obligations of the lender are either
incidental to ownership or consequences of the borrower’s
rights and duties.
Exception: Consensual contracts (1934)– contract is constituted by
mere consent of both parties; delivery is demandable but not based on
the real contract of loan; i.e. consensual contract to constitute a loan
in the future
However, there is a need for delivery: To effect either a commodatum
or muttum,
= Delivery, either real or constructive, is essential. This is so because
unless there is delivery, the borrower in commodatum cannot
exercise due diligence over the thing loaned.
Consent of the parties: The borrower and the lender must of course
consent either personally or through an authorized agent, as in every
obligation founded upon a contract. However, the necessary
acceptance need not be actual but may be implied from
circumstances.
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Consensual contract of future loans: Aside from the real contracts of (1) The death of either the bailor or the bailee
commodatum and loan, there can also be a consensual contract extinguishes the contract;
created by an accepted promise to deliver something by way of (2) The bailee can neither lend nor lease the
commodatum or simple loan, object of the contract to a third person.

Ex. . A promised to lend 1,000 to B. The promise was accepted by B. However, the members of the bailee's household
This contract (consensual) is already binding upon the parties so that may make use of the thing loaned, unless there
if A does not fulfill his promise, B has the right to demand is a stipulation to the contrary, or unless the
compliance thereof. But note here that the real contract of loan does nature of the thing forbids such use. (n)
not yet exist. Art. 1940. A stipulation that the bailee may make
use of the fruits of the thing loaned is valid.
IV. DISTINCTIONS
I. CONTRACT OF COMMODATUM
COMMODATUM MUTUUM A. CONCEPT
Character Essentially gratuitous Naturally gratuitous a. CASES
Object Non-fungible object (but Object is money or 1. Commodatum is Essentially Gratuitous
may be consumable) fungible thing REPUBLIC V BALAGTAS
Purpose Transfer its use Transfer its ownership QUICK FACTS: Bagtas borrowed 3 bulls from the Bureau of
Effect Restoration of the very Restoration of an equal Animal Industry for 1 year with a breeding fee of 10% of the book
thing loaned quantity and quality value. After the expiration of the term, he requested for a renewal but
(equivalent amount) only for 1 was granted. He then offered to buy all 3 at a lower price
Risk On the lender (as owner) On the borrower (as but was denied. He was then asked to return all 3 bulls. 2 of the bulls
debtor of a generic thing) were returned but 1 was killed by a Huk raid.
Personal in character Not personal in character ISSUE: W.O.N. Bagtas is liable for the loss of the bull.
Referred to as loan for Referred to as loan for HELD: The appellant contends that the Sahiniwal bull was
use or temporary consumption accidentally killed during a raid by the Huk in November 1953 upon
possession the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Duration May be claimed before May not be claimed until Cagayan, where the animal was kept, and that as such death was due
the end of the term if the term expires or is to force majeure she is relieved from the duty of returning the bull or
urgently needed forfeited paying its value to the appellee. The contention is without merit. The
loan by the appellee to the late defendant Jose V. Bagtas of the three
Fungible: those that can be substituted and those that cannot be used bulls for breeding purposes for a period of one year from 8 May 1948
without being consumed; if the intention is to allow a substitution of to 7 May 1949, later on renewed for another year as regards one bull,
the thing given was subject to the payment by the borrower of breeding fee of 10%
of the book value of the bulls. The appellant contends that the
contract was commodatum and that, for that reason, as the appellee
Non-fungible: if the intention is to compel a return of the identical retained ownership or title to the bull it should suffer its loss due
thing given to force majeure. A contract ofcommodatum is essentially
Consumable: a movable which cannot be used in a manner gratuitous.1 If the breeding fee be considered a compensation, then
appropriate to its nature without its being consumed, i.e. gasoline the contract would be a lease of the bull. Under article 1671 of the
Non-consumable: a movable which can be used in a manner Civil Code the lessee would be subject to the responsibilities of a
appropriate to its nature without its being consumed, i.e. a book possessor in bad faith, because she had continued possession of the
Art. 1935. The bailee in commodatum acquires bull after the expiry of the contract. And even if the contract
the used of the thing loaned but not its fruits; if be commodatum, still the appellant is liable, because article 1942 of
any compensation is to be paid by him who the Civil Code provides that a bailee in a contract of commodatum —
acquires the use, the contract ceases to be . . . is liable for loss of the things, even if it should be through a
fortuitous event:
a commodatum. (1941a)
(2) If he keeps it longer than the period stipulated . . .
Art. 1936. Consumable goods may be the subject (3) If the thing loaned has been delivered with appraisal of its
of commodatum if the purpose of the contract is value, unless there is a stipulation exempting the bailee from
not the consumption of the object, as when it is responsibility in case of a fortuitous event;
merely for exhibition. (n) The original period of the loan was from 8 May 1948 to 7 May 1949.
The loan of one bull was renewed for another period of one year to
Art. 1937. Movable or immovable property may
end on 8 May 1950. But the appellant kept and used the bull until
be the object of commodatum. (n)
November 1953 when during a Huk raid it was killed by stray bullets.
Art. 1938. The bailor in commodatum need not be Furthermore, when lent and delivered to the deceased husband of the
the owner of the thing loaned. (n) appellant the bulls had each an appraised book value, to with: the
Art. 1939. Commodatum is purely personal in Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
P744.46. It was not stipulated that in case of loss of the bull due to
character. Consequently:
fortuitous event the late husband of the appellant would be exempt
from liability.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
2 Book
II – LLB, EH405, USC – College of Law
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2. Commodatum is for a Certain Period
MINA V PASCUAL
QUICK FACTS: Francisco Fontanilla acquired a lot. He allowed his
brother Andres to construct on 6/7 of ½ of the lot a warehouse.
The heirs of Andres want to sell the warehouse along with the lot
where it stands. The heirs of Francisco oppose the sale on the ground
that there exists only a commodatum and asked the lower court to
decide on the issue of ownership over the lot.
ISSUE: W.O.N. the contract was a commodatum.
HELD: Upon the premise of these facts, or even merely upon that of
the first of them, the sentencing of the defendants to deliver the lot to
the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the
nullity of the sale of the lot, made in the present case.
          The defendants do not hold lawful possession of the lot in
question.1awphil.net
          But, although both litigating parties may have agreed in their
idea of the commodatum, on account of its not being, as indeed it is
not, a question of fact but of law, yet that denomination given by
them to the use of the lot granted by Francisco Fontanilla to his
brother, Andres Fontanilla, is not acceptable. Contracts are not to be
interpreted in conformity with the name that the parties thereto agree
to give them, but must be construed, duly considering their
constitutive elements, as they are defined and denominated by law.
          By the contract of loan, one of the parties delivers to the other,
either anything not perishable, in order that the latter may use it
during the certain period and return it to the former, in which case it
is called commodatum . . . (art. 1740, Civil Code).
          It is, therefore, an essential feature of the commodatum that the
use of the thing belonging to another shall for a certain period.
Francisco Fontanilla did not fix any definite period or time during
which Andres Fontanilla could have the use of the lot whereon the
latter was to erect a stone warehouse of considerable value, and so it
is that for the past thirty years of the lot has been used by both
Andres and his successors in interest. The present contention of the
plaintiffs that Cu Joco, now in possession of the lot, should pay rent
for it at the rate of P5 a month, would destroy the theory of the
commodatum sustained by them, since, according to the second
paragraph of the aforecited article 1740, "commodatum is essentially
gratuitous," and, if what the plaintiffs themselves aver on page 7 of
their brief is to be believed, it never entered Francisco's mind to limit
the period during which his brother Andres was to have the use of the
lot, because he expected that the warehouse would eventually fall
into the hands of his son, Fructuoso Fontanilla, called the adopted son
of Andres, which did not come to pass for the reason that Fructuoso
died before his uncle Andres. With that expectation in view, it
appears more likely that Francisco intended to allow his brother
Andres a surface right; but this right supposes the payment of an
annual rent, and Andres had the gratuitous use of the lot.
          Hence, as the facts aforestated only show that a building was
erected on another's ground, the question should be decided in
accordance with the statutes that, thirty years ago, governed
accessions to real estate, and which were Laws 41 and 42, title 28, of
the third Partida, nearly identical with the provisions of articles 361
and 362 of the Civil Code. So, then, pursuant to article 361, the
owner of the land on which a building is erected in good faith has a
right to appropriate such edifice to himself, after payment of the
indemnity prescribed in articles 453 and 454, or to oblige the builder
to pay him the value of the land. Such, and no other, is the right to
which the plaintiff are entitled.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
3 Book
II – LLB, EH405, USC – College of Law
          For the foregoing reasons, it is only necessary to annul the sale
of the said lot which was made by Ruperta Pascual, in representation
of her minor children, to Cu Joco, and to maintain the latter in the use
of the lot until the plaintiffs shall choose one or the other of the two
rights granted them by article 361 of the Civil Code.1awphil.net
          The judgment appealed from is reversed and the sale of the lot
in question is held to be null and void and of no force or effect.
3. Effect of Adverse Possession for 11 Years
CATHOLIC VICAR V CA
QUICK FACTS: Catholic Vicar tried to register parcels of land to
its name. Respondents opposed the registration claiming ownership
of the land. Catholic Vicar claims that it has already satisfied the
required period of adverse possession to have the land registered
under its name.
ISSUE: W.O.N. the land can be registered under the name of
Catholic Vicar.
HELD: xxx Petitioner was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring
the properties in its name for taxation purposes. When petitioner
applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary
acquisitive prescription requires possession for ten years, but always
with just title. Extraordinary acquisitive prescription requires 30
years. 4
xxx xxx xxx
The Court of Appeals found that petitioner did not meet the
requirement of 30 years possession for acquisitive prescription over
Lots 2 and 3. Neither did it satisfy the requirement of 10 years
possession for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not believe the findings
of the trial court that Lot 2 was acquired from Juan Valdez by
purchase and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned
by Valdez and Octaviano. Both Valdez and Octaviano had Free
Patent Application for those lots since 1906. The predecessors of
private respondents, not petitioner Vicar, were in possession of the
questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which
are not in question, but not Lots 2 and 3, because the buildings
standing thereon were only constructed after liberation in 1945.
Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in
1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the
Bishop but said Bishop was appointed only in 1947, the church was
constructed only in 1951 and the new convent only 2 years before the
trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the
parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and
3 were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house
was borrowed by petitioner Vicar after the church and the convent
were destroyed. They never asked for the return of the house, but
when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to
return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in
trust the property subject matter of commodatum. The adverse claim
of petitioner came only in 1951 when it declared the lots for taxation
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purposes. The action of petitioner Vicar by such adverse claim could
not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and
private respondents were possessors under claim of ownership in
good faith from 1906; that petitioner Vicar was only a bailee
in commodatum; and that the adverse claim and repudiation of trust
came only in 1951.
4. Effect of Suspension of Possessory Rights for More
than 50 Years
REPUBLIC V CA
QUICK FACTS: Baloy had a possessory information title for the
land along with tax declarations. The land was used as a reservation
but has now been abandoned. He seeks to register it under his name.
However, the republic opposes it because it claims that the land is
now public land having been made part of a US Naval Reservation
and that Baloy was given under the law a period within which to file
his application and failing to do so within such time, he is now
barred.
ISSUE: W.O.N. the land is public land and registrable?
HELD: Clearly under said provisions, private land could be deemed
to have become public land only by virtue of a judicial declaration
after due notice and hearing. It runs contrary therefore to the
contention of petitioners that failure to present claims set forth under
Sec. 2 of Act 627 made the land ipso facto public without any deed of
judicial pronouncement.
xxx xxx xxx
The finding of respondent court that during the interim of 57 years
from November 26, 1902 to December 17, 1959 (when the U.S. Navy
possessed the area) the possessory rights of Baloy or heirs were
merely suspended and not lost by prescription, is supported by
Exhibit "U," a communication or letter No. 1108-63, dated June 24,
1963, which contains an official statement of the position of the
Republic of the Philippines with regard to the status of the land in
question. Said letter recognizes the fact that Domingo Baloy and/or
his heirs have been in continuous possession of said land since 1894
as attested by an "Informacion Possessoria" Title, which was granted
by the Spanish Government. Hence, the disputed property is private
land and this possession was interrupted only by the occupation of
the land by the U.S. Navy in 1945 for recreational purposes. The U.S.
Navy eventually abandoned the premises. The heirs of the late
Domingo P. Baloy, are now in actual possession, and this has been so
since the abandonment by the U.S. Navy. A new recreation area is
now being used by the U.S. Navy personnel and this place is remote
from the land in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of
owner. It partakes of the character of acommodatum. It cannot
therefore militate against the title of Domingo Baloy and his
successors-in-interest. One's ownership of a thing may be lost by
prescription by reason of another's possession if such possession be
under claim of ownership, not where the possession is only intended
to be transient, as in the case of the U.S. Navy's occupation of the
land concerned, in which case the owner is not divested of his title,
although it cannot be exercised in the meantime.
b. KINDS
1. Ordinary commodatum – the possession of the bailee is
more secured for he has the right to retain the thing loaned
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
4 Book
II – LLB, EH405, USC – College of Law
until the expiration of the period agreed upon, or the
accomplishment of the use for which the commodatum has
been constituted.
2. Precarium – a kind of commodatum where the bailor may
demand the thing at will. It has been defined as a “contract
by which the owner of a thing, at the request of another
person, gives the latter the thing for use as long as the
owner shall please; presumed that the 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.
Cases:
i. If Neither the Duration of the Contract or the
Use of the Thing is Stipulated
QUINTOS V BECK
QUICK FACTS: Quintos has a house in Del Pilar St. which she
rented out to Beck. She allowed Beck to use certain furniture with the
agreement that the latter would return/deliver them to her upon
demand. After a few months, the house was sold by Quintos to the
Lopezes. They gave Beck 60 days to vacate. QUiintos asked for the
furniture but Beck did not deliver. He instead told Quintos to call for
them, putting them at her disposal. Upon the expiration of the term,
Beck deposited the furniture to the sheriff.
ISSUE: W.O.N. Quintos was correct in not delivering the furniture
and liable for the expenses of the deposit to the sheriff.
HELD: The contract entered into between the parties is one
of commadatum, 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 latters demand (clause 7
of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the
Civil Code). 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 eletric lamps. The provisions of article 1169
of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to
get the furniture when they were offered to her.
          As the defendant had voluntarily undertaken to return all the
furniture to the plaintiff, upon the latter's demand, the Court could not
legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. 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.
ii. If the Use of the Thing is Merely Stipulated
CATHOLIC VICAR V CA
SEE PREVIOUS
C. PACTUM DE COMMODANDO
An accepted promise to deliver something by way of
commodatum.
It is valid but no commodatum is perfected until
delivery.
B. REQUISITES
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a)Capacity - no special capacity required; need not be the owner of
the object of commodatum
b)Object – non fungible (can be used without being consumed)
c. Consideration – contract must be gratuitous- an act of liberality
C. CHARACTERISTICS
1. Real (because perfected by delivery)
2. Principal (because it can stand alone by itself; does not depend on
the existence and validity of another contract as differentiated from
an accessory contract such as pledge)
3. Gratuitous (otherwise, contract is one of lease)
4. Personal in nature (because of the trust; only the bailee can use
the object of the contract and members of his family. However,
members of his family cannot use if the contract expressly so provide
and the nature of the thing prohibits such use, such as laptop with a
confidential information in work-related activites)
Bailor need not be the owner= Reason – the contract of
commodatum does not transfer ownership. All that is required is that
the bailor has the right to the use of the property which he is lending,
and that he be allowed to alienate this right to use. Hence, in lease for
example, a lessee may become a sub-lessor, unless he has been
expressly prohibited to do so in the contract of lease.
Personal nature of commodatum: The NCC considers
commodatum as purely personal and this constitutes an exception to
the rule that all rights acquired by virtue of an obligation are
transmissible.
Does bailee have a right to use the fruits? As a rule, the bailee is
not entitled to the fruits, otherwise the contract may be one of
usufruct. It should be noted that the right to use is distinct from the
right to enjoy the fruits, since under the law fruits should as a rule
pertain to the owner of the thing producing the fruits. However, to
stipulate that the bailee makes use of the fruits would not destroy the
essence of a commodatum, for liberality is still the actual cause or
consideration of the contract.
OBLIGATIONS OF THE BAILEE:
Art. 1941. The bailee is obliged to pay for the
ordinary expenses for the use and preservation
of the thing loaned. (1743a)
Art. 1942. The bailee is liable for the loss of the
thing, even if it should be through a fortuitous
event:
(1) If he devotes the thing to any purpose
different from that for which it has been loaned;
(2) If he keeps it longer than the period
stipulated, or after the accomplishment of the
use for which the commodatum has been
constituted;
(3) If the thing loaned has been delivered with
appraisal of its value, unless there is a
stipulation exempting the bailee from
responsibility in case of a fortuitous event;
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
5 Book
II – LLB, EH405, USC – College of Law
(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. (1744a and 1745)
Reason for the law in Art. 1942:
Par. 1 – this amounts to bad faith or abuse of generosity considering
the fact that commodatum is gratuitous
Par. 2 – he is guilty of a certain kind of default
Par. 3 – evidently, the giving of the value was made to hold the bailee
liable after all this is not a sale, and neither is ownership transferred
in commodatum (Exception: when there is a stipulation to the
contrary. It may in a sense be said that the appraisal converts the
commodatum into a mutuum)
Par. 4 – This is prohibited by the law for it amounts to a violation of
the personal character of commodatum
Par. 5 – this amounts to an act of ingratitude and to a failure to
exercise due diligence, considering the fact that comodatum is
gratuitous
Misuse or abuse: A misuse or abuse of the property is ordinarily a
conversion for which the bailee is generally held responsible, to the
full extent of the loss.
Art. 1943. The bailee does not answer for the
deterioration of the thing loaned due only to the
use thereof and without his fault. (1746)
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.
(1747a)
Art. 1945. When there are two or more bailees to
whom a thing is loaned in the same contract,
they are liable solidarily. (1748a)
I. RIGHTS AND OBLIGATIONS OF THE PARTIES
A. RIGHTS AND OBLIGATION OF THE BORROWER
a. RIGHTS
b. OBLIGATIONS/DUTIES
- To preserve the thing or take care of it with the diligence of
a good father of a family (GFF)
- To shoulder the ordinary expenses for the use and
preservation of the thing loaned
- To return the identical thing after the expiration of the
period of the contract of commodatum or in case of
precarium, upon demand
CASES:
1. EFFECT OF FAILURE TO RETURN
QUINTOS V BECK
SEE PREVIOUS
CATHOLIC VICAR V CA
SEE PREVIOUS
DE LOS SANTOS V JARRA
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QUICK FACTS: Plaintiff owned 10 1st class carabaos which he lent
to his father-in-law Jimenea without compensation upon the
condition that they shall be returned after the work at the latter’s mill
is terminated. Plaintiff then demanded the return of the animals since
the work at the mill has been done already but Jimenea refused.
When Jimenea died, defendant Jarra was placed as administatrix of
Jimenea’s estate
ISSUE: W.O.N. the contracts is one of a commodatum
HELD: From the foregoing it may be logically inferred that the
carabaos loaned or given on commodatum to the now deceased
Magdaleno Jimenea were ten in number; that they, or at any rate the
six surviving ones, have not been returned to the owner thereof, Felix
de los Santos, and that it is not true that the latter sold to the former
three carabaos that the purchaser was already using; therefore, as the
said six carabaos were not the property of the deceased nor of any of
his descendants, it is the duty of the administratrix of the estate to
return them or indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic
denomination the specific one of commodatum is derived, establishes
prescriptions in relation to the last-mentioned contract by the
following articles:
ART. 1740. By the contract of loan, one of the parties delivers
to the other, either anything not perishable, in order that the
latter may use it during a certain period and return it to the
former, in which case it is called commodatum, or money or any
other perishable thing, under the condition to return an equal
amount of the same kind and quality, in which case it is merely
called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to
pay interest.
ART. 1741. The bailee acquires retains the ownership of the
thing loaned. The bailee acquires the use thereof, but not its
fruits; if any compensation is involved, to be paid by the person
requiring the use, the agreement ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from the
commodatum pass to the heirs of both contracting parties, unless
the loan has been in consideration for the person of the bailee, in
which case his heirs shall not have the right to continue using
the thing loaned.
The carabaos delivered to be used not being returned by the
defendant upon demand, there is no doubt that she is under obligation
to indemnify the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud,
negligence, or delay, and those who in any manner whatsoever
act in contravention of the stipulations of the same, shall be
subjected to indemnify for the losses and damages caused
thereby.
The obligation of the bailee or of his successors to return either the
thing loaned or its value, is sustained by the supreme tribunal of
Sapin. In its decision of March 21, 1895, it sets out with precision the
legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor
retains the ownership of the thing loaned, and at the expiration
of the period, or after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee to return the
thing itself to its owner, or to pay him damages if through the
fault of the bailee the thing should have been lost or injured, it is
clear that where public securities are involved, the trial court, in
deferring to the claim of the bailor that the amount loaned be
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
6 Book
II – LLB, EH405, USC – College of Law
returned him by the bailee in bonds of the same class as those
which constituted the contract, thereby properly applies law 9 of
title 11 ofpartida 5.
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. (1749a)
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. (1750a)
Art. 1948. The bailor may demand the immediate
return of the thing if the bailee commits any act
of ingratitude specified in Article 765. (n)
Art. 1949. The bailor shall refund the
extraordinary expenses during the contract for
the preservation of the thing loaned, provided
the bailee brings the same to the knowledge of
the bailor before incurring them, except when
they are so urgent that the reply to the
notification cannot be awaited without danger.
If the extraordinary expenses arise on the
occasion of the actual use of the thing by the
bailee, even though he acted without fault, they
shall be borne equally by both the bailor and the
bailee, unless there is a stipulation to the
contrary. (1751a)
Art. 1950. If, for the purpose of making use of
the thing, the bailee incurs expenses other than
those referred to in Articles 1941 and 1949, he is
not entitled to reimbursement. (n)
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.
Can the bailee retain the thing because the bailor owes him
something?
Generally, No, because bailment implies a trust that as soon as the
time has expired, or the purpose accomplished, the bailed property
must be restored to the bailor.
Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
 CREDIT TRANSACTIONS
PreMidterm Reviewer
Exception: Art. 1951; However, the parties may agree on
conventional compensation, that is, they may agree that the object of
commodatum may serve as payment for the debt of the bailor.
Art. 1952. The bailor cannot exempt himself from
the payment of expenses or damages by
abandoning the thing to the bailee. (n)  change in value. In case it is impossible to
I. RIGHTS AND OBLIGATIONS OF THE PARTIES
Primary obligation of the bailor is to allow the bailee the use of the
thing loaned for the duration of the period stipulated or until the
accomplishment of the purpose for which the commodatum was
constituted. The reason is that the bailor is bound by the terms of the
contract of commodatum which is “for a certain time”.
Exception: if bailor should have an urgent need of the thing or if
bailee commits an act of ingratitude, he may demand its return or
temporary use.
A. EFFECT AS TO THE LENDER
a. To Pay Extraordinary Expenses of Preservation
- As a rule, the extraordinary expenses should be paid by the
bailor because it is he who profits by said expenses;
otherwise, the thing borrowed would be destroyed.
- Generally, notice is required because the bailor should be
given discretion as to what he wants to do with his own
property.
b. To Answer for Damages to the Borrower
Reason: When a person lends, he ought to confer a benefit, and not
to do a mischief. If he does not reveal the flaws, he is liable for his
bad faith.
Note: but the obligation of a gratuitous lender goes no further than
this, he cant therefore be made liable for not communicating anything
which he did not know, whether he ought to have known it or not.
- It is evident that the flaws referred to in this article are
hidden defects, not obvious ones.
Right of retention: for the damages spoken in this article, the bailee
has the right of retention until paid of said damages. (Art. 1944)
1. The Lender cannot Evade Liability by Abandonment of
the Thing
Reason: The value of the thing borrowed might be less than the value
of the expenses or damages
Art. 1953. A person who receives a loan of money
or any other fungible thing acquires the
ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
quality. (1753a)
Art. 1954. A contract whereby one person
transfers the ownership of non-fungible things to
another with the obligation on the part of the
latter to give things of the same kind, quantity,
and quality shall be considered a barter. (n)
Art. 1955. The obligation of a person who
borrows money shall be governed by the
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
7 Book
II – LLB, EH405, USC – College of Law
provisions of Articles 1249 and 1250 of this
Code.
If what was loaned is a fungible thing other than
money, the debtor owes another thing of the
same kind, quantity and quality, even if it should
deliver the same kind, its value at the time of the
perfection of the loan shall be paid. (1754a)
Art. 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)
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. (n)
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. (n)
Art. 1959. Without prejudice to the provisions of
Article 2212, interest due and unpaid shall not
earn interest. However, the contracting parties
may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new
interest. (n)
Art. 1960. If the borrower pays interest when
there has been no stipulation therefor, the
provisions of this Code concerning solutio
indebiti, or natural obligations, shall be applied,
as the case may be. (n)
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. (n)
I. SIMPLE LOAN
A. CONCEPT
a. MUTUUM V COMMODATUM
CHEE KIONG YAM V MALIK
QUICK FACTS: 3 different criminal charges were filed against
chee kiong yam for estafa. In all complaints, he was said to have
misappropriated the funds given to him. These transactions were
referred to as “simple loan” or a “simple business loan”. PI was
conducted by judge and warrant was issued against him, He filed this
petition claiming that the facts recited in the complaints did not
constitute the crime of estafa, and assuming they did, they were not
within the jurisdiction of the respondent judge.
ISSUE: W.O.N. he committed estafa.
HELD: Estafa through misappropriation is committed according to
Article 315, paragraph 1, subparagraph (b), of the Revised Penal
Code as follows:
Art. 315. Swindling (Estafa). — Any person who shall defraud
another by any of the means mentioned herein below shall be
punished by:
xxx xxx xxx
1. With unfaithfulness or abuse of confidence namely:
xxx xxx xxx
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 CREDIT TRANSACTIONS
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b) By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property received
by the offender in trust or on commission, or for administration,
or under any other obligation involving the duty to make
delivery of or to return the same, even though such obligation be
totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property.
In order that a person can be convicted under the abovequoted
provision, it must be proven that he has the obligation to deliver or
return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the
bills or coins, which they received from private respondents. This is
so because as clearly stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money
that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the
Civil Code.
Art. 1933. — By the contract of loan, one of the parties
delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in
which case the contract is called a commodatum; or money or
other consumable thing upon the condition that the same
amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loam 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.
It can be readily noted from the above-quoted provisions that in
simple loan (mutuum), as contrasted to commodatum, the borrower
acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered
misappropriation thereof.
In U.S. vs. Ibañez, 19 Phil. 559, 560 (1911), this Court held that it is
not estafa for a person to refuse to nay his debt or to deny its
existence.
We are of the opinion and so decide that when the relation is purely
that of debtor and creditor, the debtor can not be held liable for the
crime of estafa, under said article, by merely refusing to pay or by
denying the indebtedness.
It appears that respondent judge failed to appreciate the distinction
between the two types of loan, mutuum and commodatum, when he
performed the questioned acts, He mistook the transaction between
petitioners and respondents Rosalinda Amin, Tan Chu Kao and
Augusto Sajor to be commodatum wherein the borrower does not
acquire ownership over the thing borrowed and has the duty to return
the same thing to the lender.
b. MUTUUM V BARTER
Non-consumable thing is delivered and another non-
consumable thing of the same kind and quality in payment.
c. MUTUUM V LEASE
There is no loss of ownership in lease; lease can be referred
to as a commodatumw/compensation.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
8 Book
II – LLB, EH405, USC – College of Law
TOLENTINO V GONZALES
Wa’y laro na case 
d. MUTUUM V AGENCY
LIWANAG V CA
QUICK FACTS: Rosales constituted Liwanag and Tabligan as her
agents in buying and selling cigarettes business. Under their
agreement, Rosales would give the money needed to buy cigarettes
while Liwanag and Tabligan would sell them, with corresponding
40% commission if the goods are sold; otherwise, the money would
be returned to Rosales. Thus Rosales gave several cash advances to
Liwanag and Tabligan amounting to P633,650.00. The two, after a
few visits to Rosales to report on the progress of the transactions,
never showed up to remit the proceeds of sale, nor returned the
money advanced. Liwanag was charged with estafa, which she was
convicted of. This was affirmed by CA, hence the petition.
ISSUE: WO.N. they are liable for estafa.
HELD:
The receipt signed by Liwanag states thus:
May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE
HUNDRED TWENTY SIX THOUSAND AND SIX
HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency,
to purchase cigarrets (sic) (Philip & Marlboro) to be sold to
customers. In the event the said cigarrets (sic) are not sold, the
proceeds of the sale or the said products (shall) be returned to
said Mrs. Isidora P. Rosales the said amount of P526,650.00 or
the said items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It indicates that
the money delivered to Liwanag was for a specific purpose, that is,
for the purchase of cigarettes, and in the event the cigarettes cannot
be sold, the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed
entered into by and between the parties, we have ruled that when
money or property have been received by a partner for a specific
purpose (such as that obtaining in the instant case) and he later
misappropriated it, such partner is guilty of estafa.  7
Neither can the transaction be considered a loan, since in a contract
of loan once the money is received by the debtor, ownership over the
same is transferred. 8 Being the owner, the borrower can dispose of it
for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not
dispose of the money as she pleased because it was only delivered to
her for a single purpose, namely, for the purchase of cigarettes, and if
this was not possible then to return the money to Rosales. Since in
this case there was no transfer of ownership of the money delivered,
Liwanag is liable for conversion under Art. 315, par. l(b) of the
Revised Penal Code.
B. KINDS
a. Gratuitous
b. With Interest (onerous) - must be expressly stipulated and in
writing
C. REQUISITES
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 CREDIT TRANSACTIONS
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a.Capacity of the parties – basic legal capacity plus lender
must be the owner of the thing
b. Object – fungible or money
c. Consideration – liberality on the part of the lender for
gratuitous kind of loan; interest on the part of the lender,
use of the money on the part of the borrower for onerous
kind of loan
d. Form – in whatever form; not a formal but a real contract,
thus, form is not essential for its validity
Case:
1. Accepted Promise to Deliver Something by Way of
Simple Loan
SAURA IMPORT & EXPORT CO., INC. V DBP
FACTS: In July 1953 Saura applied to the Rehabilitation Finance
Corporation or DBP, for an industrial loan of P500K.On January 7,
1954 RFC passed Resolution approving the loan application for
P500k. Saura, Inc. was officially notified of the resolution. Saura,
Inc. wrote a letter to RFC, requesting a modification of the terms laid
down by it. On April 1954 the loan documents were executed: the
promissory note, with F.R. Halling, representing China Engineers,
Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17. The
loan was suggested to be reduced from P500k to P300k. In the
meantime Saura, Inc. had written RFC requesting that the loan of
P500k be granted. The request was denied by RFC, which added in
its letter-reply that it was "constrained to consider as cancelled the
loan of P300k ... in view of a notification ... from the China
Engineers Ltd., expressing their desire to consider the loan insofar as
they are concerned."
On July 1954 Saura, Inc. took exception to the cancellation
of the loan and informed RFC that China Engineers, Ltd. "will at any
time reinstate their signature as co-signer of the note if RFC releases
to us the P500k originally approved by you." Because of the conflict
with regards to the negotiations within the DBP, Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the
mortgage, and so, on June 1955 RFC executed the corresponding
deed of cancellation and delivered it to Ramon F. Saura himself as
president of Saura, Inc.
Almost 9 years after the mortgage in favor of RFC was
cancelled at the request of Saura, Inc., the latter commenced the
present suit for damages, alleging failure of RFC (as predecessor of
the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the
plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
ISSUE: W.O.N. there was a perfected consensual contract.
HELD: We hold that there was indeed a perfected consensual
contract, as recognized in Article 1934 of the Civil Code, which
provides:
ART. 1954. 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 perferted until
the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the
application of Saura, Inc. for a loan of P500,000.00 was approved by
resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the
basic claim that the defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
9 Book
II – LLB, EH405, USC – College of Law
It should be noted that RFC entertained the loan application of Saura,
Inc. on the assumption that the factory to be constructed would utilize
locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when
RFC, by Resolution No. 9083 approved on December 17, 1954,
restored the loan to the original amount of P500,000.00. it imposed
two conditions, to wit: "(1) that the raw materials needed by the
borrower-corporation to carry out its operation are available in the
immediate vicinity; and (2) that there is prospect of increased
production thereof to provide adequately for the requirements of the
factory." The imposition of those conditions was by no means a
deviation from the terms of the agreement, but rather a step in its
implementation. There was nothing in said conditions that
contradicted the terms laid down in RFC Resolution No. 145, passed
on January 7, 1954, namely — "that the proceeds of the loan shall be
utilized exclusively for the following purposes: for construction of
factory building — P250,000.00; for payment of the balance of
purchase price of machinery and equipment — P240,900.00; for
working capital — P9,100.00." Evidently Saura, Inc. realized that it
could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be able in
sufficient quantity this year or probably next year," and asking that
out of the loan agreed upon the sum of P67,586.09 be released "for
raw materials and labor." This was a deviation from the terms laid
down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955
the negotiations which had been going on for the implementation of
the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC's conditions. So instead of doing so and
insisting that the loan be released as agreed upon, Saura, Inc. asked
that the mortgage be cancelled, which was done on June 15, 1955.
The action thus taken by both parties was in the nature cf mutual
desistance — what Manresa terms "mutuo disenso"  1 — which is a
mode of extinguishing obligations. It is a concept that derives from
the principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its extinguishment.  2
D. EFFECTS: OBLIGATION OF THE BORROWER (ONLY)
To return the thing or amount (same amount, kind or quality)
borrowed
1. Rule if the thing borrowed is money
- Return or payment of the numerical value
- if currency not stipulated – pay in legal tender
Cases:
i. Payment in the currency stipulated
RONO V GOMEZ
QUICK FACTS: Cristobal Roño received as a loan four thousand
pesos in Japanese fiat money from Jose L. Gomez. He informed the
later that he would use the money to purchase a jitney; and he agreed
to pay that debt one year after date in the currency then prevailing.
After the liberation, Roño was sued for payment. His main defense
was his liability should not exceed the equivalent of 4k pesos
"mickey mouse" money — and could not be 4k pesos Philippine
currency, because the contract would be void as contrary to law,
public order and good morals.
ISSUE: Whether or not the contract is contrary to the Usury law,
because on the basis of calculations by Government experts Roño
only received the equivalent of one hundred Philippine pesos and
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 CREDIT TRANSACTIONS
PreMidterm Reviewer
now he is required to disgorge four thousand pesos or interest greatly
in excess of the lawful rates.
HELD: One basic principle of the law on contracts of the Civil Code
is that "the contracting parties may establish any pacts, clauses and
conditions they may deem advisable, provided they are not contrary
to law, morals or public order." (Article 1255.) Another principle is
that "obligations arising from contracts shall have the force of law
between the contracting parties and must be performed in accordance
with their stipulations" (Article 1091).
Invoking the above proviso, Roño asserts this contract is contrary to
the Usury law, because on the basis of calculations by Government
experts he only received the equivalent of one hundred Philippine
pesos and now he is required to disgorge four thousand pesos or
interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the
money received "will not earn any interest." Furthermore, he
received four thousand pesos; and he is required to pay four
thousand pesos exactly. The increased intrinsic value and purchasing
power of the current money is consequence of an event (change of
currency) which at the time of the contract neither party knew would
certainly happen within the period of one year. They both elected to
subject their rights and obligations to that contingency. If within one
year another kind of currency became legal tender, Gomez would
probably get more for his money. If the same Japanese currency
continued, he would get less, the value of Japanese money being then
on the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil
Code recognizes their validity (see art. 1790 and Manresa's comment
thereon) on a par with insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within
the meaning of Usury Laws. Interest is some additional money to be
paid in any event, which is not the case herein, because Gomez might
have gotten less if the Japanese occupation had extended to the end of
1945 or if the liberation forces had chosen to permit the circulation of
the Japanese notes.
ii. Stipulation not to Pay while War is Going On
NEPOMUCENO V NARCISO
QUICK FACTS: In 1938, plaintiff executed a mortgage in favor of
defendant on a parcel of land to secure the payment of P24k in 7
years at 8% interest per year. By mutual agreement, the term was
modified in 1943 by reducing the interest to 6% per year from
December 1941 until the end of the war and by stipulating that the
mortgagor shall not pay and release the mortgage while the war went
on. In 1944, the plaintiff offered to pay which the defendant refused.
Plaintiff filed this action to compel the defendant to accept his tender
of payment. The trial court sustained the defense that payment was
premature. Plaintiff appealed alleging that the provision for non-
redemption during the war is against public policy and a restraint on
the freedom of commerce.
ISSUE: Whether or not said provision is against public policy as to
render said contract void.
HELD: Appellants contend that the stipulation in the contract of
September 30, 1943, that "while the war goes on the mortgagor, his
administrators or assigns cannot redeem the property mortgaged," is
against public policy and therefore null and void. They cite and rely
on article 1255 of the Civil Code, which provides:
ART. 1255. — The contracting parties may establish any pacts,
clauses, and conditions they may deem advisable, provided they
are not contrary to law, morals, or public order.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
10 Book
II – LLB, EH405, USC – College of Law
They argue that "it would certainly be against public policy and
a restraint on the freedom of commerce to compel a debtor not
to release his property from a lien — even if he wanted to by the
payment of the indebtedness — while the war goes on, which
was undoubtedly of a very uncertain duration."
The first two paragraphs of article 1125 of the Civil Code
provide:
ART. 1125. — Obligation for the performance of which a day
certain has been fixed shall be demandable only when the day
arrives.
A day certain is understood to be one which must necessarily
arrive, even though its date be unknown.
Article 1127 says:
ART. 1127. Whenever a term for the performance of an
obligation is fixed, it is presumed to have been established for
the benefit of the creditor and that of the debtor, unless from its
tenor or from other circumstances it should appear that the term
was established for the benefit of one or the other.
It will be noted that the original contract of mortgage provided for
interest at 8 per cent per annum and that the principal together with
the interest was payable within the period of seven years from
November 14, 1938. But by mutual agreement of the parties that term
was modified on September 30, 1943, by reducing the interest to 6
per cent per annum from December 8, 1941, until the end of the war
and by stipulating that the mortgagor shall not pay off the mortgage
while the war went on.
iii. Extraordinary Inflation or Deflation
EQUITABLE PCI BANK V NG SHEUNG NGOR
QUICK FACTS: Ng Sheung Ngor had dollar and peso loans with
Equitable PCI. They claim that they availed of the loans offered by
Equitable because of the low interest rates. However, they did not
know that there was a clause that allowed the bank to raise interest
rates. The bank claimed that Ng Sheung Ngor knew of this and that
they’ve been availing of the loans, which have even been restructured
for the last 5 years. The year was 2001, the lower court said that there
was extraordinary deflation of the peso and ordered the use of 1996
exchange rate.
ISSUE: W.O.N. the PNs were valid and there exists extraordinary
deflation.
HELD: Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is, beyond the
common fluctuation in the value of currency) and such decrease
could not be reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse
situation.[73] 
Article 1250 of the Civil Code provides: 
Article 1250. In case an extraordinary inflation or deflation of
the currency stipulated should intervene, the value of the
currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the
contrary.
 For extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:
1.      that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);[74]
 2.      that the obligation was contractual in nature;[75] and
 3.      that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.[76]    
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 Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary inflation.  Moreover, although the
obligation in this instance arose out of a contract, the parties did not
agree to recognize the effects of extraordinary inflation (or deflation).
[77] The RTC never mentioned that there was a such stipulation
either in the promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at the
exchange rate fixed by the BSP on the date of maturity.[78]
 
2. If the thing borrowed is not money
- To pay another thing of the same kind, quantity and quality,
even if it should change in value. In case it is impossible to
deliver the same kind, its value at the time of the perfection
of the loan shall be paid.
Example: A borrowed from B five sacks of rice. At the
time the loan was perfected, each sack cost 1,800. Even if
at the time of payment, the price would change, 5 sacks of
the same kind and quality of rice should be returned.
However, if it is impossible to deliver the same kind, 1,800
should be paid. Note that the value at the time of
PERFECTION (not payment) applies.
Stipulation: No payment shall be made within a period,
payment shall be made after the said period – valid; for the
benefit of the lender to earn interest
b. To pay interest
- When to pay? If expressly stipulated in writing
- Art. 2212. Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may
be silent upon this point. (Legal interest in legal delay after
judicial demand is not contractual interest agreed by the
parties but serves as a penalty or damage dues)
GR: Accrued interest (interest due and unpaid) shall not earn
interest except in 2 instances:
 When judicially demanded as provided
for in Art. 2212
 When there is an 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. This
practice is called compounding interest.
Case:
1. Stipulation for Legal Interest but Higher Rate is Charged
ESPIRITU V LANDRITO
2. Liability for Contractual Interest After Maturity of Note
JARDENIL V SOLAS
QUICK FACTS: Salas issued a promissory note where it was
clearly agreed that he will pay interest only up to the date of maturity,
or until March 31, 1934, and that payment is extendable by one year
but without mention of interest.
ISSUE: Is defendant-appellee bound to pay the stipulated interest
only up to the date of maturity as fixed in the promissory note, or up
to the date payment is effected?
HELD: As the contract is silent as to whether after that date, in the
event of non-payment, the debtor would continue to pay interest, we
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
11 Book
II – LLB, EH405, USC – College of Law
cannot in law, indulge in any presumption as to such interest;
otherwise, we would be imposing upon the debtor an obligation that
the parties have not chosen to agree upon. Article 1755 of the Civil
Code provides that "interest shall be due only when it has been
expressly stipulated." There is nothing in the mortgage deed to show
that the terms employed by the parties thereto are at war with their
evident intent. On the contrary the act of the mortgage of granting to
the mortgagor on the same date of execution of the deed of mortgage,
an extension of one year from the date of maturity within which to
make payment, without making any mention of any interest which
the mortgagor should pay during the additional period, indicates that
the true intention of the parties was that no interest should be paid
during the period of grace. Neither has either of the parties shown
that, by mutual mistake, the deed of mortgage fails to express their
agreement, for if such mistake existed, plaintiff would have
undoubtedly adduced evidence to establish it and asked that the deed
be reformed accordingly, under the parcel-evidence rule.
As the contract is clear and unmistakable and the terms employed
therein have not been shown to belie or otherwise fail to express the
true intention of the parties and that the deed has not been assailed on
the ground of mutual mistake which would require its reformation,
same should be given its full force and effect. When a party sues on a
written contract and no attempt is made to show any vice therein, he
cannot be allowed to lay any claim more than what its clear
stipulations accord. His omission, to which the law attaches a definite
warning as an in the instant case, cannot by the courts be arbitrarily
supplied by what their own notions of justice or equity may dictate.
3. Effect if Interest is Paid even if not Stipulated
- If unstipulated interest (it is, therefore, not due) is paid by
mistake, the debtor may recover as this would be a case of
solutio indebiti or undue payment. But when the
unstipulated interest, or interest stipulated, there being a
stipulation but it is not in writing, is paid voluntarily
because the debtor feels morally obliged to do so, there can
be no recovery as in the case of natural obligations.
4. What is not Considered as Interest
Case:
SENTINEL INSURANCE CO. V CA
FACTS: Petitioner Sentinel Insurance Co., Inc., was the surety in a
contract of suretyship with Nemesio Azcueta, Sr., who is doing
business under the name and style of 'Malayan Trading both of them
bound themselves, 'jointly and severally, to fully and religiously
guarantee the compliance with the terms and stipulations of the credit
line granted by private respondent Rose Industries, Inc., in favor of
Nemesio Azcueta, Azcueta made various purchases of tires, batteries
and tire tubes from the private respondent but failed to pay therefor,
prompting Rose Industries to demand payment but because Azcueta
failed to settle his accounts, the case was referred to the Insurance
Commissioner who invited the attention of the petitioner on the
matter and the latter cancelled the Suretyship Agreement with due
notice to the private respondent.
Meanwhile, private respondent Rose Industries filed with the
respondent court of Makati a complaint for collection of sum of
money against herein petitioner and Azcueta.The decision having
become final and executory, the prevailing party moved for its
execution which respondent judge granted and pursuant thereto, a
notice of attachment and levy was served upon the petitioner. On the
same day.Contending that the order was issued with grave abuse of
discretion, petitioner went to respondent court on a petition for
certiorari and mandamus to compel the court below to clarify its
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decision “to pay interest at 14% per annum on the principal
obligation and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full amount is
fully paid.”
ISSUE: Whether or not respondent court should not have made an
award for "damage dues" at such late stage of the proceeding since
said dues were not the subject of the award made by the trial court.
HELD: To clarify an ambiguity or correct a clerical error in the
judgment, the court may resort to the pleadings filed by the parties,
the findings of fact and the conclusions of law expressed in the text
or body of the decision. this was what respondent court did in
resolving the original petition.
The findings made by respondent court did not actually nullify the
judgment of the trial court. More specifically, the statement that the
imposition of 2% interest every 45 days commencing from April 30,
1975 on top of the 14% per annum (as would be the impression from
a superficial reading of the dispositive portion of the trial court's
decision) would be usurious is a sound observation. It should,
however, be stressed that such observation was on the theoretical
assumption that the rate of 2% is being imposed as interest, not as
damage dues which was the intendment of the trial court.
Damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are
distinct claims which may be demanded separately, in the same
manner that commissions, fines and penalties are excluded in the
computation of interest where the loan or forbearance is not secured
in whole or in part by real estate or an interest therein.
While interest forms part of the consideration of the contract itself,
damage dues (penalties, and so forth) are usually made payable only
in case of default or non-performance of the contract. 11 Also,
although interest is subject to the provisions of the Usury Law, there
is no policy or provision in such law preventing the enforcement of
damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.
The lower court's decision explicitly ordered petitioner to pay private
respondent the amount of P198,602.41 as principal obligation
including interest and damage dues, which is a clear and unequivocal
indication of the lower court's intent to award both interest and
damage dues.
E. Bank Deposits
Cases:
a. Nature of bank deposits
GOPOCO GROCERY V PACIFIC COAST BISCUIT
QUICK FACTS: The Mercantile Bank of China was declared in
liquidation. Creditors and all those who had any claim against it were
required to present the same before the Bank Commissioner within
90 days. Gopoco presented its claim.
ISSUE: What is the real nature of current account a savings deposit?
HELD: The current account and savings deposit have lost their
character as deposits and are converted into simple commercial loans
because in cases of such deposits, the bank has made use thereof in
the ordinary course of its transactions as an institution engaged in the
banking business, not because it so wishes but precisely because of
the authority deemed to have been granted to it by the depositors to
enable him to collect the interest which they had been and they are
now collecting, and by virtue further of the authority granted to it by
Section 125 of the Corporation Law and the Banking Law. The
deposits created a juridical relation of creditor and debtor. The back
acquired ownership of the money deposited.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
12 Book
II – LLB, EH405, USC – College of Law
CENTRAL BANK OF THE PHILS. V MORFE
RULING: ARTICLE 2244. With reference to other property, real
and personal, of the debtor, the following claims or credits shall be
preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in
the order of priority of the dates of the instruments and of the
judgments, respectively.
xxx xxx xxx
We are of the opinion that such judgments cannot be
considered preferred and that article 2244(14)(b) does not apply to
judgments for the payment of the deposits in an insolvent savings
bank which were obtained after the declaration of insolvency. The
Rohr case supplies some illumination on the disposition of the instant
case. The Supreme Court of Montana said:
The general principle of equity that the assets of
an insolvent are to be distributed ratably among general
creditors applies with full force to the distribution of the assets of
a bank. A general depositor of a bank is merely a general creditor,
and, as such, is not entitled to any preference or priority over other
general creditors. xxx
The circumstance that the Fidelity Savings Bank, having
stopped operations since February 19, 1969, was forbidden to do
business, and that ban would include the payment of time deposits,
implies that suits for the payment of such deposits were prohibited.
The trial court's order which contains the Bank Liquidation
Rules and Regulations, indicated that, in Step IV, the court directed
the Central Bank, as liquidator, to submit a Project of Distribution
which should include "a list of the preferred credits to be paid in full
in the order of priorities established in Articles 2241, 2242, 2243,
2246 and 2247" of the Civil Code. It is important to note that Article
2244 was not mentioned. Therefore, there is no cogent reason why
the Elizes and Padilla spouses should not adhere to the procedure
outlined in the said rules and regulations.
SERRANO V CENTRAL BANK OF THE PHIL.
RULING: By the very nature of the claims and causes of action
against respondents, they in reality are recovery of time deposits plus
interest from respondent Overseas Bank of Manila, and recovery of
damages against respondent Central Bank for its alleged failure to
strictly supervise the acts of the other respondent Bank and protect
the interests of its depositors by virtue of the constructive trust
created when respondent Central Bank required the other respondent
to increase its collaterals for its overdrafts said emergency loans, said
collaterals allegedly acquired through the use of depositors money.
These claims shoud be ventilated in the Court of First Instance of
proper jurisdiction as We already pointed out when this Court denied
petitioner's motion to intervene in G.R. No. L-29352. Claims of these
nature are not proper in actions for mandamus and prohibition as
there is no shown clear abuse of discretion by the Central Bank in its
exercise of supervision over the other respondent Overseas Bank of
Manila, and if there was, petitioner here is not the proper party to
raise that question, but rather the Overseas Bank of Manila, as it did
in G.R. No. L-29352. Neither is there anything to prohibit in this
case, since the questioned acts of the respondent Central Bank (the
acts of dissolving and liquidating the Overseas Bank of Manila),
which petitioner here intends to use as his basis for claims of
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damages against respondent Central Bank, had been accomplished a
long time ago.
Furthermore, both parties overlooked one fundamental principle in
the nature of bank deposits when the petitioner claimed that there
should be created a constructive trust in his favor when the
respondent Overseas Bank of Manila increased its collaterals in favor
of respondent Central Bank for the former's overdrafts and
emergency loans, since these collaterals were acquired by the use of
depositors' money.
Bank deposits are in the nature of irregular deposits. They are really
loans because they earn interest. All kinds of bank deposits, whether
fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans. 14 Current and savings deposit are loans
to a bank because it can use the same. The petitioner here in making
time deposits that earn interests with respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a
depositor. The respondent Bank was in turn a debtor of petitioner.
Failure of he respondent Bank to honor the time deposit is failure to
pay s obligation as a debtor and not a breach of trust arising from
depositary's failure to return the subject matter of the deposit
b. Liability for failure to return savings deposit
GUINGONA V CITY FISCAL OF MANILA
QUICK FACTS: David deposited/invested his money with National
Savings and Loans Association in the form of savings and time
deposits. The bank was placed under receivership. He sought to
recover his money. However, he was told by the Central Bank that
only P300K+ was reported by NSLA. Now, he is charging Guingona
et. al. with estafa for misappropriating his investment. Guingona et.al.
filed this petition to restrain the conduct of PI because they claim
their liability, if at all, is only civil in nature.
ISSUE: W.O.N. they are guilty of estafa.
HELD: It must be pointed out that when private respondent David
invested his money on time and savings deposits with the aforesaid
bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the
New Civil Code provides that:têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in
banks and similar institutions shall be governed by the provisions
concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA
114,119 [1975], We said:têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are hat true deposits. are
considered simple loans and, as such, are not preferred credits
(Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of
China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil
414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association
65 Phil. 375; Fletcher American National Bank vs. Ang Chong
UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific
Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central
Bank of the Philippines (96 SCRA 102 [1980]) that:têñ.£îhqwâ£
Bank deposits are in the nature of irregular deposits. They are
really 'loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans (Art. 1980 Civil
Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
saving deposits, are loans to a bank because it can use the same.
The petitioner here in making time deposits that earn interests
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
13 Book
II – LLB, EH405, USC – College of Law
will respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank
was in turn a debtor of petitioner. Failure of the respondent Bank
to honor the time deposit is failure to pay its obligation as a
debtor and not a breach of trust arising from a depositary's
failure to return the subject matter of the deposit (Emphasis
supplied).
Hence, the relationship between the private respondent and the
Nation Savings and Loan Association is that of creditor and debtor;
consequently, the ownership of the amount deposited was transmitted
to the Bank upon the perfection of the contract and it can make use of
the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however, no
obligation to return or deliver the same money that was deposited.
And, the failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under Article
315, par. l(b) of the Revised Penal Code, but it will only give rise to
civil liability over which the public respondents have no- jurisdiction.
Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of
the contract, there is no deposit but some other
contract. (1758a)
Art. 1963. An agreement to constitute a deposit
is binding, but the deposit itself is not perfected
until the delivery of the thing. (n)
Art. 1964. A deposit may be constituted judicially
or extrajudicially. (1759)
Art. 1965. A deposit is a gratuitous contract,
except when there is an agreement to the
contrary, or unless the depositary is engaged in
the business of storing goods. (1760a)
Art. 1966. Only movable things may be the object
of a deposit. (1761)
Art. 1967. An extrajudicial deposit is either
voluntary or necessary. (1762)
DEPOSIT:
I. CONCEPT
Deposit – a contract whereby a person (depositor) delivers a
movable property to another person (depositary) exclusively for
safe keeping and with the obligation of returning the same upon
demand.
II. CHARACTERISTICS
A. Real contract – perfected by delivery of the subject matter
B. Naturally or generally gratuitous – no consideration; deposit
presumed to be gratuitous; unless there is an agreement to the
contrary or unless the depositary is engaged in the business of storing
goods
C. Purpose is primarily for custody
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 CREDIT TRANSACTIONS
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Cases:
a. Effect if Balance of Commission Retained by Agent
US V IGPUARA
QUICK FACTS: Montilla and Veraguth deposited P2k+ with
Igpuara. Igpuara failed to come up with the amount when demand
was made. He was then charged with estafa in the CFI. The lower
court found him guilty. He now claims that the transaction was a loan
and not a deposit as he has drawn up an instrument given to
Montilla’s agent making the amount “deposited” to him payable upon
demand.
ISSUE: W.O.N. Igpuara is a depositary thereby making him liable
for estafa?
HELD: It is also erroneous to assert that sum of money set forth in
said certificate is, according to it, in the defendant's possession as a
loan. In a loan the lender transmits to the borrower the use of the
thing lent, while in a deposit the use of the thing is not transmitted,
but merely possession for its custody or safe-keeping.
In order that the depositary may use or dispose of the things
deposited, the depositor's consent is required, and then:
The rights and obligations of the depositary and of the depositor shall
cease, and the rules and provisions applicable to commercial loans,
commission, or contract which took the place of the deposit shall be
observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent
of the depositary for using or disposing of the P2,498, which the
certificate acknowledges, or any contract entered into with the
depositor to convert the deposit into a loan, commission, or other
contract.
That demand was not made for restitution of the sum deposited,
which could have been claimed on the same or the next day after the
certificate was signed, does not operate against the depositor, or
signify anything except the intention not to press it. Failure to claim
at once or delay for sometime in demanding restitution of the things
deposited, which was immediately due, does not imply such
permission to use the thing deposited as would convert the deposit
into a loan.
xxx xxx xxx
In a decision of an appeal, September 28, 1895, the principle was laid
down that: "Since he commits the crime ofestafa under article 548 of
the Penal Code of Spain who to another's detriment appropriates to
himself or abstracts money or goods received on commission for
delivery, the court rightly applied this article to the appellant, who, to
the manifest detriment of the owner or owners of the securities, since
he has not restored them, willfully and wrongfully disposed of them
by appropriating them to himself or at least diverting them from the
purpose to which he was charged to devote them."
xxx xxx xxx
It is unquestionable that in no sense did the P2,498 which he willfully
and wrongfully disposed of to the detriments of his principal, Juana
Montilla, and of the depositor, Eugenio Veraguth, belong to the
defendant.
b. Effect if Foreign Currency Deposited is Sold by the Bank
BPI V IAC
QUICK FACTS: Zshornack left $3k with Garcia, manager of a
Comtrust Branch for safekeeping. When Zshornack demanded for
their return the bank did not return the amount to him. Instead, the
bank claims that it sold the $$$ and credited the peso equivalent to
his account.
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
14 Book
II – LLB, EH405, USC – College of Law
ISSUE: Did the bank have the authority to sell the $$$ entrusted to it
for safekeeping?
HELD: The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that the intent of the parties
was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time, Thus, Zshornack demanded the return of
the money on May 10, 1976, or over five months later.
xxx xxx xxx
The above arrangement is that contract defined under Article 1962,
New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
Note that the object of the contract between Zshornack and
COMTRUST was foreign exchange. Hence, the transaction was
covered by Central Bank Circular No. 20, Restrictions on Gold and
Foreign Exchange Transactions, promulgated on December 9, 1949,
which was in force at the time the parties entered into the transaction
involved in this case. The circular provides:
xxx xxx xxx
As earlier stated, the document and the subsequent acts of the parties
show that they intended the bank to safekeep the foreign exchange,
and return it later to Zshornack, who alleged in his complaint that he
is a Philippine resident. The parties did not intend to sell the US
dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been entered
into at all.
Since the mere safekeeping of the greenbacks, without selling them
to the Central Bank within one business day from receipt, is a
transaction which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of prohibited
transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of
the parties a cause of action against the other. "When the nullity
proceeds from the illegality of the cause or object of the contract, and
the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other. . ."
[Art. 1411, New Civil Code.] The only remedy is one on behalf of the
State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause
of action.
c. Nature of Rental of Safety Deposit Box
CA AGRO-INDUSTRIAL DEV’T. CORP. V CA
QUICK FACTS: Aguirre, Pres. Of CA Agro, entered into a sale on
installment of 2 parcels of land. The certificate of title was placed in
the SDB of Security Bank, to be given to CA Agro only after full
payment. Ramos then came along and offered to buy the lands from
Aguirre at a higher price than that which he paid for. Aguiree and
Sps.Puugao then went to the bank to open the SDB but no certificate.
Ramos backed out of the sale. Aguirre no sues bank for loss of
expected profit from the sale.
ISSUE: W.O.N. the bank in “renting out” the SDBs is acting as a
depositor or a lessor.
HELD: We agree with the petitioner's contention that the contract for
the rent of the safety deposit box is not an ordinary contract of lease
as defined in Article 1643 of the Civil Code. However, We do not
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fully subscribe to its view that the same is a contract of deposit that is
to be strictly governed by the provisions in the Civil Code on
deposit; 19the contract in the case at bar is a special kind of deposit.
It cannot be characterized as an ordinary contract of lease under
Article 1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the box remained with
the respondent Bank; without this key, neither of the renters could
open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said
key had a duplicate which was made so that both renters could have
access to the box.
Hence, the authorities cited by the respondent Court 20 on this point
do not apply. Neither could Article 1975, also relied upon by the
respondent Court, be invoked as an argument against the deposit
theory. Obviously, the first paragraph of such provision cannot apply
to a depositary of certificates, bonds, securities or instruments which
earn interest if such documents are kept in a rented safety deposit
box. It is clear that the depositary cannot open the box without the
renter being present.
We observe, however, that the deposit theory itself does not
altogether find unanimous support even in American jurisprudence.
We agree with the petitioner that under the latter, the prevailing rule
is that the relation between a bank renting out safe-deposit boxes and
its customer with respect to the contents of the box is that of a bail or
and bailee, the bailment being for hire and mutual benefit. 21
xxx xxx xxx
In the context of our laws which authorize banking institutions to rent
out safety deposit boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act 23pertinently provides:
Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects,
and rent safety deposit boxes for the safeguarding of such
effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a),
(b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of
a contract of deposit, i.e., the receiving in custody of funds,
documents and other valuable objects for safekeeping. The renting
out of the safety deposit boxes is not independent from, but related to
or in conjunction with, this principal function. A contract of deposit
may be entered into orally or in writing 25 and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the
agreement. 26 In the absence of any stipulation prescribing the
degree of diligence required, that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting the depositary from
any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law
and public policy. In the instant case, petitioner maintains that
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conditions 13 and 14 of the questioned contract of lease of the safety
deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability
in connection therewith. 28
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's responsibility
as a depositary under Section 72(a) of the General Banking Act. Both
exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented
safe, to wit:
xxx xxx xxx
Furthermore, condition 13 stands on a wrong premise and is contrary
to the actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises
and is under its absolute control; moreover, the respondent Bank
keeps the guard key to the said box. As stated earlier, renters cannot
open their respective boxes unless the Bank cooperates by presenting
and using this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective. xxx
B. EITHER UNILATERAL V BILATERAL
- when the deposit is gratuitous, it is a unilateral contract
because only the depositary has an obligation. But when the
deposit is for compensation, the juridical relation created
becomes bilateral because it gives rise to obligations on the
part of both the depositary and the depositor
C. NON-USE BY DEPOSITARY OF THE THING DEPOSITED
- He can’t make use of the thing unless there is a stipulation
or when the preservation of the thing deposited requires its
use, it must be used but only for that purpose but main
purpose should be for safekeeping only. Of course, if
safekeeping is not the principal purpose, there is no deposit
but some other contract, like one of lease or commodatum.
Example for “its use is to preserve the thing”: car – engine
must be turned on in order to preserve it
Case:
Nature of Agreement to Extend Payment of Money Deposited
and to Pay Interest
JAVELLANA V LIM
QUICK FACTS: Javellana turned over to Lim et. al P2k+ to be
payable/returned on January of 1898. Lim et. al. were unable to come
up with the money by that time and asked for an extension. Several
extensions were given with a stipulation to pay interest. Partial
payments were made by Lim et. al. for the interest accrued. Now,
Javellana wants to collect principal. Lim et. al claims there is no
interest agreed upon and that the payments already made were for the
principal amount, in effect saying there was no loan.
ISSUE: W.O.N. there was a loan.
HELD: The document of indebtedness inserted in the complaint
states that the plaintiff left on deposit with the defendants a given
sum of money which they were jointly and severally obliged to return
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 CREDIT TRANSACTIONS
PreMidterm Reviewer
on a certain date fixed in the document; but that, nevertheless, when
the document appearing as Exhibits 2, written in the Visayan dialect
and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902, that
the amount deposited had not yet been returned to the creditor,
whereby he was subjected to losses and damages amounting to 830
pesos since the 20th of January, 1898, when the return was again
stipulated with the further agreement that the amount deposited
should bear interest at the rate of 15 per cent per annum, from the
aforesaid date of January 20, and that the 1,000 pesos paid to the
depositor on the 15th of May, 1900, according to the receipt issued
by him to the debtors, would be included, and that the said rate of
interest would obtain until the debtors on the 20th of May, 1897, it is
called a deposit consisted, and they could have accomplished the
return agreed upon by the delivery of a sum equal to the one received
by them. For this reason it must be understood that the debtors were
lawfully authorized to make use of the amount deposited, which they
have done, as subsequent shown when asking for an extension of the
time for the return thereof, inasmuch as, acknowledging that they
have subjected the letter, their creditor, to losses and damages for not
complying with what had been stipulated, and being conscious that
they had used, for their own profit and gain, the money that they
received apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund should
be made. Such conduct on the part of the debtors is unquestionable
evidence that the transaction entered into between the interested
parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that —
The depository cannot make use of the thing deposited without
the express permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that —
When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment.
The permission shall not be presumed, and its existence must be
proven.
D. ONLY MOVABLES CAN BE OBJECT THEREOF
III. KINDS
Extrajudicial – maybe voluntary (constituted by consent or mutual
consent of the parties); or necessary (constituted in compliance with
a legal obligation or on the occasion of a calamity or made by
travelers in inns, hotels or made by travelers with common carriers)
Judicial (sequestration) – when an attachment or seizure of property
in litigation is ordered
Regular – can’t use the thing
Irregular – may use the thing deposited, such as bank deposits
Voluntary or necessary
IV. DEPOSIT V SALE AND BARTER
Effect: Deposit, ownership is not transferred; sale/barter, ownership
is transferred upon delivery
Consideration: Deposit is naturally gratuitous; sale/barter is always
onerous
Deposit, real contract; sale/barter, consensual contract
V. DEPOSIT V COMMODATUM
Purpose: Deposit is for safekeeping or mere custody; commodatum is
to use
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Consideration: Deposit may be gratuitous; commodatum is
essentially and always gratuitous
Art. 1968. A voluntary deposit is that wherein the
delivery is made by the will of the depositor. A
deposit may also be made by two or more
persons each of whom believes himself entitled
to the thing deposited with a third person, who
shall deliver it in a proper case to the one to
whom it belongs. (1763)
Art. 1969. A contract of deposit may be entered
into orally or in writing. (n)
Art. 1970. If a person having capacity to contract
accepts a deposit made by one who is
incapacitated, the former shall be subject to all
the obligations of a depositary, and may be
compelled to return the thing by the guardian, or
administrator, of the person who made the
deposit, or by the latter himself if he should
acquire capacity. (1764)
Art. 1971. If the deposit has been made by a
capacitated person with another who is not, the
depositor shall only have an action to recover the
thing deposited while it is still in the possession
of the depositary, or to compel the latter to pay
him the amount by which he may have enriched
or benefited himself with the thing or its price.
However, if a third person who acquired the
thing acted in bad faith, the depositor may bring
an action against him for its recovery. (1765a) 
I. VOLUNTARY DEPOSIT
A.Kinds
- Where the depositor has complete freedom in choosing the
depositary
- Where two or more persons each claiming to be entitled to
a thing may deposit the same with a third person. In such
case, the third person assumes the obligation to deliver to
the one to whom it belongs.
B. Requisites
a. Capacity of the parties – depositor need not be the owner of the
thing
Where depositary capacitated and depositor incapacitated: If the
depositary is capacitated, he is subject to all the obligations of a
depositary whether or not the depositor is capacitated. In the latter
case, the depositary must return the property to the legal
representatives of the incapacitated or to the depositor himself if he
should acquire capacity.
Example: A accepted a deposit from B, an insane individual. As long
as B is insane, he cannot by himself compel the return of the thing.
He must act through his guardian or administrator. Should B be of
sound mind again, he can by himself compel the return of what has
been deposited.
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 CREDIT TRANSACTIONS
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Under the law, persons who are capable cannot allege the incapacity
of those with whom they contract.
- Return of the depositary extinguishes the obligation under
oblicon
Where depositary incapacitated and depositor capacitated:
The incapacitated depositary does not incur the obligation of a
depositary. However, he is liable (1) to return the thing
deposited while still in his possession and (2) to pay the
depositor the amount by which he may have benefited himself
with the thing or its price subject to the right of any third person
who acquired the thing in good faith
a. Object – not intangibles and immovable but only
movable or corporeal
b. Formalities – no form required because it is a real
contract
Art. 1972. The depositary is obliged to keep the
thing safely and to return it, when required, to
the depositor, or to his heirs and successors, or
to the person who may have been designated in
the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall
be governed by the provisions of Title I of this
Book.
If the deposit is gratuitous, this fact shall be
taken into account in determining the degree of
care that the depositary must observe. (1766a)
Art. 1973. Unless there is a stipulation to the
contrary, the depositary cannot deposit the thing
with a third person. If deposit with a third person
is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is
manifestly careless or unfit. The depositary is
responsible for the negligence of his employees.
(n)
Art. 1974. The depositary may change the way of
the deposit if under the circumstances he may
reasonably presume that the depositor would
consent to the change if he knew of the facts of
the situation. However, before the depositary
may make such change, he shall notify the
depositor thereof and wait for his decision,
unless delay would cause danger. (n)
Art. 1975. The depositary holding certificates,
bonds, securities or instruments which earn
interest shall be bound to collect the latter when
it becomes due, and to take such steps as may be
necessary in order that the securities may
preserve their value and the rights corresponding
to them according to law.
The above provision shall not apply to contracts
for the rent of safety deposit boxes. (n)
Art. 1976. Unless there is a stipulation to the
contrary, the depositary may commingle grain or
other articles of the same kind and quality, in
which case the various depositors shall own or
have a proportionate interest in the mass. (n) 
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Art. 1977. The depositary cannot make use of the
thing deposited without the express permission
of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing
deposited requires its use, it must be used but
only for that purpose. (1767a)
Art. 1978. When the depositary has permission to
use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still
the principal purpose of the contract.
The permission shall not be presumed, and its
existence must be proved. (1768a)
Art. 1979. The depositary is liable for the loss of
the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the
depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though
he himself may have been authorized to use
the same. (n)
Art. 1980. Fixed, savings, and current deposits of
money in banks and similar institutions shall be
governed by the provisions concerning simple
loan. (n)
Art. 1981. When the thing deposited is delivered
closed and sealed, the depositary must return it
in the same condition, and he shall be liable for
damages should the seal or lock be broken
through his fault.
Fault on the part of the depositary is presumed,
unless there is proof to the contrary.
As regards the value of the thing deposited, the
statement of the depositor shall be accepted,
when the forcible opening is imputable to the
depositary, should there be no proof to the
contrary. However, the courts may pass upon the
credibility of the depositor with respect to the
value claimed by him.
When the seal or lock is broken, with or without
the depositary's fault, he shall keep the secret of
the deposit. (1769a)
Art. 1982. When it becomes necessary to open a
locked box or receptacle, the depositary is
presumed authorized to do so, if the key has
been delivered to him; or when the instructions
of the depositor as regards the deposit cannot be
executed without opening the box or receptacle.
(n)
Art. 1983. The thing deposited shall be returned
with all its products, accessories and accessions.
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 CREDIT TRANSACTIONS
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Should the deposit consist of money, the
provisions relative to agents in article 1896 shall
be applied to the depositary. (1770)
Art. 1984. The depositary cannot demand that
the depositor prove his ownership of the thing
deposited.
Nevertheless, should he discover that the thing
has been stolen and who its true owner is, he
must advise the latter of the deposit.
If the owner, in spite of such information, does
not claim it within the period of one month, the
depositary shall be relieved of all responsibility
by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to
believe that the thing has not been lawfully
acquired by the depositor, the former may return
the same. (1771a)
Art. 1985. When there are two or more
depositors, if they are not solidary, and the thing
admits of division, each one cannot demand more
than his share.
When there is solidarity or the thing does not
admit of division, the provisions of Articles 1212
and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to
one of the depositors, the depositary shall return
it only to the person designated. (1772a)
Art. 1986. If the depositor should lose his
capacity to contract after having made the
deposit, the thing cannot be returned except to
the persons who may have the administration of
his property and rights. (1773)
Art. 1987. If at the time the deposit was made a
place was designated for the return of the thing,
the depositary must take the thing deposited to
such place; but the expenses for transportation
shall be borne by the depositor.
If no place has been designated for the return, it
shall be made where the thing deposited may be,
even if it should not be the same place where the
deposit was made, provided that there was no
malice on the part of the depositary. (1774)
Art. 1988. The thing deposited must be returned
to the depositor upon demand, even though a
specified period or time for such return may have
been fixed.
This provision shall not apply when the thing is
judicially attached while in the depositary's
possession, or should he have been notified of
the opposition of a third person to the return or
the removal of the thing deposited. In these
cases, the depositary must immediately inform
the depositor of the attachment or opposition.
(1775)
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
18 Book
II – LLB, EH405, USC – College of Law
Art. 1989. Unless the deposit is for a valuable
consideration, the depositary who may have
justifiable reasons for not keeping the thing
deposited may, even before the time designated,
return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its
consignation from the court. (1776a)
Art. 1990. If the depositary by force majeure or
government order loses the thing and receives
money or another thing in its place, he shall
deliver the sum or other thing to the depositor.
(1777a)
Art. 1991. The depositor's heir who in good faith
may have sold the thing which he did not know
was deposited, shall only be bound to return the
price he may have received or to assign his right
of action against the buyer in case the price has
not been paid him. (1778) 
I. RIGHTS AND OBLIGATIONS OF THE PARTIES
A. Obligations of the Depositary
a. To preserve the Thing
1. Agreement that the Depositary may Use the Thing
Deposited
May agree that the depositary may use the thing deposited for
purposes of preservation; and if depositary uses the thing not for
preservation purposes, he may be liable for damages
2. Delegation of Custody- can’t delegate
Exception: If with consent or permission of the depositor – not liable
Exception to the exception: If 3 rd person to whom custody is
delegated is manifestly careless, negligent or unfit – liable
Exception to the exception to the exception: If such third person is
chosen or nominated by the depositor – not liable
3. Change of the Manner of Deposit
- Can’t change the manner of deposit unless there are
circumstances that he may reasonably presume that the
depositor would consent to the change if he knew of the
facts of the situation. However, before the depositary may
make such change, he shall notify the depositor thereof and
wait for his decision, unless delay would cause danger.
4. Preservation of the Value
i.e. if it earns interest, collect the interest.
5. Secrecy of Deposit
= When the thing deposited is delivered closed
and sealed, the depositary must return it in the
same condition, and he shall be liable for
damages should the seal or lock be broken
through his fault.
b. To Return the Thing
1. To whom
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 CREDIT TRANSACTIONS
PreMidterm Reviewer
- Depositor, or to his heirs and successors or third person
designated in the contract
- If depositor was incapacitated at the time of making the
deposit, to his guardian or administrator or the person who
made the deposit or to the depositor himself should he
acquire capacity
- If depositor subsequently loses capacity– persons who may
have the administration of his property and rights or legal
representative.
2. What is to be returned
If money – numerical value of the money
If specific thing – the thing itself and its products, accessions and
accessories. Thus, the young of an animal which was deposited shall
be returned to the depositor.
- If replacement is given, replacement must be delivered to
the depositor
- Proceeds in expropriation must be given to the depositor
- The depositor's heir who in good faith may have sold the
thing which he did not know was deposited, shall only be
bound to return the price he may have received or to assign
his right of action against the buyer in case the price has not
been paid him.
If generic thing – depositary can commingle funds of depositor;
Unless there is a stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality, in
which case the various depositors shall own or have a proportionate
interest in the mass; co-owner is interested only to the extent of the
amount deposited
Case:
Commingling of Funds
ROMAN CATHOLIC BISHOP V DELA PENA
QUICK FACTS: Fr. Dela Pena was able to collect P6k+ for the
construction of a leper hospital. He then made a deposit with HSBC
in Iloilo in the amount of P19k of which is included the P6k+ raised
for the hospital. Shortly thereafter, war broke out and Fr. Dela Pena
was captured. On the suspicion that the funds in his account were for
revolutionary purposes, it was confiscated and turned over to the
gov’t. Bishop of Jaro is now claiming the amount from the Estate of
Fr. Dela Pena.
ISSUE: W.O.N. Fr. Dela Pena was liable for the loss.
HELD: xxx a careful examination of the case leads us to the
conclusion that said trust funds were a part of the funds deposited and
which were removed and confiscated by the military authorities of
the United States.
xxx xxx xxx
Although the Civil Code states that "a person obliged to give
something is also bound to preserve it with the diligence pertaining to
a good father of a family" (art. 1094), it also provides, following the
principle of the Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for events which
could not be foreseen, or which having been foreseen were inevitable,
with the exception of the cases expressly mentioned in the law or
those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal
funds De la Peña did not thereby assume an obligation different from
that under which he would have lain if such deposit had not been
made, nor did he thereby make himself liable to repay the money at
all hazards. If the had been forcibly taken from his pocket or from his
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
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II – LLB, EH405, USC – College of Law
house by the military forces of one of the combatants during a state
of war, it is clear that under the provisions of the Civil Code he
would have been exempt from responsibility. The fact that he placed
the trust fund in the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who must
respond at all hazards.
xxx There was no law prohibiting him from depositing it as he did
and there was no law which changed his responsibility be reason of
the deposit. While it may be true that one who is under obligation to
do or give a thing is in duty bound, when he sees events approaching
the results of which will be dangerous to his trust, to take all
reasonable means and measures to escape or, if unavoidable, to
temper the effects of those events, we do not feel constrained to hold
that, in choosing between two means equally legal, he is culpably
negligent in selecting one whereas he would not have been if he had
selected the other.
The court, therefore, finds and declares that the money which is the
subject matter of this action was deposited by Father De la Peña in
the Hongkong and Shanghai Banking Corporation of Iloilo; that said
money was forcibly taken from the bank by the armed forces of the
United States during the war of the insurrection; and that said Father
De la Peña was not responsible for its loss.
3. Form or Manner of Return
If sealed and locked – return sealed and locked; presumed open
Basis for determining value – statement of the depositor
When it becomes necessary to open a locked box or receptacle, the
depositary is presumed authorized to do so, if the key has been
delivered to him; or when the instructions of the depositor as regards
the deposit cannot be executed without opening the box or receptacle.
4. Place of Return
Place stipulated, if none, place where the thing is at the time it is
claimed
- If at the time the deposit was made a place was designated
for the return of the thing, the depositary must take the
thing deposited to such place; but the expenses for
transportation shall be borne by the depositor.
- If no place has been designated for the return, it shall be
made where the thing deposited may be, even if it should
not be the same place where the deposit was made,
provided that there was no malice on the part of the
depositary.
Time of Return
- At any time claimed by depositor even if there is stipulation
, unless when the deposit is judicially attached while in the
depositary’s possession or should the depositary have been
notified of the opposition of a third person to the return or
the removal of the thing deposited
Set Off
- Bank deposits can be set-off with the obligation of the
depositor to the bank
o A (depositor) – B (bank): A deposited 100,000 to
the bank and A also loaned 100,000 to the bank.
In effect, there are 2 contracts of loan.
- Bank cannot demand payment of the loan until maturity
- This is legal compensation – by operation of law even
without the parties knowing it; no need of consent by the
depositor
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 CREDIT TRANSACTIONS
PreMidterm Reviewer
Cases:
Right of Bank to Apply a Deposit to the Debt of the
Depositor
ASSOCIATED BANK V TAN (citing GULLAS V PNB)
QUICK FACTS: Vicente Tan is a valued client of Associated Bank.
He deposited a UCPB check worth P101k supposedly making his
total deposits amount to about P297k. After being advised by the
bank that the check was already cleared, he withdrew P240k. The
next day, he deposited P50k to cover the postdated checks he issued
to his business partners. However, the checks bounced. He sued the
bank for damages. Apparently, the bank debited P101k from his
account because the check was returned which it claims it has every
right to do.
ISSUE: W.O.N. the bank is liable for damages.
HELD: The liability of petitioner in this case ultimately revolves
around the issue of whether it properly exercised its right of setoff.
The determination thereof hinges, in turn, on the bank’s role and
obligations, first, as respondent’s depositary bank; and second, as
collecting agent for the check in question.
xxx xxx xxx
Also affirming this long standing doctrine, Philippine Bank of
Commerce v. Court of Appeals 16 has held that "the degree of
diligence required of banks is more than that of a good father of a
family where the fiduciary nature of their relationship with their
depositors is concerned."17Indeed, the banking business is vested with
the trust and confidence of the public; hence the "appropriate
standard of diligence must be very high, if not the highest, degree of
diligence."18 The standard applies, regardless of whether the account
consists of only a few hundred pesos or of millions.19
xxx xxx xxx
It is undisputed -- nay, even admitted -- that purportedly as an act of
accommodation to a valued client, petitioner allowed the withdrawal
of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking
system. Such a practice is unusual, because a check is not legal tender
or money;21 and its value can properly be transferred to a depositor’s
account only after the check has been cleared by the drawee bank. 22
xxx xxx xxx
Indeed, the bank deposit slip expressed this reservation:
"In receiving items on deposit, this Bank obligates itself only as the
Depositor’s Collecting agent, assuming no responsibility beyond
carefulness in selecting correspondents, and until such time as actual
payments shall have come to its possession, this Bank reserves the
right to charge back to the Depositor’s account any amounts
previously credited whether or not the deposited item is returned. x x
x."25
However, this reservation is not enough to insulate the bank from any
liability. In the past, we have expressed doubt about the binding force
of such conditions unilaterally imposed by a bank without the consent
of the depositor.26 It is indeed arguable that "in signing the deposit
slip, the depositor does so only to identify himself and not to agree to
the conditions set forth at the back of the deposit slip." 27
xxx xxx xxx
. It is undeniable that the bank’s premature authorization of the
withdrawal by respondent on October 1, 1990, triggered -- in rapid
succession and in a natural sequence -- the debiting of his account,
the fall of his account balance to insufficient levels, and the
subsequent dishonor of his own checks for lack of funds. The CA
correctly noted thus:
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
20 Book
II – LLB, EH405, USC – College of Law
"x x x [T]he depositor x x x withdrew his money upon the advice by
[petitioner] that his money was already cleared. Without such advice,
[respondent] would not have withdrawn the sum of P240,000.00.
Therefore, it cannot be denied that it was [petitioner’s] fault which
allowed [respondent] to withdraw a huge sum which he believed was
already his.
"To emphasize, it is beyond cavil that [respondent] had sufficient
funds for the check. Had the P101,000.00 not [been] debited, the
subject checks would not have been dishonored. Hence, we can say
that [respondent’s] injury arose from the dishonor of his well-funded
checks. x x x."35
Aggravating matters, petitioner failed to show that it had immediately
and duly informed respondent of the debiting of his account.
Nonetheless, it argues that the giving of notice was discernible from
his act of depositing P50,000 on October 2, 1990, to augment his
account and allow the debiting. This argument deserves short shrift.
First, notice was proper and ought to be expected. By the bank
manager’s account, respondent was considered a "valued client"
whose checks had always been sufficiently funded from 1987 to
1990,36 until the October imbroglio. Thus, he deserved nothing less
than an official notice of the precarious condition of his account.
Second, under the provisions of the Negotiable Instruments Law
regarding the liability of a general indorser 37 and the procedure for a
notice of dishonor,38 it was incumbent on the bank to give proper
notice to respondent. In Gullas v. National Bank,39 the Court
emphasized:
"x x x [A] general indorser of a negotiable instrument engages
that if the instrument – the check in this case – is dishonored and
the necessary proceedings for its dishonor are duly taken, he will
pay the amount thereof to the holder (Sec. 66) It has been held
by a long line of authorities that notice of dishonor is necessary
to charge an indorser and that the right of action against him
does not accrue until the notice is given.
"x x x. The fact we believe is undeniable that prior to the
mailing of notice of dishonor, and without waiting for any action
by Gullas, the bank made use of the money standing in his
account to make good for the treasury warrant. At this point
recall that Gullas was merely an indorser and had issued checks
in good faith. As to a depositor who has funds sufficient to meet
payment of a check drawn by him in favor of a third party, it has
been held that he has a right of action against the bank for its
refusal to pay such a check in the absence of notice to him that
the bank has applied the funds so deposited in extinguishment of
past due claims held against him. (Callahan vs. Bank of
Anderson [1904], 2 Ann. Cas., 203.) However this may be, as to
an indorser the situation is different, and notice should actually
have been given him in order that he might protect his
interests."40
5. Bank’s failure to return amount
Case:
Liability for Failure to Return the Bank Deposit
GUINGONA V CITY FISCAL OF MANILA
Already cited; see in Mutuum
6. When Bank Officials may be Guilty of Estafa
Case:
GUINGONA V CITY FISCAL OF MANILA (MR)
7. Earnest Money
Case:
Obligation if Sale did not Materialize
COMPANIA MARITIMA V CA
Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
 CREDIT TRANSACTIONS
PreMidterm Reviewer
QUICK FACTS: froilan purchased a ship from the shipping
administration. Froilan defaulted in his payments thus the ship was
repossessed. After repossessing the ship, the administration entered
into a contract with Pan Oriental wherein the latter would charter the
ship with an option to buy which shall be deemed entered into when
Pan Oriental pays 25% of the purchase price. Pan Oriental incurred
expenses and deposited P15k to the Administration. Froilan was able
to seek reconsideration which was granted. Thus, the ship’s
possession was returned to him enabling him to sell the same to
Compania Maritima.
ISSUE: W.O.N. Pan Oriental can recover the deposit of P15k?
HELD: The return of Pl5,000.00 ordered by the Trial Court and
affirmed by the Appellate Court was but just and proper. As this
Court found, that sum was tendered to REPUBLIC "which together
with its (PAN-ORIENTAL's) alleged expenses already made on the
vessel, cover 25% of the cost of the vessel, as provided in the option
granted in the bareboat contract (Exhibit "C"). This amount was
accepted by the Administration as deposit ...." Since the purchase did
not eventually materialize for reasons attributable to REPUBLIC, it is
but just that the deposit be returned. 12 It is futile to allege that PAN-
ORIENTAL did not plead for the return of that amount since its
prayer included other reliefs as may be just under the premises.
Courts may issue such orders of restitution as justice and equity may
warrant.
Art. 1992. If the deposit is gratuitous, the
depositor is obliged to reimburse the depositary
for the expenses he may have incurred for the
preservation of the thing deposited. (1779a)
Art. 1993. The depositor shall reimburse the
depositary for any loss arising from the character
of the thing deposited, unless at the time of the
constitution of the deposit the former was not
aware of, or was not expected to know the
dangerous character of the thing, or unless he
notified the depositary of the same, or the latter
was aware of it without advice from the
depositor. (n)
Art. 1994. The depositary may retain the thing in
pledge until the full payment of what may be due
him by reason of the deposit. (1780)
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing
deposited;
(2) In case of a gratuitous deposit, upon the
death of either the depositor or the depositary.
(n)
I. RIGHTS AND OBLIGATIONS OF THE PARTIES
A. Obligations of the Depositor
- If the deposit is gratuitous, no obligation to pay
compensation
- If engaged in the business of storing goods or if there is
stipulation to pay compensation – onerous; to pay
compensation
- No expenses for the use – because depositary is not allowed
to use
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
21 Book
II – LLB, EH405, USC – College of Law
B. Security of the Depositary
- Depositary has claims against the depositor arising out of
the deposit for:
1) Compensation not paid
2) For expenses of preservation not reimbursed
3) For damages not indemnified
- Depositary has a right to retain or exercise possessory lien
until he is paid of the above cases, unless agreed upon for
conventional compensation; however, such right is lost if
thing is returned but claims are not lost; in this case, there
is a pledge created by operation of law
II. TERMINATION OF THE CONTRACT
A. Extinguishment
a. General Causes
1) Loss or destruction
2) If depositor claims or demands for the thing
3) If depositary renounces the deposit in case he has
justifiable reasons or reasonable grounds to believe that the
thing was obtained illegally
4) Expiration of the term
5) Termination of the purpose of the deposit or fulfillment of
the resolutory condition
6) Mutual withdrawal from the contract
7) For gratuitous contracts, death of either party, contract is
extinguished.
8) For onerous contracts, deposit is not extinguished due to
death of either parties. Deposit is extinguished only when
deposit is terminated by the heirs of the depositor.
b. Other Causes
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code.
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal
obligation;
(2) When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. (1781a)
Art. 1997. The deposit referred to in No. 1 of the
preceding article shall be governed by the
provisions of the law establishing it, and in case
of its deficiency, by the rules on voluntary
deposit.
The deposit mentioned in No. 2 of the preceding
article shall be regulated by the provisions
concerning voluntary deposit and by Article
2168. (1782)
Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
 CREDIT TRANSACTIONS
PreMidterm Reviewer
Art. 1998. The deposit of effects made by the
travellers in hotels or inns shall also be regarded
as necessary. The keepers of hotels or inns shall
be responsible for them as depositaries, provided
that notice was given to them, or to their
employees, of the effects brought by the guests
and that, on the part of the latter, they take the
precautions which said hotel-keepers or their
substitutes advised relative to the care and
vigilance of their effects. (1783)
Art. 1999. The hotel-keeper is liable for the
vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel.
(n)  -
Art. 2000. The responsibility referred to in the
two preceding articles shall include the loss of, or
injury to the personal property of the guests
caused by the servants or employees of the
keepers of hotels or inns as well as strangers;
but not that which may proceed from any force
majeure. The fact that travellers are constrained
to rely on the vigilance of the keeper of the
hotels or inns shall be considered in determining
the degree of care required of him. (1784a)
Art. 2001. The act of a thief or robber, who has
entered the hotel is not deemed force majeure,
unless it is done with the use of arms or through
an irresistible force. (n)
Art. 2002. The hotel-keeper is not liable for
compensation if the loss is due to the acts of the
guest, his family, servants or visitors, or if the
loss arises from the character of the things
brought into the hotel. (n)  ISSUE: Is hotel liable?
Art. 2003. The hotel-keeper cannot free himself
from responsibility by posting notices to the
effect that he is not liable for the articles brought
by the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility
of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void. (n)
Art. 2004. The hotel-keeper has a right to retain
the things brought into the hotel by the guest, as
a security for credits on account of lodging, and
supplies usually furnished to hotel guests. (n)  In an early case, 38 the Court of Appeals through its then Presiding
I. NECESSARY DEPOSIT
A. KINDS
a. In Compliance with Legal Obligations
- governed by the law establishing them and in default
thereof, by the rules on voluntary deposit
- The judicial deposit of a thing the possession of which is
being disputed in a litigation by 2 or more persons (Art.
538)
b. On the Occasion of a Calamity
Thru the Efforts of: RJ MARTINEZ & DAISY GARONG
22 Book
II – LLB, EH405, USC – College of Law
- Made on the occasion of any calamity such as fire, storm,
flood, pillage, shipwreck, or other similar events –
regulated by the provisions concerning voluntary deposit
c. By Transients
- in inns, hotels and motels (motorist hotels) – Not applicable
to boarding houses; refers not to boarders; non-transients
are governed by the rules on lease.
Obligations of the transients:
1) To notify the hotel keeper of the goods – doesn’t need
to enumerate them
2) Take necessary precautions prescribed regarding their
safekeeping
The hotel-keeper is liable for the vehicles, animals and
articles which have been introduced or placed in the
annexes of the hotel.
- The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the
articles brought by the guest. Any stipulation between the
hotel-keeper and the guest whereby the responsibility of the
former as set forth in articles 1998 to 2001 is suppressed or
diminished shall be void.
Case:
YHT REALTY CORP. V CA
QUICK FACTS: McLoughlin stayed with Tropicana Hotel. He
deposited $$$ in the safety deposit box. Some of the $$$ were
lost/stolen. It was found that Tan took the $$$ with the assistance of
some employees (since the SDB can only be opened with 2 keys, the
guest’s and the hotel’s). McLoughlin wants hotel to be liable together
with Tan and the employees. Hotel argues it is not liable because of
Undertaking signed by McLoughlin that it is free from liability.
HELD: Article 2003 was incorporated in the New Civil Code as an
expression of public policy precisely to apply to situations such as
that presented in this case. The hotel business like the common
carrier's business is imbued with public interest. Catering to the
public, hotelkeepers are bound to provide not only lodging for hotel
guests and security to their persons and belongings. The twin duty
constitutes the essence of the business. The law in turn does not allow
such duty to the public to be negated or diluted by any contrary
stipulation in so-called "undertakings" that ordinarily appear in
prepared forms imposed by hotel keepers on guests for their
signature.
Justice (later Associate Justice of the Court) Jose P. Bengzon, ruled
that to hold hotelkeepers or innkeeper liable for the effects of their
guests, it is not necessary that they be actually delivered to the
innkeepers or their employees. It is enough that such effects are
within the hotel or inn. 39 With greater reason should the liability of
the hotelkeeper be enforced when the missing items are taken without
the guest's knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene
Article 2003 of the New Civil Code for they allow Tropicana to be
released from liability arising from any loss in the contents and/or use
of the safety deposit box for any cause whatsoever.40 Evidently, the
undertaking was intended to bar any claim against Tropicana for any
loss of the contents of the safety deposit box whether or not
Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
 CREDIT TRANSACTIONS
PreMidterm Reviewer

negligence was incurred by Tropicana or its employees. The New parties

Civil Code is explicit that the responsibility of the hotel-keeper shall As to PURPOSE To secure the owners For safe-keeping
extend to loss of, or injury to, the personal property of the guests right
even if caused by servants or employees of the keepers of hotels or
As to OBJECT May be real or Personal property only
inns as well as by strangers, except as it may proceed from any force
personal property
majeure.41 It is the loss through force majeure that may spare the
hotel-keeper from liability. In the case at bar, there is no showing that As to CAUSE Remuneratory Generally gratuitous
the act of the thief or robber was done with the use of arms or As to For the benefit of the Generally for the
through an irresistible force to qualify the same as force majeure.42 POSSESSION owner/ winning party benefit of the
Petitioners likewise anchor their defense on Article 2002 43 which to the case depositor.
exempts the hotel-keeper from liability if the loss is due to the acts of As to Ends only upon court Can demand at any
his guest, his family, or visitors. Even a cursory reading of the TERMINATION order time
provision would lead us to reject petitioners' contention. The
justification they raise would render nugatory the public interest
sought to be protected by the provision. xxx this provision I. Judicial deposit (sequestration of property in
presupposes that the hotel-keeper is not guilty of concurrent litigation)
negligence or has not contributed in any degree to the occurrence of
the loss. A depositary is not responsible for the loss of goods by theft, Judicial deposit – takes place when an attachment or seizure of
unless his actionable negligence contributes to the loss. 44 property in litigation is ordered by a court
In the case at bar, the responsibility of securing the safety deposit box Examples:
was shared not only by the guest himself but also by the management 1) Properties attached by the sheriff upon the filing of a
since two keys are necessary to open the safety deposit box. Without complaint
the assistance of hotel employees, the loss would not have occurred. 2) A receiver (disinterested party) may be appointed by the
Thus, Tropicana was guilty of concurrent negligence in allowing Tan, court to administer and preserve the property in litigation
who was not the registered guest, to open the safety deposit box of 3) In suits of replevin or manual delivery of personal property
McLoughlin, even assuming that the latter was also guilty of 4) Garnishment
negligence in allowing another person to use his key. xxx xxx 5) Levy

d. In Common Carriers
- Hand carried items are deemed a necessary deposit. Xxx end xxX
- Requirement on notice and exercise of precaution still
applies.
"Nothing great will ever be achieved without great mean, and men
Art. 2005. A judicial deposit or sequestration are great only if they are determined to be so." 
takes place when an attachment or seizure of - Charles De Gaulle 
property in litigation is ordered. (1785)
Art. 2006. Movable as well as immovable
property may be the object of sequestration.
(1786)
Art. 2007. The depositary of property or objects
sequestrated cannot be relieved of his
responsibility until the controversy which gave
rise thereto has come to an end, unless the court
so orders. (1787a)
Art. 2008. The depositary of property
sequestrated is bound to comply, with respect to
the same, with all the obligations of a good
father of a family. (1788)
Art. 2009. As to matters not provided for in this
Code, judicial sequestration shall be governed by
the Rules of Court. (1789) 

I. JUDICIAL DEPOSIT
A. SPECIAL RULE
B. DISTINGUISHED FROM EXTRA-JUDICIAL DEPOSIT
JUDICIAL EXTRA-JUDICIAL
DEPOSIT DEPOSIT
(VOLOUNTARY)
As to SOURCE By Court order By the will of the

Thru the Efforts of: RJ MARTINEZ & DAISY GARONG Based on Credit Transactions Syllabus AY 2010-2011 & De Leon’s
23 Book
II – LLB, EH405, USC – College of Law