CREDIT TRANSACTIONS

ATTY. NOROSSANA ALAUYA-SANI, CPA

MSU COLLEGE OF LAW

MUTUUM
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)

FUNGIBLE VS CONSUMMABLE
➢ Whether the thing is consumable or not depends upon its nature and whether it is
fungible or not depends upon the intention of the parties.

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)

MUTUUM VS COMMODATUM VS BARTER

MUTUUM

▪ The subject matter is money or any other fungible things

▪ It may be gratuitous or onerous

COMMODATUM

▪ The bailee is bound to return the identical things borrowed when the time has expired or
the purpose has been served

▪ It is always gratuitous

BARTER

▪ The subject matter is non-fungible things

▪ The equivalent thing is given in return for what has been received

▪ It is an onerous contract

▪ It is really a mutual sale

Art. 1955. The obligation of a person who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of
the same kind, quantity and quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time of the perfection of the loan shall
be paid. (1754a)

▪ Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated

should supervene, 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. (n)

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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

▪ If the thing loaned is money, payment should be made in the currency stipulated. If the
agreement is silent on the currency, then payment must be made in the currency in which
the money was delivered, based on the principle that the borrower must pay “the same
amount of the same kind and quality”. If it is not possible to deliver in the relevant
currency, payment must be made in the currency which is the legal tender in the
Philippines

Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
(1755a)

EXCEPTIONS: 1. In case of damages after delay

2. Compounded interest- interest upon interest

a. When there is agreement to charge interest on interest

b. when such is judicially demanded and upon final
judgment (legal interest).

ESCALATION CLAUSE, is a stipulation allowing a \n increase in the interest rate

originally agreed upon by the parties.

▪ Any increase in the rate of interest made pursuant to an escalation clause must be the
result of an agreement between the parties.

Art. 1957. Contract and stipulations, under the cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in accordance
with laws on usury.

▪ It is only the stipulation on usurious interest which should be treated as void so

that the loan becomes without stipulation to pay interest.

▪ Interest no longer subject to ceiling. The rate will depend on the agreement of the
parties, subject to the power of the courts to temper the interest rate if they are
found unconscionable o iniquitous considering the circumstances of each case.

▪ The parties are now free to stipulate the interest to be paid on monetary
obligations and absent any evidence of fraud, undue influence or any vice of
consent exercised by one party against the other, the interest rate agreed upon is
binding upon them.

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)

▪ This article simply means that if unstipulated interest is paid by mistake,

the debtor may recover as this would be a case of solutio indebiti or undue
payment. But where the unstipulated interest or interest stipulated, there being a
stipulation but it is not in writing, is obliged paid voluntarily because the debtor
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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

feels morally obliged to do so, there can be no recovery as in the case of natural
obligations.

USURY LAW
Usury may be defined as contracting for or receiving something in excess of the amount
allowed by law for the loan or forebearance of money, goods or chattels.
C.B. Circular No. 905 effectively removed the ceilings on interest rate on loans or
forebearance of money, goods or credits. It did not repeal nor amend the Usury Law but
simply suspended the latter’s effectivity.
Unconscionable Interest Rate
There is nothing in the C.B. Circular No. 905 grants lenders a carte blanche
authority to raise interest rates to levels which will enslave their borrowers or lead to a
hemorrhaging of their assets.
Penalty
Where a borrower has agreed to pay a rate of interest not forbidden by law, but has
stipulated that, in the event of him not paying at the time specified, the obligation shall
bear a higher rate of interest, either from default or from the date of its execution, or that
some specific sum shall be paid in addition to the principal and interest contracted for,
increased rate is generally regarded as penalty.
Imposing an unconscionable rate of interest on a money debt, even if knowingly
and voluntarily assumed is immoral and unjust. It is tantamount to a repugnant spoliation
and iniquitous deprivation of property, repulsive to the common sense of man. It has no
support in law, in principles of justice or in the human conscience nor is there any reason
which may justify such imposition.
Attorney’s Fees
Stipulations on the payment of attorney’s fees are not forbidden by law. The
purpose is to safeguard the lender against future loss or damage by being compelled to
retain counsel.
However, if the amount of attorney’s fees stipulated is excessive, the same is
subject to equitable reduction.
Validity of Contract.
While the stipulation to pay usurious interest is void, the contract of loan remains
valid.
Escalation Clause
A contractual stipulation providing for adjustments in the interest rate agreed upon
in the event there is change in the legal rate of interest effected by law or Monetary Board
as authorized by law.
De-escalation clause: An escalation clause can only be valid if it also include a de-
escalation clause.
Legal Interest

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 CREDIT TRANSACTIONS
ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

The Monetary Board lowered such legal or default interest from 12% to 6% per annum for
the loan or forbearance of any money, goods or credits, and the rate allowed in judgments,
in the absence of an express contract as to such rate of interest, starting July 1, 2013 under
BSP Circular 799. Under the same Circular, the 6% legal rate of interest is also uniformly
applied to non-loan obligations.

CASES
G.R. No. L-23559 October 4, 1971 DIZON, J.: AURELIO G. BRIONES, vs.
PRIMITIVO P. CAMMAYO, ET AL.,
Facts: Aurelio G. Briones filed an action against the Cammayos, to recover from them,
jointly and severally, the amount of P1,500.00, plus damages, attorney's fees and costs of
suit.
In its answer, defendants argue that they executed the real estate mortgage, as security for
the loan of P1,200.00 upon the usurious agreement;
1. That although the mortgage contract, was executed for securing the payment of
P1,500.00 for a period of one year, without interest, the truth and the real fact is
that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of
P1,200.00 and withheld the sum of P300.00 which was intended as advance
interest for one year;
2. and That on account of said loan of P1,200.00, defendant Primitivo P.
Cammayo paid to the plaintiff during the period from October 1955 to July
1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to
acknowledge as part payment of the account but as in interest of the said loan
for an extension of another term of one year;
The trial court sentencing defendants to pay the principal of the loan notwithstanding its
finding that the same was tainted with usury.

Issues:
1) In a loan with usurious interest, may the creditor recover the principal of the loan?
(2) Should attorney's fees be awarded in plaintiff's favor?
Under Usury Law Act 2655 a usurious contract is void; that the creditor had no right of
action to recover the interest in excess of the lawful rate; but that this did not mean that the
debtor may keep the principal received by him as loan — thus unjustly enriching himself to
the damage of the creditor. A contract of loan with usurious interest consists of principal
and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is
to pay interest thereon. And said two stipulations are divisible in the sense that the former
can still stand without the latter.
Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of the latter shall leave the former in
force."

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal.
The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.
Neither is there a conflict between the New Civil Code and the Usury Law. Under the
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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or
value than is allowed in said law, may recover the whole interest paid. The New Civil
Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury
laws may be recovered by the debtor, with interest thereon from the date of payment."
Article 1413, in speaking of "interest paid in excess of the interest allowed by the usury
laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of 20%
per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the
usurious interest, not just that part thereof in excess of the interest allowed by law. It is in
this case that the law does not allow division. The whole stipulation as to interest is void,
since payment of said interest is illegal. The only change effected, therefore, by Article
1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of
that allowed by law, which the Usury Law already provided for, but to add that the same
can be recovered "with interest thereon from the date of payment."

Furthermore, penal sanctions are available against a usurious lender, as a further deterrence
to usury. The principal debt remaining without stipulation for payment of interest can thus
be recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for there was none, the same being void.
Rather, it is due to the general provision of law that in obligations to pay money, where the
debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code).
The court a quo therefore, did not err in ordering defendants to pay the principal debt with
interest thereon at the legal rate, from the date of filing of the complaint. Mulet vs. People,
but found that the same does not apply to the present case. ... . This last amount is not
usurious interest on the capital of the loan but the value of the produce of the land sold to
petitioner under pacto de retro with the unpaid balance of the usurious interest as the
consideration of the transaction. This consideration, because contrary to law, is illicit, and
the contract which results therefrom, null and void. (Art. 1275, Civil Code).

CASTRO, J., dissenting: that in a contract which is tainted with usury, the prestation to pay
such interest is an integral part of the cause of the contract. 1 It is also the controlling
cause, for a usurer lends his money not just to have it returned but indeed, to acquire in
coordinate gain. Article l957, which is a new provision in the Civil Code, provides as
follows: "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.

PACITA F. REFORMINA vs. HON VALERIANO TOMOL GR NO. L-59096

October 11, 1985

Doctrine: If the obligation consists in the payment of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest which
is six percent per annum.
Facts: Petitioners suffered as a result of fire and claim its insurance. Article 2209 provides
for the payment of interest, in the absence of stipulation, the legal interest should be 6%
per annum. Petitioner contends that they should have 12% per annum as provided in the
CENTRAL bank Circular No. 416. Respondents argued that such provision is applicable to
section 1 of Act No. 2665 which deals about loans, forbearances of money, good or credits,
and rate allowed in judgment.

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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

Issue: WON Petitioner can have the 12% interest per annum.
Ruling: No. Article 2209 remains untouched despite the grant of authority to the
CENTRAL Bank Act No. 2655. To make the CENTRAL bank Circular No. 416 applicable
to any case other than those specifically provided for by the Usury Law will make the same
of doubtful constitutionality since the Monetary Board will be exercising legislative
functions which was beyond the investment of P.D. No. 116.

Liam Law vs. Olympic Sawmill [G.R. No. L-30771, May 28, 1984]

Facts
Plaintiff loaned P10,000.00, without interest, to defendant. The loan became ultimately due
on January 31, 1960, but was not paid on that date, with the debtors asking for an extension
of three months, or up to April 30, 1960.

On March 17, 1960, the parties executed another loan document. Payment of the
P10,000.00 was extended to April 30, 1960, but the obligation was increased by P6,000.00
as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form
part of the principal obligation to answer for attorney’s fees, legal interest, and other cost
incident thereto to be paid unto the creditor and his successors in interest upon the
termination of this agreement.

Defendants again failed to pay their obligation by April 30, 1960 and, on September 23,
1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00 constituted usurious interest.

Issue:Whether or not, the P6000.00 constituted usurious interest.

Ruling: Moreover, for sometime now, usury has been legally non-existent. Interest can
now be charged as lender and borrower may agree upon. The Rules of Court in regards to
allegations of usury, procedural in nature, should be considered repealed with retroactive
effect.

PHILIPPINE NATIONAL BANK v. IAC AND SPS. FERMIN MAGLASANG

AND ANTONIA SEDIGO, GR NO. 75223, 1990-03-14

Facts:

PNB extended financial assistance to the private respondents in the

form of loans.The promissory notes bore 12% interest per annum plus
1% interest as penalty charge in case of default the payments.
Private respondents mortgaged several real estate properties in favor
of the petitioner as security of their loans. Then the price of sugar
went down in 1977, the private respondents incurred deficits in the
payment of their loans.

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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

Presidential Decree No. 116, issued CB Circular No. 705 increasing

the ceiling on the rate of interest on both secured and unsecured
loans up to no more than 21% per annum.

PNB Board of Directors revised its lending interest rates on the

medium and long-term loans effective June 1, 1980, per PNB board
resolution dated May 26, 1980.

When the private respondents defaulted in the payments of their

loans, the petitioner demanded not only the settlement of their
outstanding obligation but also the payment of the new interest rate
of 21% per annum beginning June 1, 1980 per the PNB board
resolution.

For failure of the private respondents to settle their obligation, then

in the amount of P84,743.34, the petitioner foreclosed the mortgage
P21,743.34; 21% per annum and 3% penalty charge starting
November 27, 1981

Issues:

The main issue in this case is whether or not the revised rate of
interest imposed on the loans of the private respondents is legal.

Ruling:

The petition is without merit.

In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the
Court ruled that the Escalation Clause is a valid provision in the loan agreement provided
that - (1) the increased rate imposed or charged does not exceed the ceiling fixed by law or
the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the
law or regulation authorizing such an increase; and (3) the remaining maturities of the
loans are more than 730 days as of the effectivity of the law or regulation authorizing such
an increase.

Likewise in Banco Filipino Savings and Mortgage Bank v. Navarro, (152 SCRA 346
[1987]), the Court said that for an Escalation Clause to be valid, it must include a de-
escalation clause. There can be an increase in interest if increased by law or by the
Monetary Board; and in order for such stipulation to be valid, it must include a provision
for reduction of the stipulated interest "in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board," as provided for in P.D. No. 1684,
promulgated on March 17, 1980. There is no question that PNB board resolution dated
May 26, 1980 contains such de-escalation clause, under paragraph 8 thereof, to wit:

"(8) To enable us to adjust interest rates in accordance with CB Circular Letter of March
19, 1980, the covering promissory note for all short/medium/long-term loans shall include
the following conditions:

"The Bank reserves the right to increase the interest rate within the limits allowed by law
or by the Monetary Board, provided, that the interest rate agreed upon shall be reduced in
the event that the applicable maximum interest rate is reduced by law or by the Monetary
Board: Provided, further, that the adjustment in the interest rate shall take effect on or after
the effectivity of the increase or increase in the maximum rate of interest." (Exhibits, p. 77)

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ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on December
1, 1979. The promissory notes executed by the private respondents show that they are all payable
on demand but the records do not show when payment was demanded. Even granting that it was
demanded on the effectivity of the law, it is obvious that the period of 730 days has not yet elapsed
at the date the mortgaged properties were sold at public auction on November 27, 1981 (Certificate
of Sheriff's Sale, Records of Exhibits, p. 84). Accordingly, as of December 1, 1979, the remaining
maturity days of the loans were less than 730 days. Hence, the increased rate imposed or charged
is not valid.

The claim of private respondents that the respondent appellate court committed mathematical error
in computing the 12% interest due their deficiencies is a factual issue.

Absent the recognized exceptions, finding of facts of the Court of Appeals are conclusive on the
parties and Supreme Court on the tenet that this Court decides appeals which only involve
questions of law and that it is not the function of the Supreme Court to analyze and to weigh such
evidence all over again, its jurisdiction being limited to reviewing errors of law that might have
been committed by the lower court (Philippine National Bank v. Court of Appeals, 159 SCRA 433
[1988]).

Integrated Realty Corp vs PNB

GR No. 60705, 28 June 1989
174 SCRA 295

FACTS
Raul Santos made a time deposit with OBM in the amount of P500H and he was
issued a certificate of time deposits. On another date, Santos again made a time deposit
with OBM in the amount of P200H, he was again issued a CTD. IRC, thru its president
Raul Santos, applied for a loan and/or credit line (P700H) with PNB. To secure such,
Santos executed a Deed of Assignment of the 2 time deposits. After due dates of the time
deposit certificates, OBM did not pay PNB. PNB then demanded payment from IRC and
Santos, but they replied that the loan was deemed paid with the irrevocable assignment of
the time deposit certificates.

PNB then filed with RTC to collect from IRC and Santos with interest. The trial
court ruled in favor of PNB ordering IRC and Santos to pay PNB the total amount of
P700H plus interest of 9% PA, 2% additional interest and 1% PA penalty interest. On
appeal, the CA ordered OBM to pay IRC and Santos whatever amts they will to PNB with
interest.

IRC and Santos now claim that OBM should reimburse them for whatever amts
they may be adjudged to pay PNB by way of compensation for damages incurred.

ISSUE
Whether or not the claim of IRC and Santos will prosper.

HELD
The Court held in the affirmative. The 2 time deposits matured on 11 January 1968
and 6 February 1968, respectively. However, OBM was not allowed and suspended to
operate only on 31 July 1968 and resolved on 2 August 1968. There was a yet no obstacle
to the faithful compliance by OBM of its liabilities. For having incurred in delay in the
performance of its obligation, OBM should be held for damages. OBM contends that it had
agreed to pay interest only up to the dates of maturity of the CTD and that Santos is not
entitled to interest after maturity dates had expired.

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 CREDIT TRANSACTIONS
ATTY. NOROSSANA ALAUYA-SANI, CPA
MSU COLLEGE OF LAW

While it is true that under Article 1956 of the CC, no interest shall be due unless it
has been expressly stipulated in writing, this applies only to interest for the use of money.
It does not comprehend interest paid as damages. OBM is being required to pay such
interest, not as interest income stipulated in the CTD, but as damages for failure and delay
in the payment of its obligations which thereby compelled IRC and Santos to resort to the
courts.

The applicable rule is that LEGAL INTEREST, in the nature of damages for non-
compliance with an obligation to pay sum of money, is recoverable from the date judicially
or extra-judicially demand is made.

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