Credit Transaction Premid HONG

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I. Bailment, defined
It is 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.
Generally, a bailment may be said to be a contractual relation.
To be legally enforceable, it must contain the essential elements of a valid
contract.
It may also be created by operation of law.
II. Parties
In COMMODATUM: In MUTUUM:
1. Bailor the giver 1. Lender - the one who delivers
2. Bailee the recipient of the thing 2. Borrower - the one who receives
bailed
Title XI - LOAN
General Provisions
ARTTICLE 1933-1934
I. Loan, defined
It is a contract where one of the parties delivers to another something which
comprises a commodatum or a mutuum in the form of money or something
circulation as money; it must be repayable absolutely in all events.
II. Kinds
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.
A. COMMODATUM - loan of B. MUTUUM simple loan or

use loan of consumption
Something to be returned Equivalent amount to be
(subject matter is non-fungible returned (subject matter is
thing) fungible)
Essentially gratuitous (if there is May be gratuitous or onerous
compensation ceases to be (with interest)
commodatum) Ownership goes to borrower or
Ownership retained by lender or baille
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bailor Refers to personal property only

May involve real or personal Referred to as loan for
property consumption
Referred to as loan for use or Borrower bears the risk of loss,
temporary possession because of his ownership
Lender bears the risk of loss Can be generally oblige to pay at
because of his ownership the end of the period
While generally oblige to return Not personal in character
object at end of period, still in
some cases the return can be
demanded even before the end
of the period
Personal in character
III. Characteristics
1. REAL Loan is perfected by delivery of the thing loaned.
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.
2. UNILATERAL Loan produces obligations only for the borrower. Obligations

of the lender are either incidental to ownership or consequences of the
borrowers rights and duties.
Note: to deliver is not an obligation of the lender because it is what perfects the
contract of loan. Remember that if there is no promise then there is no obligation.
Obligation comes ofter the perfection of the contract.
Q: when does delivery becomes an obligation?

A: in Pactum de commodatum case- the agreement to constitute commodatum.
Note: in the negotiation stage, if the lender has agreed to accept a loan, a VALID
CONSENSUAL CONTRACT or a PACTUM DE COMMODATUM already exixts, but not
the real contract of loan. In this case, there is an obligation to deliver the thing.
IV. Distinctions
Commodatum Mutuum
Character Essentially gratuitous Naturally gratuitous
Object Non-fungible object (but may be Object is money or fungible
consumable); may be real or thing; personal property only
personal property
Purpose Transfer its use ; ownership Transfer its ownership to
retained by the lendor or bailor borrower or bailee
Effect Restoration of the very thing Restoration of an equal
loaned; identical thing quantity and quality (equivalent
amount)
Risk On the lender (as owner) On the borrower (as debtor of
a generic thing)
Personal in character Not personal in character
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Referred to as loan for use or Referred to as loan for

temporary possession consumption
Duration May be claimed before the end of May not be claimed until the
the term if urgently needed term expires or is forfeited
CHAPTER I
COMMODATUM
Section I Nature of Commodatum
ARTICLES 1935 1940

ARTICLE 1935.The bailee in commodatum acquires the use of the thing
loaned but not its fruits; if any compensation is to be paid by him who acquires
the use, the contract ceases to be a commodatum. (1941a)
ARTICLE 1936.Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as when it is
merely for exhibition. (n) aisa dc
ARTICLE 1937.Movable or immovable property may be the object
of commodatum. (n)
ARTICLE 1938.The bailor in commodatum need not be the owner of the thing
loaned. (n)
ARTICLE 1939.Commodatum is purely personal in character. Consequently:
(1)The death of either the bailor or the bailee extinguishes the contract;
(2)The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee's household may make use of the
thing loaned, unless there is a stipulation to the contrary, or unless the nature
of the thing forbids such use. (n)
ARTICLE 1940.A stipulation that the bailee may make use of the fruits of the
thing loaned is valid. (n)
I. Contract of Commodatum,
A. Concept
1. Commodatum is essentially gratuitous. If compensation is present, the contract
ceases to be a Commodatum. In such a case, there arises a lease contract. The
right to use is limited to the thing loaned but not to its fruits unless there is a
stipulation to the contrary.
2. Purpose: The right to use is limited to the thing loaned for a certain time or
period. If bailee not entitled to the use of the thing, the contract may be a
DEPOSIT not a Commodatum.
3. Subject matter: A Commodatum is generally non-consumable things, whether
real or personal.
Consumable goods however may be the subject of a Commodatum but only for
purposes of EXHIBITION!
4. Bailor need not be the owner: Since ownership is not transferred in a
Commodatum, the bailor need not be the owner of the thing loaned. It is
sufficient that the bailor has such possessory interest in the subject matter or
right to its use which he may assert against the bailee and the third persons
although not against the rightful owner.
5. Commodatum is purely personal: Death of either bailor or bailee extinguishes or
terminates the contract unless, by stipulation the Commodatum is transmitted to

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the heirs of either or both parties. If there are two or more borrowers/bailee, the
death of one does not extinguish the contract in the absence of stipulation to the
contrary. (Source: De Leon)
6. Movable or immovable property may be a subject of a commodatum.
a. Cases:
1. Commodatum is essentially gratuitous
REPUBLIC vs. BAGTAS
FACTS:
Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau
of Animal Industry three bulls for a period of one year for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the
bulls. Upon the expiration of the contract, the borrower asked for a renewal for
another period of one year. However, the Secretary of Agriculture and Natural
Resources approved a renewal thereof of only one bull for another year and
requested the return of the other two. Bagtas wrote to the Director of Animal
Industry that he would pay the value of the three bulls and later reiterated his
desire to buy them at a value with a deduction of yearly depreciation to be
approved by the Auditor General. The Director of Animal Industry advised him that
the book value of the three bulls could not be reduced and that they either be
returned or their book value paid not later which Bagtas failed to pay or to return.
An action against him was commenced, praying that he be ordered to return the
three bulls loaned to him or to pay their book value with interests, and costs; and
that other just and equitable relief be granted. Bagtas answered that because of
the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture
and Natural Resources and the President of the Philippines from the refusal by the
Director of Animal Industry to deduct from the book value of the bulls
corresponding yearly depreciation of 8% from the date of acquisition, to which
depreciation the Auditor General did not object, he could not return the animals
nor pay their value and prayed for the dismissal of the complaint.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid
by the Huks in November 1953 upon the surrounding barrios of Hacienda Felicidad
Intal, Baggao, Cagayan, where the animal was kept, and that as such death was
due to force majeure she is relieved from the duty of the returning the bull or
paying its value to the appellee.
ISSUE:
Whether or not Bagtas is relieved from the duty of returning or paying for the
value of the bull.
SC RULING:
Bagtas is not relieved of his obligation. The loan by the appellee to the late
defendant Bagtas of the three bulls for breeding purposes for a period of one year,
later on renewed for another year as regards one bull, 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 retained ownership or title to the bull it should suffer its loss due to
force majeure. A contract of commodatum is essentially gratuitous. If the breeding

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fee be considered a compensation, then the contract would be a lease of the bull.
Under the Civil Code, the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession of the bull after the
expiry of the contract. And even if the contract be commodatum still the appellant
is liable, because the Civil Code provides that a bailee in a contract of
commodatum is liable for loss of the thing, even if it should be through a fortuitous
event:
xxx 2) If he keeps it longer than the period stipulated;
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.
2. Effect of Adverse Possession for 11 years
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE vs. COURT

OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ
FACTS:
The whole controversy started when the petitioner Catholic Vicar Apostolic of
the Mountain Province (VICAR for brevity) filed with the Court of First Instance of
Baguio Benguet an application for registration of title over Lots 1, 2, 3, and 4 in
Psu-194357, situated at Poblacion Central, La Trinidad, Benguet. On March 22,
1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title
thereto. After trial on the merits, the land registration court promulgated its
Decision, dated November 17, 1965, confirming the registrable title of VICAR to
Lots 1, 2, 3, and 4.
The respondent in this case appealed the decision of the land registration
court to the then Court of Appeals. The Court of Appeals rendered its decision,
reversing the decision of the land registration court and dismissing the VICAR's
application as to Lots 2 and 3. VICAR then filed with the Supreme Court a petition
for review on certiorari of the decision of the Court of Appeals dismissing his (its)
application for registration of Lots 2 and 3. The Heirs of Juan Valdez and Pacita
Valdez, on likewise filed with the Supreme Court a petition for review.
The Supreme Court denied in a minute resolution both petitions (of VICAR
on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for
lack of merit. Upon the finality of both Supreme Court resolution. The Heirs of
Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion
For Execution of Judgment praying that the Heirs of Octaviano be placed in
possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on
December 7, 1978, denied the motion on the ground that the Court of Appeals
decision did not grant the Heirs of Octaviano any affirmative relief. The heirs of
Octaviano and the Heirs of Valdez then filed their cases for recovery of possession.
In these two cases , the plaintiffs argue that the defendant Vicar is barred
from setting up the defense of ownership and/or long and continuous possession
of the two lots in question since this is barred by prior judgment of the Court of
Appeals under the principle of res judicata. Plaintiffs contend that the question of
possession and ownership have already been determined by the Court of Appeals
and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme
Court). On his part, defendant Vicar maintains that the principle of res judicata

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would not prevent them from litigating the issues of long possession and ownership
because the dispositive portion of the prior judgment merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar contends
that only the dispositive portion of the decision, and not its body, is the controlling
pronouncement of the Court of Appeals.
ISSUE:
Whether or not the adverse possession of the petitioner of the subject lot for
11 years would constitute as a valid acquisitive prescription of the lot?
SC RULING:
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
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 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 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.
We find no reason to disregard or reverse the ruling of the Court of Appeals
in CA-G.R. No. 38830-R. Its findings of fact have become incontestable. This Court
declined to review said decision, thereby in effect, affirming it. It has become final
and executory a long time ago.
3. Effect of Suspension of Possessory Rights for more than 50 years

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REPUBLIC vs. CA
FACTS:
Applicant Baloys claim is anchored on their possessory information title
coupled with their continuous, adverse and public possession over the land in
question. An examination of said title shows that the description and the area of
the land stated therein substantially coincides with the land applied for and that
said title had been regularly issued having been acquired by applicants
predecessor, Domingo Baloy, under the provisions of the Spanish Mortgage Law.
Applicants presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had
become public land thru the operation of Act 627 of the Philippine Commission. On
November 26, 1902 pursuant to the executive order of the President of the U.S.,
the area was declared within the U.S. Naval Reservation.
ISSUE:
Whether or not the possessory rights of Baloy are lost?
SC RULING:
No. The finding of the 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 the heirs were merely suspended and
not lost by prescription, is supported by 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.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It
partakes of the character of a commodatum. It cannot therefore militate against
the title of Domingo Baloy and his successor-in-interest. Ones ownership of a thing
may be lost by prescription by reason of anothers 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. Navys 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 Commodatum is divided into

1. ORDINARY - has a definite period stipulated. One of the parties delivers to
another something not consumable so that the latter may use the same for
a certain time and return it. In the ordinary commodatum, the possession of
the bailee is more secure for he has the right to retain the thing loaned until
the expiration of the period agreed upon, or the accomplishment of the use
for which the commodatum has been constituted.
2. PRECARIUM - no definite time or use stipulated, or merely tolerated. One
whereby the bailor may demand the thing loaned at will (art.1947) if
neither the duration of the contract nor the use to which the thing loaned
should be devoted has been stipulated, or if the use of the thing is merely
tolerated by the owner.
Cases:

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1. If neither the duration of the contract nor the use of the thing
loaned is stipulated
QUINTOS vs. BECK
FACTS:
Beck was a tenant of Quintos and occupied the latter's house. Upon the novation
of the contract of lease between the plaintiff and the defendant, the former
gratuitously granted to the latter the use of the furniture, subject to the condition
that the defendant would return them to the plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on notified
the defendant of the conveyance, and asked him to vacate the premises. Also,
Quintos required the defendant to return all the furniture transferred to him for
them in the house where they were found.
Beck wrote a letter to the plaintiff informing her that he could not give up the three
gas heaters and the four electric lamps because he would use them until the 15th
of the same month when the lease in due to expire. before vacating the house,
the defendant deposited with the Sheriff all the furniture belonging to the plaintiff
and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue,
in the custody of the said sheriff.
ISSUE:
1. Whether the defendant complied with his obligation to return the furniture
upon the plaintiff's demand;
2. whether the latter is bound to bear the deposit fees thereof,
3. whether she is entitled to the costs of litigation.
SC RULING:
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
Issue 1:
YES, 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.
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.
Issue 2:
NO, 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.

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Issue 3:
Yes, the plaintiff is entitled to the payment thereof by the defendant in case of his
inability to return some of the furniture because under paragraph 6 of the
stipulation of facts, the defendant has neither agreed to nor admitted the
correctness of the said value.
The costs in both instances should be borne by the defendant because the plaintiff
is the prevailing party. The defendant was the one who breached the contract of
commodatum, and without any reason he refused to return and deliver all the
furniture upon the plaintiff's demand. The expenses which may be occasioned by
the delivery to and deposit of the furniture with the Sheriff shall be for the account
of the defendant. the defendant shall pay the costs in both instances
2. If the use of the thing is merely tolerated
CATHOLIC VICAR vs. CA
FACTS:
Catholic Vicar Apostolic of the Mountain Province filed with the Court of First
Instance of Baguio Benguet on September 5, 1962 an application for registration of
title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic
Church building, convents, high school building, school gymnasium, school
dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan
Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots
Nos. 2 and 3, respectively, asserting ownership and title thereto. The two lots were
possessed by the predecessors-in-interest of private respondents under claim of
ownership in good faith from 1906 to 1951; petitioner had been in possession of
the same lots as bailee in commodatum up to 1951, when petitioner repudiated the
trust and when it applied for registration in 1962; petitioner had been in possession
as owner for eleven years.
ISSUE:
Whether or not Catholic Vicar acquired subject lots by way of ordinary acquisitive
prescription.
SC RULING:
There is no possibility of acquisitive prescription which requires 10 years possession
with just title and 30 years of possession without. 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 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.

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c. Pactum de Commodando (1934)

An accepted promise to deliver something by way of commodatum.
It is valid but no commodatum is perfected until delivery.
Case:
Effect of approval of loan application
SAURA IMPORT and EXPORT CO., INC. vs. DEVELOPMENT BANK OF THE
PHILIPPINES
FACTS:
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to
the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00
to pay the balance of the purchase price of the jute mill machinery and equipment;
and P9,100.00 as additional working capital.On January 7, 1954 RFC passed
Resolution No. 145 approving the loan application for P500,000.00, to be secured
by a first mortgage on the factory building to be constructed, the land site thereof,
and the machinery and equipment to be installed. Saura, Inc. was officially notified
of the resolution on January 9, 1954. The day before, however, evidently having
otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it. On April 13, 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 500,000 to 300,00. In the meantime Saura, Inc. had
written RFC requesting that the loan of P500,000.00 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 P300,000.00 ... in view of a notification ... from the China
Engineers Ltd., expressing their desire to consider the loan insofar as they are
concerned."
On July 24, 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 P500,000.00 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 17, 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.
The trial court rendered judgment for the plaintiff, ruling that there was a
perfected contract between the parties and that the defendant was guilty of breach

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thereof.
ISSUE:
Whether or not the approval of the loan create an obligation on the part of
DBP which it has to fulfill in favor of Saura Inc.
SC Ruling:
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.
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.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not
protest against any alleged breach of contract by RFC, or even point out that the
latter's stand was legally unjustified. Its request for cancellation of the mortgage
carried no reservation of whatever rights it believed it might have against RFC for
the latter's non-compliance. As it is there was mutual desistance to the
performance of the obligation.
B. Requisites

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1. CAPACITY - no special capacity. Any person entitled to possession may

be the lender so long as his rights to the thing are not strictly personal.
(Lender need not be the owner; a lessee may constitute a contract of
Commodatum; a thief may even be a bailor.)
2. OBJECT - must be non-fungible. If consumable, valid so long as the use
agreed upon will not to consume it (for exhibition purposes). It may
be real or personal
3. CONSIDERATION - gratuitous. If not, it ceases to be a Commodatum.
(maybe a lease)
4. FORM - no special form is required. Commodatum starts from the
moment the thing is delivered.
C. Characteristics
1. REAL- 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
ARTICLES 1941 1945
ARTICLE 1941.The bailee is obliged to pay for the ordinary expenses for the
use and preservation of the thing loaned. (1743a)
ARTICLE 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;
(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)
ARTICLE 1943.The bailee does not answer for the deterioration of the thing loaned
due only to the use thereof and without his fault. (1746)
ARTICLE 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)
ARTICLE 1945.When there are two or more bailees to whom a thing is loaned in
the same contract, they are liable solidarily. (1748a)

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I. Rights and Obligations of the Bailee

A. Rights and obligations of the borrower or baliee
a. Right of a BAILEE:
A personal right to use the thing, but not to use its fruits unless
stipulated by the parties. He can neither lend nor lease the thing to a
stranger who is not a member of his household because the contract is
personal.
b. Obligations/ duties of a BAILEE:

1. To preserve the thing.
2. To incur expenses required by the use and preservation of the thing,
without reimbursement.
Q: why should the bailee pay for such expenses?
A: because he is suppose to return the identical thing, so he is obliged
to take care of the thing (diligence of a good father of a family)
3. To return the thing at the expiration of the contract.
The bailee cannot retain the thing on account of the bailors obligation or
bailors debt.
4. He does not answer for damages not due to his fault, but only due to
use
But he is liable for fortuitous events if:
1. If the thing is devoted to a different use (amounts to
bad faith or abuse of generosity)
2. If return of the thing is delayed
3. If the thing bailed has been appraised (the law presumes
that the parties intend that the borrower shall be liable)
4. If the bailee lends it to a stranger/ to a third person, not
a member of the household. (this is prohibited by law
because commodatum is purely personal)
5. If the bailee did not save it when he could Act of
ingratitude, failure to exercise due diligence.
Note: when an appraisal value is given, the bailee may be held liable in case of
a fortuitous event. Exception to this if you agreed that there is no liability.
Q: what if the bailor is obligated to the bailee, can the bailee retain the
object?
A: NO, legal compensation cannot take place because 2 obligations are not
the same.
5. Two or more borrowers are solidarily liable.

Note: in the obligations and contracts the GR is that plurality of parties results to
joint obligation. It will only result to solidarity if it is (1) agreed upon, (2)
provided by law, (3) nature of the obligation requires solidarity.
Cases:
Effect of failure to return
QUINTOS vs. BECK
FACTS:

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The plaintiff brought this action to compel the defendant to return her
certain furniture which she lent him for his use. She appealed from the judgment
of the Court of First Instance of Manila which ordered that the defendant return to
her the three has heaters and the four electric lamps found in the possession of the
Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement as
to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's
house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation
of the contract of lease between the plaintiff and the defendant, the former
gratuitously granted to the latter the use of the furniture, subject to the condition
that the defendant would return them to the plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September
14, 1936, these three notified the defendant of the conveyance, giving him sixty
days to vacate the premises under one of the clauses of the contract of lease.
There after the plaintiff required the defendant to return all the furniture
transferred to him for them in the house where they were found. On the 7th of
the same month, the defendant wrote another letter to the plaintiff informing her
that he could not give up the three gas heaters and the four electric lamps because
he would use them until the 15th of the same month when the lease in due to
expire. The plaintiff refused to get the furniture in view of the fact that the
defendant had declined to make delivery of all of them.
On November 15th, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the
warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
ISSUE:
Whether or not the defendant has the obligation to return the furniture upon
demand of the plaintiff?
SC RULING:
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. 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.
The defendant, 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.
The appealed judgment is modified and the defendant is ordered to return

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and deliver to the plaintiff, in the residence to return and deliver to the
plaintiff, in the residence or house of the latter, all the furniture
described.
CATHOLIC VICAR vs. CA
FACTS:
Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed an
application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357 located in
Benguet. Said Lots being the sites of the Catholic Church building, convents, high
school building, school gymnasium, school dormitories, social hall, stonewalls, etc.
However, the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title
thereto. After trial on the merits, the land registration court promulgated its
Decision confirming the registrable title of VICAR to Lots 1, 2, 3, and 4. However,
the Court of Appeals rendered its decision reversing the decision of the land
registration court and dismissing the VICAR's application as to Lots 2 and 3, the
lots claimed by the two sets of oppositors in the land registration case (and two
sets of plaintiffs in the two cases now at bar), the first lot being presently occupied
by the convent and the second by the women's dormitory and the sister's convent.
ISSUE:
Whether or not Vicar can validly claim the lands in question.
SC RULING:
No, Vicar cannot validly acquire the lands especially on the ground of
acquisitive prescription. 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 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. Ordinary
acquisitive prescription requires possession for ten years, but always
with just title. Extraordinary acquisitive prescription requires 30 years.
DE LOS SANTOS vs. JARRA
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

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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 Spain. 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
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 of partida 5.
ARTICLES 1946 1952

I. Rights and Obligations of the Bailor
ARTICLE 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. acd
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)
ARTICLE 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)
ARTICLE 1948.The bailor may demand the immediate return of the thing
if the bailee commits any act of ingratitude specified in article 765. (n)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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. (1752) cdtai
ARTICLE 1952.The bailor cannot exempt himself from the payment of expenses
or damages by abandoning the thing to the bailee. (n)

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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
cannot 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
PRIMARY OBLIGATION OF THE BAILOR:

To allow the bailee the use of the thing loaned for the duration of the period
stipulated. (bailor bound by the terms of the contract of commodatum).
RIGHT OF THE BAILOR TO DEMAND RETURN OF THE THING FOR ACTS OF

INGRATITUDE:
Under Art. 1948, bailor may demand the return of thing if the bailee
commits acts of ingratitude specified under Art. 765
1. If the donee should commit some offense against the person, the
honor or the property of the donor, or of his wife or children under
his parental authority;
2. If the donee imputes to the donor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless the
crime or the act has been committed against the donee himself, his wife or
children under his authority;
3. If he unduly refuses him support when the donee is legally or
morally bound to give support to the donor. (648a)
OBLIGATION TO REFUND EXTRAORDINARY EXPENSES:

GR: Bailor bears the extra ordinary expenses.
IF: bailee makes such repairs, he must first notify the bailor and bailor must
refund the bailee.
The notice is important because it is possible that the bailor may not
want to incur the extraordinary expenses at all. Bailor should be given
the discretion as to what must be done with his property.
EXEPTION: when such repairs are so urgent.
Q: why should the bailor be notified before incurring the expenses?

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A: because he should be given the discretion as to what he wants to do with his own
property. If the bailor doesnt want to preserve the thing, then he may not pay.
EXTRAORDINARY EXPENSES ARISING FROM THE ACTUAL USE OF THE THING

LOANED:
Such expenses (caused by fortuitous event) arising on the occasion of the
actual use of the thing loaned shall be borne by the bailor and bailee alike on a 50-
50 (pro rata)
LIABILTY TO PAY DAMAGES FOR KNOWN HIDDEN DEFECTS:

Requisites:
1. There is flaw or defect in the thing loaned
2. That the flaw or defect is hidden
3. The bailor is aware of such flaw
4. He does not notify or advise the bailee of the same and;
5. The bailee suffers damage by reason of such flaw or defect.
IF FLAW IS UNKNOWN TO THE BAILOR:

Bailor is not liable because commodatum is gratuitous. The rule is different in
sale (Art, 1547), and lease (Art. 1653) (Source: De Leon)
II. Termination
Causes of Extinguishment
1. Expiration of the time or use stipulated
- If there is urgent need before due date, he can demand for the return
- Bailor can also temporarily borrow the thing then return the object to
the bailee if due date has not expired yet.
2. Claim of the lender
- GENERAL RULE: 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 instituted.
- EXCEPTION: In case of urgent need in which case bailee may demand
its return or temporary use.
- Reason: The right of the bailor is based on the fact that commodatum
is essentially gratuitous.
3. Destruction of the thing
- If the thing can no longer be used for the thing intended
Q: what if the destruction was due to the bailees fault?
A: regardless who cause the destruction, the commodatum is
extinguished, but the bailee can still be held liable for damages.
4. Death of the borrower/ bailee
- Unless there is a stipulation to the contrary.
5. Ingratitude of the bailee
The bailor may demand the return when the bailee commits an act of
ingratitude:
If the bailee should commit an offense against the person, the
honor or the property of the bailor, or the wife or children under
his parental authority
If the bailee imputes to the bailor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless the

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crime or the act has been committed against the bailee himself,
his wife, or children under his authority
If the bailee unduly refuses the bailor support when the bailee is
legally and morally bound to give support to the bailor
Chapter II
SIMPLE LOAN or MUTUUM
Loan, defined. It is a contract where one of the parties delivers to another

something which comprises a commodatum or a mutuum in the form of
money or something circulation as money; it must be repayable absolutely in all
events
ARTICLES 1953 1961

ARTICLE 1953.A person who receives a loan of money or any other
fungible [replaceable by another identical item] thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same
kind and quality. (1753a)
ARTICLE 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)
ARTICLE 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[replaceable by another identical item] 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)
ARTICLE 1956.No interest shall be due unless it has been expressly
stipulated in writing. (1755a)
ARTICLE 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) cd i
ARTICLE 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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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 or MUTUUM

A. Concept

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It is a contract whereby one party delivers to another money or fungible

thing, on the condition of returning the same kind, amount and quality. If the
object loaned is not fungible but the borrower is to return another of the
same kind and quality, it is barter.
Cases:
a. Mutuum vs. Commodatum
CHEE KIONG YAM vs. MALIK
FACTS:
This is a petition for certiorari, prohibition, and mandamus with preliminary
injunction. Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of
Jolo, Sulu, acted without jurisdiction, in excess of jurisdiction and with grave abuse
of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by
respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners
that there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above
determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed
in his court as Criminal Cases No. M-111, M-183 and M-208.
In the three criminal cases the respondents charges the petitioner with
estaffa through misappropriation, however in the face of the documents it
state that the amount received was in the nature of a simple loan.
ISSUE:
Whether or not the petitioners in this case can be charged of estaffa
when the obligation is said to be that of simple loan.
SC Ruling:
We agree with the petitioners that the facts alleged in the three
criminal complaints do not constitute estafa through misappropriation.
In order that a person can be convicted of estafa, 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

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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. Ibaez, 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.
Thus the criminal complaints against petitioners are hereby
declared null and void; respondent judge is hereby ordered to dismiss said
criminal cases and to recall the warrants of arrest he had issued in connection
therewith.
b. Mutuum vs Barter
- Mutuum is a contract whereby one party delivers to another money or
fungible thing, on the condition of returning the same kind, amount and
quality. If the object loaned is not fungible but the borrower is to return
another of the same kind and quality, it is barter.
c. Mutuum vs. Lease
TOLENTINO vs. GONZALES SY CHIAM
FACTS:
Sometime prior to the 28th day of November, 1922, the appellants
(Tolentino and Manio) purchased of the Luzon Rice Mills, Inc., a piece or parcel
of land with the camarin located thereon for the price of P25,000,
promising to pay therefor in three installments. One of the conditions of
that contract of purchase was that on failure of the purchaser (plaintiffs and
appellants) to pay the balance of said purchase price or any of the
installments on the date agreed upon, the property bought would revert
to the original owner. For the last installment, upon receiving the letter of the
vendor of said property, the purchasers, the appellants herein, realizing that
they would be unable to pay the balance due began to make an effort to
borrow money with which to pay the balance of their indebtedness on

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the purchase price of the property involved. Finally an application was

made to the defendant for a loan for the purpose of satisfying their
indebtedness to the vendor of said property. After some negotiations the
defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of
P17,500 upon condition that the plaintiffs execute and deliver to him a
pacto de retro of said property.
ISSUE:
May a tenant charge his landlord with a violation of the Usury Law upon the
ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest?
SC RULING:
No. The value of money, goods or credits is easily ascertained while
the amount of rent to be paid for the use and occupation of the property
may depend upon a thousand different conditions. It will thus be seen that
the rent to be paid for the use and occupation of property is not necessarily fixed
upon the value of the property. The amount of rent is fixed, based upon a
thousand different conditions and may or may not have any direct reference to the
value of the property rented. To hold that "usury" can be based upon the
comparative actual rental value and the actual value of the property, is to subject
every landlord to an annoyance not contemplated by the law, and would create a
very great disturbance in every business or rural community. We cannot bring
ourselves to believe that the Legislature contemplated any such disturbance in the
equilibrium of the business of the country.
Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the
effect of receiving or taking usurious rates." It will be noted that said statute
imposes a penalty upon a "loan" or forbearance of any money, goods, chattels or
credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent".
A "loan," as that term is used in the statute, signifies the giving of a sum
of money, goods or credits to another, with a promise to repay, but not a
promise to return the same thing. To "loan," in general parlance, is to
deliver to another for temporary use, on condition that the thing or its
equivalent be returned; or to deliver for temporary use on condition that
an equivalent in kind shall be returned with a compensation for its use.
The word "loan," however, as used in the statute, has a technical meaning. It
never means the return of the same thing. It means the return of an
equivalent only, but never the same thing loaned. A "loan" has been
properly defined as an advance payment of money, goods or credits upon
a contract or stipulation to repay, not to return, the thing loaned at some
future day in accordance with the terms of the contract. Under the contract
of "loan," as used in said statute, the moment the contract is completed the
money, goods or chattels given cease to be the property of the former owner and
becomes the property of the obligor to be used according to his own will, unless
the contract itself expressly provides for a special or specific use of the same. At all
events, the money, goods or chattels, the moment the contract is executed, cease
to be the property of the former owner and becomes the absolute property of the
obligor.

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A contract of "loan" differs materially from a contract of "rent." In a

contract of "rent" the owner of the property does not lose his ownership.
He simply loses his control over the property rented during the period of
the contract. In a contract of "loan" the thing loaned becomes the
property of the obligor. In a contract of "rent" the thing still remains the
property of the lessor. He simply loses control of the same in a limited
way during the period of the contract of "rent" or lease. In a contract of
"rent" the relation between the contractors is that of landlord and
tenant. In a contract of "loan" of money, goods, chattels or credits, the
relation between the parties is that of obligor and obligee. "Rent" may be
defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. It is defined as the
return or compensation for the possession of some corporeal inheritance, and is a
profit issuing out of lands or tenements, in return for their use. It is that, which is
to paid for the use of land, whether in money, labor or other thing agreed upon. A
contract of "rent" is a contract by which one of the parties delivers to the
other some nonconsumable thing, in order that the latter may use it
during a certain period and return it to the former; whereas a contract of
"loan", as that word is used in the statute, signifies the delivery of money
or other consumable things upon condition of returning an equivalent
amount of the same kind or quantity, in which cases it is called merely a
"loan." In the case of a contract of "rent," under the civil law, it is called
a "commodatum."
In the present case the property in question was sold. It was an

absolute sale with the right only to repurchase. During the period of
redemption the purchaser was the absolute owner of the property.
During the period of redemption the vendor was not the owner of the
property. During the period of redemption the vendor was a tenant of the
purchaser. During the period of redemption the relation which existed
between the vendor and the vendee was that of landlord and tenant.
That relation can only be terminated by a repurchase of the property by
the vendor in accordance with the terms of the said contract. The
contract was one of rent. The contract was not a loan, as that word is
used in Act No. 2655.
d. Mutuum vs. Estafa
LIWANAG vs. CA
When there is no transfer of ownership, it is not a simple loan but estafa.
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,

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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.
SC RULING: Liwanag alleged the contract between her and Rosales was
simple loan, hence there was no estafa. But the court held that the
transaction cannot be considered loan since in a contract of loan, once
money is received, ownership over the same is transferred. Being the
owner, the borrower can dispose of it freely. Here, Liwanag could not
dispose of the property freely as it was delivered to her for the single
purpose of buying cigarettes, and if this was not possible then to return
the money to Rosales. As there was no transfer of ownership of the
money delivered, Liwanag is liable for conversion under Art.315 par.1(b)
of the RPC.
B. Kinds
1. Gratuitous if no stipulation of payment of interest
2. With interest
C. Requisites
1. Capacity of the parties
No special capacity is required to be a lender except ownership.
But an emancipated minor may not borrow money without the consent of
his parent or guardian.
2. Object
Consumable
Mutuum involves money or any other fungible things. If not
fungible, the contract is barter.
3. Consideration
Gratuitous (liberality) or onerous (interest).
4. Form
No special form is needed; but there must be delivery, as the
contract is real.
An accepted promise to deliver something by way of simple loan
may be subject to the Statute of Frauds if not to be performed
within one year. This contract is consensual as distinguished from loan
proper which is real.
Case:
Accepted promise to deliver something by way of simple loan
SAURA IMPORT and EXPORT CO., INC., vs. DEVELOPMENT BANK OF THE
PHILIPPINES
FACTS:
Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before
its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building for the
manufacture of jute sacks; P240,900.00 to pay the balance of the
purchase price of the jute mill machinery and equipment; and P9,100.00

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as additional working capital.

After agreeing on the terms of the industrial loan, Mr. & Mrs. Ramon E.
Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China
Engineers, Ltd. shall sign the promissory notes jointly with the borrower-
corporation. On January 7, 1954 RFC passed Resolution No. 145 approving
the loan application for P500,000.00, to be secured by a first mortgage
on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Saura, Inc. was officially notified of
the resolution on January 9, 1954. The day before, however, evidently having
otherwise been informed of its approval, Saura, Inc. wrote a letter to
RFC, requesting a modification of the terms laid down by it, namely: that
in lieu of having China Engineers, Ltd. which was willing to assume
liability only to the extent of its stock subscription with Saura, Inc. sign
as co-maker on the corresponding promissory notes.
It appears, however, that despite the formal execution of the loan
agreement the reexamination contemplated in Resolution No. 736 proceeded. In a
meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura,
President of Saura, Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. But after the reexamination, there ensued
several more circumstances that occurred that resulted to the prolonged
the discharged of the loan. Afterwhich, the loan was again restored to the
original amount of P500,000. Yet at one point, the negotiations between the
two parties came to a standstill, and so Saura Inc. did not anymore
pursue the matter. Instead, it requested RFC to cancel the mortgage, and
so, on June 17, 1955 RFC executed the corresponding deed of
cancellation and delivered it to Ramon F. Saura himself as president of
Saura, Inc.
On January 9, 1964, 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: Whether or not the defendant bank is guilty of breach of contract of loan.
SC RULING:
No. DBP is not guilty of breach of contract of loan. The Supreme Court held
in this case that although there was a perfected consensual contract between the
parties, such that there was offer and acceptance: 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.
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. It was in line with such assumption that when RFC
approved and restored the loan to the original amount of P500,000.00. There was
nothing in said conditions that contradicted the terms laid down in RFC Resolution

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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."
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 of mutual desistance, what
Manresa terms "mutuo disenso," which is a mode of extinguishing obligations.
Clearly, the subsequent conduct of Saura Inc. requesting for cancellation of
the mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance confirms their desistance. All these
circumstances demonstrate beyond doubt that the said agreement had been
extinguished by mutual desistance and that on the initiative of the plaintiff-
appellee itself.
D. Effects (Obligation of the Borrower only) Art. 1955

a. To return the thing or amount borrowed at the period stipulated or fixed
according to general rules.
If the thing borrowed is money;
Art.1249. The payment of debts in money shall be made in the
currency stipulated and if it is not possible to deliver such
currency then in the currency which is the legal tender in
the Philippines.
The delivery of promissory notes payable to order or bills of
exchange or other mercantile documents shall produce the effect
of payment only when they have been cashed or when through
the fault of the creditor they have been impaired.
Art. 1250. In case of 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.
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 Currency Stipulated
RONO vs. GOMEZ
FACTS:
Cristobal Roo 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, Roo was sued for payment. His

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main defense was his liability should not exceed the equivalent of 4,000 pesos
"mickey mouse" money and could not be 4,000 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 Roo 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.
SC RULING:
No, he is not paying interest. 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.
ii) Stipulation not to pay while war is going on
NEPOMUCENO vs. NARCISO
FACTS:
In 1938, plaintiff executed a mortgage in favor of defendant on a parcel of land to
secure the payment of P24,000 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.
SC RULING: There is nothing immoral or violative of public order in the questioned

stipulation. The morgagee apparently did not want to have their pre-war credit
paid with Japanese military notes, and the mortgagor voluntarily agreed not to do
so in consideration of the reduction of the rate of interest. It was a perfectly
equitable and valid transaction. Appellants were bound by said contract and
appellees were not obliged to receive payment before it was due. Hence, the latter
had reason not to accept the tender of payment made to them by the former.

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Judgment affirmed.
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 theyve 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]
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

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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
2. Rule: If the thing borrowed is not money,

- Return the same amount in equal kind and quality, even if the price has
changed or else its value at the time the contract was perfected.
b. To Pay Interest
When it is expressly agreed in writing (Art. 1956)
When the stipulation to pay is verbal, the volountary payment is valid as a
performance of a natural obligation. (But GR: Verbal void; EXCP: voluntary
payment)
Interest paid even if not stipulated, is not recoverable, it being proof of a tacit
contract or a natural obligation.
a. Except where it is proved that the interest was paid by error (solution
indebiti)
b. Interest payable in kind, it is appraised at the current price at the time
of payment (Art. 1958)
c. Interest due shall not earn interest (no compounding) in the absence of
agreement and without prejudice to Art 2212 (interest after judicial
demand) (Art. 1595)
d. The following are not considered interest:
- Increase in the price when the sale is on installment
- Attorneys fees for cost of collection
- Penalty for breach
Bank deposits, whether fixed savings or current are governed by the
provisions concerning simple loan.
1. Requites
Cases:
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL
ROSARIO, petitioners, vs. EQUITABLE PCI BANK (formerly THE
PHILIPPINE COMMERCIAL INTERNATIONAL BANK), respondent
FACTS.
Pan Pacific Service Contractors, Inc. is engaged in contracting
mechanical works on airconditioning system. Pan Pacific, entered into a
contract of mechanical works with respondent. Contract stipulated, among
others, that Pan Pacific shall be entitled to a price adjustment in case of increase
in labor costs and prices of materials. In 1990, labor costs and prices of materials
escalated. In accordance with the escalation clause, Pan Pacific claimed a price
adjustment of P5,165,945.52. TCGI Engineers recommended to respondent that
the price adjustment should be pegged at P3,730,957.07 However, respondent
withheld the payment of the price adjustment under the escalation clause despite
Pan Pacific's repeated demands. Instead, respondent offered Pan Pacific a loan

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of P1.8 million. Against its will Pan Pacific was constrained to execute a
promissory note in the amount of P1.8 million which was released directly to
laborers and suppliers.
When the P1.8 million loan matured and respondent demanded payment plus
interest and penalty Pan Pacific refused to pay the loan. Pan Pacific maintained
that the P1.8 million was to be considered as an advance payment on the price
adjustment. Therefore, there was really no consideration for the promissory note;
hence, it is null and void from the beginning. Petitioners filed a complaint for
declaration of nullity/annulment of the promissory note, sum of money, and
damages against the respondent. The lower court rendered a decision in favor of
the plaintiff, ordering respondent the payment of the unpaid balance of the
adjustment price, with interest thereon at the legal rate of twelve (12%) percent
per annum from the date when the complaint was filed, until the amount is fully
paid.
Petitioner appealed to the SC claiming that the interest rate applicable should be
the 18% bank lending rate.
ISSUE: WON the interest rate should be 18% bank lending rate instead of the
12%.
RULING.
It is settled that the agreement or the contract between the parties is the
formal expression of the parties' rights, duties, and obligations. Thus, when the
terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the
parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement. . A review of Section 2.6 of the
Agreement and Section 60.10 of the General Conditions shows that the consent
of the respondent is not needed for the imposition of interest at the current bank
lending rate, which occurs upon any delay in payment. When the terms of a
contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations governs. We agree with petitioners'
interpretation that in case of default, the consent of the respondent is not needed
in order to impose interest at the current bank lending rate.
Under Article 2209 of the Civil Code, the appropriate measure for damages in
case of delay in discharging an obligation consisting of the payment of a sum of
money is the payment of penalty interest at the rate agreed upon in the contract
of the parties. In the absence of a stipulation of a particular rate of penalty
interest, payment of additional interest at a rate equal to the regular monetary
interest becomes due and payable. Finally, if no regular interest had been agreed
upon by the contracting parties, then the damages payable will consist of
payment of legal interest which is 6%, or in the case of loans or forbearances of
money, 12% per annum.
The written agreement entered into between petitioners and respondent provides
for an interest at the current bank lending rate in case of delay in payment and
the promissory note charged an interest of 18%. To prove petitioners' entitlement
to the 18% bank lending rate of interest, petitioners presented the promissory
note prepared by respondent bank itself. This promissory note, although
declared void by the lower courts because it did not express the real intention of
the parties, is substantial proof that the bank lending rate at the time of default
was 18% per annum.
SC odered respondent to pay petitioners P1,516,015.07 with interest at the bank

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lending rate of 18% per annum starting 6 May 1994 until the amount is fully paid.
2. Stipulation for legal interest but higher rate is charged
Espiritu vs Landrito , April 4, 2007
FACTS:
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the
amount of P350,000.00 payable in three months. To secure the loan, the Spouses
Landrito executed a real estate mortgage over a 540 square meter lot located in
Alabang, Muntinlupa in favor of the Spouses Espiritu. From the P350,000.00 that
the Landritos were supposed to receive, P17,500.00 was deducted as interest for
the first month which was equivalent to five percent of the principal debt,
andP7,500.00 was further deducted as service fee. The agreement, however,
provided that the principal indebtedness earns "interest at the legal rate."
Spouses Landrito were unable to pay the principal. The loan agreement was
extended through an Amendment of Real Estate Mortgage. The loan was
restructured in such a way that the unpaid interest became part of the principal,
thus increasing the principal to P385,000. The new loan agreement adopted all
other terms and conditions contained in first agreement. The loan agreement was
renewed three more times. In all these subsequent renewals, the same terms and
conditions found in the first agreement were retained.
The principal was increased to P507,000.00 inclusive of running interest. Then it
was increased to P647,000.00, and finally increased to P874,125.00. At the
hearing before the trial court, Zoilo Espiritu testified that the increase in the
principal in each amendment of the loan agreement did not correspond to the
amount delivered to the Spouses Landrito. Rather, the increase in the principal
had been due to unpaid interest and other charges.
The debt remained unpaid and Spouses Espiritu foreclosed the mortgaged
property. During the auction sale, the property was sold to the Spouses Espiritu
as the lone bidder.
The Spouses Landrito failed to redeem the subject property. While the negotiated
price for the land started atP1,595,392.79, it was allegedly increased from time to
time. Spouses Landrito allegedly tendered two managers checks and some cash,
totaling P1,800,000.00 to the Spouses Espiritu but the latter refused to accept the
same. They also alleged that the Spouses Espiritu increased the amount
demanded to P2.5 Million and gave them until July 1992 to pay the said amount.
However, upon inquiry, they found out that on 24 June 1992, the Spouses
Espiritu had already executed an Affidavit of Consolidation of Ownership and
registered the mortgaged property in their name, and that the Register of Deeds
of Makati had already issued TCT. On 9 October 1992, the Spouses Landrito,
represented by their son Zoilo Landrito, filed an action for annulment or
reconveyance of title, with damages against the Spouses Espiritu. Among the
allegations in their Complaint, they stated that the Spouses Espiritu, as creditors
and mortgagees, "imposed interest rates that are shocking to ones moral
senses."
HELD:
Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which
the Spouses Espiritu imposed interest and charges, in connection with the loan.
Article 1956. No interest shall be due unless it has been stipulated in writing. The
omission of the Spouses Espiritu in specifying in the contract the interest rate
which was actually imposed, in contravention of the law, manifested bad faith.

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In several cases, this Court has been known to declare null and void stipulations
on interest and charges that were found excessive, iniquitous, and
unconscionable. In declaring void the stipulations authorizing excessive interest
and charges, the Court declared that although the Usury Law was suspended,
nothing in the said Circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging
of their assets.
Stipulation authorizing iniquitous or unconscionable interests are contrary to
morals, if not against the law. Under Article1409 of the Civil Code, these contracts
are inexistent and void from the beginning. The nullity of the stipulation on the
usurious interest does not, however, affect the lenders right to recover the
principal of the loan. Nor would it affect the terms of the real estate mortgage.
The right to foreclose the mortgage remains with the creditors, and said right can
be exercised upon the failure of the debtors to pay the debt due. The debt due is
to be considered without the stipulation of the excessive interest. A legal interest
of 12% per annum will be added in place of the excessive interest formerly
imposed.
It has not yet been shown that the Spouses Landrito had already failed to pay the
correct amount of the debt and, therefore, a foreclosure sale cannot be
conducted in order to answer for the unpaid debt. The foreclosure sale conducted
upon their failure to pay P874,125 in 1990 should be nullified since the amount
demanded as the outstanding loan was overstated; consequently it has not been
shown that the mortgagors the Spouses Landrito, have failed to pay their
outstanding obligation. Moreover, if the proceeds of the sale together with its
reasonable rates of interest were applied to the obligation, only a small part of its
original loans would actually remain outstanding, but because of
the unconscionable interest rates, the larger part corresponded to said excessive
and iniquitous interest.
As a result, the subsequent registration of the foreclosure sale cannot transfer
any rights over the mortgaged property to the Spouses Espiritu. Significantly, the
records show that the property mortgaged was purchased by the Spouses
Espiritu and had not been transferred to an innocent purchaser for value. This
means that an action for reconveyance may still be availed of in this case.
The provisions of the Real Estate Mortgage are not annulled and the principal
obligation stands. In addition, the interest is not completely removed; rather, it is
set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the
principal, with its recomputed interest which runs from the time the loan
agreement was entered into on 5 September 1986 until the present, there is
nothing in this Decision which prevents the Spouses Espiritu from foreclosing the
mortgaged property.
Petition is DENIED.
3. Liability for contractual interest after maturity of note

JARDENIL vs. SOLAS
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.

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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?
SC RULING:
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 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.
G.R. No. 160545 March 9, 2010

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and
ROGELIOS. PANTALEON, Petitioners, vs. ARTHUR F. MENCHAVEZ,
Respondent
FACTS:
On December 8, 1993 PRISMA obtained a 1 million loan from respondent with a
monthly interest of 40,000.00 and is payable for six months which is secured by a
promissory note issued by Rogelios Pantaleon, President and Chairman of the
Board of PRISMA.
Its total obligation is1,240,000.00 to be paid under the following schedule of paym
ents:
January 8, 1994......40,000.00
February 8, 1994.....40,000.00
March 8, 1994.........40,000.00
April 8, 1994............40,000.00
May 8, 1994.............40,000.00
June 8,1994.............1,040,000.00
The petitioners failed to completely pay the loan within the stipulated 6 month

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period. From September 8, 1994 to January 4, 1997, the petitioners paid a total of
1,108,772.00.
However, therespondent found that the petitioners still had an outstanding balanc
eof 1,364,151.00 as of
January4, 1997 to which it applied a 4% monthly interest. On August 28,
1997, respondent filed a complaint for sum of money with the RTC to enforce the
unpaid balance plus 4% monthly interest. The RTC ordered the petitioners to
jointly and severally pay the respondent the amount of 3,526,117.00 plus 4% per
month interest from February11,1999 until fully paid.CA affirmed the RTC
Decision by imposing a 12% per annum interest, computed from the filling of the
complaint until finality of judgment and thereafter.
ISSUE:
Whether or not the parties agreed to the 4% monthly interest on the loan? If so,
does the rate of interest apply to the 6-month payment period only or until full
payment of the loan?
RULING:
NO.The parties did not agree to the 4% monthly interest on the loan. Interest due
should be stipulated in writing;
otherwise,12% per annum. Obligations arising from contracts have the force
of law between the contracting parties and should be complied with in good faith.
When the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulations governs In such
cases, courts have no authority to alter the contract by construction or to make a
new contract for
the parties; a court's duty is confined to the interpretation of the contract the
parties made for themselves without regard to its wisdom or folly, as the court
cannot supply material stipulations or read into the contract words the contract
does not contain. It is only when the contract is vague and ambiguous that courts
are permitted to resort to the interpretation of its terms to determine the parties
intent. The 1 million loan with 40,000.00per month interest for
six months having a total obligation of
1,240,000.00 for the total six month period is an agreed sumwhich can be
computed at 4% interest per month, but no such rate of interest was stipulated in
the promissory note; rather a fixed sum equivalent to this fixed rate was
agreed upon Article 1956 of the Civil Code specifically mandates that "no interest
shall be due unless it has been expressly stipulated in writing." Under this
provision, the payment of interest in loans or forbearance of money is allowed
only if: (1) there was an express stipulation for the payment of interest; and (2)
the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of interest at a
stipulated rate. Applying this provision, we find that the interest of P40,
000.00 per month corresponds only to the six (6)-month period of the loan, or
from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should be at the legal
interest rate of 12%per annum. It is a familiar doctrine in obligations and
contracts that the parties are bound by the stipulations, clauses, terms and
conditions they have agreed to, which is the law between them, the only limitation
being that these stipulations, clauses, terms and conditions are not contrary to
law, morals, public order or public policy.
The payment of the specific sum of money of P 40,000.00 per month was voluntar

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ily agreed upon by the petitioners and the respondent. There is nothing from the
records and, in fact, there is no allegation showing that petitioners were victims of
fraud when they entered into the agreement with the respondent. Therefore, as
agreed by the parties, the loan of P1,000,000.00 shall earn P 40,000.00 per month
for a period of six (6) months, or from December 8,1993 to June 8, 1994, for a
total principal and interest amount of P1,240,000.00. Thereafter, interest at the
rate of 12% per annum shall apply. The amounts already paid by the petitioners
during the pendency of the suit, amounting toP1,228,772.00 as of February12,
1999 should be deducted from the total amount due, computed as indicated
above.
4. 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.
- Exception:
SIGA-AN vs VILLANUEVA
G.R.No. 173227,Jan. 20,2009
Facts:
On March 3, 1998, respondent Alicia Villanueva filed a complaint for a sum of

money against petitioner Sebastian Siga-an. Respondent alleged that she was a
businesswoman engaged in supplying office materials and equipments to the PNO;
while petitioner was a military officer and comptroller of the PNO from 1991-1996.
Sometime in 1992, respondent claimed that the petitioner approached her inside
the PNO office and offered to loan her the amount of P540,000. She accepted the
offer since she needed capital for her business. The loan agreement was not
reduced in writing and there was no stipulation as to the payment of interest for
the loan.
On August 31, 1993, respondent issued a check worth P500,000 to petitioner as

partial payment of the loan. Two months later she issued another check in the
amount of P200,000 as payment of the remaining balance. Petitioner told her that
she since she paid a total amount of P700,000 for the P540,000 worth of loan, the
excess amount of P160,000 would be applied as interest for the loan. Not satisfied
with the amount applied as interest, the petitioner pestered her to pay additional
interest. He threatened to block her transactions with the PNO if she won't
comply. The respondent conceded since all her transactions with the PNO need
the approval of the petitioner. Thus, she paid additional amounts in cash and
checks as interest for the loan. She asked the petitioner to give her receipts but he
told her that there's no need for a receipt because there's mutual trust and
understanding between them.
Thereafter, the respondent consulted a lawyer regarding propriety of paying

interest on the loan despite the absence of agreement to that effect. Her lawyer
told her that petitioner could not validly collect interest on the loan because there

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was no agreement between her and petitioner. Upon being advised by her lawyer
that she made an over payment, she sent a demand letter to petitioner asking for
the return of the excess amount. But the petitioner just ignored the demand
letter.
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent(1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of P660,000.00 as attorneys fees.
In his answer to the complaint, the petitioner denied that he offered a loan to
respondent and mentioned the mistakes committed by the respondent regarding
the payment of the loan and that there was no over payment.
After the trial, the RTC rendered a decision holding that respondent made an over
payment of her loan obligation to petitioner and that the latter should refund the
excess amount to the former. The alleged interest should not be included because
there was no agreement between them regarding the payment of interest. It
concluded that since respondent made an excess payment to petitioner in the
amount of P660,000.00 through mistake,petitioner should return the said amount
to respondent pursuant to the principle of solutio indebiti.
Petitioner appealed to the CA but the CA affirmed the ruling of the RTC. Petitioner
filed a motion for reconsideration to the appellate court, hence this petition.
ISSUES:
1.WON no interest was due to petitioner.
2.WON applying the principle of solution indebiti is proper.
RULING:
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1)there was an express stipulation for the payment of
interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.
Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerning
solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle
of solutio indebiti. Said provision provides that if something is received when there
is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
The principle of solutio indebiti applies where (1) a payment is made when there
exists no binding relation between the payor, who has no duty to pay, and the

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person who received the payment; and (2) the payment is made through mistake,
and not through liberality or some other cause.
In the present case, petitioners obligation arose from a quasi-contract of solutio

indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the
damages awarded and on the attorneys fees, to be computed from the time of
the extra-judicial demand on 3 March 1998, up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
5. Interest paid in kind

- Article 1958; value should be determined at time and place of payment
6. Compounding of Interest
- Is interest on accrued interest. It is valid to charge compound interest, but
there must be a written agreement to this effect; otherwise said compound
interest should not be charged, unless it be interest charged upon judicial
demand (Paras)
- GENERAL RULE: accrued interest (interest due and unpaid) will not bear
interest.
- EXCEPTION: if there is agreement to this affect OR there is judicial demand.
THEN such accrued interest will bear interest at a legal rate, unless different
rate is stipulated.
7. Effect of usurious/ unconscionable interest.

G.R. Nos. 150773 & 153599 September 30, 2005
SPOUSES DAVID B. CARPO and RECHILDA S. CARPO, petitioners, vs.
ELEANOR CHUA and ELMA DY NG, respondents.
FACTS: The cases stemmed from a loan contracted by petitioners. They
borrowed from Eleanor Chua and Elma Dy Ng the amount of P175,000.00, payable
within six (6) months with an interest rate of six percent (6%) per month. To
secure the payment of the loan, petitioners mortgaged their residential house and
lot. Petitioners failed to pay the loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed and the mortgaged property sold at a
public auction. The house and lot was awarded to respondents.
Upon failure of petitioners to exercise their right of redemption, a certificate of
sale was issued. Despite the issuance of the TCT, petitioners continued to occupy
the said house and lot, prompting respondents to file a petition for writ of
possession with the RTC. Petitioners then filed a complaint for annulment of real
estate mortgage and the consequent foreclosure proceedings.
Petitioners claim that following the Court's ruling in Medel v. Court of Appeals the
rate of interest stipulated in the principal loan agreement is clearly null and void.
Consequently, they also argue that the nullity of the agreed interest rate affects
the validity of the real estate mortgage. In Medel, the Court found that the
interest stipulated at 5.5% per month or 66% per annum was so iniquitous or
unconscionable and exorbitant as to render the stipulation void and, hence,
contrary to morals ("contra bonos mores"), if not against the law. The stipulation
is void.

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Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should
have been declared null and void.
ISSUES: Whether or not a creditor in a usurious contract may recover the
principal of the loan, and, whether or not he may also recover interest thereon at
the legal rate.
Whether or not the illegal terms as to payment of interest likewise renders a
nullity the legal terms as to payments of the principal obligation.
RULING: Pursuant to the freedom of contract principle embodied in Article 1306

of the Civil Code, contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. In the
ordinary course, the codal provision may be invoked to annul the excessive
stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per
annum. This stipulation is similarly invalid. However, the RTC refused to apply the
principle cited and employed in Medel on the ground that Medel did not pertain to
the annulment of a real estate mortgage, as it was a case for annulment of the
loan contract itself.
The consideration of the mortgage contract is the same as that of the principal
contract from which it receives life, and without which it cannot exist as an
independent contract. Being a mere accessory contract, the validity of the
mortgage contract would depend on the validity of the loan secured by it.
The Court's ultimate affirmation in the cases cited of the validity of the principal
loan obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest.
Appellants fail to consider that 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."
Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may
be enforced."
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.
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

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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."
It is clear and settled that the principal loan obligation still stands and remains
valid. By the same token, since the mortgage contract derives its vitality from the
validity of the principal obligation, the invalid stipulation on interest rate is similarly
insufficient to render void the ancillary mortgage contract.
It should be pointed out though that since an excessive stipulated interest rate
may be void for being contrary to public policy, an action to annul said interest
rate does not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage. Despite the nullity of the
stipulated interest rate, the principal loan obligation subsists, and along with it the
mortgage that serves as collateral security for it.
8. What is not considered as interest - Penalty for Breach

SENTINEL INSURANCE CO. vs. 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 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.
SC RULING:
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

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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 vs. PACIFIC COAST BISCUIT
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?
SC RULING:
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.

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CENTRAL BANK OF THE PHIL. vs. MORFE
FACTS:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank
to be insolvent. The Board directed the Superintendent of Banks to take charge of
its assets, forbade it to do business and instructed the Central Bank Legal Counsel
to take legal actions. Central Bank of the Philippines, then filed the corresponding
petition for assistance and supervision in the Court of First Instance of Manila.
Prior to the institution of the liquidation proceeding but after the declaration
of insolvency, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the
Court of First Instance of Manila against the Fidelity Savings Bank for the recovery
of the sum of P50, 584 as the balance of their time deposits. In the judgment
rendered, the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum
of P50, 584 plus accumulated interest.
In another case, spouses Augusta A. Padilla and Adelaida Padilla secured on
April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of
P80,000 as the balance of their time deposits, plus interests, P70,000 as moral
and exemplary damages and P9,600 as attorney's fees.
After the two judgments were rendered and upon motions of the Elizes and
Padilla spouses but over the opposition of the Central Bank, the court directed the
latter as liquidator, to pay their time deposits as preferred judgments, evidenced
by final judgments. From the said order, the Central Bank appealed to this Court
by certiorari. It contends that the final judgments secured by the Elizes and Padilla
spouses do not enjoy any preference because (a) they were rendered after the
Fidelity Savings Bank was declared insolvent and (b) under the charter of the
Central Bank and the General Banking Law, no final judgment can be validly
obtained against an insolvent bank.
ISSUE: Whether or not a final judgment for the payment of a time deposit in a
savings bank which judgment was obtained after the bank was declared
insolvent, is a preferred claim against the bank.
SC RULING:
Section 29 of Republic Act No. 265 provides:
Whenever upon examination by the Superintendent or his examiners
or agents into the condition of any banking institution, it shall be disclosed
that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its depositors or
creditors, it shall be the duty of the Superintendent forthwith, in writing to
inform the Monetary Board of the facts, and the Board, upon finding
the statements of the Superintendent to be true, shall forthwith forbid the
institution to do business in the Philippines and shall take charge of its
assets and proceeds according to law.
xxx xxx xxx
If the Monetary Board shall determine that the banking institution
cannot resume business with safety to its creditors, it shall, by the Office of
the Solicitor General, file a petition in the Court of First Instance reciting the
proceedings which have been taken and praying the assistance and
supervision of the court in the liquidation of the affairs of the same. The

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Superintendent shall thereafter, upon order of the Monetary Board and

under the supervision of the court and with all convenient speed, convert
the assets of the banking institution to money.
Section 30 of the same law also provides that:

In case of liquidation of a banking institution, after payment of the
costs of the proceedings, including reasonable expenses and fees of the
Central Bank to be allowed by the court, the Central Bank shall pay the
debts of such institution, under the order of the court, in accordance with
their legal priority.
The trial court or, to be exact, the liquidation court noted that there is no
provision in the charter of the Central Bank in the General Banking Law (Republic
Acts Nos. 265 and 337, respectively) which suspends or abates civil actions
against an insolvent bank pending in courts other than the liquidation court. It
reasoned out that, because such actions are not suspended, judgments against
insolvent banks could be considered as preferred credits under article 2244(14)(b)
of the Civil Code. It further noted that, in contrast with the Central Act, section 18
of the Insolvency Law provides that upon the issuance by the court of an order
declaring a person insolvent "all civil proceedings against the said insolvent shall
be stayed."
On the other hand, the Central Bank argues that after the Monetary Board
has declared that a bank is insolvent and has ordered it to cease operations, the
Board becomes the trustee of its assets "for the equal benefit of all the creditors,
including the depositors". The Central Bank cites the ruling that "the assets of an
insolvent banking institution are held in trust for the equal benefit of all creditors,
and after its insolvency, one cannot obtain an advantage or a preference over
another by an attachment, execution or otherwise" it is also the stand of the
Central Bank is that all depositors and creditors of the insolvent bank should file
their actions with the liquidation court.
It cites the ruling that "a creditor of an insolvent state bank in the hands of
a liquidator who recovered a judgment against it is not entitled to a preference for
(by) the mere fact that he is a judgment creditor." It should be noted that fixed,
savings, and current deposits of money in banks and similar institutions are not
true deposits. They are considered simple loans and, as such, are not preferred
credits
The aforequoted section 29 of the Central Bank's charter explicitly provides
that when a bank is found to be insolvent, the Monetary Board shall forbid it to do
business and shall take charge of its assets. Evidently, one purpose in prohibiting
the insolvent bank from doing business is to prevent some depositors from having
an undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would be
rendered for the payment of their deposits and then such judgments would be
considered preferred credits under article 2244 (14) (b) of the Civil Code.
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

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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 vs Central Bank of the Philippines

G.R. No. L-30511 February 14, 1980
Facts:
Petitioner Manuel Serrano and Concepcion Maneja made time deposits with
respondent bank Overseas Bank of Manila for 1 year with interest. Concepcion
Maneja then assigned his time deposit to petitioner. Petitioner made a series of
demands to have the time deposits honored but respondent Overseas Bank failed
to do so. The former then filed a petition for mandamus and prohibition to have
respondent Central Bank of the Philippines jointly and severally liable with
respondent Overseas Bank on the alleged failure of the respondent Overseas Bank
of Manila return the time deposits made by petitioner and assigned to him on the
ground that respondent Central Bank failed in its duty to exercise strict supervision
over respondent Overseas Bank of Manila to protect depositors and the general
public.
Issue:
1. Can Central Bank be held liable to petitioner?
2. What is the nature of bank time deposits?
Held:
1. No. 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.

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2. 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 vs. CITY FISCAL OF MANILA
FACTS:
The instant petition seeks to prohibit public respondents from proceeding
with the preliminary investigation of I.S. No. 81-31938, in which petitioners were
charged by private respondent Clement David, with estafa and violation of Central
Bank Circular No. 364 and related regulations regarding foreign exchange
transactions principally, on the ground of lack of jurisdiction in that the allegations
of the charged, as well as the testimony of private respondent's principal witness
and the evidence through said witness, showed that petitioners' obligation is civil
in nature.
From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20
on nine deposits, P13,531.94 on savings account deposits (jointly with his sister,
Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au
jointly with Denise Kuhne), that David was induced into making the aforestated
investments by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then
NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under receivership by the
Central Bank, so that David filed claims therewith for his investments and those of
his sister; that on July 22, 1981 David received a report from the Central Bank
that only P305,821.92 of those investments were entered in the records of NSLA;
that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance
of the investments, at the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange transactions; that after
demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the
amounts misappropriated to P959,078.14 and US$75,000.00."
At the inception of the preliminary investigation before respondent Lota,
petitioners moved to dismiss the charges against them for lack of jurisdiction
because David's claims allegedly comprised a purely civil obligation which was
itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the
instant petition because: (a) the production of the Promisory Notes, Banker's
Acceptance, Certificates of Time Deposits and Savings Account allegedly showed
that the transactions between David and NSLA were simple loans, i.e., civil

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obligations on the part of NSLA which were novated when Guingona, Jr. and
Martin assumed them; and (b) David's principal witness allegedly testified that the
duplicate originals of the aforesaid instruments of indebtedness were all on file
with NSLA, contrary to David's claim that some of his investments were not record
ISSUE:
Whether or not the petitioner in this case is properly charge of estaffa
through misappropriation of funds deposited in NSLA making them subject to the
jurisdiction of the respondents investigation.
SC Ruling:
There is merit in the contention of the petitioners that their liability is civil in
nature and therefore, public respondents have no jurisdiction over the charge of
estaffa.
It must be pointed out that when private respondent David invested his
money on nine. 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:
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:
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:
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 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

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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.
c. Bank as proper party in complaint for qualified theft

People v. Puig
FACTS: Cases of Qualified theft were filed against Puig and Porras who were
Cashier and Bookkeeper, respectively, of Rural Bank of Pototan when they steal
and carry away the sum of P15,000.00 deposited in the said bank. However, RTC
failed to find the existence of probable cause for the issuance of the warrant of
arrest on the ground that the element of taking without the consent of the
owner was missing for it is the depositors-clients, and not the bank which filed
the complaint in these cases, who are the owners of the money allegedly taken by
the Puig and Porras and hence, the real parties- in- interest.
ISSUE: WON Rural bank was the proper party to file a case against the
respondents.
HELD: YES. It is beyond doubt that tellers, Cashiers, Bookkeepers and other
employees of a Bank who come into possession of the monies deposited therein
enjoy the confidence reposed in them by their employer. Banks, on the other
hand, where monies are deposited, are considered the owners thereof.
This is very clear not only from the express provisions of the law, but from
established jurisprudence. The relationship between banks and depositors has
been held to be that of creditor and debtor. Articles 1953 and 1980 of the New
Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established
the nature of possession by the Bank of the money deposits therein, and the
duties being performed by its employees who have custody of the money or have
come into possession of it. The Court has consistently considered the allegations
in the Information that such employees acted with grave abuse of confidence, to
the damage and prejudice of the Bank, without particularly referring to it as owner
of the money deposits, as sufficient to make out a case of Qualified Theft.
In summary, the Bank acquires ownership of the money deposited by its clients;
and the employees of the Bank, who are entrusted with the possession of money
of the Bank due to the confidence reposed in them, occupy positions of
confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft
Title XII - DEPOSIT

Chapter 1
Deposit in General and its Different Kinds

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ARTICLES 1962 1967

ARTICLE 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)
ARTICLE 1963.An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing. (n)
ARTICLE 1964.A deposit may be constituted judicially or extrajudicially.
(1759)
ARTICLE 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)
ARTICLE 1966.Only movable things may be the object of a deposit.
(1761)
ARTICLE 1967.An extrajudicial deposit is either voluntary or necessary.
(1762)
I. Concept
DEPOSIT is a contract 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.
Degree of care: Exercise over the thing deposited the same diligence as he would
exercise over his property.
II. Characteristics
A. It is a real contract perfected by delivery.
B. It is naturally gratuitous, unless the contrary is stipulated or the depositary is
engaged in the business goods.
C. The purpose is primarily custody; where the custody is secondary, it is not
deposit.
Cases:
a. Effect if balance of commission retained by agent
US vs. Igpuara
FACTS:
The defendant therein is charged with the crime of estafa, for having
swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency,
which he had take on deposit from the former to be at the latter's disposal.
The defendant received P2,498 is a fact proven. The defendant drew up a
document declaring that they remained in his possession, which he could not have
said had he not received them. They remained in his possession, surely in no other
sense than to take care of them, for they remained has no other purpose. They
remained in the defendant's possession at the disposal of Veraguth; but on August
23 of the same year Veraguth demanded for him through a notarial instrument
restitution of them, and to date he has not restored them.
ISSUE:
Whether or not the contract between the defendant and Montilla and
Veraguth are that of deposit.

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SC RULING:
It is erroneous to assert that the certificate of deposit in question is
negotiable like any other commercial instrument: First, because every commercial
instrument is not negotiable; and second, because only instruments payable to
order are negotiable. Hence, this instrument not being to order but to bearer, it is
not negotiable.
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.
Article 408 of the Code of Commerce of 1829, previous to the one now in force,
provided:
The depositary of an amount of money cannot use the amount, and if he
makes use of it, he shall be responsible for all damages that may accrue and
shall respond to the depositor for the legal interest on the amount.
Thus the defendant is liable.
b. Effect if foreign currency deposited is sold by bank
BPI vs. IAC
[The original parties to this case were Rizaldy T. Zshornack and the Commercial
Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."]
In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed
COMTRUST through a corporate merger, and was substituted as party to the case.]
FACTS:
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST,
Quezon City Branch, a dollar savings account and a peso current account. The
complaint filed with the trial court alleged that on December 8, 1975, Zshornack
entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as

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greenbacks) for safekeeping, and that the agreement was embodied in a

document, a copy of which was attached to and made part of the complaint. The
document reads:
Makati Cable Address:

Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY

of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum
of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.
Received by:
(Sgd.) VIRGILIO V.
GARCIA
It was also alleged in the complaint that despite demands, the bank refused
to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to
Zshornack's peso current account at prevailing conversion rates. It must be
emphasized that COMTRUST did not deny specifically under oath the authenticity
and due execution of the above instrument. During trial, it was established that on
December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976,
COMTRUST explained that the sum was disposed of in this manner: US$2,000.00
was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00
were deposited to Zshornack's current account per deposit slip accomplished by
Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso
proceeds amounting to P8,350.00 were deposited to his current account per
deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to
Zshornack's current account at prevailing conversion rates, BPI now posits another
ground to defeat private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as defined in Article 1962,
New Civil Code), which banks do not enter into. The bank alleges that Garcia
exceeded his powers when he entered into the transaction. Hence, it is claimed,
the bank cannot be liable under the contract, and the obligation is purely personal
to Garcia.
ISSUE:
Whether or not the contract in question is a contract of depositum.

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SC RULING:
It was a contract of depositum.
In this case, no sworn answer denying the due execution of the document in
question, or questioning the authority of Garcia to bind the bank, or denying the
bank's capacity to enter into the contract, was ever filed. Hence, the bank is
deemed to have admitted not only Garcia's authority, but also the bank's power, to
enter into the contract in question.
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.
That 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.
It bears to take 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:
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 intended 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. 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.
c. Nature of rental of safety deposit box
CA Agro-Industrial Devt. Corp. vs. CA
FACTS:
Petitioner and Spouses Pugao entered into agreement for a sale of land. They
deposited the certificates of title in a safety deposit box in SBTC so that it will be
given to petitioner upon full payment. The safety deposit box has a guard key for
the bank and 2 keys for petitioner and the Pugaos. Ramos wanted to buy the land
so she wanted to inspect the certificate of title, but upon opening by petitioner and
Spouses Pugao, the certificates of title were not there anymore. Because the

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reconstitution of title took time, Ramos withdrew her offer to purchase. So

petitioner filed a case against the bank. But it was dismissed by the RTC and the
CA because they said it was covered by their contractual agreement that the bank
is not responsible for the loss and that it is a contract of lease. The position of
petitioner is that it is a contract of deposit.
ISSUE:
Is the contractual relation between a commercial bank and another party in a
contract of rent of a safety deposit box with respect to its contents placed by the
latter one of bailor and bailee or one of lessor and lessee?
SC RULING:
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 pertinently
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. . . .
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 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. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to
be observed. 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.
With respect to property deposited in a safe-deposit box by a customer of a safe-

deposit company, the parties, since the relation is a contractual one, may by
special contract define their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract is not in violation of law
or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from the
relationship of the parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its

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own fraud or negligence or that of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-deposit box cannot
limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some extent by
agreement or stipulation.
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those
relied upon by the Court of Appeals. In the instant case, the respondent Bank's
exoneration cannot, contrary to the holding of the Court of Appeals, be based on or
proceed from a characterization of the impugned contract as a contract of lease,
but rather on the fact that no competent proof was presented to show that
respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety
deposit box only upon both parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both the
petitioner and the Pugaos agreed that each should have one (1) renter's key, it
was obvious that either of them could ask the Bank for access to the safety deposit
box and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and
no bad faith on its part had been established, the trial court erred in condemning
the petitioner to pay the respondent Bank attorney's fees. To this extent, the
Decision of public respondent Court of Appeals must be modified.
D. The contract is either unilateral or bilateral, according to whether it is

gratuitous or onerous.
- 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
E. The depositary cannot make use of the thing deposited without express
permission.
- (*when the preservation of the thing deposited requires its use, it must be
used but only for that purpose (Art. 1977))
- - He cant 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

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a. Nature of agreement to extend payment of money deposited and to

pay interest
Javellana vs. Lim
FACTS:
The defendants executed and subscribed a document in favor of the plaintiff
reading as follows:
We have received from Angel Javellana, as a deposit without interest, the

sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we
will return to the said gentleman, jointly and severally, on the 20th of January,
1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo
Lim.
When the obligation became due, the defendants begged the plaintiff for an
extension of time for one year for the payment thereof, and binding themselves to
pay interest at the rate of 15 per cent per annum to which the plaintiff acceded;
ISSUE:
Whether the contract is a lease or a deposit.
SC RULING:
The contract entered by the parties was a loan of money with interest.
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.
Acknowledging that they were not able to comply with what had been stipulated,
they engaged to pay interest to the creditor. 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.
Because defendant was not able to return the amount deposited, he agreed
to pay interest at the rate of 15 per cent per annum, it was because, as a matter of
fact, he did not have in his possession the amount deposited. By granting them the
extension, evidently confirmed the express permission previously given to use and
dispose of the amount stated as having been deposited, which, in accordance with
the loan. As a matter of course, be inferred that there was no renewal of the
contract deposited converted into a loan, because, as has already been stated, the
defendants received said amount by virtue of real loan contract under the name of
a deposit.
F. Only movables can be the object of contractual deposit.
III. Kinds
A. a) Judicial (Sequestration) takes place when an attachment or seizure of
property in litigation is ordered.
b) Extra-judicial (Art.1967)

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a. Voluntary kind where the delivery is made by the will of the

depositor or by two or more persons each of whom believes himself
entitled to the thing deposited.
b. Necessary one made in compliance with a legal obligation, or on
the occasion of any calamity, or by travellers in hotels and inns, or
by travellers with common carriers.
The main difference between a voluntary deposit and a necessary deposit is that
in the former, the depositor has a complete freedom in choosing the depositary,
whereas in the latter, there is lack of free choice in the depositor.
Judicial Extra-judicial
1. Creation
Will of the court Will of the parties or contract
2. Purpose
Security or to insure the right of a Custody and safekeeping
party to property or to recover in
case of favorable judgment
3. Subject Matter
Movables or immovables, Movables only
but generally immovables
4. Cause
Always onerous May be compen-sated or not, but
generally gratuitous
5. When must the thing be returned
Upon order of the court or when Upon demand of depositor
litigation is ended
6. In whose behalf it is held
Person who has a right Depositor or third person designated
When a deposit becomes a loan or commodatum:

If thing deposited is non-consumable, the contract loses the character of a
deposit and acquires that of a commodatum despite the fact that the parties may
have denominated it as a deposit, unless safekeeping is still the principal purpose.
If thing deposited consists of money/consumable things, the contract is
converted into a simple loan or mutuum unless safekeeping is still the principal
purpose in which case it is called an irregular deposit.
Example: bank deposits are irregular deposits in nature but governed by law on
loans
Irregular Deposit vs. Simple Loan

Irregular Deposit Simple Loan
B. The only benefit is that which The essential cause for the transaction
accrues to the depositor is the necessity of the buyer
C. The depositor can the return of A lender is bound by the provisions of
the article at anytime the contract and cannot seek
restitution until the time for payment,
as provided in the contract arises
(*from the case of Compania Agricola de Ultramar vs. Nepomoceno, 55 Phil.
283)
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Cases:
Deposit with interest
Compania Agricola vs. Nepomoceno
FACTS:
It appears from the record that on March 17, 1927, the registered
partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano
Velasco & Co., Inc., were, on petition of the creditors, declared insolvent by the
Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a
claim against one of the insolvents Mariano Velasco & Co., claiming the sum of
P10,000, with the agreed interest thereon at the rate of 6 per cent per annum from
April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co.
and asked the court to declare it a preferred claim.
The assignee of the insolvency answered the claim by interposing a general
denial. The claim was thereupon referred by the court to a Commissioner to
receive the evidence, and on September 23, 1929, the court rendered a decision
declaring that the alleged deposit was a preferred claim for the sum mentioned,
with interest at 6 per cent per annum from April 5, 1918, until paid.
ISSUE:
Whether or not the contract entered into by Compania Agricola with Mariano
Velasco & Co. is that of loan or a deposit.
SC Ruling:
In our opinion the court below erred in finding that the claim of the appellee
should be considered a deposit and a preferred claim. In the case of Gavieres vs.
De Tavera (1 Phil., 17), very similar to the present case, this court held that the
transaction therein involved was a loan and not a deposit, the court held;
Although in the document in question a deposit is spoken of,
nevertheless from an examination of the entire document it clearly appears
that the contract was a loan and that such was the intention of the parties.
It is unnecessary to recur to the cannons of interpretation to arrive at this
conclusion. The obligation of the depository to pay interest at the rate of 6
per cent to the depositor suffices to cause the obligation to be considered as
a loan and makes it likewise evident that it was the intention of the parties
that the depository should have the right to make use of the amount
deposited, since it was stipulated that the amount could be collected after
notice of two months in advance. Such being the case, the contract lost the
character of a deposit and acquired that of a loan. (Art. 1768, Civil Code.)
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."

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"The permission not be presumed, and its existence must be

proven."
The two cases quoted are sufficient to show that the ten thousand pesos
delivered by the appellee to Mariano Velasco & Co. cannot de regarded as a
technical deposit. But the appellee argues that it is at least an "irregular deposit."
Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that
there are three points of difference between a loan and an irregular deposit. The
first difference which he points out consists in the fact that in an irregular deposit
the only benefit is that which accrues to the depositor, while in a loan the essential
cause for the transaction is the necessity of the borrower. The contract in question
does not fulfill this requirement of an irregular deposit.
In the present case the transaction in question was clearly not for the sole
benefit of the Compania Agricola de Ultramar; it was evidently for the benefit of
both parties. Neither could the alleged depositor demand payment until the
expiration of the term of three months.
For the reasons stated, the appealed judgment is reversed, and we hold that
the transaction in question must be regarded as a loan.
Deposit of palay with permission to mill
Baron vs. David
FACTS:
These two actions were instituted in the CFI of Pampanga by the plaintiffs,
Silvestra Baron and Guillermo Baron, for the purpose of recovering from the
defendant, Pablo David, the value of palay alleged to have been sold by the
plaintiffs to the defendant in the year 1920.
Both the plaintiffs claim that the palay which was delivered by them to the
defendant was sold to the defendant; while the defendant, on the other hand,
claims that the palay was deposited subject to future withdrawal by the depositors
or subject to some future sale which was never effected. He therefore supposes
himself to be relieved from all responsibility by virtue of the fire of January 17,
1921 which allegedly burned the palay.
SC RULING:
It should be stated that the palay in question was placed by the plaintiffs in the
defendants mill with the understanding that the defendant was at liberty to
convert it into rice and dispose of it at his pleasure. The mill was actively running
during the entire season, and as palay was daily coming in from many customers
and as rice was being constantly shipped by the defendant to Manila, or other rice
markets, it was impossible to keep the plaintiffs palay segregated. In fact the
defendant admits that the plaintiffs palay was mixed with that of others.
In view of the nature of the defendants activities and the way in which the palay
was handled in the defendants mill, it is quite certain that all of the plaintiffs
palay, which was put in before June 1, 1920, had been milled and disposed of long
prior to the fire of January 17, 1921.
Considering the fact that the defendant had thus milled and doubtless sold the
plaintiffs palay prior to the date of the fire, it results that he is bound to account
for its value, and his liability was not extinguished by the occurrence of the fire.

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Even supposing that the palay may have been delivered in the character of deposit,
subject to future sale or withdrawal at plaintiffs election, nevertheless if it was
understood that the defendant might mill the palay and he has in fact appropriated
it to his own use, he is of course bound to account for its value.
Under Article 1768 (Art 1978, NCC)of the Civil Code, when the depositary has
permission to make use of the thing deposited, the contract loses the character of
mere deposit and becomes a loan or a commodatum; and of course by
appropriating the thing, the bailee becomes responsible for its value. In this
connection we wholly reject the defendants pretense that the palay delivered by
the plaintiffs or any part of it was actually consumed in the fire of January 1921.
IV. Deposit vs Sale and Barter

DEPOSIT SALE AND BARTER
Ownership is not transferred Ownership is transferred upon
delivery
Real contract Consensual
Generally gratuitous Always onerous
V. Deposit vs Commodatum
DEPOSIT COMMODATUM
May be gratuitous Essentially and always
gratuitous
Principal purpose id safekeeping Principal purpose is use
Chapter 2
Voluntary Deposit
Section 1 General Provisions

ARTICLES 1968 1971
ARTICLE 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) cdasia
ARTICLE 1969.A contract of deposit may be entered into orally or in
writing. (n)
ARTICLE 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)
ARTICLE 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)
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I. Voluntary Deposit
It is wherein the delivery is made by the will of the depositor or by two or
more persons each of whom believes himself to be entitled to the thing deposited
Voluntary deposit vs. necessary deposit: In voluntary deposit the depositor has
complete freedom in choosing the depositary, whereas in necessary deposit there is
a lack of choice in the depositor.
II. Kinds
a. Where the deposit is by the will of the depositor (complete freedom)
b. Where the deposit is by two claimants, and the thing is to be delivered to the
one found to be entitled to it. (conflicting adversarial claims)
III. Requisites
A. Capacity of the parties: no special capacity is required- the depositor need not be
the owner of the thing and may even be incapacitated.
1. Where the depositor is capable and the depository is incapable
i. The depositor may recover the thing while in the depositarys possession.
ii. If the depositary alienates the thing, he must return the price or amount of
enrichment.
2. Where the depositor is incapable, and the depositary is capable. T
i. The depositary may be compelled to return the thing by the guardians or
by the depositor himself if he should acquire capacity. (Capacity is
required in the depositor for claiming the return but not for making a
deposit.)
B. Object must be corporeal and movable. (in extrajudicial deposit)- the purpose of
the contract is to insure restoration of the thing that may disappear.
i. In judicial deposit (receivership)- real or personal property may be
included.
C. Formalities: except for delivery, no formalities are required to perfect the
agreement.
Section 2 Obligations of Depositary

ARTICLES 1972 1991
ARTICLE 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. cda
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe. (1766a)
ARTICLE 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)
ARTICLE 1974.The depositary may change the way of the deposit if
under the circumstances he may reasonably presume that the depositor would

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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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 1977.The depositary cannot make use of the thing deposited
without the express permission of the depositor. acd
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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 1980.Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple
loan. (n)
ARTICLE 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. casia
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)
ARTICLE 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)

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ARTICLE 1983.The thing deposited shall be returned with all its

products, accessories and accessions.
Should the deposit consist of money, the provisions relative to agents in
article 1896 shall be applied to the depositary. (1770)
ARTICLE 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. cd i
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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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) cdasia
ARTICLE 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)
ARTICLE 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

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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. To preserve the thing
1. Agreement that the depositary may use the thing deposited

GR: The depositary may not to make use of the thing deposited unless
authorized. Deposit is for safekeeping not for use.
Exceptions:
a. Expressly authorized by the depositor
b. Such use is necessary for its preservation but limited for the purpose only
Effect of unauthorized use: Liability for damages
Effects of authorized use:
- Rule if the thing deposited is a non-consumable thing: The contract loses
the character of a deposit and acquires that of a commodatum despite the
fact that the parties may have denominated it as deposit.
Exception: Safekeeping is still the principal purpose of the contract.
- Rule if the thing deposited is money or other consumable thing: The
contract is converted into a simple loan or mutuum.
Exception: Safekeeping is still the principal purpose of the contract, but it now
becomes an irregular deposit.
2. Delegation of custody
GR: The depositary is not allowed to deposit the thing with a third person.
Exception: The depositary is authorized by express stipulation.
Liabilities: The depositary is liable for loss of the thing deposited when:
a. He transfers the deposit with a third person without authority although there
is no negligence on his part and the third person
b. He deposits the thing with a third person who is manifestly careless or unfit
although authorized, even in the absence of negligence; or
c. The thing is lost through the negligence of his employees whether the latter
are manifestly careless or not.
Exemption from liability: The thing is lost through the negligence of the third
person with whom he was allowed to deposit the thing if such person is not
manifestly careless or unfit.
3. Change of the manner of deposit

GR: The depositary may not change the way/manner of deposit.
Exception: If there are circumstances indicating that the depositor would
consent to the change.
Requisites:
a. The depositary must notify the depositor of such change
b. The depositary must wait for the reply of the depositor to such change
Exception: If the delay of the reply would cause danger.
4. Preservation of the value

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If the thing deposited should earn interest, the depositary is under

obligation to:
a. to collect interest as it fall due
b. to take steps to preserve its value and rights corresponding to it
The depositary is bound to collect the capital, as well as the interest, when due.
5. Secrecy of deposit
The depositary has the obligation to:
a. Return the thing deposited when delivered closed and sealed in the same
condition
b. Pay for damages should the seal or lock be broken through his fault, which is
presumed unless proven otherwise
c. Keep the secret of the deposit when the seal or lock is broken with or without
his fault.
The depositary is authorized to open the thing deposited which is closed and
sealed when there is:
a. Presumed authority (i.e. when the key has been delivered to him or the
instructions of the depositor cannot be done without opening it)
b. Necessity
B. To return the thing
1. To whom
The depositary is obliged to return the thing deposited, when required to:
- The depositor
- To his heirs or successors
- To the person who may have been designated in the contract
If the depositor was incapacitated at the time of making the deposit, the
property must be returned to:
- His guardian or administrator
- To the person who made the deposit
- To the depositor himself should he acquire capacity
Even if the depositor had the capacity at the time of making the deposit but he
subsequently loses his capacity during the deposit, the thing must be returned to
his legal representative.
2. What is to be returned
i. If money
-Obligation to pay interest on sums converted for personal use.
ii. If specific thing
-Obligation to return products, accessories and accessions.
iii. If generic thing
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.

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3. Form or manner of return

If thing deposited is divisible and there are joint depositors:
Each depositor can demand only his proportionate share thereto.
If thing is not divisible and the obligation is solidary:
Rules on active solidarity shall apply, i.e. each one of the solidary depositors may
do whatever maybe useful to the others but not anything which may be
prejudicial to the latter, and the depositary may return the thing to anyone of the
solidary depositors unless a demand, judicial or extrajudicial, for its return has
been made by one of them in which case, delivery should be made to him.
4. Place of return
GR: At the place agreed upon by the parties, transportation expenses shall be
borne by the depositor.
Exception: In the absence of stipulation, at the place where the thing deposited
might be even if it should not be the same place where the original deposit was
made.
5. Time of return
GR: 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.
Exceptions:
a. When the thing is judicially attach while in the depositarys possession
b. When notified of the opposition of a third person to the return or the removal
of the thing deposited
6. Set-off
GR: The bank can set-off the deposits in its hands for the payment of any
indebtedness to it on the part of the depositor.
However, if the depositor is a mere indorser of a check which was later
dishonoured, the right of action does not accrue until a notice of dishonour is
given to him.
Cases:
i) Right of bank to apply a deposit to the debt of a depositor
GULLAS vs. NATIONAL BANK
62 PHIL 519
Facts:
Atty. Gullas has a current account with PNB.
The treasury of the US issued a warrant in the amount of $361 payable
to the order of Bacos. Gullas and Lopez signed as indorsers of this
warrant. Thereupon it was cashed by PNB.
The warrant was subsequently dishonored by the Insular treasurer.
At that time, Gullas had a balance of P500 in PNB. From this balance,
he also issued some checks which eventually could not be paid when it
was sequestered by the Bank.
When it learned of the dishonor, PNB sent notice to Gullas stating that
it applied the outstanding balances from his current account as
payment of the dishonored warrant. Such notice could not be delivered
to him since he was out of town.
Without any action from Gullas, PNB applied the dishonored warrant

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against his account.

Because of this, Gullas was unable to pay for the checks he issued
before the application.
Gullas filed a complaint against PNB.
Issue:
Whether or not PNB has a right to apply a deposit to the debt of a
depositor to the bank?
Held:
Yes, PNB has a right to apply the payment against the account of the
depositor.
The relation between a depositor and a bank is that if creditor and debtor.
The general rule is that a bank has a right to set off of the deposit in its
hands for the payment of any indebtedness to it on the part of the
depositor.
However, prior to the mailing of the 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. Notice should have been
given to him in order that he might protect his interest. He should be
awarded with nominal damages because of the premature action of the
Bank.
Associated Bank (now Westmont Bank) vs. Tan
While banks are granted by law the right to debit the value of a
dishonored check from a depositors account, they must do so with the
highest degree of care, so as not to prejudice the depositor unduly.
FACTS:
Vicente Henry Tan (hereafter TAN) is a businessman and a regular
depositor-creditor of the Associated Bank (hereinafter referred to as the
BANK). Sometime in September 1990, he deposited a postdated UCPB
check with the said BANK in the amount of P101,000.00 issued to him by
a certain Willy Cheng from Tarlac. The check was duly entered in his bank
record thereby making his balance in the amount of P297,000.00, as of
October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon
advice and instruction of the BANK that the P101,000.00 check was
already cleared and backed up by sufficient funds, TAN, on the same date,
withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day
after, TAN deposited the amount of P50,000.00 making his existing
balance in the amount of P107,793.45, because he has issued several
checks to his business partners.
However, his suppliers and business partners went back to him
alleging that the checks he issued bounced for insufficiency of funds.
Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps
regarding the matter for he has adequate and sufficient funds to pay the
amount of the subject checks. Nonetheless, the BANK did not bother nor
offer any apology regarding the incident. Consequently, TAN, as plaintiff,
filed a Complaint for Damages on December 19, 1990, with the Regional

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Trial Court of Cabanatuan City.

In his [C]omplaint, [respondent] maintained that he had sufficient
funds to pay the subject checks and alleged that his suppliers decreased in
number for lack of trust.
By way of affirmative defense, petitioner averred that respondent
had no cause of action against it and argued that it has all the right to
debit the account of the respondent by reason of the dishonor of the
check deposited by the respondent which was withdrawn by him prior to
its clearing
ISSUE # 1:
Whether or not the petitioner, which is acting as a collecting bank,
has the right to debit the account of its client for a check deposit which
was dishonored by the drawee bank.
SC RULING:
A bank generally has a right of setoff over the deposits therein for
the payment of any withdrawals on the part of a depositor. The right of a
collecting bank to debit a clients account for the value of a dishonored
check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that
fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been
held to be that of creditor and debtor. Thus, legal compensation under
Article 127810 of the Civil Code may take place "when all the requisites
mentioned in Article 1279 are present,as follows:
"(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor."
ISSUE #2:
Whether or not the right to set off has been properly exercised by the
Bank.
SC RULING:
No, the bank did not properly exercise the right accorded to it.
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 depositors

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account only after the check has been cleared by the drawee bank.22
Under ordinary banking practice, after receiving a check deposit, a
bank either immediately credit the amount to a depositors account; or
infuse value to that account only after the drawee bank shall have paid
such amount.23 Before the check shall have been cleared for deposit, the
collecting bank can only "assume" at its own risk -- as herein petitioner did
-- that the check would be cleared and paid out.
Further, the reservation made by the bank that it assumes no
responsibility beyond carefulness in selecting correspondents, and until
such time as actual payments shall have come to its possession, the Bank
reserves the right to charge back to the Depositors account any amounts
previously credited whether or not the deposited item is returned, this
reservation is not enough to insulate the bank from any liability. 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."
Moreover, by the express terms of the stipulation, petitioner took upon
itself certain obligations as respondents agent, consonant with the
well-settled rule that the relationship between the payee or holder of a
commercial paper and the collecting bank is that of principal and agent.
As a general rule, a bank is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of
their employment. The manager of the banks Cabanatuan branch,
Consorcia Santiago, categorically admitted that she and the employees
under her control had breached bank policies. They admittedly
breached those policies when, without clearance from the drawee bank
in Baguio, they allowed respondent to withdraw on October 1, 1990,
the amount of the check deposited. Santiago testified that respondent
"was not officially informed about the debiting of the P101,000 from his
existing balance of P170,000 on October 2, 1990 x x x.Being the
branch manager, Santiago clearly acted within the scope of her
authority in authorizing the withdrawal and the subsequent debiting
without notice. Aggravating matters, petitioner failed to show that it
had immediately and duly informed respondent of the debiting of his
account.
7. Banks failure to return amount

Claims for recovery of time deposits plus interest from an insolvent bank shall be
filed before the liquidation proceedings in the proper court. Failure of bank to
honor the time deposit is not a breach of trust arising from a depositarys failure
to return the subject matter but a mere failure to pay its obligation as a debtor.
i) Liability for failure to return bank deposit
Guingona vs. City Fiscal of Manila
FACTS:
From March 20, 1979 to March 1981, Clement David invested with the Nation
Savings and Loan Association P1,145,436.20 on time deposits, P13,531.94 on
savings deposits(jointly with his sister, Denise Kuhne), US $10,000.00 on time
deposit, US $15,000.00 under a receipt and guarantee of payment and US
$50,000.00 under a receipt dated June 8,1980 (all jointly with Denise Kuhne).

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David was allegedly introduced into making said investments by Robert

Marshall, an Australian national, who was allegedly a close associate of
petitioner Teofisto Guingona, Jr., then NSLA President, petitioner Antonio
Martin then NSLA Executive Vice-President and petitioner Teresita Santos,
then NSLA General Manager.
On March 21, 1981 NSLA was placed under receivership by the Central Bank,
so that David filed claims therewith for his investments and those of his sister.
SC RULING:
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.
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.
Considering that the liability of the petitioners is purely civil in nature and that
there is no clear showing that they engaged in foreign exchange transactions,
We hold that the public respondents acted without jurisdiction when they
investigated the charges against the petitioners.
Consequently, public respondents City Fiscal should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work
great injustice to petitioners and would render meaningless the proper
administration of justice.
8. When bank officials may be guilty of estafa

GR: Failure of bank to return the amount deposited will not constitute estafa
through misappropriation.
Exception: (Guingona va City Fiscal of Manila)
When bank officials may be guilty of estafa
Guingona vs. City Fiscal of Manila, July 18, 1985, Motion for Reconsideration -
However, if the bank entered in its records or books the amount of only
P305,821.92 out of the deposits of P1,145,546, the bank officials may be guilty of
estafa through misappropriation.
FACTS:
Respondent Clement David filed a motion for the reconsideration of this Courts
decision. He contends that this Court failed to consider that the petitioners entered
in the records and books of the Nation Savings and Loan Association only
P305,821.92 out of his deposits in the amount of P1,145,546.20, P15,531.93 and
$75,000 and that they admitted that they did not deliver the difference when they

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assumed in their personal capacities the obligation to pay him.

He argues that the petitioners committed estafa through misappropriation.
SC RULING:
The prohibition petition should be dismissed.
The petitioners have no cause of action for prohibition because the City Fiscal has
jurisdiction to conduct the preliminary investigation. It has not been finished. The
filing of this petition is premature. The case does not fall within any of the
exceptions when prohibition lies to stop the preliminary investigation.
9. Earnest money
-If a sale did not materialize, the earnest money is considered to be deposited
I ) Obligation if sale did not materialize
Compania Maritima vs. CA
FACTS:
Fernando A. Froilan purchased from the Shipping Administration a boat for
the sum of P200,000.00, with a down payment of P50,000.00. To secure payment
of the unpaid balance of the purchase price, a mortgage was constituted on the
vessel in favor of the Shipping Administration. Froilan incurred a series of defaults
notwithstanding reconsiderations granted, so much so that. The General Manager
of the Shipping Administration directed its officers to take immediate possession of
the vessel. However, the boat was, not only actually repossessed, but the title
thereto was registered again in the name of the Shipping Administration, re-
transferring the ownership thereof to the government.
On the other hand, Pan Oriental, offered to charter the vessel for a monthly
rent of P3,000.00 which the government accepted Pan Oriental's offer on the
condition that the latter shall cause the repair of the vessel advancing the cost. In
accordance with this charter contract, the vessel was delivered to the possession of
Pan Oriental.
In the meantime, Froilan tried to explain his failure to comply with the
obligations he assumed and asked that he be given another extension to file the
necessary bond. The Shipping Administration denied his petition for
reconsideration.
The Shipping Administration and Pan Oriental formalized the charter
agreement and signed a bareboat contract with option to purchase.
The formal bareboat charter with option to purchase in favor of the Pan
Oriental was returned to the General Manager of the Shipping Administration
without action because of a Cabinet resolution restoring Froilan to his rights to said
boat. But Froilan again failed to comply with these conditions. This led to the
authorization by the Cabinet, that the charter contract with Pan Oriental will
continue. The Cabinet yet again resolved to restore Froilan to his rights under the
original contract of sale.
Pan Oriental protested to this restoration of Froilan's rights under the
contract of sale. Pan Oriental refused to surrender possession of the vessel. The
court ordered the seizure of the vessel from Pan Oriental and its delivery to the
plaintiff.
The Republic of the Philippines was allowed to intervene in the proceeding,
also prayed for the possession of the vessel in order that the chattel mortgage
constituted thereon may be foreclosed. Defendant Pan Oriental resisted said

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intervention, claiming to have its right of retention, in view of the expenses it had
incurred for the repair of the said vessel.
Subsequently, Compaia Maritima, as purchaser of the vessel from
Froilan, was allowed to intervene in the proceedings (RTC). The lower court
rendered a decision upholding Froilan's and Compaia Maritima's right to the
ownership and possession of the ship.
ISSUE:
Who has a better right to the ship?
SC RULING:
Neither Froilan nor the Pan Oriental holds a valid contract over the vessel.
However, since the intervenor Shipping Administration, representing the
government practically ratified its proposed contract with Froilan by receiving the
full consideration of the sale to the latter, for which reason the complaint in
intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to
question this actuation of the Shipping Administration because it had no valid
contract in its favor, the of the lower court adjudicating the vessel to Froilan and its
successor Maritima, must be sustained.
Nevertheless, under the already adverted to, Pan Oriental cannot be
considered as in bad faith until after the institution of the case. However, since it is
not disputed that said made useful and necessary expenses on the vessel,
appellant is entitled to the refund of such expenses with the light to retain the
vessel until he has been reimbursed therefor (Art. 546, Civil Code).
For clarity, this court ordered to be paid by MARITIMA and the REPUBLIC,
jointly and severally, to PAN-ORIENTAL are: (a) the sum of P6,937.72 a month
from February 3, 1951, the date of PAN-ORIENTAL's dispossession, in the concept
of damages for the deprivation of its right to retain the vessel.
RULING ON THE TOPIC (Obligation when sale did not materialize)
There 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. 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.
Section 3 Obligations of the Depositor

ARTICLES 1992 1995
ARTICLE 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)
ARTICLE 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.

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(n) aisa dc
ARTICLE 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)
ARTICLE 1995.A deposit is 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:
i. To pay the compensation agreed upon
ii. To reimburse the expenses for the preservation of the thing deposited
gratuitously.
This does not include useful expenses or expenses incurred for mere
luxury or pleasure
Article 1992 does not apply when the deposit is onerous.
iii. To indemnify the depositary for damages he may have suffered by reason
of the deposit.
This includes damages due to the defects of the thing and all others
due to the deposit, unless:
The depositor was not aware, or
The depositary was notified, or
The depositary knew without notice.
B. Security of the Depositary: He may retain the thing deposited as pledge until the
full payment of what is owed on account of the deposit, including remuneration
stipulated.
(*but see Article 1200, obligations arising from deposit are not extinguished by
compensation)
II. Termination of the Contract

Art. 1995. A deposit is extinguished:
1. Upon the loss or destruction of the thing deposited;
2. In case of gratuitous deposit, upon the death of either the depositor or the
depositary.
Extinguishment:
General Causes:
Upon the loss or destruction of the thing deposited.
If gratuitous, upon the death of either the depositor or the
depositary.
Other Causes:
By claim of the deposit by the depositor at ant time.
By renunciation of the depositary unless deposit is for consideration.
The depositary who may have just reason for not keeping the
deposit may, even before the term expires, return to the
depositor and if the later refuse, he may obtain its
consignation from the court. [Art. 1989]
The reasons must be real and serious: examples;
excessive period, need to go abroad, serious danger of
loss.

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Reasons known at the time the deposit was accepted

and not properly invoked at that time are unavailing.
Death of either property, if the deposit is gratuitous;
But deposit is not extinguished by compensation [Art.1200]
Chapter 3
Necessary Deposit
ARTICLES 1996 2004
ARTICLE 1996.A deposit is necessary: cdasia
(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)
ARTICLE 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)
ARTICLE 1998.The deposit of effects made by 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)
ARTICLE 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)
ARTICLE 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 by 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 hotel or inn shall be
considered in determining the degree of care required of him. (1784a) aisa dc
ARTICLE 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)
ARTICLE 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)
ARTICLE 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)
ARTICLE 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)
I. Necessary Deposit

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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. (Article 1996)
A. Kinds
a. In compliance with legal obligations
It shall be governed by the provisions of the law establishing it, and in case of
its deficiency, by the rules on voluntary deposit.
Example: A borrowed P100,000. 00 from B, and as security thereof, pledged his
diamond ring. If B uses the ring without the authority of A, A may ask that the
ring be judicially or extrajudicially deposited. (Article 2104, Civil Code the
creditor cannot use the thing pledged, without the authority of the owner, and if
he should do so, or should misuse the thing in any other way, the owner may
ask that it be judicially or extrajudicially deposited." When the preservation of
the thing pledged requires its use, it must be used by the creditor but only for
that purpose.
b. On the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or
other similar events.
It shall be regulated by the provisions concerning voluntary deposit and by
Article 2168 when during fire, flood, storm, or other calamity, property is
saved from destruction by another person without the knowledge of the
owner; the latter is bound to pay the former just compensation.
Example: In a fire, Jose save Pedros car. Jose is in possession of the car; Jose is
supposed to be its depositary. Deposits made on the occasion of a calamity have
been fittingly termed depositos miserable.
c. By transients - That made by travelers in hotels or inns.
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.
Travellers refer to transient and was certainly not meant to include ordinary
or regular boarders in any apartment, house, inn or hotel. Guest is
synonymous to travellers. Non-transient are governed by the rules on lease.
Nature of Precautions to be given to guests may be given directly or orally
to the guests, or may be typed or printed on posters.
The liability or responsibility by the hotel or inn keeper commences as soon
there is an evident intention on the part of the travelers to avail himself of the
accommodations of the hotel or inn. It does not matter whether
compensation has already been paid or not, or whether the guest has already
partaken of food and drink or not.
The liability of hotel or inn keeper includes:
o For the vehicles, animals and articles which have been introduced or
placed in the annexes of the hotel;
o Damages to good by their servants or employees as well as strangers
but not that which may proceed from any force majeure or if there has
been robbery by intimidation of persons;
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

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of the former as set forth in articles 1998 to 2001 is suppressed or diminished

shall be void.
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.
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.
Cases:
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 guests and the hotels). 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.
ISSUE: Is hotel liable?
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.
In an early case,38 the Court of Appeals through its then Presiding 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
negligence was incurred by Tropicana or its employees. The New Civil Code is explicit
that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees of the keepers
of hotels or inns as well as by strangers, except as it may proceed from any force
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 the act of the thief or robber was
done with the use of arms or through an irresistible force to qualify the same as force
majeure.42
Petitioners likewise anchor their defense on Article 200243 which exempts the hotel-
keeper from liability if the loss is due to the acts of his guest, his family, or visitors.

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Even a cursory reading of the 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 presupposes that the hotel-keeper is not
guilty of concurrent 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, unless his
actionable negligence contributes to the loss.44
In the case at bar, the responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two keys are necessary to
open the safety deposit box. Without the assistance of hotel employees, the loss would
not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety deposit box of McLoughlin,
even assuming that the latter was also guilty of negligence in allowing another person
to use his key. xxx xxx
DURBAN APARTMENTS CORPORATION VS PIONEER INSURANCE

FACTS:
On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation . . .,
by right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of
Damages against [petitioner] Durban Apartments Corporation, doing business under
the name and style of City Garden Hotel, and [defendant before the RTC] Vicente
Justimbaste . . . . [Respondent averred] that: it is the insurer for loss and damage of
Jeffrey S. See's [the insured's] 2001 Suzuki Grand Vitara . . . with Plate No. XBH-510
under Policy No. MC-CV-HO-01-0003846-00-D in the amount of P1,175,000.00; on April
30, 2002, See arrived and checked in at the City Garden Hotel in Makati corner
Kalayaan Avenues, Makati City before midnight, and its parking attendant, defendant .
. . Justimbaste got the key to said Vitara from See to park it[. O]n May 1, 2002, at
about 1:00 o'clock in the morning, See was awakened in his room by [a] telephone call
from the Hotel Chief Security Officer who informed him that his Vitara was carnapped
while it was parked unattended at the parking area of Equitable PCI Bank along Makati
Avenue between the hours of 12:00 [a.m.] and 1:00 [a.m.]; See went to see the Hotel
Chief Security Officer, thereafter reported the incident to the Operations Division of the
Makati City Police Anti-Carnapping Unit, and a flash alarm was issued.
Upon service of Summons, [petitioner] Durban Apartments and [defendant]
Justimbaste filed their Answer with Compulsory Counterclaim alleging that: See did not
check in at its hotel, on the contrary, he was a guest of a certain Ching Montero . . .;
defendant . . . Justimbaste did not get the ignition key of See's Vitara, on the contrary,
it was See who requested a parking attendant to park the Vitara at any available
parking space, and it was parked at the Equitable Bank parking area, which was within
See's view, while he and Montero were waiting in front of the hotel
ISSUE:
WHETHER OR NOT THE PETIONER HOTEL CAN BE HELD LIABLE
HELD:
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns:
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
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. aCSTDc
Art. 1998.The deposit of effects made by travelers in hotels or inns shall

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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.
Plainly, from the facts found by the lower courts, the insured See deposited his vehicle
for safekeeping with petitioner, through the latter's employee, Justimbaste. In turn,
Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected
from See's delivery, when he handed over to Justimbaste the keys to his vehicle, which
Justimbaste received with the obligation of safely keeping and returning it. Ultimately,
petitioner is liable for the loss of See's vehicle.
d. That made with common carriers.
Chapter 4
Sequestration or Judicial Deposit
ARTICLES 2005- 2009
ARTICLE 2005.A judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered. (1785)
ARTICLE 2006.Movable as well as immovable property may be the object
of sequestration. (1786)
ARTICLE 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) aisa dc
ARTICLE 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)
ARTICLE 2009.As to matters not provided for in this Code, judicial
sequestration shall be governed by the Rules of Court. (1789a)
III. Judicial Deposit

A judicial deposit or sequestration takes place when an attachment or
seizure of property in litigation is ordered. (Art. 2005)
Movable as well as immovable property may be the object of
sequestration. (Art. 2006)
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. (Art. 2007)
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. (Art.
2008)
As to matters not provided for in this Code, judicial sequestration shall be
governed by the Rules of Court. (Art. 2009)
IV. Special Rule

1. Examples of an attachment or seizure of property by judicial order:
a. Under Rule 57, Revised Rules of Court: a proper party may, at the
commencement of the action or at any time thereafter, have the properties of
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the adverse party attached as security for the satisfaction of any judgment
that may be recovered.
b. Under Rule 60, a sheriff may be ordered to seize personal property in suits for
the delivery of personal property.
c. In PCGG sequestration cases pending before the Sandiganbayan.
V. Distinguished from extra-judicial deposit

JUDICIAL DEPOSIT EXTRA-JUDICIAL DEPOSIT
(VOLOUNTARY)
a. As to source By Court order By the will of the parties
b. As to purpose To secure the owners right For safe-keeping
c. As to object May be real or personal Personal property only
property
d. As to cause Remuneratory Generally gratuitous
e. As to For the benefit of the Generally for the benefit of
possession owner/ winning party to the depositor.
the case
Warehouse Receipts Act

(Act No. 2137, as amended)
Concept
The Act does not define a warehouse receipt.
It has been defined as a written acknowledgement by a warehouseman
that he has received and holds certain goods therein described in store for
the person to whom it is issued.
It has also been defined as a simple written contract between the owner of
the goods and the warehouseman to pay the compensation for the
service.
The law does not define what a warehouse is. As used, however, in the Act,
warehouse means the building or place where the goods are deposited and
stored for profit.
A warehouseman is a person lawfully engaged in the business of storing goods
for profit.
Receipts not issued by a warehouseman are not warehouse receipts
although in the form of warehouse receipts.
But a duly authorized officer or agent of a warehouseman may validly
issue a warehouse receipt.
Receipts may be issued by any warehouseman.
Form
The Act does not require or specify any particular form for warehouse
receipts, provided that it contains the essential terms, as enumerated in section 2 of
the Warehouse Receipts Act, which must be embodied in every warehouse receipts:
1. Location of the Warehouse
This requirement is for the benefit of the holders of the warehouse receipt
to enable them to determine where the goods are deposited especially

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when the warehouseman has more than one warehouse located in

different places.
2. Date of the Receipt
The date of issue appearing in the warehouse receipt indicates prima facie
the date when the contract of deposit is perfected and when storage
charges shall begin to run against the depositor.
3. Consecutive number of Receipt
To identify each receipt with the goods for which it was issued.
4. Person to whom good are deliverable
This determines the person or persons who shall prima facie be entitled
lawfully to the possession of the goods deposited. This requirement,
however, does not determine the negotiability of the receipt because
notwithstanding the failure to use the words of negotiability, the receipt
may still be considered negotiable.
5. Rate of Storage Charges
This states the consideration for the contract from the view of the
warehouseman. In the absence thereof, the law presumes that the
depositor shall pay the customary or reasonable compensation for the
services of the warehouseman.
6. Description of the Goods or Packages
For the identification so that the identical property delivered to the
warehouseman may be delivered back by him upon the return of the
warehouse receipt. However, the mere fact that the goods deposited are
incorrectly described does not make ineffective the receipt when the
identity of the goods is fully established by the evidence.
7. Signature of the Warehouseman
The warehousemans signature furnishes the best evidence of the fact that
the warehouseman has received the goods described in the receipt and
has bound himself to assume all obligations in connection therewith.
8. Warehousemans ownership of or interest in the goods
It seems wise that where they issue negotiable instrument in this way, the
document should carry notice of the fact on its face.
9. Statement of the advances made and liabilities incurred
To preserve the lien of the warehouseman over the goods stored or the
proceeds thereof in his hands.
Effect of Omission:
1. The validity of receipt not affected.
The omission of any of the requirements will not affect the validity of the
warehouse receipt.
2. Warehouseman liable for damages.
It will only render the warehouseman liable for damages to those injured
by his omission.
3. Negotiability of receipt not affected.
Section 2 doen not deal with the negotiuability of the warehouse receipt.
Thus, omission of any terms in section 2 that are required will not affect
the negotiability of the warehouse receipt.
4. Contract converted to ordinary deposit.
The issuance of the warehouse receipt in the form provided by the law is
merely permissive and directory and not mandatory in the sense that if the

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requirements are not observed, then the goods delivered for storage
become ordianry deposits.
Terms that cannot be included in a warehouse receipt:

SECTION 3. Form of receipts. What terms may be inserted. A
warehouseman may insert in a receipt issued by him any other terms and
conditions provided that such terms and conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the safe-
keeping of the goods entrusted to him which is reasonably careful man would exercise
in regard to similar goods of his own.
*In addition to those limiations, the stipulations in the receipt must not be contrary to
law, morals, good customs, public order, or public policy.
1. Exemption from liability for misdelivery.

A warehouseman is not authorized to insert any term exempting him from
liability for misdelivery of goods because such would be against section 10
of the Act or for not giving a statutory notice in case of sale of goods
because such would contrary to section 33 and 34.
2. Exemption from liablitiy for negligence.
The warehouseman cannot insert any term which would would relieved
him from liability for his own negligence, such as For account and at the
risk of the depositor. The warehouseman is required by law to exercise
that degree of care in the safekeeping of the goods entrusted to him which
a reasonable careful man would exercise in regard to similar goods of his
own.
Kinds
Non-negotiable receipt
A receipt in which it is stated that the goods received will be delivered to the
depositor or to any other specified person, is a non-negotiable receipt. (Section
4)
Negotiable receipt
A receipt in which it is stated that the goods received will be delivered to the
bearer or to the order of any person named in such receipt is a negotiable
receipt. (Section 5)
NOTE:
The word negotiable is not used in the sense in which it is applied to bills
of exchange or promissory notes but only as indicating that in the passage of
warehouse receipts through the channels of commerce, the law regards the
property which they describe as following them and gives their regular transfer
by indorsement the effect of manual delivery of the thing specified in them.
[Vannett vs. Reilly Hertz Automobile Co., 173 N.W.466]
a. Effects of words non-negotiable

..no provision shall be inserted in a negotiable receipt that it is non-
negotiable. Such provision if inserted shall be void.

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b. Rule if more that one receipt is issued.

Sec. 6. Duplicate receipts must be so marked..- when more that one
negotiable receipt is issued for the same goods, the word duplicate shall be
plainly placed upon the face of every such receipt, except on the first one
issued. A warehouseman shall be liable for all damages caused by his failure
to do so to anyone who purchased the subsequent receipt for value
supposing it to be original, even though the purchase be after the delivery of
the goods by the warehouseman to the holder of the original receipt.
Obligations of the Warehouseman

1. To take care of the goods
A warehouseman shall be liable for any loss or injury to the goods caused by his
failure to exercise such care in regard to them as reasonably careful owner of
similar goods would exercise, but he shall not be liable, in the absence of an
agreement to the contrary, for any loss or injury to the goods which could not have
been avoided by the exercise of such care. (Section 21)
The warehouse man is required to exercise ordinary or reasonable care in the
custody of the goods, that is, the diligence of a good father of a family.
In the absence of any agreement to the contrary, the warehouseman is not liable
for any loss or injury to the goods which could not have been avoided by the
exercise of such care. While the warehouseman may limit his liability to an agreed
value of the property received in case of loss, he cannot, however, stipulate with
the depositor that he would not be responsible for any loss even if caused by his
negligence.
2. To deliver the goods

A warehouseman, in the absence of some lawful excuse provided by this Act, is
bound to deliver the goods upon a demand made either by the holder of a receipt
for the goods or by the depositor.
In case the warehouseman refuses or fails to deliver the goods in compliance
with a demand by the holder or depositor so accompanied, the burden shall be
upon the warehouseman to establish the existence of a lawful excuse for such
refusal. (Section 8).
a. What must accompany the demand (Section 8)
An offer to satisfy the warehouseman's lien;
A warehouseman having a lien valid against the person demanding the
goods may refuse to deliver the goods to him until the lien is satisfied. He
loses his lien upon the goods by surrendering possession thereof.
An offer to surrender the receipt, if negotiable, with such indorsements as
would be necessary for the negotiation of the receipt; and
The offer to surrender the receipt is required for the protection of the
warehouseman since the receipt represents the goods described therein.
Furthermore, the warehouseman will be criminally liable if he delivers the
goods without obtaining possession of such receipt. The warehousemans
right to require production of the receipt as a condition precedent to delivery
is subject to waiver, as where he refuses to deliver on other grounds than its
production.

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A readiness and willingness to sign, when the goods are delivered, an

acknowledgment that they have been delivered, if such signature is requested
by the warehouseman.
b. To whom delivery must be made (Section 9)
The person lawfully entitled to the possession of the goods, or his agent;
A warehouseman is justified in delivering the good to the person to
whom a competent court has ordered the delivery of the goods; or to an
attaching creditor; or to the purchaser in case of sale of the goods by the
warehouseman to enforce his lien or where the goods are perishable or
hazardous.
A person who is either himself entitled to delivery by the terms of a non-
negotiable receipt issued for the goods, or who has written authority from the
person so entitled either indorsed upon the receipt or written upon another
paper; or
Oral authority is sufficient
A person in possession of a negotiable receipt by the terms of which the
goods are deliverable to him or order, or to bearer, or which has been
indorsed to him or in blank by the person to whom delivery was promised by
the terms of the receipt or by his mediate or immediate indorser.
The warehouseman is liable for misdelivery to a mere possessor of a
negotiable receipt by the terms of which the goods covered by it are
deliverable to the order of another, not being an indorsee thereon.
c. Misdelivery (Section 10)
What it constitutes?
Where a warehouseman delivers the goods to one who is not in fact
lawfully entitled to the possession of them.
Liability for misdelivery:

For conversion to all having a right of property or possession in the goods
if he delivered the goods otherwise than as authorized by subdivisions (b) and
(c) of the preceding section (refer to Section 9)
Warehouseman shall also be liable though he delivered the goods as
authorized by said subdivisions but prior to such delivery he had either: (a)
Been requested, by or on behalf of the person lawfully entitled to a right of
property or possession in the goods, not to make such deliver; or (b) Had
information that the delivery about to be made was to one not lawfully entitled
to the possession of the goods.
d. Where goods are covered by a negotiable receipt
When the warehouseman must deliver; Attachment or levy upon the goods
(Section 25)
If goods are delivered to a warehouseman by the owner or by a person
whose act in conveying the title to them to a purchaser in good faith for value
would bind the owner, and a negotiable receipt is issued for them, they can not
thereafter, while in the possession of the warehouseman, be attached by
garnishment or otherwise, or be levied upon under an execution unless the
receipt be first surrendered to the warehouseman or its negotiation enjoined.
The warehouseman shall in no case be compelled to deliver up the actual
possession of the goods until the receipt is surrendered to him or impounded by
the court.

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Cancellation of receipt (Section 11)

Except as provided in section thirty-six, where a warehouseman delivers
goods for which he had issued a negotiable receipt, the negotiation of which
would transfer the right to the possession of the goods, and fails to take up and
cancel the receipt, he shall be liable to any one who purchases for value in good
faith such receipt, for failure to deliver the goods to him, whether such purchaser
acquired title to the receipt before or after the delivery of the goods by the
warehouseman.
The negotiable receipt must be one the negotiation of which would
transfer the right to the possession of the goods. So, the warehouseman who
delivers the goods to the real owner without taking up and cancelling the receipt
is not liable to the purchaser for value in good faith of such receipt from a thief
for failure to deliver the goods to him as the thief has not title to the goods.
When only part of the goods are delivered (Section 12)

Except as provided in section thirty-six, where a warehouseman delivers
part of the goods for which he had issued a negotiable receipt and fails either to
take up and cancel such receipt or to place plainly upon it a statement of what
goods or packages have been delivered, he shall be liable to any one who
purchases for value in good faith such receipt, for failure to deliver all the goods
specified in the receipt, whether such purchaser acquired title to the receipt
before or after the delivery of any portion of the goods by the warehouseman.
e. Liability for altered receipts (Section 13)
The alteration of a receipt shall not excuse the warehouseman who issued it
from any liability if such alteration was: (a) Immaterial, (b) Authorized, or
(c) Made without fraudulent intent.
If the alteration was authorized:
- The warehouseman shall be liable according to the terms of the receipt as
altered
If the alteration was unauthorized but made without fraudulent intent:
- The warehouseman shall be liable according to the terms of the receipt as
they were before alteration.
Material and fraudulent alteration of a receipt:
- Shall not excuse the warehouseman who issued it from liability to deliver
according to the terms of the receipt as originally issued, the goods for
which it was issued but shall excuse him from any other liability to the
person who made the alteration and to any person who took with notice of
the alteration. Any purchaser of the receipt for value without notice of the
alteration shall acquire the same rights against the warehouseman which
such purchaser would have acquired if the receipt had not been altered at
the time of purchase.
Material but innocently made though unauthorized:
- The warehouse man is liable on the altered receipt according to its original
tenor.
f. Where negotiable receipt is lost or destroyed (Section 14)
Where a negotiable receipt has been lost or destroyed, a court of
competent jurisdiction may order the delivery of the goods upon satisfactory
proof of such loss or destruction and upon the giving of a bond with sufficient
sureties to be approved by the court to protect the warehouseman from any
liability or expense, which he or any person injured by such delivery may incur

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by reason of the original receipt remaining outstanding. The court may also in
its discretion order the payment of the warehouseman's reasonable costs and
counsel fees.
The delivery of the goods under an order of the court as provided in this
section, shall not relieve the warehouseman from liability to a person to whom
the negotiable receipt has been or shall be negotiated for value without notice of
the proceedings or of the delivery of the goods.
g. Where the warehouseman claims ownership over the goods (Section 16)
No title or right to the possession of the goods, on the part of the
warehouseman, unless such title or right is derived directly or indirectly from a
transfer made by the depositor at the time of or subsequent to the deposit for
storage, or from the warehouseman's lien, shall excuse the warehouseman from
liability for refusing to deliver the goods according to the terms of the receipt.
h. Where there are adverse claimants (Section 17 18)
SECTION 17. Interpleader of adverse claimants. If more than one person
claims the title or possession of the goods, the warehouseman may, either as a
defense to an action brought against him for non-delivery of the goods or as an
original suit, whichever is appropriate, require all known claimants to interplead.
- This is for the protection of the warehouseman. In such case, he will be
relieved from liability in delivering the goods to the person to whom the
court finds to have a better right.
SECTION 18. Warehouseman has reasonable time to determine validity of
claims. If someone other than the depositor or person claiming under him has
a claim to the title or possession of goods, and the warehouseman has
information of such claim, the warehouseman shall be excused from liability for
refusing to deliver the goods, either to the depositor or person claiming under
him or to the adverse claimant until the warehouseman has had a reasonable
time to ascertain the validity of the adverse claim or to bring legal proceedings to
compel claimants to interplead.
- Take note: the warehouseman is not excused from liability in case he
made a mistake.
i. Liability for non-existence or misdescription of goods (Section 20)
A warehouseman shall be liable to the holder of a receipt for damages
caused by the non-existence of the goods or by the failure of the goods to
correspond with the description thereof in the receipt at the time of its issue. If,
however, the goods are described in a receipt merely by a statement of marks
or labels upon them or upon packages containing them or by a statement that
the goods are said to be goods of a certain kind or that the packages containing
the goods are said to contain goods of a certain kind or by words of like purport,
such statements, if true, shall not make liable the warehouseman issuing the
receipt, although the goods are not of the kind which the marks or labels upon
them indicate or of the kind they were said to be by the depositor.
Negotiation of Negotiable Receipt
A. How
a. By delivery
SECTION 37. Negotiation of negotiable receipt of delivery. A negotiable
receipt may be negotiated by delivery:

CREDIT TRANSACTIONS
(a) Where, by terms of the receipt, the warehouseman undertakes to deliver

the goods to the bearer, or
(b) Where, by the terms of the receipt, the warehouseman undertakes to
deliver the goods to the order of a specified person, and such person or a
subsequent indorsee of the receipt has indorsed it in blank or to bearer.
Where, by the terms of a negotiable receipt, the goods are deliverable to
bearer or where a negotiable receipt has been indorsed in blank or to bearer,
any holder may indorse the same to himself or to any other specified person,
and, in such case, the receipt shall thereafter be negotiated only by the
indorsement of such indorsee.
b. By indorsement
SECTION 38. Negotiation of negotiable receipt by indorsement. A negotiable
receipt may be negotiated by the indorsement of the person to whose order the
goods are, by the terms of the receipt, deliverable. Such indorsement may be in
blank, to bearer or to a specified person. If indorsed to a specified person, it
may be again negotiated by the indorsement of such person in blank, to bearer
or to another specified person. Subsequent negotiation may be made in like
manner.
B. Who may negotiate

SECTION 40. Who may negotiate a receipt. A negotiable receipt may be
negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt has been
entrusted by the owner, if, by the terms of the receipt, the warehouseman
undertakes to deliver the goods to the order of the person to whom the possession
or custody of the receipt has been entrusted, or if, at the time of such entrusting,
the receipt is in such form that it may be negotiated by delivery.
C. Rights of a person to whom a receipt is negotiated

SECTION 41. Rights of person to whom a receipt has been negotiated. A
person to whom a negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had
ability to convey to a purchaser in good faith for value, and also such title to the
goods as the depositor or person to whose order the goods were to be delivered by
the terms of the receipt had or had ability to convey to a purchaser in good faith for
value, and
(b) The direct obligation of the warehouseman to hold possession of the goods for
him according to the terms of the receipt as fully as if the warehouseman and
contracted directly with him.
D. Rights of transferee of an order negotioable receipt (not negotiated)

SECTION 42. Rights of person to whom receipt has been transferred. A person
to whom a receipt has been transferred but not negotiated acquires thereby, as
against the transferor, the title of the goods subject to the terms of any agreement
with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and thereby to acquire the

CREDIT TRANSACTIONS
direct obligation of the warehouseman to hold possession of the goods for him
according to the terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a
non-negotiable receipt, the title of the transferee to the goods and the right to
acquire the obligation of the warehouseman may be defeated by the levy of an
attachment or execution upon the goods by a creditor of the transferor or by a
notification to the warehouseman by the transferor or a subsequent purchaser from
the transferor of a subsequent sale of the goods by the transferor.
SECTION 43. Transfer of negotiable receipt without indorsement. Where a

negotiable receipt is transferred for value by delivery and the indorsement of the
transferor is essential for negotiation, the transferee acquires a right against the
transferor to compel him to indorse the receipt unless a contrary intention appears.
The negotiation shall take effect as of the time when the indorsement is actually
made.
E. Warranties on sale of receipt

SECTION 44. Warranties of a sale of receipt. A person who, for value,
negotiates or transfers a receipt by indorsement or delivery, including one who
assigns for value a claim secured by a receipt, unless a contrary intention appears,
warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity or worth of
the receipt, and
(d) That he has a right to transfer the title to the goods and that the goods are
merchantable or fit for a particular purpose whenever such warranties would have
been implied, if the contract of the parties had been to transfer without a receipt of
the goods represented thereby.
F. Validity of negotiation as against the real owner

SECTION 47. When negotiation not impaired by fraud, mistake or duress. The
validity of the negotiation of a receipt is not impaired by the fact that such
negotiation was a breach of duty on the part of the person making the negotiation
or by the fact that the owner of the receipt was induced by fraud, mistake or duress
or to entrust the possession or custody of the receipt to such person, if the person
to whom the receipt was negotiated or a person to whom the receipt was
subsequently negotiated paid value therefor, without notice of the breach of duty,
or fraud, mistake or duress.
G. Effect of subsequent negotiation of a previously negotiated/transferred receipt

SECTION 48. Subsequent negotiation. Where a person having sold, mortgaged,
or pledged goods which are in warehouse and for which a negotiable receipt has
been issued, or having sold, mortgaged, or pledged the negotiable receipt
representing such goods, continues in possession of the negotiable receipt, the
subsequent negotiation thereof by the person under any sale or other disposition
thereof to any person receiving the same in good faith, for value and without notice
of the previous sale, mortgage or pledge, shall have the same effect as if the first

CREDIT TRANSACTIONS
purchaser of the goods or receipt had expressly authorized the subsequent

negotiation.
H. Effect of negotiation on vendors lien negotiation defeats vendors lien. An

innocent holder of a negotiable warehouse receipt has a better right to the goods
for which the receipt is given than the vendor who has a vendors lien upon the
goods. So, the warehouseman is not obliged to deliver or justified in delivering the
goods to an unpaid seller unless the receipt is first surrendered for cancellation.
Transfer of Non-Negotiable Receipt

SECTION 39. Transfer of receipt. A receipt which is not in such form that it can
be negotiated by delivery may be transferred by the holder by delivery to a
purchaser or donee.
A non-negotiable receipt can not be negotiated, and the indorsement of such a
receipt gives the transferee no additional right.
Transfer of non-negotiable receipt:

- A non-negotiable receipt of title cannot be negotiated. Nevertheless, it may be
transferred or assigned by delivery. The transferee or assignee acquires only the
rights stated in sec. 42.
- If receipt is endorsed, the transferee acquires no additional right.
Criminal Offenses
SECTION 50. Issue of receipt for goods not received. A warehouseman, or an
officer, agent, or servant of a warehouseman who issues or aids in issuing a receipt
knowing that the goods for which such receipt is issued have not been actually
received by such warehouseman, or are not under his actual control at the time of
issuing such receipt, shall be guilty of a crime, and, upon conviction, shall be
punished for each offense by imprisonment not exceeding five years, or by a fine
not exceeding ten thousand pesos, or both.
SECTION 51. Issue of receipt containing false statement. A warehouseman, or

any officer, agent or servant of a warehouseman who fraudulently issues or aids in
fraudulently issuing a receipt for goods knowing that it contains any false
statement, shall be guilty of a crime, and upon conviction, shall be punished for
each offense by imprisonment not exceeding one year, or by a fine not exceeding
two thousand pesos, or by both.
SECTION 52. Issue of duplicate receipt not so marked. A warehouse, or any

officer, agent, or servant of a warehouseman who issues or aids in issuing a
duplicate or additional negotiable receipt for goods knowing that a former
negotiable receipt for the same goods or any part of them is outstanding and
uncanceled, without plainly placing upon the face thereof the word "duplicate"
except in the case of a lost or destroyed receipt after proceedings are provided for
in section fourteen, shall be guilty of a crime, and, upon conviction, shall be
punished for each offense by imprisonment not exceeding five years, or by a fine
not exceeding ten thousand pesos, or by both.
SECTION 53. Issue for warehouseman's goods or receipts which do not state that
fact. Where they are deposited with or held by a warehouseman goods of which

CREDIT TRANSACTIONS
he is owner, either solely or jointly or in common with others, such warehouseman,

or any of his officers, agents, or servants who, knowing this ownership, issues or
aids in issuing a negotiable receipt for such goods which does not state such
ownership, shall be guilty of a crime, and, upon conviction, shall be punished for
each offense by imprisonment not exceeding one year, or by a fine not exceeding
two thousand pesos, or by both.
SECTION 54. Delivery of goods without obtaining negotiable receipt. A

warehouseman, or any officer, agent, or servant of a warehouseman, who delivers
goods out of the possession of such warehouseman, knowing that a negotiable
receipt the negotiation of which would transfer the right to the possession of such
goods is outstanding and uncanceled, without obtaining the possession of such
receipt at or before the time of such delivery, shall, except in the cases provided for
in sections fourteen and thirty-six, be found guilty of a crime, and, upon conviction,
shall be punished for each offense by imprisonment not exceeding one year, or by a
fine not exceeding two thousand pesos, or by both.
SECTION 55. Negotiation of receipt for mortgaged goods. Any person who
deposits goods to which he has no title, or upon which there is a lien or mortgage,
and who takes for such goods a negotiable receipt which he afterwards negotiates
for value with intent to deceive and without disclosing his want of title or the
existence of the lien or mortgage, shall be guilty of a crime, and, upon conviction,
shall be punished for each offense by imprisonment not exceeding one year, or by a
fine not exceeding two thousand pesos, or by both.
o In Section 50- the warehouseman is made liable if it issues a receipt knowing

that the goods for which such receipt is issued have not been actually
received by such warehouseman.
o Warehouse receipts are issued for the goods or merchandise stored with the
warehouseman. It is essential that the goods for which the receipt is issued
shall be in the warehousemans possession.
Ingredients of offenses punished by section 54.

1. There is delivery of goods out of the possession of the warehouseman, by the
warehouseman himself or by any officer, agent, or servant of the
warehouseman;
2. The person who caused the delivery has knowledge that a negotiable receipt for
the goods, which would transfer the right to the possession thereof, is
outstanding and uncanceled; and
3. The person causing the delivery does so without obtaining possession of the
receipt at or before the time of delivery.
Nature of Criminal Responsibility:

1. Violation by the warehouseman himself- under section 54, he may be held
criminally liable if he caused the withdrawal of the goods in question
2. Violation by some other person- section 54 shows that other persons may also
be held liable for violation thereof. the warehouseman OR any other officer,
agent or servant of a warehouseman .
o The criminal responsibility punished by the law is individual, not attributive, so
that the warehouseman should not be punished even for violations which

CREDIT TRANSACTIONS
some other officer, agent or servant of the warehouseman may have

committed.
3. Possibility that right to goods sold has been transferred to a third person- for a
warehouseman not to be held liable under section 54, for having delivered goods
from his warehouse to a person other than the one entitled thereto. It must be
shown that such transfer to said third person was in the course of the
transaction with the depositor in whose name the receipt of the stored goods
was issued.


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CREDIT TRANSACTIONS

A. COMMODATUM - loan of B. MUTUUM simple loan or

bailor Refers to personal property only

2. UNILATERAL Loan produces obligations only for the borrower. Obligations

Q: when does delivery becomes an obligation?

Referred to as loan for use or Referred to as loan for

ARTICLES 1935 1940

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

2. Effect of Adverse Possession for 11 years

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE vs. COURT

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

3. Effect of Suspension of Possessory Rights for more than 50 years

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

b. Kinds Commodatum is divided into

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

2. If the use of the thing is merely tolerated

CATHOLIC VICAR vs. CA

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

c. Pactum de Commodando (1934)

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

1. CAPACITY - no special capacity. Any person entitled to possession may

ARTICLES 1941 1945

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

I. Rights and Obligations of the Bailee

b. Obligations/ duties of a BAILEE:

5. Two or more borrowers are solidarily liable.

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

CATHOLIC VICAR vs. CA

DE LOS SANTOS vs. JARRA

The carabaos delivered to be used not being returned by the

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

indemnify for the losses and damages caused thereby.

ARTICLES 1946 1952

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

A. EFFECT AS TO THE LENDER

PRIMARY OBLIGATION OF THE BAILOR:

RIGHT OF THE BAILOR TO DEMAND RETURN OF THE THING FOR ACTS OF

OBLIGATION TO REFUND EXTRAORDINARY EXPENSES:

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

EXTRAORDINARY EXPENSES ARISING FROM THE ACTUAL USE OF THE THING

LIABILTY TO PAY DAMAGES FOR KNOWN HIDDEN DEFECTS:

IF FLAW IS UNKNOWN TO THE BAILOR:

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

Loan, defined. It is a contract where one of the parties delivers to another

ARTICLES 1953 1961

I. SIMPLE LOAN or MUTUUM

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

It is a contract whereby one party delivers to another money or fungible

CHEE KIONG YAM vs. MALIK

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

TOLENTINO vs. GONZALES SY CHIAM

CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

the purchase price of the property involved. Finally an application was

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A contract of "loan" differs materially from a contract of "rent." In a

In the present case the property in question was sold. It was an

d. Mutuum vs. Estafa

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CREDIT TRANSACTIONS PRE-MIDTERM REVIEWER

as additional working capital.