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CREDIT TRANSACTIONS

LOAN

Q: With regard to an award of interest in the concept of actual and compensatory damages, please
state the
guidelines regarding the manner of computing legal interest in the following situations:

1. When the obligation is breached and it consists in the payment of a sum of money like a loan
or forbearance of money;

2. When the obligation does not constitute a loan or forbearance of money. Consider the
issuance of BSP-MB Circular No. 799, which became effective on July 1, 2013. (2016 BAR)

A:
1. When the obligation is breached and it consists in the payment of sum of money like a loan or forbearance
of money, in the absence of stipulation, the rate of interest shall be the legal rate of 6% per annum, (Art. 2209,
CC) which was increased to 12% per NB Circular No. 905, series of 1982 to be computed from default. The
twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. From July 1, 2013, the new
rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable. (Nacar v. Gallery
Frames, 703 SCRA 439 [2013], applying BSP-MB Circular No. 799)

2. The interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable uncertainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially
or extra-judicially, but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged. (Nacar v. Gallery Frames,
703 SCRA 439 [2013])

Q: A, upon request, loaned his passenger jeepney to B to enable B to bring his sick wife from Paniqui,
Tarlac to the Philippine General Hospital in Manila for treatment. On the way back to Paniqui, after
leaving his wife at the hospital, people stopped the passenger jeepney. B stopped for them and
allowed them to ride on board, accepting payment from them just as in the case of ordinary passenger
jeepneys plying their route. As B was crossing Bamban, there was an onrush of lahar from Mt.
Pinatubo. The jeep that was loaned to him was wrecked.

1) What do you call the contract that was entered into by A and B with respect to the passenger
jeepney that was loaned by A to B to transport the latter’s sick wife to Manila?

2) Is B obliged to pay A for the use of the passenger jeepney?

3) Is B liable to A for the loss of the jeepney? (1993 BAR)

A:
1) The contract is called “commodatum”. ( Art. 1933, Civil Code)

2) No, B is not obliged to pay A for the use of the passenger jeepney because commodatum is essentially
gratuitous. ( Art. 1933, Civil Code)

3) Yes, because B devoted the thing to a purpose different from that for which it has been loaned ( Art. 1942,
par. 2 Civil Code)

Q: Distinguish briefly but clearly between mutuum and commodatum. (2004 BAR)

A: In mutuum, the object borrowed must be a consumable thing the ownership of which is transferred to the
borrower who incurs the obligation to return the same consumable to the lender in an equal amount, and of the
same kind and quality. In commodatum, the object borrowed is usually a non-consumable thing the ownership
of which is not transferred to the borrower who incurs the obligation to return the very thing to the lender.

Q: Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the
understanding that the latter could use it for one year for his personal or family use while Pedro works
in Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the
brakes
repaired. He spent a total amount of P15, 000.00. After using the vehicle for two weeks, Tito discovered
that it consumed too much fuel. To make up for the expenses, he leased it to Annabelle. Two months
later, Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while being
driven by Tito, the van was accidentally damaged by a cargo truck without his fault.
a) Who shall bear the P15, 000.00 spent for the repair of the van? Explain.

b) Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito?
Explain.

c) Does Pedro have the right to retrieve the van even before the lapse of one year? Explain.

d) Who shall bear the expenses for the accidental damage caused by the cargo truck, granting
that the truck driver and truck owner are insolvent? Explain. (2005 BAR)

A:
a) The contract between Pedro and Tito is one of commodatum. Of the P15, 000.00 spent, Pedro, the bailor,
shall bear the expenses for the repair of the faulty brakes, they being extraordinary expenses incurred due to
the non-disclosure by the bailor of the defect or fault; Tito, on the other hand, shall shoulder that part of the
P15, 000.00 spent for the tune-up, said expense being ordinary for the use and preservation of the van.

b) The costs for the fuel and other materials are considered ordinary expenses, and consequently Tito, the
bailee, shall shoulder them. ( Art. 1941, Civil Code)

c) No, Pedro cannot demand the return of the van until after the expiration of the one-year period stipulated.
However, if in the meantime he should have urgent need of the van, he may demand its return or temporary
use.

d) Both Tito and Pedro shall bear equally the costs of the extraordinary expenses, having been incurred on the
occasion of actual use of the van by Tito, the bailee, even though he acted without fault.
Q: Distinguish usufruct from commodatum. (1998 BAR)

A: Usufruct is a right given to a person (usufructuary) to enjoy the property of another with the obligation of
preserving its form and substance. ( Art. 562, Civil Code) On the other hand, commodatum is a contract by
which one of the parties (bailor) delivers to another (bailee) something not consumable so that the latter may
use it for a certain time and return it. In usufruct the usufructuary gets the right to the use and to the fruits of the
same, while in commodatum, the bailee only acquires the use of the thing loaned but not its fruits. Usufruct
may be constituted on the whole or a part of the fruits of the thing. ( Art. 564, Civil Code) It may even be
constituted over consumables like money ( Alunan v. Veloso, 52 Phil. 545). On the other hand, in
commodatum, consumable goods may be subject thereof only when the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition. ( Art. 1936, Civil Code)

Q: In the province, a farmer couple borrowed money from the local merchant. To guarantee payment,
they left the Torrens Title of their land with the merchant, for him to hold until they pay the loan. Is
there a –
a) contract of pledge
b) contract of mortgage
c) contract of antichresis, or
d) none of the above?
Explain. (1996 BAR)

A: None of the above. There is no pledge because only movable property may be pledged ( Art. 2094). If at all,
there was a pledge of the paper or document constituting the Torrens Title, as a movable by itself, but not of
the land which the title represents. There is no mortgage because no deed or contract was executed in the
manner required by law for a mortgage ( Arts. 2085 to 2092; Arts. 2124 to 2131). There is no contract of
antichresis because no right to the fruits of the property was given to the creditor ( Art. 2132). A contract of
simple loan was entered into with security arrangement agreed upon by the parties which is not one of those
mentioned above.

Q: The parties in a contract of loan of money agreed that the yearly interest rate is 12% and it can be
increased if there is a law that would authorize the increase of interest rates. Suppose OB, the lender,
would increase by 5% the rate of interest to be paid by TY, the borrower, without a law authorizing
such increase, would OB’s action be just and valid? Why? Has TY have a remedy against the
imposition of the rate increase? Explain. (2001, 2004 BAR)

A: OB's action is not just and valid. The debtor cannot be required to pay the increase in interest there being
no law authorizing it, as stipulated in the contract of loan. Increasing the rate in the absence of such law
violates the principle of mutuality of contracts under Art. 1308.

DEPOSIT

Q: In order to secure a bank loan, XYZ Corporation surrendered its deposit certificate, with a maturity
date
of 01 September 1997 to the bank. The corporation defaulted on the due repayment of the loan,
prompting the bank to encash the deposit certificate. XYZ Corporation questioned the above action
taken by the bank as being a case of pactum commissorium. The bank disagrees. What is your
opinion? (1997 BAR)
A: There is no pactum commissorium here. Deposits of money in banks and similar institutions are governed
by the provisions on simple loans (Art. 1980). The relationship between the depositor and a bank is one of
creditor and debtor. Basically this is a matter of compensation as all the elements of compensation are present
in this case (BPI v. CA, G.R. No. 104612, May 10, 1994).

Q: X, who has a savings deposit with Y Bank in the sum of P1, 000, 000.00 incurs a loan obligation with
the said Bank in the sum of P800 000.00 which has become due. When X tries to withdraw his deposit,
Y Bank allows only P200, 000.00 to be withdrawn, less service charges, claiming that compensation
has extinguished its obligation under the savings account to the concurrent amount of X’s debt. X
contends that compensation is improper when one of the debts, as here, arises from a contract of
deposit. Assuming that the promissory note signed by X to evidence the loan does not provide for
compensation between said loan and his savings deposit, who is correct? (1998 BAR)

A: Y Bank is correct. Art. 1287, Civil Code, does not apply. All the requisites of Art. 1279, Civil Code are
present. In the case of Gullas v. PNB (62 Phil. 519), The Supreme Court held:

“The Civil Code contains provisions regarding compensation (set off) and deposit. These portions of Philippine
Law provide that compensation shall take place when two persons are reciprocally creditor and debtor of each
other. In this connection, it has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. xxx As a general rule, a bank has a right of set off of the deposits in its hands for the
payment of any indebtedness to it on the part of a depositor.” Hence, compensation took place between the
mutual obligations of X and Y Bank.

GUARANTY AND SURETYSHIP

Q: What is the difference between "guaranty" and "suretyship"? (2010 BAR)

A: Guaranty and Suretyship distinguished:

1. The obligation in guaranty is secondary; whereas, in suretyship, it is primary.

2. In guaranty, the undertaking is to pay if the principal debtor cannot pay; whereas, in suretyship, the
undertaking is to pay if the principal debtor does not pay.

3. In guaranty, the guarantor is entitled to the benefit of excussion; whereas, in suretyship the surety is not
entitled.

4. Liability in guaranty depends upon an independent agreement to pay the obligations of the principal if he
fails to do so; whereas, in suretyship, the surety assumes liability as a regular party.

5. The Guarantor insures the solvency of the principal debtor; whereas, the surety insures the debt.

6. In a guaranty, the guarantor is subsidiarily liable; whereas, in a suretyship, the surety binds himself solidarity
with the principal debtor (Art. 2047)

Q: AB sold to CD a motor vehicle for and in consideration of P120, 000, to be paid in twelve monthly
equal instalments of P10, 000.00, each instalment being due and payable on the 15th day of each
month starting January 1997. To secure the promissory note, CD (a) executed a chattel mortgage on
the subject motor vehicle, and (b) furnished a surety bond issued by Philamlife. CD failed to pay more
than two (2) instalments. AB went after the surety but he was only able to obtain three-fourths (3/4) of
the total amount still due and owing from CD. AB seeks your advice on how he might, if at all recover
the deficiency. How would you counsel AB? (1997 BAR)

A: Yes, he can recover the deficiency. The action of AB to go after the surety bond cannot be taken to mean a
waiver of his right to demand payment for the whole debt. The amount received from the surety is only
payment pro tanto, and an action may be maintained for a deficiency debt.

PLEDGE

Q: In 1982, Steve borrowed P400, 000.00 from Danny, collateralized by a pledge of shares of stock of
Concepcion Corporation worth P800, 000.00. In 1983, because of the economic crisis, the value of the
shares pledged fell to only P100, 000.00. Can Danny demand that Steve surrender the other shares
worth P700,000.00? (1994 BAR)

A: No. Bilateral contracts cannot be changed unilaterally. A pledge is only a subsidiary contract, and Steve is
still indebted to Danny for the amount of P400, 000.00 despite the fall in the value of the stocks pledged.

Q: Distinguish a contract of chattel mortgage from a contract of pledge. (1999 BAR)

A: In a contract of CHATTEL MORTGAGE possession belongs to the creditor, while in a contract of PLEDGE
possession belongs to the debtor.

A chattel mortgage is a formal contract while a pledge is a real contract.

A contract of chattel mortgage must be recorded in a public instrument to bind third persons while a contract of
pledge must be in a public instrument containing description of the thing pledged and the date thereof to bind
third persons.

Q: Are the right of redemption and the equity of redemption given by law to a mortgagor the same?
Explain. (1999 BAR)

A: The equity of redemption is different from the right of redemption. EQUITY OF REDEMPTION is the right of
the mortgagor after judgment in a judicial foreclosure proceedings, within a period of not less than 90 days,
before the sale or confirmation of the sale, to pay into the court the amount of the judgment debt. On the other
hand, RIGHT OF REDEMPTION is the right of the mortgagor, after the sale of the mortgaged property, to
redeem the property by paying to the purchaser in the sale or for him to the sheriff who made the sale, the
amount paid by him, with interest, within one year from the sale. There is no right of redemption, only equity of
redemption, in a judicial foreclosure under the Rules of Court.