CREDIT TRANSACTIONS INTRODUCTION Meaning and Scope of Credit Transactions: A. Credit Transactionsall transactions involving the purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future By the use of credit, persons are able to enjoy a thing today but pay for it later Through the banking system, actual money transfer is eliminated by cancellation of debts and credits B. Credit Transactions are really Contracts of Security Securitysomething given, deposited or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property Secured creditorone who holds a security from his debtor for payment of the latters debts 1. Secured transactions or Contracts of Real Securitysupported by collateral or an encumbrance of property o When mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss 2. Unsecured transactions or Contracts of Personal Securitythe fulfillment of which is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety C. Examples of Credit Transactions 1. Bailment Contracts Bailmenta French word bailer meaning to deliver; delivery of property of one person to another in trust for a specific purpose, with a contract, 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 In general, Bailment is a contractual relation; but, to be legally enforceable, it must contain all the elements of a validRoan Salanga 2A Credit Transactions

contract; however, agreement is not always necessary to create bailment, it may be created by operation of law In every bailment, there is an obligation on the part of the bailee to restore the subject of the bailment in the same or in altered form or to account therefor Parties in Bailment: a. Bailor (Comodatario)the giver; the party who delivers the possession or custody of the thing bailed b. Bailee (Comodante)the recipient; the party who receives the possession or custody of the thing thus delivered Kinds of Contractual Bailment: (classification is with reference to compensation) a. Those for the sole benefit of the bailorincludes i. gratuitous deposit ii. mandatumbailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same b. Those for the sole benefit of the baileeincludes i. Commodatum ii. Gratuitous simple loan or mutuum c. Those for the benefit of both partiesincludes i. Deposit for a compensation ii. Involuntary deposit iii. Pledge iv. Bailments for hire (locatio et conductio)arises when goods are left with the bailee for some use or service by him and is always for some compensation 1. Hire of things (locatio rei)goods are delivered for the temporary use of the hirer 2. Hire of service (locatio operis faciendi)goods are delivered for some work or labor upon it by the bailee 3. Hire for carriage of goods (locatio operis mercium vehendarum) goods are delivered either to a common carrier or to a private person for the purpose of being carried from place to placePage 1 of 18

4. Hire of custody (locatio custodiae)goods are delivered for storage o First two kinds are gratuitous bailments; there is really no consideration for they are considered more as a favor by one party to the party benefited o The third kind results from bailments involving business transactions known as mutual-benefit bailments 2. Usury 3. Contracts of guaranty and suretyship, mortgage, antichresis, ans concurrence and preference of credits LOAN General Provisions 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 t, in which case, the contract is call a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case, the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownerships of the thing loaned, while in simple loan, ownership passes to the borrower. Contract of loan is governed by the rules as to the requisites and validity of contracts in general Characteristics of Contract of Loan: 1. a Real contract because the delivery of the thing loaned is necessary for the perfection of the contract 2. a Unilateral contract because once the subject matter has been delivered, it creates obligations on the part of only one of the parties Cause or Consideration in a Contract of Loan: 1. Acquisition of the thing (as to the borrower) 2. Right to demand its return or its equivalent (as to the lender)Roan Salanga 2A

Kinds of Loan: 1. Commodatumthe bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for certain time and return the identical thing o Kinds of Commodatum: a. Ordinary commodatum b. Precariumthe bailor may demand the thing loaned at will 2. Simple loan or mutuumthe lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality o A thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature, like rice, money, or gasoline Commodatum vs. Mutuum Commodatum Mutuum (Simple Loan) Subject matter is not consumable Subject matter is money or other consumable thing Ownership of the thing loaned is Ownership is transferred to the retained by the lender borrower Essentially gratuitous May be gratuitous or it may be onerous, that is, with stipulation to pay interest Borrower must return the same Borrower need only to pay the thing loaned same amount of the same kind and quality Involve real or personal property Refers only to personal property A loan for use or temporary A loan for consumption possession Bailor may demand the return of Lender may not demand its return the thing loaned before the before the lapse of the term agreed expiration of the term in case of upon urgent need Loss of the subject matter is Borrower suffers the loss even if suffered by the bailor since he is caused exclusively by a fortuitous the owner event and he is not discharged from his duty to pay Purely personal in character

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Credita sum credited on the books of a company to a person who appears to be entitled to it o Presupposes a creditor-debtor relationship o It implies ability, by reason of property or estates, to make a promised payment o It is correlative to debt or indebtedness that which is due to any person as distinguished from that which he owes o It is a debt considered from the creditors standpoint o It may consist of money, goods, or services Loan vs. Credit Loan Credit The delivery by one party (lender) A persons ability to borrow money and the receipt by the other party or things by virtue of the (borrower) who become the owner confidence or trust reposed by a of a given sum of money or other lender that he will pay what he may consumable thing upon an promise within a specified period agreement, express or implied, to The concession of credit repay the same amount of the same necessarily involves the granting of kind and quality, with or without loans up to the limit of the amount interest fixed in the credit Loan vs. Discounting of Paper Loan To Discount a Paper Mode of loaning money Interest is usually taken at Interest is deducted in advance the expiration of a credit On a single-name paper Always on a double-name paper Interest is calculated on the amount loaned and not on the amount actually received o Single-name papera promissory note with no endorsement other than the signature of the maker o Double-name paperone on which two signatures appear with both parties liable for payment 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.Roan Salanga 2A

Commodatum and Mutuum are real contracts which require the delivery of the subject matter thereof for their perfection Consensual Contractan accepted promise to make a future loan where it is binding upon the parties, it is only after delivery will the real contract of loan arise o Examples: a. Application for loan approved by corporation b. Mortgage executed by virtue of loan granted c. Only partial amount released under a loan agreement secured by mortgage The mere fact of insolvency of a debtor (bank) is never an excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him Chapter 1 COMMODATUM Section 1 Nature of Commodatum 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. Commodatum is essentially gratuitous. The contract ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the use. In such case, there arises a Lease Contract. o If the consideration is the rendering of some service, an Innominate Contract will result Commodatum is similar to a donation in that it confers a benefit to the recipient Bailees right of use is limited to the thing loaned but not to its fruits unless there is a stipulation to the contrary The purpose of the contract is the temporary use of the thing loaned o If the bailee is not entitled to the use of the thing, the contract may be a Deposit Essential future of commodatum is that the use shall be for a certain time

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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. General rule: In commodatum, the subject matter is generally nonconsumable things, whether real or personal Exception: Consumable things may be the subject matter if the purpose is not the consumption of the object but merely for exhibition If no time for use of the subject matter is specified, the contract would be a specie of commodatum called Precarium 1937. Movable or immovable property may be the object of commodatum.

1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. The enjoyment of the fruits must only be incidental to the use of the thing itself for if it is the main cause, the contract may be one of Usufruct Section 2 Obligations of the Bailee 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. The borrower must take good care of the things with the diligence of a good father of a family As to extraordinary expenses, Art. 1949 governs 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 accomplishement 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 General Rule: bailee is not liable for loss or damage due to a fortuitous event o Reason: bailor retains the ownership of the thing loaned Exception: Art. 1942 o Purpose: to punish the bailee for his improper acts although they may not be the proximate cause of the loss

1938. The bailor in commodatum need not be the owner of the thing loaned. The bailor need not be the owner of the thing loaned since by the loan, ownership does not pass to the borrower.

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 bailees household may make use of the thing loaned, unless there is stipulation to the contrary, or unless the nature of the thing forbids such use. This article constitutes an exception to the general rule that all rights acquired by virtue of an obligation are transmissible The death of either party terminates the contract unless by stipulation, the commodatum is transmitted to the heirs of either or both parties If there are two or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contraryRoan Salanga 2A

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1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. In the absence of agreement to the contrary, the depreciation caused by the reasonable and natural use of the thing is borne by the bailor Bailee is only liable if he is guilty of fault or negligence or if he devotes the thing to any purpose different from that for which it has been loaned 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. Bailees right extends no further than to the retention of the thing loaned until he is reimbursed for the damages suffered by him. o He cannot lawfully sell the thing to satisfy said damages In case of pledge, the creditor has the right to retain the thing pledged until he shall have been fully paid There is no adverse possession by bailee when he retains the thing loaned 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. The reason is to safeguard effectively the rights of the lender This is an exception by express provision of law to the general rule that the concurrence of two or more parties in the same obligation gives rise only to a joint obligation Section 3 Obligations of the Bailor 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. The bailor may demand the return of the thing loaned if: a. He should have an urgent need of the thing b. If the borrower commits an act of ingratitude The return may only be temporary or it may be permanent because the law uses its return or temporary use In case of temporary use of the thing by the bailor, the rights and duties of the parties are likewise temporarily suspended 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 Precariuma kind of commodatum where the bailor may demand the thing at will o A contract by which the owner of the thing, at the request of another person, gives the latter the thing for use as long as the owner shall please 1948. The bailor may demand the immediate return of the thing if the bailee commits any acts of ingratitude specified in Article 765. Acts of ingratitude in Article 765: a. Bailee committed some offenses against the person, honor or the property of the bailor, or his wife or children under his parental authority b. Bailee imputes to the bailor 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 bailee himself, his wife or children under his parental authority c. Bailee unduly refuses the bailor support when the bailee is legally or morally bound to give support to the bailor 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,Page 5 of 18

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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. Extraordinary expenses for the preservation of the thing loaned such expenses shall be borne by the bailor because it is the bailor who profits by said expenses o Notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all, Except when they are so urgent that the reply cannot be awaited without danger Extraordinary expenses arising from actual use of the thing loaned such expenses shall be borne by the bailor and bailee alike on a 50-50 basis, Except when there is a stipulation to the contrary o It is an equitable solution because the bailee benefits from the use of the thing loaned to him and the bailor benefits as the owner of the thing loaned 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. All expenses, other than those mentioned in Arts. 1941 and 1949, not necessary for the use and preservation of the thing must be shouldered by the borrower Expenses for ostentation are to be borne by the bailee because they are not necessary for the preservation of the thing 1951. The bailor, who, knowing the flaws of the thing, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. Requisites, which must concur, for the liability to pay damages for known hidden flaws to arise: 1. There is a flaw or defect in the thing loaned 2. The flaw or defect is hidden 3. The bailor is aware thereof 4. He does not advise the bailee of the sameRoan Salanga 2A

5. The bailee suffers damages by reason of said flaw or defect The bailor is made liable for his bad faith where the bailee is given the right of retention until he is paid damages Where flaw is unknown to the bailor, he is not liable because commodatum is gratuitous o However, the rule is different in sale and lease, for in these contracts, valuable consideration is received by the vendor and the lessor 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. Reason: it would be unfair to allow the bailor to just abandon the thing instead of paying for said expenses and/or damages

Chapter 2 SIMPLE LOAN OR MUTUUM 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. Simple loan or mutuuminvolves the return of the equivalent only and not the identical thing because the borrower acquires the ownership thereof; a bilateral contract o A loan of money may be payable in kind o Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation Hence, there is no estafa committed by a person who refuses to pay his debt or denies its existence The consumption of the thing loaned is the distinguishing character of the contract of mutuum from that of commodatum The obligation to pay may include the accessory duty to pay interest The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan Fungible thingsthose which are usually dealt with by number, weright, or measure such as rice, oil, etc. that any given unit or portion is treated as the equivalent of any other unit or portionPage 6 of 18

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Fungible vs. Consumable things Fungible Consumable Depends upon the intention of the Depends upon its nature parties Simple loan vs. Contract of Rent Contract of Loan Signifies the delivery of money or some other consumable thing to another with a promise to repay an equivalent amount of the same kind and quality No promise to return the same thing loaned since it becomes the property of the obligor Contract of Rent One of the parties delivers to another some non-consumable thing in order that the latter may use it during a certain period and return it to the former The owner or lessor of the property does not lose his ownership; he simply loses control over the property rented Obligor-obligee relationship Landlord-tenant relationship Creditor receives payment for Owner of the property receive his loan compensation or price either in money, provisions, chattels, or labor from the occupant thereof in return for its use Simple loan vs. Trust receipt o Trust Receipta written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of the Decree (Trusts Receipt Law) o Pure trust receipt transactiongoods belong in ownership to the bank and are only released to the importer in trust after the loan is granted o The danger in characterizing a simple loan as trust receipt transaction is that Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner o The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under threats of

criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. o Such agreements are Contracts of Adhesion which borrowers have no option but to sign lest their loan be disapproved 1954. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. Objects of simple loan: a. Loan of Moneypayment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency which is legal tender in the Phils, and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of the creation of the obligation o Check is not a legal tender and, therefore, cannot constitute valid tender of payment b. Loan of Fungible thingborrower is under obligation to pay the lender another thing of the same kind, quality, and quantity. o In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan 1956. No interest shall be due unless it has been expressly stipulated in writing. Requisites for recovery of interest: 1. Payment of interest must be expressly stipulated 2. Agreement must be in writing 3. Interest must be lawful In the absence of stipulated interest, there can be legal interest pursuant to Art. 2209 Kinds of interest: a. Monetary interestinterest paid as compensation for the use of moneyPage 7 of 18

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b. Compensatory interestinterest imposed by law or by courts as penalty or indemnity for damages for breach of contractual obligations Existence of stipulation to pay interest: a. A particular rate of interest has been expressly stipulated by the parties b. If the exact rate of the interest is not mentioned, the legal rate of 12% shall be payable c. No increase in interest shall be due unless such increase has also been expressly stipulated d. Sales invoices or slips issued by a store, stating interests and attorneys fees in the usual printed forms, without the signature of the obligor, do not constitute the express stipulation required by Art. 1956 e. It is only in contracts of loan, with or without security, that interest may be stipulated and demanded f. The receipt by the creditor of interest payment up to a certain date on a loan that has already matured does not ipso facto result in the renewal or extension of maturity period of the loan up to the said date g. Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Liability for interest even in the absence of stipulation: (exceptions to Art. 1956) 1. Indemnity for damagesdebtor in delay is liable to pay legal interest (6% / 12%) as indemnity for damages even in the absence of stipulation for the payment of interest a. Under Art. 2209, the appropriate measure for damages in case of delay is the payment of the penalty interest at the rate agreed upon o In the absence of a stipulation, then the payment of additional interest at a rate equal to the regular monetary interest, o If no regular interest had been agreed upon, then payment of legal interest which is 6% annually or, in the case of loans of forbearances of money, 12% per annum as provided for in Central Bank Circular No. 416 b. Under Art. 2213, interest cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certaintyRoan Salanga 2A

c. CB Circular No. 416 fixes the legal rate of interest at 12% per annum for 1) loans; 2) forbearance of any money, goods or credits; and 3) judgments involving such loans or forbearance, in the absence of express agreement as to such rate of interest o If the obligation arises from other sources or by way of damages arising from injury to persons and loss of property which does not involve a loan, the applicable rate is 6% per annum as provided in Art. 2209 d. When the judgment of the court awarding a sum of money becomes final and executor, the rate of legal interest shall be 12% per annum from such finality until its satisfaction e. Interest as indemnity for damages is payable only in case of default or non-performance of the contract 2. Interest accruing from unpaid interestinterest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point o Where the courts judgment which did not provide for the payment of interest has already become final, no interest may be awarded. Liquidated damagessurcharges and penalties agreed to be paid by the debtor in case of default o Whether intended as an indemnity or penalty, it shall be equitably reduced if they are iniquitous and unconscionable o To determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case Cost of money (payment of interest) is separate and distinct from that of surcharges and penalties o A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may be separately demanded 1957. Contracts and stipulation, 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. Interest rates are no longer subject to any ceiling. The rate will depend on the agreement of the parties. Usurious contracts declared void: a. Form of contract is not conclusiveparol evidence is admissible to show that a written document though legal in form was in fact aPage 8 of 18

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clock or device to cover usury if from a construction of the whole transaction it becomes apparent there exists a corrupt intention to violate the laws on usury b. Contract void only as to interest involvedthe nullity of the stipulation on the usurious interest does not affect the lenders right to receive back the principal amount of the loan c. Right of debtorthe amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily Instances of contracts disguised to cover usurious loans: (must show evidence of bad faith or guilty intent) a. Credit sale of property at exorbitant price to loan applicant b. Purchase of lenders property at an exorbitant price to be taken from loanthe principal debt is the amount of the loan plus the fair value of the property at the time of the receipt by the buyer. All in excess of that sum is usury. c. Price of sale with right to repurchase clearly inadequate d. Pretended lease by borrower at usurious rental e. Rent free by lender of borrowers property in addition to interest on loans f. Date for repayment of loan with interest ante-dates actual transaction g. Payment by borrower for lenders services as addition compensation for loan 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.

2. When there is an express stipulation made by the parties o Compounding interestthe interest due and unpaid shall be added to the principal obligation and the resulting amount shall earn interest; allowed by the Usury law if there is express stipulation o Penalty or compensatory interestpenalty charge is also compounded is allowed o Stipulation as to compound interest must be in writing 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. If unstipulated interest (not due) is paid by mistake, debtor may recover as this would be a case of solutio indebiti or undue payment But where the unstipulated interest, or interest stipulated, there being a stipulation but it is not in writing, is paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery as in the case of natural obligation 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. Usury Law is now legally non-existent The interest legally chargeable depends upon the agreement between the lender and the borrower CB Circular No. 905 removed the Usury Law ceiling on interest rates for secured and unsecured loans, regardless of maturity rendering it legally ineffective According to the SC, the Circular did not repeal nor in any way amend the Usury Law but simply suspended the latters effectivity However, nothing in 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

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. General rule: Accrued interest (interest due and unpaid) shall not earn interest Exceptions: 1. When judicially demanded as provided for in Art. 2212Roan Salanga 2A

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DEPOSIT Chapter 1: DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS 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. Deposit is from the word depositum of the Roman Law Characteristics of contract of deposit: o It is a real contract because it is perfected by the delivery of the subject matter o When deposit is gratuitous, it is a unilateral contract because only the depositary has an obligation o When it is for compensation, it is a bilateral contract because it gives rise to obligations on the part of both the depositary and depositor Principal purpose of contract of deposit : safekeeping of the thing delivered o If safekeeping is only an accessory or secondary obligation of the recipient of the thing, deposit is not constituted but some other contract like elase, commodatum or agency o Where the balance of a commission account remains in the possession of the agent at the principals disposal, the same acquires at once the character of a deposit which the former must return or restore to the latter at any time it is demanded It could only become his as a loan if so expressly agreed by its owner who would then be obligated not to demand it until the expiration of the legal or stipulated period o Where US dollars in cash were received by the bank for safekeeping The depositary cannot make use of the thing deposited except only in two instances mentioned in Art. 1977 deposit vs mutuum vs commodatum Principal purpose

Deposit Mutuum Commodatum Safekeeping or mere Consumption of Transfer of the custody subject matter use Depositor can demand the return of the subject matter at will May be gratuitous Lender must wait until the expiration of the period granted to the debtor Essentially and always gratuitous

Object

Both movable and Only money and immovable property any other fungible thing Extrajudicial deposit, Both movable only movable or and immovable corporeal things property

1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. Where there has been no delivery, there is merely an agreement to deposit which, however, is binding and enforceable upon the parties o Hence, a contract of future deposit is consensual 1964. A deposit may be constituted judicially or extrajudicially. Creation of deposit: 1. By virtue of a court order 2. By law A deposit cannot be created by the will of the parties for the reason that the Code employs the word constituted and classifying deposit In a deposit, it is essential that the depositary is not the owner of the property deposited Kinds of deposit: 1. Judicialone which takes place when an attachment or seizure of property in litigation is ordered 2. Extrajudicial

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a. Voluntaryone wherein the (a) delivery is made by the will of the depositor or (b) by two or more persons each of whom believes himself entitled to the thing deposited b. Necessaryone made in compliance with a (a) legal obligation, or (b) on the occasion of any calamity, or (c) by travelers in hotels and inns, or (d) by travelers with common carriers 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. In involuntary deposit, where the property is saved from destruction during a calamity by another person without the knowledge of the owner, the latter is bound to pay the former just compensation 1966. Only movable things may be the object of a deposit. In Extrajudicial deposit, whether voluntary or necessary, only movable things In Judicial deposit, may cover movable as well as immovable property Only corporeal things are contemplated 1967. An extrajudicial deposit is either voluntary or necessary. (see discussion in Art. 1964) Chapter 2: VOLUNTARY DEPOSIT Section 1: General Provisions 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. Ordinarily, there are only two persons involved. Sometimes, the depository may be a third person General Rule: Depositor must be the owner of the thing deposited o Exception: it may belong to a person other than the depositorRoan Salanga 2A

A carrier, commission agent, lessee, etc. may deposit goods temporarily in his possession considering that the contract does not involve the transfer of ownership The depositary cannot dispute the title of the depositor to the thing deposited o Depositary is in estoppel Two or more persons each claiming to be entitled to a thing may deposit the same with a third person o In such case, the third person assumes the obligation to deliver to the one to whom it belongs 1969. A contract of deposit may be entered into orally or in writing. Except for the delivery of the thing, there are no formalities required for the existence of contract of deposit 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. Persons who are capable cannot allege the incapacity of those with whom they contract 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 be 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. A deposited a watch with B, a minor who sold it to C o If C acted in bad faith, A may recover the watch from him o If C acted in good faith, As only recourse is against B to compel him to return the price received for the watch or the amount by which he may have benefited himself

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Section 2: Obligations of the Depositary 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. Liability: a. If loss occurs through his fault or negligence, even if the thing was insured b. Loss of the thing while in his possession, ordinarily raises a presumption of fault on his part c. Required degree of care is greater if the deposit is for compensation. But even when it is gratuitous, due care must still be exercised 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. Depositor is liable for loss: a. If he transfers the deposit with a third person without authority although there is no negligence on his part and the third person b. If he deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence c. If the thing is lost through the negligence of his employees whether the latter are manifestly careless or not Exemption from liability: o If the thing is lost without negligence of the third person with whom he was allowed to deposit the thing if such third person is not manifestly careless or unfit

1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation. However, before the depositary may makes such change, he shall notify the depositor thereof and wait for his decision, unless delay would cause danger.

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. The depositary is bound to collect not only the interest but also the capital itself when due Contract for the rent of safety deposit box o A special kind of deposit and not an ordinary contract of lease o Not governed by the provisions on deposit o The relation of bailee and bailor is created between the parties to the transaction as to such securities or other valuables 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. A received from B for deposit 30 cavans of rice, from C, 20 cavans of rice, and from D, 10 cavans, the rice being of the same kind and quality. In the absence of any contrary stipulation, A can commingle the 60 cavans and B, C, and D would become co-owners of the entire 60 cavans in the proportion of 1/2, 1/3, and 1/6, respectively 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages.Page 12 of 18

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However, when the preservation of the thing deposited requires its use, it must be used bit only for that purpose. e.g. a depositary may use a radio received in deposit occasionally to prevent the accumulation of moisture 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. Effect if permission to use if given: o If thing deposited is non-consumablethe contract ceases to be deposit and acquires that of a commodatum o If thing is money or other consumable thingit converts the contract into a simple loan or mutuum But if safekeeping is still the principal purpose, it is still deposit but an irregular one or called irregular deposit Bank deposits are in the nature of irregular deposits but they are really loans governed by the law on loans Permission to use is not presumed except when such use is necessary for the preservation of the thing deposited and the burden is on the depositary to prove that permission has been given Irregular Deposit Mutuum Consumable thing deposited Lender is bound by the provisions of the may be demanded at will by contract and cannot seek restitution until the irregular depositor the time for payment has arisen Only benefit accrues to Essential cause for the transaction is the depositor necessity of the borrower A loan with a stipulation to pay interest is for the benefit of both parties Depositor has preference Common creditors enjoy no preference over other creditors in the distribution of the debtors property

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 depositors 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 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. While the bank has the obligation to return the amount deposited, it has no obligation to return or deliver the same money that was deposited There is a debtor-creditor relationship because the depositor (creditor) lends the bank (debtor) money and the bank agrees to pay the depositor on demand o A banks failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depositarys failure to return the subject matter of the deposit. It will not constitute estafa through misappropriation o Payment by a bank of the amount of a depositors check is not a loan to the latter by the former which may be satisfied by a subsequent deposit, but a payment by a bank as debtor to the depositor as creditor o General rule: bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor o In the performance of its obligations, the drawee bank is bound by its internal banking rules and regulations and is liable to the depositor for fraud, negligence, or delay o Bank is engaged in business impressed with public interest and must protect it with the highest degree of care more than that of a good father of the family or of an ordinary business firm; hence, it must exercise extraordinary diligence

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1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be liable for damages should the seal or lock be broken through his fault. Fault on the part of the depositary is presumed, unless there is proof to the contrary. As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening is imputable to the depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the value claimed by him. When the seal or lock is broken, with or without the depositarys fault, he shall keep the secret of the deposit. 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. Depositary is authorized to open the thing deposited which is closed and sealed when there is a. Presumed authority b. Necessity 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 Art. 1896 shall be applied to the depositary. The depositor is the owner or at least represents the owner of the thing deposited, hence, all consequences of such ownership must be returned to him If what has been deposited is money, the depositary has no right to make use thereof and therefore he is not liable to pay interestRoan Salanga 2A

o If the depositary be in delay or has used the money without permission, he shall be liable for interest as indemnity 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 such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. To acquire proof of ownership would open the door to fraud and bad faith, for the depositary, on the pretense of requiring proof of ownership, may be able to retain the thing 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 Arts. 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. Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him

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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. Person to whom return must be made are those under Arts. 1970, 1972 and 1986 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.

if the latter should refuse to receive it, the depositary may secure its consignation from the court. The depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if a. Deposit is gratuitous, and b. Justifiable reasons exist for its return Depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence 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. Depositary is not liable for loss of the thing by force majeure or by government order 1991. The depositors heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. However, if the heir acted in bad faith, he is liable for damages and the sale or appropriation of the thing deposited constitutes estafa Section 3: Obligations of a Depositor 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. Under gratuitous deposit, the right to reimbursement covers all expenses for preservation, whether ordinary or extraordinary o The law refers to necessary expenses only Under deposit for compensation, the expenses of preservation are borne by the depositary because they are deemed included in the compensation o There can, however, be a contrary stipulation

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 depositarys possession, or should 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. General Rule: a depositor can demand the return of the thing deposited at will and this is true whether a period has been stipulated or not o if the deposit is for a compensation, the depositary is entitled to the compensation corresponding to the entire period depositary should only be authorized in case of conflicting claims to consign the thing in court through an action of interpleader 1989. Unless the deposit is for 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; andRoan Salanga 2A

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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. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of deposit. This article is an example of a pledge created by operation of law The thing retained serves as security for the payment of what may be due to the depositary by reason of the deposit 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 depositor or the depositary The causes mentioned above are not exclusive. Other causes are (a) return of the thing, (b) novation, (c) merger, (d) expiration of the term, (e) fulfillment of the resolutory condition, etc. If deposit is for compensation, it is not extinguished by the death of either party because an onerous deposit is not personal in nature o Hence, rights and obligations arising therefrom are transmissible to their respective heirs o But the heirs of either party have a right to terminate the deposit even before the expiration of the term Chapter 3: NECESSARY DEPOSIT 1996. A deposit is necessary: 1. When it is made in compliance with a legal obligation 2. When it takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events 1997. The deposit referred to in No. 1 of the preceding articles shall be governed by the provisions of the law establishing it, and in case of deficiency, by the rules on voluntary deposit.Roan Salanga 2A

The deposit mentioned in No. 2 of the preceding article shall be regulated by the provisions concerning voluntary deposit and by Article 2186. Necessary deposit in compliance with a legal obligation: a. Judicial deposit of a thing the possession of which is being disputed in a litigation by two or more persons b. Deposit with a bank or public institution of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservation c. Deposit of a thing pledged when the creditor uses the same without the authority of the owner or misuses it in any other way d. Those required in suits are provided in Rules of Court e. Those constituted to guarantee contracts with the government; the deposit arises from an obligation of public or administrative character Necessary deposit made on the occasion of any calamity: Deposit created by accident or fortuitous event o Possession of movable property passes from one person to another by accident or fortuitously through force of circumstances and which the law imposes on the recipient the obligations of a bailee o More immediate object is to save the property rather than its safekeeping o There must be a causal relation between the calamity and the constitution of the depositdeposito miserable 1998. The deposit of effects made by travelers 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 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.

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1999. The hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel. Before keepers of hotels or inns may be held responsible, the following elements must concur: a. They have been previously informed about the effects brought by the guests b. Latter have taken the precautions prescribed regarding their safekeeping The responsibility imposed extends to all those who offer loding for a compensation Travelers and guestsrefers to transients and not to boarders; non-transients are governed by the rules on lease Inna public house for the lodging of travelers for compensation and until capacity is reached; a place of public entertainment that does not provide lodging Motelan establishment which provides lodging and parking and in which the rooms are usually accessible from an outdoor parking area 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 travelers 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. 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. 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the guests, his family, servants or visitors, or it the loss arises from the character of the things brought into the hotel. Hotel-keeper is liable regardless of the amount of care exercised:

a. Loss or injury is caused by his servants or employees as well as by strangers provided that notice has been given and proper precautions taken b. Loss is caused by the act of thief or robber done without the use of arms and irresistible force Hotel-keeper is not liable in the following cases: a. Loss or injury is cause by force majeure, theft or robbery by a stranger with the use of arms or irresistible force, unless he is guilty of fault or negligence failing to provide against the loss or injury from his cause b. Loss is due to the acts of the guests, his family, servants or visitors c. Loss arises from the character of the things brought into the hotel 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. It is not necessary in order to hold an inn-keeper liable that the effects of the guests be actually delivered to him or his employees; it is enough that they are within the inn 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. The act of obtaining food or accommodation in a hotel or inn without paying therefor constitutes estafa Chapter 4: SEQUESTRATION OR JUDICIAL DEPOSIT 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. 2006. Movable as well as immovable property may be the object of sequestration.

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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 courts so orders. 2008. The depositary of property sequestrated is bound to comply, with respect to the same, with all the obligations of a food father of a family. Judicial deposit or sequestrationtakes place when an attachment or seizure of property in litigation is ordered by a court Deposit is judicial because it is auxiliary to a case pending in court Purpose: to maintain status quo during the pendency of the litigation or to insure the right of the parties to the property in case of a favorable judgment Depositary of sequestrated property is the person appointed by the court Judicial deposit vs Extrajudicial deposit Judicial deposit Extrajudicial deposit Cause or origin Will of the court Will of the parties, hence, there is a contract Purpose As security and to Custody and secure the right of a safekeeping of the party to recover in case thing of a favorable judgment Subject matter Either movable or Only movable immovable property property but generally immovable property Remuneration Always remunerated or May be compensated onerous or not, but generally gratuitous In whose behalf it In behalf of a person In behalf of the is held who, by the judgment, depositor or third has a right person designated 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by the Rules of Court. The law on judicial deposit is remedial or procedural in natureRoan Salanga 2A Credit Transactions Page 18 of 18