Title XI - LOAN

General Provisions
(Articles 1933 1934)

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.

Parties

In COMMODATUM: In MUTUUM:
1. Bailor the giver 1. Lender - the one who delivers
2. Bailee the recipient of the thing bailed 2. Borrower - the one who receives

Classes
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.

COMMODATUM - loan of use MUTUUM simple loan or loan of consumption

Something to be returned (subject matter is
non-fungible thing)
Essentially gratuitous (if there is
compensation ceases to be commodatum)
Ownership retained by lender or bailor
May involve real or personal property
Referred to as loan for use or temporary
possession
Lender bears the risk of loss because of
his ownership
While generally oblige to return object at
end of period, still in some cases the return
can be demanded even before the end of
the period
Personal in character
Equivalent amount to be returned (subject
matter is fungible)
May be gratuitous or onerous (with
interest)
Ownership goes to borrower or baille
Refers to personal property only
Referred to as loan for consumption
Borrower bears the risk of loss, because of
his ownership
Can be generally oblige to pay at the end
of the period
Not personal in character

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.

Distinctions
Commodatum Mutuum

Character Essentially gratuitous Naturally gratuitous

Object Non-fungible object (but may be consumable) Object is money or fungible thing

Purpose Transfer its use Transfer its ownership

 Effect Restoration of the very thing loaned Restoration of an equal 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

Referred to as loan for use or temporary Referred to as loan for consumption

possession

Duration May be claimed before the end of the term if May not be claimed until the term expires
urgently needed or is forfeited

CHAPTER I
COMMODATUM

Section I Nature of Commodatum

(Articles 1935 1940)

Contract of Commodatum, Concept

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.
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.
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!
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.
Commodatum is purely personal: Death of either bailor or bailee extinguishes or 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/bailee, the death of one does not extinguish the contract in the absence of stipulation
to the contrary. (Source: De Leon)

Cases:
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 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.

Commodatum is for a certain period

ALEJANDRA MINA, ET AL., vs. RUPERTA PASCUAL, ET AL.,

FACTS:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired a property
during his lifetime having purchased a lot a public auction. Andres Fontanilla, with the consent of his brother,
Francisco, erected a warehouse on a part of the lot of his brother.
When Franciso Fontanilla died, the herein plaintiffs, Alejandro Mina, et al., were recognized without
discussion as his heirs. On the other hand, when Andres Fontanilla died, the children of Ruperta Pascual
were recognized as his heirs without discussion and are consequently entitled to the warehouse. The
plaintiffs and the defendants are therefore, virtually, to all appearance, the owners of the warehouse; while
the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the
remainder thereof.
But on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants,
petitioned the Court of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half
of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs, that is Alejandra Mina, et al.,
opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied
by the warehouse, which they claimed was their exclusive property.
The plaintiffs thereofre requested the court to decide the question of ownership first before the it
passes upon the petition for the sale of the warehouse. However, the trial court still ordered the sale of the
warehouse.
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco.
On appeal, commenced by the plaintiffs, the decision of the trial court was reversed. But soon after a
writ of execution was issued and the plaintiffs were given possession of the lot, the trial court annulled this
possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was
served.
The plaintiffs now commenced this present action for the purpose of having the sale of the said lot
declared null and void and of no force and effect.

ISSUE: Whether or not defendant Pascual is the owner of the property so as to give her the right to sell the
warehouse and the lot where it stands.

SC RULING:
No. Defendant Pascual has no right to sell the lot where the warehouse is standing. What is
essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership,
and they themselves only the use, of the said lot. But while finding the plaintiffs to be the owners of the lot,
we recognized in principle the existence of a commodatum under which the defendants held the lot.
An essential feature of the commodatum is the use of the thing belonging to another shall for a
certain period. Therefore, it is evident that he who has only the mere use of the thing cannot transfer its
ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never
were the owners of the lot sold. The sale of it by them is necessarily null and void. On cannot convey to
another what he has never had himself.
The purchaser could not acquire anything more than the interest that might be held by a person to
whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed of.
What the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths
part of one-half of the warehouse and the use of the lot occupied by his building. This, and nothing more,
could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor the
remaining one-seventh of the said first half, of the warehouse.
The present contention, however, of the plaintiffs that Cu Joco, now in possession of the lot, should
pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them,
since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially
gratuitous.
Hence, as the facts show that a building was erected on another's ground, the question should be
decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which
were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362
of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a building is erected in
good faith has a right to appropriate such edifice to himself, after payment of the indemnity prescribed in
articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right
to which the plaintiff are entitled.
For these reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta
Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot
until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil
Code.

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 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.

Effect of Suspension of Possessory Rights for more than 50 years

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.

Kinds
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:
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.

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

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.

Pactum de Commodando
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 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.

Requisites
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.

Section II Obligations of the Bailee

(Articles 1941 1945)

Rights and Obligations of the Bailee

Right of a BAILEE:
1. 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.

Obligations of a BAILEE:
1. To preserve the thing.
2. To incur expenses required by the use and preservation of the thing, without reimbursement.
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:
If the thing is devoted to a different use
If return of the thing is delayed
If the thing bailed has been appraised
If the bailee lends it to a stranger
If the bailee did not save it when he could
5. Two or more borrowers are solidarily liable .

Cases:
Effect of failure to return
QUINTOS vs. BECK

FACTS:
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 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 indemnify for
the losses and damages caused thereby.
 The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the
legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the thing
loaned, and at the expiration of the period, or after the use for which it was loaned has been accomplished, it
is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the
fault of the bailee the thing should have been lost or injured, it is clear that where public securities are
involved, the trial court, in deferring to the claim of the bailor that the amount loaned be 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.

Section III Obligations of the Bailor

(Articles 1946 1952)

Rights and Obligations of the Bailor

A. incidental obligation of the bailor - To pay extraordinary expenses of preservation, if notified by the
bailee. The bailee may elect to make such repairs provided he notify the bailor (notice may be dispense
with if such repair is urgently required).
B. Hidden defects- bailor liable to answer for damages to the bailee if due to defects known and not
disclosed. Bailor does not answer for unknown defects. (Source: Cruz)

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. 465
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.

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)

Termination
Causes of Extinguishment
1. Expiration of the time or use stipulated
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
4. Death of the borrower
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 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
(Articles 1953 1961)

Concept
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:
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 estaffa, it must be proven that he has the obligation to
deliver or return the same money, goods or personal property that he received. Petitioners had no such
obligation to return the same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly stated in criminal complaints, the related civil complaints and the supporting
sworn statements, the sums of money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
Art. 1933. By the contract of loan, one of the parties delivers to another, either something
not consumable so that the latter may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loam
ownership passes to the borrower.
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his
act will not be considered misappropriation thereof.
In U.S. vs. 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.

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 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.
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.

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, 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.

Kinds
1. Gratuitous
2. With interest

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
Muttum involves money or any other fungible things. If not fungible, the contract is barter.
3. Consideration
Gratuitous or onerous.
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 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 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.

Effects (Obligation of the Borrower only)

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of
articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money the debtor owes another thing of the same
kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind,
its value at the time of the perfection of the loan shall be paid.

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.

If the thing borrowed is not money, to 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.

Cases:
Payment in Currency Stipulated
RONO vs. GOMEZ

FACTS:
Cristobal Roo received as a loan 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 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.

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. Judgment affirmed.

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.
/
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 mortgagee 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.

Increase in the prince when sale is on installment

MANILA TRADING vs. TAMARAW PLANTATION

FACTS:
On August 23, 1920, the plaintiff sold to the defendant the goods mentioned in Exhibit A of the
defendant for P5,300, if paid in cash, but as it was not so paid, there was added to said amount the sum of
P265, which is 5 per cent thereon, making a total of P5,565. The defendant paid the first six monthly
installments provided in Exhibit A, plus P213.89 on account of the seventh installment, that is, a total of
P2,996.39, and failed to pay the rest, namely, P2,568.61; wherefore said goods were on August 15, 1922,
sold by the sheriff of Mindoro at public auction, as provided in Act No. 1508, the proceeds of the sale having
amounted to P2,000, which were paid to the plaintiff.
On December 24, 1920, the plaintiff sold to the defendant the goods mentioned in Exhibit B for
P2,550, if paid in cash. To said amount there was added the sum of P127.50, which is 5 per cent thereon,
making a total of P1,877.50. The defendant paid P800 upon the delivery of the goods, but did not pay
anything more afterwards; wherefore said goods were sold at public auction by the sheriff of Mindoro on
August 15, 1922, for P1,000, as provided in Act No. 1508, said sum of P1,000 having been paid to the
plaintiff.
 The trial court, in view of said stipulation of facts, rendered judgment, sentencing the defendant to
pay to the plaintiff company

ISSUE:
Whether or not the increase of the price of an article sold on credit upon its cash sale value constitutes
interest within the meaning of the Usury Law.

SC RULING:
No. The instant case is of a chattel mortgage given to secure payment for the agricultural
implements sold by the plaintiff to the defendant. The transaction was carried out between the parties in
good faith, and there is no proof that the contract of sale of agricultural effects, secured by a mortgage on
the same goods, was executed as a loan of money. This being so, the parties may freely agree upon the
price of the goods sold, and it cannot be said that the credit, greater than the cash, price, constitutes
interest within the meaning of the Usury Law. The increase of the price, when the sale is on credit, serves
not only to cover the expenses generally entailed by such transactions on credit, but also to encourage
cash sales, so useful to commerce. It is up to the purchaser to decide which price he prefers in making the
purchase. If he prefers to purchase for cash, he obtains a 5 per cent reduction of the price; if, on the
contrary, he prefers to buy on credit, he cannot complain of the increase of the price demanded by the
vendor.
"On principle and authority, the owner of property, whether real or personal, has a perfect right to
name the price on which he is willing to sell, and to refuse to accede to any other. He may offer to sell at a
designated price for cash or at a much higher price on credit, and a credit sale will not constitute usury
however great the difference between the two prices, unless the buying and selling was a mere pretense." It
is also established that: "A vendor mat well fix upon the property one price for cash and another for credit,
and the mere fact that the credit price exceeds the costs price by a greater percentage than is permitted by
the usury laws is a matter of concern to the parties but not to the courts, barring evidence of bad faith. If the
parties have acted in good faith such a transaction is not a loan, and not usurious."

Attorneys fees

ANDREAS vs. GREEN

FACTS:
The defendant and appellant questions the clause in the promissory note sued on reading "and a further
sum equal to 10 per cent of the total amount due as and for expenses of collection for attorney's fees
whether actually incurred or not," as in contravention of the Usury Law.

SC RULING: Stipulations in negotiable instruments for the payment of collection and attorney's fees are not
forbidden by lay in this jurisdiction. The lender may without violating the Usury Law provide in a note for an
attorney's fee to cover the cost of collection. This has been definitely held in a long line of cases both here
and elsewhere. The purpose of a stipulation in a note for reasonable attorney's fees is not to give the
lender a larger compensation for the loan than the law allows, but is to safeguard the lender against
future loss or damage by being compelled to retain counsel to institute judicial proceedings to
collect his debt.

The only difference between the provision of the promissory note here complained of and the provision of
the promissory notes in any of the above-cited cases is that the note before us contains these additional
words: "whether actually incurred or not." But this clause is merely descriptive in nature is in reality
merely surplusage. The idea of the parties was to provide for a penalty to cover expenses of collection. That
such expenses were actually incurred in this case is now before the appellate court for decision. Whether
the creditor could enforce the penalty where expenses of collection and attorney's fees were not actually
incurred, is questionable, but does not affect the result in this case.
Judgment affirmed.

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 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.

Bank Deposits
Cases:
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.

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 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 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.

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
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 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.

Title XII - DEPOSIT

Chapter 1
Deposit in General and its Different Kinds
(Articles 1962 1967)

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.

Characteristics
o It is a real contract perfected by delivery.
o It is naturally gratuitous, unless the contrary is stipulated or the depositary is engaged in the business
goods.
o The purpose is primarily custody; where the custody is secondary, it is not deposit.
o The contract is either unilateral or bilateral, according to whether it is gratuitous or onerous.
o 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))
o Only movables can be the object of contractual deposit.

Cases:
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.

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.

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 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.

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.

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 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 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.

Effects 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.

Kinds
Judicial (Sequestration) takes place when an attachment or seizure of property in litigation is ordered.
Extra-judicial (Art.1967)
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 party to Custody and safekeeping
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 compensated or not, but generally
gratuitous
5. When must the thing be returned
Upon order of the court or when litigation is Upon demand of depositor
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
o The only benefit is that which accrues to the The essential cause for the transaction is the

depositor necessity of the buyer
o The depositor can the return of the article at A lender is bound by the provisions of the contract
anytime 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)

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."
"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. 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.

Chapter 2
Voluntary Deposit

Section 1 General Provisions

(Articles 1968 1971)

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.

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)

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.
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)

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

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

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.

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.

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.

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)

9. Earnest money
-If a sale did not materialize, the earnest money is considered to be deposited

Cases:
Commingling of Funds; Obligation for money taken by force majeure

Roman Catholic Bishop of Jaro vs. de la Pena

FACTS:
Appeal from the judgment of the Court of First Instance of Iloilo.
The plaintiff, the Roman Catholic Bishop of Jaro, is the trustee of a charitable donation made for the
construction of a leper hospital. Father Agustin de la Pea was the duly authorized representative of the
plaintiff to receive the legacy. Gregorio de la Pea is the administrator of the estate of Father De la Pea.
In the year 1898 the books of Father De la Pea, as trustee, showed that he had on hand as such
trustee the sum of P6,641.00, collected by him for the charitable purposes aforesaid. In the same year he
deposited in his personal account P19, 000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter
and during the war of the revolution, Father De la Pea was arrested by the military authorities as a political
prisoner, and while detained, there was an order on said bank in favor of the United States Army officer for
the sum deposited in said bank. The money was taken from the bank by the military authorities by virtue of
such order, was confiscated and turned over to the Government. The trust funds were a part of the funds
deposited and which were removed and confiscated by the military authorities of the United States.

ISSUE: Whether or not Father de la Pea is responsible for the loss of the money.

SC RULING:
NO. Father de la Pea is not responsible for the loss of the money as it was taken by force majeure.
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the
diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the
Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for
events which could not be foreseen, or which having been foreseen were inevitable, with the exception of
the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby
assume an obligation different from that under which he would have lain if such deposit had not been made,
nor did he thereby make himself liable to repay the money at all hazards. The fact that he placed the trust
fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a
debtor who must respond at all hazards.
There was no law prohibiting him from depositing it as he did and there was no law which changed
his responsibility by reason of the deposit. While it may be true that one who is under obligation to do or give
a thing is in duty bound, when he sees events approaching the results of which will be dangerous to his trust,
to take all reasonable means and measures to escape or, if unavoidable, to temper the effects of those
events, we do not feel constrained to hold that, in choosing between two means equally legal, he is culpably
negligent in selecting one whereas he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was
deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said
money was forcibly taken from the bank by the armed forces of the United States during the war of the
insurrection; and that said Father De la Pea was not responsible for its loss.

Right of bank to apply a deposit to the debt of the depositor

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 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 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.

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).
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.

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 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.

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 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)

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)

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 any 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.
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)

Necessary Deposit
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)

Kinds
1. Those made 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.
2. When it takes place 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.
3. 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 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.
4. That made with common carriers.

Chapter 4
Sequestration or Judicial Deposit
(Articles 2005- 2009)

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)

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 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.

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 property Personal property only
d. As to cause Remuneratory Generally gratuitous
e. As to possession For the benefit of the owner/ Generally for the benefit of the
winning party to the case depositor.

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 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 does not deal with the negotiability 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 requirements are not observed, then the
goods delivered for storage become ordinary 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 limitations, 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 liability for negligence.
The warehouseman cannot insert any term which 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.

b. Rule if more than one receipt is issued.

 Sec. 6. Duplicate receipts must be so marked..- when more than 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.
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 cannot 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.

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 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:
(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 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 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 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 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.