#2credit transactions_sy22-23 2s_lecture notes_bb post

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 Required Reading

– Civil Code of the Pilippines Annotated by Eduardo L. Paras, 19th Edition, 2021,
Volume Five, Par II, Arts. 1868-2270 (Special Contracts), Rex Book Store, Manila,
 Philippines;

– Lecture Notes as posted in the Blackboard;

- Assigned cases - decisions of the Supreme Court of the Philippines;

 Recommended Reading (Optional) - Other References

o Credit Transactions and Quasi-Contracts by Dean Ernesto L. Pineda, 2006

Edition, Central Book Supply, Inc., 927 Quezon Avenue, Quezon City,
Philippines;

o Comments and Cases on Credit Transactions by Hector S. De Leon and Hector

M. De Leon, Jr., Thirteenth Edition 2016, and,

20230118_January 18, 2023_Wednesday

 Discussion of sample case work;

#3Credittransactionscase_20160817_Spouses Tan v. China Banking Corporation, G.R.

No. 200299_rc marked_for discussion to illustrate requirement for case work

THIRD DIVISION

G.R. No. 200299, August 17, 2016

SPOUSES JUAN CHUY TAN AND MARY TAN (DECEASED)

SUBSTITUTED BY THE SURVIVING HEIRS, JOEL TAN AND ERIC TAN,
Petitioners, v. CHINA BANKING CORPORATION, Respondent.
 DECISION

PEREZ, J.:

For resolution of the Court is the instant Petition for Review on Certiorari1

[note the course of action taken by the aggrieved party – petition for review on
certiorari; distinguish this from petition for certiorari;]

filed by petitioner Spouses Juan Chuy Tan and Mary Tan (deceased) substituted by
the surviving heirs, Joel Tan and Eric Tan, seeking to reverse and set aside the
Decision2 dated 14 October 2011 and Resolution3 dated 24 January 2012 of the Court
of Appeals (CA) in CA-G.R. CV. No. 87450. The assailed decision and resolution
affirmed with modification the 29 December 2003 Decision4 of the Regional Trial
Court (RTC) of Makati City, Branch 142 by ordering that the penalty surcharge of
24% per annum as stipulated in the contract of loan is reduced to 12% per annum.

[Note

Facts/transaction occurred in 1997;

RTC decision was in 20031229; motion for reconsideration of the RTC decision
was filed with the RTC but was denied;

Note that in going up to CA, both the RTC decision and the resolution denying the
MR are challenged;

CA decision was in 20111014; motion for reconsideration of the CA decision was

filed with the CA but was denied;

Note that in going up to SC, both the CA decision and the resolution denying the
MR are challenged;

SC decision 2016 08 27;

It took 13 years from RTC decision to SC decision; note how litigations can take
long, reason by parties/counsels are urged to consider alternative resolutions of
disputes to better serve the interests of the parties to the case;

The Facts
Petitioner Lorenze Realty and Development Corporation (Lorenze Realty) is a
domestic corporation duly authorized by Philippine laws to engage in real estate
business. It is represented in this action by petitioners Joel Tan and Eric Tan as
substitutes for their deceased parents, Spouses Juan Chuy Tan and Mary Tan
(Spouses Tan).

Respondent China Banking Corporation (China Bank), on the other hand, is a

universal banking corporation duly authorized by Bangko Sentral ng Pilipinas (BSP)
to engage in banking business.

On several occasions in 1997, Lorenze Realty obtained from China Bank various
amounts of loans and credit accommodations in the following amounts:

chanRoblesvirtualLawlibrary

PROMISSORY NOTE PRINCIPAL

DATE NOS. AMOUNT
27 June 1997 BDC-0345 P1,600,000.00
30 July 1997 BDC-0408 1,000,000.00
13 August 1997 BDC-0422 1,100,000.00
18 August 1997 BDC-0432 1,960.000.00
21 August 1997 BDC-0438 1,490.000.00
2 September 1997 BDC-0455 2,200,000.00
1 October 1997 BDC-0506 1,700,000.00
20 November 1997 DLS-0316 2,800,000.00
18 June 1997 DLS-0324 5,500,000.00
18 June 1997 DLS-0325 2,675,000.00
04 July 1997 DLS-0360 7,000,000.00
24 July 1997 DLS-0403 4,000,000.00
28 August 1997 BDC-0449 1,550,000.00
20 November 1997 BDC-0340 1,550,000.00
8 September 1997 BDC-0466 1,262,500.00
31 September 1997 BDC-0479 662,500.00
10 July 1997 DLS 0379 33,000,000.00
TOTAL   P71,050,000.00
It is expressly stipulated in the Promissory Notes that Lorenze Realty agreed to pay
the additional amount of 1/10 of 1% per day of the total amount of obligation due
as penalty

[1/10 of 1% per day amounts to 36.5% per annum; rate of penalty stipulated by
the parties;]

to be computed from the day that the default was incurred up to the time that the loan
obligations are fully paid. The debtor also undertook pay an additional 10% of the
total amount due including interests, surcharges and penalties as attorney's fees.
 
As a security for the said obligations, Lorenze Realty executed Real Estate
Mortgages (REM) over 11 parcels of land covered by Transfer Certificates of Title
(TCT) Nos. B-44428, B-44451, B-44452, V-4J275: V-44276, V-44277, V-44278, V-
44280, V-44281, V-44283 and V-44284 registered by the Registry of Deeds of
Valenzuela City.

Subsequently, Lorenze Realty incurred in default in the payment of its amortization

prompting China Bank to cause the extra-judicial foreclosure of the REM constituted
on the securities after the latter failed to heed to its demand to settle the entire
obligation.

After the notice and publication requirements were complied with, the mortgaged
properties were sold at a public auction wherein China emerged as the highest bidder
for the amount of P85,000,000.00 as evidenced by a certificate of sale.

As shown by the Statement of Account dated 10 August 1998, the indebtedness of

Lorenze Realty already reached the amount P114,258,179.81, broken down as
follows:

chanRoblesvirtualLawlibrary

P71,050,000.00
Principal Amount
Interest 13,521,939.31
 Penalties 19,763,257.50
Registration Expenses 9,542,013.00
Filing Fee 351,300.00
Publication Fee 25,970.00
Sheriffs Fee 2,000.00
Posting Fee 700.00

After deducting from the total amount of loan obligation the P85,000,000.00
proceeds of the public sale, there remains a balance in the amount of
P29,258,179.81. In its effort to collect the deficiency obligation, China Bank
demanded from Lorenze Realty for the payment of the remaining loan but such
demand just went to naught.
 
Consequently, China Bank initiated an action for the collection of sum of money
against the Lorenze Realty and its officers, namely, Lawrence Ong, Victoria Ong,
Juan Chuy Tan and Mary Tan before the RTC of Makati City, Branch 142.   In its
Complaint docketed as Civil Case No. 98-3069, China Bank alleged that it is entitled
to deficiency judgment because the purchase price of the securities pledged by the
debtor is not sufficient to settle the entire obligation incurred by the latter including
the interest, penalties and surcharges that had accrued from the time of default.
China Bank thus prayed that defendants be ordered to pay the amount of P29,25
8,179.81, representing the deficiency in its obligation in accordance with the express
terms of the promissory notes.

While conceding that they have voluntarily signed the promissory notes, defendants,
for their part, disclaim liability by alleging that the surety agreements did not express
the true intention of the parties. The officers of the corporation who represented
Lorenze Realty below claimed that they just signed the surety contracts without
reading the fine terms stipulated therein because they were made to believe by the
bank manager that the collaterals they offered to obtain the loans were already
sufficient to cover the entire obligation should they incur in default. The collection
suit for the deficiency obligation came as a surprise to them after China Bank
managed to successfully foreclose the securities of the obligation and purchased for
itself the mortgaged properties at the public sale. In addition, defendants averred that
the penalty in the amount of 1/10 of 1% per day of the total amount due is usurious
and shocking to the conscience

[petitioner alleges that the stipulated penalty is usurious and schocking to the
conscience]

and should be nullified by the court. Finally, they prayed that the RTC declare
Lorenze Realty's obligation fully settled on account of the sale of the securities.

On 29 December 2003, the RTC found in favor of China Bank declaring the
defendants jointly and severally liable for the amount of P29,258,179.81
representing the deficiency judgment. It was held by the trial court that Lorenze
Realty, "[a]fter having voluntarily signed the surety agreements, cannot be
discharged from the consequences of the undertaking because the terms and
conditions contained therein is considered to be the law between the parties as long
as it is not contrary to law, morals, good customs and public policy. The mistake,
misapprehension and ignorance of the defendants as to the legal effects of the
obligations are no reason for relieving them of their liabilities." The RTC disposed in
this wise:ChanRoblesVirtualawlibrary

WHEREFORE, premises considered, judgment is rendered ordering the defendants

to pay [China Bank], jointly and severally, the following:

1. [T]he amount of £29,258,179.81 representing the deficiency  claim 

as  of August   10,   1998  plus penalties accruing thereafter at the rate
of 2% per month until fully paid;

2. 5% of the total amount due as Attorney's [F]ees;

3. Expenses of litigation and cost of suit.

SO ORDERED.5chanroblesvirtuallawlibrary
On appeal, the CA affirmed with modification the judgment of the RTC by reducing
the rate of the penalty surcharge from 24% per annum to 12% per annum,

[earlier in this decision, the facts narrated that the penalty was stipulated at the rate
of 1/10 of 1% per day or 36.5% per year; the RTC decision reduced the rate to 2%
per month or 24% per annum]

and, likewise the award of attorney's fees was reduced from 5% to 2% of the total
amount due. The appellate court deemed that the rate of penalty agreed by the parties
is unconscionable under the circumstances considering that the obligation was
already partially satisfied by the sale of the securities constituted for the loan and
resolved to fairly and equitably reduce it to 12% per annum. The decretal portion of
the appellate court's decision reads:ChanRoblesVirtualawlibrary

WHEREFORE, premises considered, the assailed Decision dated December 29,

2003 of the Regional Trial Court of Makati City, Branch 142 is AFFIRMED with
MODIFICATION in that the penalty surcharge of 2% per month or 24% per annum
is reduced to 12% per annum and, likewise, the award of attorney's fees is reduced
from 5% to 2% of the total amount due.

No pronouncement as to costs.

SO ORDERED.
In a Resolution dated 24 January 2012, the CA refused to reconsider its earlier
decision by denying the Motion for Reconsideration interposed by Lorenze Realty.

The Issue

Dissatisfied with the disquisition of the Court of Appeals, Lorenze Realty elevated
the matter before the Court by filing a Petition for Review on Certiorari. For the
resolution of the Court is the sole issue of:ChanRobl

esVirtualawlibrary

WHETHER LORENZE REALTY'S OBLIGATION IS FULLY SETTLED WHEN

THE REAL PROPERTIES CONSTITUTED AS SECURITIES  FOR THE  LOAN 
WERE  SOLD  AT  THE  PUBLIC AUCTION FOR P85,000,000.00.

The Court's Ruling

 
In assailing the CA Decision, Lorenze Realty argues that it is no longer liable to pay
the deficiency obligation because the proceeds of the sale of the foreclosed
properties in the amount of P85,000,000.00 is more than enough to cover the
principal amount of the loan which is just P71,050,000.00. In fact, it further asserted
that after applying the proceeds of the public sale to the principal amount of loan,
there remains a balance of P13,950,000.00 which should more than enough to cover
the penalties, interests and surcharges.
 
For its part, China Bank maintains that the obligation of Lorenze Realty is not
extinguished by the foreclosure and sale of real properties constituted as securities
citing Article 1253 of the New Civil Code which explicitly states that "If the debt
produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered." By first applying the proceeds of the sale to
the interest, penalties and expenses of the sale, there yields a balance in the principal
obligation in the amount of P29,258,179.81.

We resolve to deny the petition.

Obligations are extinguished, among others, by payment or performance, the mode
most relevant to the factual situation in the present case.6 Under Article 1232 of the
Civil Code, payment means not only the delivery of money but also the performance,
in any other manner, of an obligation.7 Article 1233 of the Civil Code states that a
debt shall not be understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered, as the case may
be.8 In contracts of loan, the debtor is expected to deliver the sum of money due the
creditor.9 These provisions must be read in relation with the other rules on payment
under the Civil Code, such as the application of payment, to
wit:ChanRoblesVirtualawlibrary

Art. 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of them the same
must be applied. Unless the parties so stipulate, or when the application of payment
is made by the party for whose benefit the term has been constituted, application
shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the
payment is made, the former cannot complain of the same, unless there is a cause for
invalidating the contract.
In interpreting the foregoing provision of the statute, the Court in Premiere
Development Bank v. Central Surety & Insurance Company Inc.10 held that the right
of the debtor to apply payment is merely directory in nature and must be promptly
exercised, lest, such right passes to the creditor,
viz:

 "The debtor[']s right to apply payment is not mandatory. This is clear from the use
of the word [']may['] rather than the word [']shall['] in the provision which reads:
[']He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of the same must be
applied.[']
 
Indeed, the debtor[']s right to apply payment has been considered merely directory,
and not mandatory, following this Court[']s earlier pronouncement that [']the
ordinary acceptation of the terms [']may['] and [']shall['] may be resorted to as guides
in ascertaining the mandatory or directory character of statutory provisions. [']

Article 1252 gives the right to the debtor to choose to which of several obligations to
apply a particular payment that he tenders to the creditor. But likewise granted in the
same provision is the right of the creditor to apply such payment in case the debtor
fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: [']If the debtor
accepts from the creditor a receipt in which an application of payment is made, the
former cannot complain of the same.[‘] It is the directory nature of this right and the
subsidiary right of the creditor to apply payments when the debtor does not elect to
do so that make this right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary to law, public order, public
policy, morals or good customs, or prejudicial to a third person with a right
recognized by law.

A debtor, in making a voluntary payment, may at the time of payment direct an

application of it to whatever account he chooses, unless he has assigned or waived
that right.

[Note – Usually in contracts prepared by banks, there is a provision regarding

application of payment; the case is silent on the matter and the court had to make
a long discussion of the rule on application of payment; in case there is a
provision on the matter of application of payments that gives the creditor the right
to make an application of payment, would the court hold that the debtor has
assigned or waived the right to make an application of payment?]

If the debtor does not do so, the right passes to the creditor, who may make
such application as he chooses. But if neither party has exercised its option, the
court will apply the payment according to the justice and equity of the case, taking
into consideration all its circumstances." [Emphasis supplied, citations omitted.]
In the event that the debtor failed to exercise the right to elect the creditor may
choose to which among the debts the payment is applied as in the case at bar. It is
noteworthy that after the sale of the foreclosed properties at the public auction,
Lorenze Realty failed to manifest": its preference as to which among the obligations
that were all due the proceeds of the sale should be applied. Its silence can be
construed as acquiescence to China Bank's application of the payment first to the
interest and penalties and the remainder to the principal which is sanctioned by
Article 1253 of the New Civil Code which provides that:,

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered.
That they assume that the obligation is fully satisfied by the sale of the securities
does not hold any water. Nowhere in our statutes and jurisprudence do they provide
that the sale of the collaterals constituted as security of the obligation results in the
extinguishment of the obligation. The rights and obligations of parties are governed
by the terms and conditions of the contract and not by assumptions and
presuppositions of the parties.

The amount of their entire liability should be computed on the basis of the rate of
interest as imposed by the CA minus the proceeds of the sale of the foreclosed
properties in public auction.

It is worth mentioning that the appellate court aptly reduced the interest rate to 12%'
per annum which is in consonance to existing jurisprudence. in Albos v. Embisan,
11
MCMP Construction Corp. v. Monark Equipment Corp.,12  Bognot v. RRI Lending
Corporation,13  and Menchavez v. Bermudez,14 the Court struck down the stipulated
rates of interest for being excessive, iniquitous, unconscionable and exorbitant and
uniformly reduced the rates to 12% per annum.

Lorenze Realty's plea to further reduce the interest to 3% per annum has no leg to
stand on and could not be adopted by this Court. On the other hand, the appellate
court, consistent with the ruling of this Court in a number of cases, correctly pegged
the rate of interest at 1% per month or 12% per annum. We need not unsettle the
principle we had affirmed in a plethora of cases that 12% per annum is the legal rate
of interest imposed by this Court on occasions that we nullified the rates stipulated
by parties.

[Note that presently, the legal rate of interest applicable in loans and forbearance
of money is 6% and no longer 12%; see case of Nacar v. Gallery Frames (2013);]

While the Court has the power to nullify excessive interest rates and impose new
rates for the parties, such reduction, however, must always be guided by reason and
equity.
WHEREFORE, premises considered, the petition is DENIED. The assailed
Decision and Resolution of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary

Velasco, Jr., J., (Chairperson), Peralta, Reyes, and Jardeleza, JJ., concur.

Endnotes:

1
Rollo, pp. 57-78.

2
Id. at 87-106; penned by Associate Justice Antonio L, Villamor, concurred by
Associate Justices Jane Aurora C. Lantion and Ramon A. Cruz.

3
Id. at 107-108.

4
Id. at 166-171; penned by Judge Estela M. Perlas-Bernabe (now a member of this
Court).

5
Id. at 171.

6
Go Cinco, et al. v. Court of Appeals, et al., 618 Phil. 104, 112 (2009).

7
Id.

8
Id. at 112-113.

9
Id.

10
598 Phil. 827, 844-845 (2009).

11
G.R. No. 210831, 26 November 2014, 743 SCRA 283, 295-

12
296. G.R. No. 201001, 10 November 2014, 739 SCRA 432,

13
442-443. G.R. No. 180144,24 September 2014, 736 SCRA

14
357, 379-380. 697 Phil. 447, 452 (2012).
Case notes:

• The case involves the following issues:

- Does the mortagagee (respondent bank) have the right to file an
action for the collection of its deficiency claim after the foreclosure of
the REM; SC upheld the right, citing that the rights and obligations
of the parties shall be governed by the terms of the contract.

- Was petitioner’s prayer for a reduction of the penalty and interest for
being unconscionably high proper? SC sustained the reduction of the
penalty to 12% and cited past cases that this is the prevailing
jurisprudence; note the case of Nacar (legal rate of interest is now
6%)

- Does the sale of the securities extinguish the obligations of the

debtor?

- The case also makes a discussion of the rules on the application of

payment;

- Others;

• the Court in Premiere Development Bank v. Central Surety & Insurance

Company Inc.10 held that the right of the debtor to apply payment is merely
directory in nature and must be promptly exercised, lest, such right passes to
the creditor;

• after the sale of the foreclosed properties at the public auction, Lorenze
Realty failed to manifest": its preference as to which among the obligations
that were all due the proceeds of the sale should be applied. Its silence can be
construed as acquiescence to China Bank's application of the payment first to
the interest and penalties and the remainder to the principal which is
sanctioned by Article 1253;

• Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered

• the appellate court aptly reduced the interest rate to 12%' per annum which is
in consonance to existing jurisprudence. in Albos v. Embisan, 11MCMP
Construction Corp. v. Monark Equipment Corp.,12  Bognot v. RRI Lending
Corporation,13  and Menchavez v. Bermudez,14 the Court struck down the
stipulated rates of interest for being excessive, iniquitous, unconscionable
 and exorbitant and uniformly reduced the rates to 12% per annum.

Words:
 [iniquitous]/iniquity – gross injustice; a wicked act or thing; sin;
 plethora – abundance; profusion;
 gainsay – to contradict; declare as invalid;

Introduction to Credit Transaction

What is meant by credit; credere (Latin), trust or belief; the trust or belief in the ability of a
person to fulfill his obligation;

A person is creditworthy if he has money/income and collaterals; lenders also consider the
character of the borrower, whether his promise to pay is reliable;

What are credit transactions;

 Loan;
 Deposits;
 Security/collateral agreements or contracts
o Guaranty and suretyship;
o Pledge
o Real mortgage;
o Antichresis;
o Chattel mortgage;
 Related transactions/rules
o Quasi-contracts;
o Concurrence and Preference of Credits;

What is the significance of credit transactions in the economy;

 Allows a more productive use of money and property;
 Allows more exchanges of goods and service;
 Actual physical transfer of is eliminated through cancellations of debts and credit;
 Credit allows growth in the economy, growth that otherwise would not be possible if the
 resources remain under the ownership or control of the same hands; or there will be little
or no growth if there is no credit in economy;

See “How the Economic Machine Works by Ray Dalio (youtube); the video
breaks down economic concepts like credit, deficits and interest rates,
allowing viewers to learn the basic driving forces behind the economy, how
economic policies work and why economic cycles occur

How The Economic Machine Works

How The Economic Machine Works

by Ray Dalio
Principles by Ray Dalio
2.04M subscribers
Subscribe
545K
Share
34,832,685 views 23 Sept 2013
Economics 101 -- "How the Economic Machine Works." Created by
Ray Dalio this simple but not simplistic and easy to follow 30
minute, animated video answers the question, "How does the
economy really work?" Based on Dalio's practical template for
understanding the economy, which he developed over the course of
his career, the video breaks down economic concepts like credit,
deficits and interest rates, allowing viewers to learn the basic
driving forces behind the economy, how economic policies work
and why economic cycles occur. To learn more about Economic
Principles visit: http://www.economicprinciples.org.

Raymond Thomas Dalio is an American billionaire investor and

hedge fund manager, who has served as co-chief investment officer
of the world's largest hedge fund, Bridgewater Associates, since
1985. He founded Bridgewater in 1975 in New York. Wikipedia
Born: August 8, 1949 (age 73 years), Jackson Heights, New York,
United States
 Education: Harvard Business School, Harvard University, MORE
Net worth: 19.1 billion USD (2023) Forbes
Spouse: Barbara Dalio; Children: Devon, Paul, Mark, Matt.

Review of some figures in the PH Banking Industry

Top 5 Banks

(Figures in Billion Php);

1,000/Thousand;
1,000,000/Million;
1,000,000,000/Billion;
1,000,000,000,000/Trillion
(Twelve Zeroes);

% OF
ASSETS % OF % OF CAPITA CAPITA
(2020) DEPOSITS DEPOSITS LOANS LOANS L L
TO
ASSET TO TO
S DEPOSITS ASSETS

BDO 3,069 2521 82% 2205 87% 370 12%

Metrobank 2,116 1493 71% 1218 82% 296 14%

LBP 2,033 1827 90% 863 47% 146 7%

BPI 1,912 1435 75% 1214 85% 271 14%

PNB 1,067 785 74% 649 83% 145 14%

TOTAL 10,197 8061 79% 6149 76% 1228 12%

Note, BDO has a total assets of P3.1 Trillion;

82% (P2.5 Trillion) of said assets come from deposits obtained from the public; the
fund obtained from deposits can be used by the bank for
providing loans (subject to interest) or income earning investments; in 2019
the deposit interest rates provided by commercial or similar banks in PH was
approximately 4.1%;
 87% (P2.2 Trillion) of the deposits obtained by BDO was used by the bank to

Year 2019

Time Deposit Rates

Short-term (1 Year and below) 4.059%
Long-term (Above 1 Year) 4.598%
(P100 X 0.04059 = p4.059;
P100,000 x 0.04059 = P4,059;
P1,000,000 x 0.04059 = P40,590)

Savings Deposit Rates 1.231%

P100 X 0.01231 = P1.231;
P100,000 x 0.01231 = P1,231;
P1,000,000 x 0.01231 = P12,310)

grant loans to its borrowers (STATISTA); average lending interest rate in PH

was reported at 7.0958%;
LT Time Deposit - P1,000,000 x 0.04059 = P40,590);
Savings Deposits - P1,000,000 x 0.01231 = P12,310);

At bank’s average lending rates in 2019 - P1,000,000 x 0.07087 = P70,870)

Year 2019

Bank Average Lending Rates 7.087%

P100 X 0.07087 = P7.087;
P100,000 x 0.07087 = P7,087;
P1,000,000 x 0.07087 = P70,870)

Lending Rates
High 8.018%
Low 5.497%

Overnight Lending Facility Rates 4.996%

Credit transactions coverage in the Bar examinations:

 i. loan
II. Deposit
III. Guaranty and Suretyship
IV. Pledge
V. Real Mortgage
Include: Act 3135, as amended by R.A. No. 4118
VI. Antichresis
VII. Chattel Mortgage
Include: Act 1508
VIII. Quasi-contracts
IX. Concurrence and Preference of Credits;

Note – Personal Property Security Act.

Terms to understand

 Bailment, def., an act of delivering goods to a bailee for a particular purpose, without
transfer of ownership; "a contract of hire is a species of bailment"

 There are three types of bailments:

(1) for the benefit of the bailor and bailee; A bailment for the repair of an item is
a bailment for mutual benefit when the bailee receives a fee in exchange for his or her
work;
(2) for the sole benefit of the bailor; and
(3) for the sole benefit of the bailee.

 Bailment, another definition;;

Delivery of property of one person (bailor)
to another (bailee)
“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;

Property
BAILOR BAILEE
Delivery to Bailee

Return to Bailor

*Note – not exactly a trust transaction as covered by the provisions of Title V – Trusts of
the New Civil Code ; no trustee-beneficiary relationship is created;
TRUSTOR TRUSTEE
Fund/Property

BENEFICIARY

Note the following provisions relating to trust transactions: Title V – Trusts of the
New Civil Code

TITLE V - TRUSTS (n)

CHAPTER 1 General Provisions

Article 1440. A person who establishes a trust is called the trustor;

one in whom confidence is reposed as regards property
for the benefit of another person is known as the trustee;
and the person for whose benefit the trust has been created
is referred to as the beneficiary.

Article 1441. Trusts are either express or implied. Express trusts are created
by the intention of the trustor or of the parties. Implied trusts come into being
by operation of law.

Article 1442. The principles of the general law of trusts, insofar as they are
not in conflict with this Code, the Code of Commerce, the Rules of Court and
special laws are hereby adopted.

CHAPTER 2 Express Trusts

Article 1443. No express trusts concerning an immovable or any interest
therein may be proved by parol evidence.

Article 1444. No particular words are required for the creation of an express
trust, it being sufficient that a trust is clearly intended.

Article 1445. No trust shall fail because the trustee appointed declines the
designation, unless the contrary should appear in the instrument constituting
the trust.

Article 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the

trust imposes no onerous condition upon the beneficiary, his acceptance shall
be presumed, if there is no proof to the contrary.

CHAPTER 3 Implied Trusts

Article 1447. The enumeration of the following cases of implied trust does

not exclude others established by the general law of trust, but the limitation
laid down in article 1442 shall be applicable.

Article 1448. There is an implied trust when property is sold, and the legal
estate is granted to one party but the price is paid by another for the purpose
of having the beneficial interest of the property. The former is the trustee,
while the latter is the beneficiary. However, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of the one paying the price of
the sale, no trust is implied by law, it being disputably presumed that there is
a gift in favor of the child.

Article 1449. There is also an implied trust when a donation is made to a

person but it appears that although the legal estate is transmitted to the donee,
he nevertheless is either to have no beneficial interest or only a part thereof.

Article 1450. If the price of a sale of property is loaned or paid by one person
for the benefit of another and the conveyance is made to the lender or payor
to secure the payment of the debt, a trust arises by operation of law in favor
of the person to whom the money is loaned or for whom its is paid. The latter
may redeem the property and compel a conveyance thereof to him.

Article 1451. When land passes by succession to any person and he causes

the legal title to be put in the name of another, a trust is established by
implication of law for the benefit of the true owner.

Article 1452. If two or more persons agree to purchase property and by

common consent the legal title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in favor of the others in
proportion to the interest of each.

Article 1453. When property is conveyed to a person in reliance upon his

declared intention to hold it for, or transfer it to another or the grantor, there
is an implied trust in favor of the person whose benefit is contemplated.

Article 1454. If an absolute conveyance of property is made in order to

secure the performance of an obligation of the grantor toward the grantee, a
trust by virtue of law is established. If the fulfillment of the obligation is
offered by the grantor when it becomes due, he may demand the
reconveyance of the property to him.

Article 1455. When any trustee, guardian or other person holding a fiduciary

relationship uses trust funds for the purchase of property and causes the
conveyance to be made to him or to a third person, a trust is established by
operation of law in favor of the person to whom the funds belong.
 Article 1456. If property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes.

Note case where property was mistakenly delivered to a person who

received and took possession of the property; the SC held that the person
who received it received it in trust; a trust relationship is created by law.

Article 1457. An implied trust may be proved by oral evidence.

Note Art. 315 of the Revised Penal Code relating to trust transactions;
Chapter Six - SWINDLING AND OTHER DECEITS
Article 315. Swindling (estafa). - Any person who shall defraud another by
any of the means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision
mayor in its minimum period, if the amount of the fraud is over 12,000 pesos
but does not exceed 22,000 pesos, and if such amount exceeds the latter sum,
the penalty provided in this paragraph shall be imposed in its maximum
period, adding one year for each additional 10,000 pesos; but the total penalty
which may be imposed shall not exceed twenty years. In such cases, and in
connection with the accessory penalties which may be imposed under the
provisions of this Code, the penalty shall be termed prision mayor or
reclusion temporal, as the case may be.
2nd. The penalty of prision correccional in its minimum and medium
periods, if the amount of the fraud is over 6,000 pesos but does not exceed
12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision
correccional in its minimum period if such amount is over 200 pesos but does
not exceed 6,000 pesos; and
4th. By arresto mayor in its maximum period, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned,
the fraud be committed by any of the following means:
1. With unfaithfulness or abuse of confidence, namely:
(a) By altering the substance, quantity, or quality or anything of value which
the offender shall deliver by virtue of an obligation to do so, even though
such obligation be based on an immoral or illegal consideration.
(b) By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust or on
commission, or for administration, or under any other obligation involving
 the duty to make delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property. xxx.”

Note The Trust Receipts Law, PD 115, January 29, 1973

Note the case of Land Bank of the Philippines v. Perez, G.R. No. 166884,
13 June 2012

FACTS:

On June 7, 1999, Land Bank of the Philippines (LBP) filed a complaint for
estafa or violation of Article 315, paragraph 1(b) of the Revised Penal
Code, in relation to P.D. 115, against the respondents, Lamberto C. Perez,
Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon Garcia. LBP
extended a credit accommodation to ACDC through the execution of an
Omnibus Credit Line Agreement between LBP and ACDC on October 29,
1996. In various instances, ACDC used the Letters of Credit/Trust Receipts
Facility of the Agreement to buy construction materials. The respondents,
as officers and representatives of ACDC, executed trust receipts in
connection with the construction materials, with a total principal amount of
P52,344,096.32. The trust receipts matured, but ACDC failed to return to
LBP the proceeds of the construction projects or the construction materials
subject of the trust receipts. LBP sent ACDC a demand letter, dated May 4,
1999, for the payment of its debts, including those under the Trust Receipts
Facility in the amount of P66,425,924.39. When ACDC failed to comply
with the demand letter, LBP filed the affidavit-complaint.

The respondents filed a joint affidavit wherein they stated that they signed
the trust receipt documents on or about the same time LBP and ACDC
executed the loan documents; their signatures were required by LBP for the
release of the loans. The trust receipts in this case do not contain (1) a
description of the goods placed in trust, (2) their invoice values, and (3)
their maturity dates, in violation of Section 5(a) of P.D. 115. Moreover,
they alleged that ACDC acted as a subcontractor for government projects
such as the Metro Rail Transit, the Clark Centennial Exposition and the
Quezon Power Plant in Mauban, Quezon. Its clients for the construction
projects, which were the general contractors of these projects, have not yet
paid them; thus, ACDC had yet to receive the proceeds of the materials
that were the subject of the trust receipts and were allegedly used for these
constructions. As there were no proceeds received from these clients, no
misappropriation thereof could have taken place.

ISSUE: Whether or not the disputed transactions are trust receipts?

HELD:

No. There are two obligations in a trust receipt transaction. The first is
covered by the provision that refers to money under the obligation to
deliver it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision referring to merchandise received under the
obligation to return it (devolvera) to the owner. Thus, under the Trust
Receipts Law, intent to defraud is presumed when (1) the entrustee fails to
turn over the proceeds of the sale of goods covered by the trust receipt to
the entruster; or (2) when the entrustee fails to return the goods under trust,
if they are not disposed of in accordance with the terms of the trust
receipts.

In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative – the return of the proceeds of the sale or the return
or recovery of the goods, whether raw or processed.

When both parties enter into an agreement knowing that the return of the
goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under
Section 13 of P.D. 115;

True or False Statement (TF) - When both parties enter into an

agreement knowing that the return of the goods subject of the trust
receipt is not possible even without any fault on the part of the trustee, it
is not a trust receipt transaction penalized under Section 13 of P.D. 115.
This transaction becomes a mere loan, where the borrower is obligated
to pay the bank the amount spent for the purchase of the goods.

the only obligation actually agreed upon by the parties would be the return
of the proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount spent for
the purchase of the goods.

Based on these premises, we cannot consider the agreements between the

parties in this case to be trust receipt transactions because (1) from the
start, the parties were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which they were
 used; and (2) from the moment the materials were used for the government
projects, they became public, not LBP’s, property.

Since these transactions are not trust receipts, an action for estafa should
not be brought against the respondents, who are liable only for a loan.

Violations of Trust Receipts Law are criminally punishable, but no

criminal complaint for violation of Article 315, paragraph 1(b) of the
Revised Penal Code, in relation with P.D. 115, should prosper against a
borrower who was not part of a genuine trust receipt transaction. [Note
this term as used by the SC – “genuine trust receipt”]
(BROCALES,MARY GOLD R., 3rd Year, Block B UNC)

 Letter of credit [see SC case explaining LC transactions]

 Bridge Financing

TITLE XI Loan

General Provisions 

What kinds of loans are found in the provisions of the New Civil Code?
What is commodatum?
What is simple loan or mutuum?
ARTICLE 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. (1740a) 

Notes:
 What kinds of loans are provided for under the Civil Code – commodatum and
mutuum/simple loan;

 What kind of loan is commodatum;

- Parties; bailor; bailee;/ lender; borrower;
- Purpose; to enable the borrower to use the thing loaned;
- Object; non-consumable; there is an obligation to return the object delivered
to the bailee;

 What is the obligation of the bailor;

 What is the obligation of the bailee;

 Is the bailee obliged to pay for his use of the thing loaned; commodatum is
essentially gratuitous; if there is compensation, the contract may be usufruct (Title
VI Usufruct) or lease (Title VIII Lease, NCC);

 What is mutuum or simple loan;

- Parties; creditor - debtor; also referred to as lender - borrower;
- Purpose; loan for consumption (ownership of the object borrowed is
transferred to the borrower);
- Object; money or other fungible thing;
what is meant by fungible; non-fungible;
is fungibility determined by the nature of the thing;
what makes a thing fungible or non-fungible;

 What is the obligation of the debtor in mutuum; to return the same amount of the
same kind and quality;

 In mutuum or simple loan, is the borrower obliged to pay compensation for the use
of the money or fungible thing borrowed?
 Which loan is called a loan for use; a loan for consumption;

 If there is compensation for the use, the contract may be a lease;

 Obligation to pay interest must be stipulated in writing; (note that there are two
kinds of interests contemplated under the law; interest as compensation for the
use of the money (monetary interest) and interest in the concept of penalty due to
the default in the principal obligation (compensatory interest); the interest that
cannot be obliged to be paid if not stipulated in writing is the interest as
compensation for the use of the money);

 What happens to the ownership of the thing loaned

-in commodatum;
-in mutuum?

 What kind of contract is loan as to how it is perfected; loan is a real contract,

perfected by delivery of the object?

 Why is the delivery of the thing essential in loan? The use of the thing loaned
which is the object of the contract will not be possible unless the thing is delivered
to the borrower; neither can the borrower in commodatum be obliged to take care
of the thing unless it is delivered first to the borrower;

 There used to be so-called civil loans and commercial loans under the law before;
what happened to the so-called commercial laws; under Art. 2270 of the New
Civil Code, the provisions of the Code of Commerce governing sales, partnership,
agency, loan, deposits and guaranty were expressly repealed;

“Article 2270 [NCC].  The laws and regulations are hereby repealed:

(1) Those parts and provisions of the Civil Code of 1889 which are in force
on the date when this new Civil Code becomes effective:

(2) The provisions of the Code of Commerce governing sales, partnership,

agency, loan, deposit and guaranty;

(3) The provisions of the Code of Civil Procedure on prescription as far as

inconsistent with this Code; and
 (4) All laws, Acts, parts of Acts, rules of court, executive orders, and
administrative regulations which are inconsistent with this Code. (n)”

 Distinctions between commodatum and mutuum;

- subject matter;
- nature as to consideration;
- purpose;
- object as to kind of property;
- who bears the risk in case of loss of the object;
- time of return of the object or time of payment;
- character of the contract as to whether it is personal or not personal;

 Why is it important to know whether the contract of loan is commodatum or

mutuum?

 Distinction between loan and deposit;

- purpose;
- time or payment or return of the object;
- applicability of legal compensation;
- juridical relations (lender-borrower; depositor-depositary);

 What is the nature of the deposit of money in a bank by bank depositors?

TF -The deposit of money in banks as savings, fixed or time deposit is really a

loan of by the bank depositor to the bank and is governed by rules on simple
loan as well as by the provisions of the law on banking.

 Term to understand:
- loan v. discount; discount is really a mode of lending money; interest is
deducted in advance; it is on a double-name paper (to explain this);

 Loan v. lease or rent (Title VIII Lease, NCC); lease - owner of property does not
lose his ownership of the property, only the control, for the period of lease;
relationship is landlord and tenant/lessor-lessee;

 Case – money deposited, to be returned in two months, subject to interest; the

payment of interest indicates the contract is loan (mutuum) not deposit;

 Summary of things to know regarding credit transactions:

 o what rules govern credit transaction;
o what actual legal contracts are used in credit transaction;
o who are the parties to credit transactions;
o what are the right and obligations of the parties under the contracts;
o What remedies do the parties have in case of breach of the agreement;

How is a contract of loan perfected?

What is the legal significance of an accepted promise to deliver something by
way of commodatum or simple loan?
ARTICLE 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. (n) 

Notes

 If today, A agrees to lend B P100,000 next month. Today, upon the meeting of
minds, does a contract of loan come to exist?

 The contract of loan is a real contract, perfected upon delivery of the object of the
contract;

 Does B acquire any right based on an accepted promise to deliver something?


TF - “A” and “B” agreed that “A” will lend “B” P100,000 in two months. After
two months “B” will have the right to compel “A” to deliver to him the amount
promised because a contract of loan exists between them.
Assignments: Read case #3ctcase_20140115_dbp v. guarina gr 160758_rc

#3ctcase_20140115_dbp v. guarina gr 160758_rc marked

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 160758               January 15, 2014
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT
CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
The foreclosure of a mortgage prior to the mortgagor’s default on the
principal obligation is premature, and should be undone for being void and
ineffectual. The mortgagee who has been meanwhile given possession of
the mortgaged property by virtue of a writ of possession issued to it as the
purchaser at the foreclosure sale may be required to restore the possession
of the property to the mortgagor and to pay reasonable rent for the use of the
property during the intervening period.
The Case
In this appeal, Development Bank of the Philippines (DBP) seeks the
reversal of the adverse decision promulgated on March 26, 2003 in C.A.-
G.R. CV No. 59491,1 whereby the Court of Appeals (CA) upheld the
judgment rendered on January 6, 19982 by the Regional Trial Court, Branch
25, in Iloilo City (RTC) annulling the extra-judicial foreclosure of the real
estate and chattel mortgages at the instance of DBP because the debtor-
mortgagor, Guariña Agricultural and Realty Development Corporation
(Guariña Corporation), had not yet defaulted on its obligations in favor of
DBP.
[RTC decision, 1998, annulling the extra-judicial foreclosure of the real
estate and chattel mortgages at the instance of DBP; debtor-mortgagor had
not yet defaulted on its obligation;
CA decision, 2003, upheld the decision of the RTC;
SC decision, 2014;]
 Antecedents
In July 1976, Guariña Corporation applied for a loan from DBP to finance the
development of its resort complex situated in Trapiche, Oton, Iloilo. The loan,
in the amount of ₱3,387,000.00, was approved on August 5, 1976.3 Guariña
Corporation executed a promissory note that would be due on November 3,
1988.4 On October 5, 1976, Guariña Corporation executed a real estate
mortgage over several real properties in favor of DBP as security for the
repayment of the loan. On May 17, 1977, Guariña Corporation executed a
chattel mortgage over the personal properties existing at the resort complex
and those yet to be acquired out of the proceeds of the loan, also to secure
the performance of the obligation.5 Prior to the release of the loan, DBP
required Guariña Corporation to put up a cash equity of ₱1,470,951.00 for
the construction of the buildings and other improvements on the resort
complex.
The loan was released in several instalments, and Guariña Corporation used
the proceeds to defray the cost of additional improvements in the resort
complex. In all, the amount released totaled ₱3,003,617.49, [note that the
loan approved by DBP was ₱3,387,000.00] from which DBP withheld
₱148,102.98 as interest.6
Guariña Corporation demanded the release of the balance of the loan, but
DBP refused. Instead, DBP directly paid some suppliers of Guariña
Corporation over the latter’s objection. DBP found upon inspection of the
resort project, its developments and improvements that Guariña Corporation
had not completed the construction works.7 In a letter dated February 27,
1978,8 and a telegram dated June 9, 1978,9 DBP thus demanded that
Guariña Corporation expedite the completion of the project, and warned that
it would initiate foreclosure proceedings should Guariña Corporation not do
so.10
Unsatisfied with the non-action and objection of Guariña Corporation, DBP
initiated extrajudicial foreclosure proceedings. A notice of foreclosure sale
was sent to Guariña Corporation. The notice was eventually published,
leading the clients and patrons of Guariña Corporation to think that its
business operation had slowed down, and that its resort had already
closed.11
On January 6, 1979, Guariña Corporation sued DBP in the RTC to demand
specific performance of the latter’s obligations under the loan agreement,
and to stop the foreclosure of the mortgages (Civil Case No. 12707). 12 
[note that the case was initially filed in 1979; and that dispute finally got
resolved by the SC in 2014; so the dispute took about 35 years till it was
finally resolved in court]
However, DBP moved for the dismissal of the complaint, stating that the
mortgaged properties had already been sold to satisfy the obligation of
Guariña Corporation at a public auction held on January 15, 1979 at the
Costa Mario Resort Beach Resort in Oton, Iloilo.13 
[note – Guarina had to amend its complaint; its complaint prayed for the
court to stop the foreclosure intended by DBP but according to DBP the bank
had foreclosed the mortgages; Guarina had to pray for the nullification of the
foreclosure proceedings]
Due to this, Guariña Corporation amended the complaint on February 6,
197914 to seek the nullification of the foreclosure proceedings and the
cancellation of the certificate of sale. DBP filed its answer on December 17,
1979,15 and trial followed upon the termination of the pre-trial without any
agreement being reached by the parties.16
In the meantime, DBP applied for the issuance of a writ of possession by the
RTC. At first, the RTC denied the application but later granted it upon DBP’s
motion for reconsideration.
[note that there was an intervening incident; DBP applied for the issuance of
a writ of possession; under the law the buyer of the foreclosed property will
have a right to possess the property even during the period of redemption; if
the mortgagor/previous owner does not voluntarily surrender the property,
the buyer can go to court to ask for the issuance of a writ of possession]
Aggrieved, Guariña Corporation assailed the granting of the application
before the CA on certiorari (C.A.-G.R. No. 12670-SP entitled Guariña
Agricultural and Realty Development Corporation v. Development Bank of
the Philippines). After the CA dismissed the petition for certiorari, DBP
sought the implementation of the order for the issuance of the writ of
possession. Over Guariña Corporation’s opposition, the RTC issued the writ
of possession on June 16, 1982.17
[note that in 1982, DPB was able to take possession of the property; note
also that this case was decided by SC in 2014, ordering the return of the
property (a beach resort) to Guarina, so the property was in DBP’s
possession for 32 years; note that SC also ordered the payment of
compensation (rent) for DBP’s use of the property]
Judgment of the RTC
On January 6, 1998, the RTC rendered its judgment in Civil Case No. 12707,
disposing as follows:
WHEREFORE, premises considered, the court hereby resolves that the
extra-judicial sales of the mortgaged properties of the plaintiff by the Office of
the Provincial Sheriff of Iloilo on January 15, 1979 are null and void, so with
the consequent issuance of certificates of sale to the defendant of said
properties, the registration thereof with the Registry of Deeds and the
issuance of the transfer certificates of title involving the real property in its
name.
It is also resolved that defendant give back to the plaintiff or its
representative the actual possession and enjoyment of all the properties
foreclosed and possessed by it. To pay the plaintiff the reasonable rental for
the use of its beach resort during the period starting from the time it
(defendant) took over its occupation and use up to the time possession is
actually restored to the plaintiff.
And, on the part of the plaintiff, to pay the defendant the loan it obtained as
soon as it takes possession and management of the beach resort and
resume its business operation.
Furthermore, defendant is ordered to pay plaintiff’s attorney’s fee of
₱50,000.00.
So ORDERED.18
Decision of the CA
On appeal (C.A.-G.R. CV No. 59491), DBP challenged the judgment of the
RTC, and insisted that:
I
THE TRIAL COURT ERRED AND COMMITTED REVERSIBLE ERROR IN
DECLARING DBP’S FORECLOSURE OF THE MORTGAGED
PROPERTIES AS INVALID AND UNCALLED FOR.
II
THE TRIAL COURT GRIEVOUSLY ERRED IN HOLDING THE GROUNDS
INVOKED BY DBP TO JUSTIFY FORECLOSURE AS “NOT SUFFICIENT.”
ON THE CONTRARY, THE MORTGAGE WAS FORECLOSED BY
EXPRESS AUTHORITY OF PARAGRAPH NO. 4 OF THE MORTGAGE
CONTRACT AND SECTION 2 OF P.D. 385 IN ADDITION TO THE
QUESTIONED PAR. NO. 26 PRINTED AT THE BACK OF THE FIRST
PAGE OF THE MORTGAGE CONRACT.
III
THE TRIAL COURT ERRED IN HOLDING THE SALES OF THE
MORTGAGED PROPERTIES TO DBP AS INVALID UNDER ARTICLES
2113 AND 2141 OF THE CIVIL CODE.
IV
THE TRIAL COURT GRAVELY ERRED AND COMMITTED [REVERSIBLE]
ERROR IN ORDERING DBP TO RETURN TO PLAINTIFF THE ACTUAL
POSSESSION AND ENJOYMENT OF ALL THE FORECLOSED
PROPERTIES AND TO PAY PLAINTIFF REASONABLE RENTAL FOR THE
USE OF THE FORECLOSED BEACH RESORT.
V
THE TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES AGAINST
DBP WHICH MERELY EXERCISED ITS RIGHTS UNDER THE
MORTGAGE CONTRACT.19
In its decision promulgated on March 26, 2003,20 however, the CA sustained
the RTC’s judgment but deleted the award of attorney’s fees, decreeing:
WHEREFORE, in view of the foregoing, the Decision dated January 6, 1998,
rendered by the Regional Trial Court of Iloilo City, Branch 25 in Civil Case
No. 12707 for Specific Performance with Preliminary Injunction is hereby
AFFIRMED with MODIFICATION, in that the award for attorney’s fees is
deleted.
SO ORDERED.21
DBP timely filed a motion for reconsideration, but the CA denied its motion
on October 9, 2003.
Hence, this appeal by DBP.
Issues
DBP submits the following issues for consideration, namely:
WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS
DATED MARCH 26, 2003 AND ITS RESOLUTION DATED OCTOBER 9,
DENYING PETITIONER’S MOTION FOR RECONSIDERATION WERE
ISSUED IN ACCORDANCE WITH LAW, PREVAILING JURISPRUDENTIAL
DECISION AND SUPPORTED BY EVIDENCE;
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ADHERED
TO THE USUAL COURSE OF JUDICIAL PROCEEDINGS IN DECIDING
C.A.-G.R. CV NO. 59491 AND THEREFORE IN ACCORDANCE WITH THE
“LAW OF THE CASE DOCTRINE.”22
Ruling
The appeal lacks merit.
1.
Findings of the CA were supported by the
evidence as well as by law and jurisprudence
DBP submits that the loan had been granted under its supervised credit
financing scheme for the development of a beach resort, and the releases of
the proceeds would be subject to conditions that included the verification of
the progress of works in the project to forestall diversion of the loan
proceeds; and that under Stipulation No. 26 of the mortgage contract,
[note Stipulation No. 26 which DBP argues is its basis for the foreclosure of
the mortgages; note that under the law, foreclosure may be made not only
for non-payment of the principal obligation but also for other violations of the
agreement as the parties may have agreed; a copy of the stipulation is
printed in the footnotes]
further loan releases would be terminated and the account would be
considered due and demandable in the event of a deviation from the purpose
of the loan,23 including the failure to put up the required equity and the
diversion of the loan proceeds to other purposes.24 
[this is what is referred to as an “acceleration clause,” making the
obligation immediately become due and demandable notwithstanding the
term or maturity agreed upon in the agreement;]
It assails the declaration by the CA that Guariña Corporation had not yet
been in default in its obligations despite violations of the terms of the
mortgage contract securing the promissory note.
Guariña Corporation counters that it did not violate the terms of the
promissory note and the mortgage contracts because DBP had fully
collected the interest notwithstanding that the principal obligation did not yet
fall due and become demandable.25
[note Gauarina’s counter argument;]
The submissions of DBP lack merit and substance.
The agreement between DBP and Guariña Corporation was a loan. Under
the law, a loan requires the delivery of money or any other consumable
object by one party to another who acquires ownership thereof, on the
condition that the same amount or quality shall be paid. 26 Loan is a reciprocal
obligation, as it arises from the same cause where one party is the creditor,
and the other the debtor.27 The obligation of one party in a reciprocal
obligation is dependent upon the obligation of the other, and the
performance should ideally be simultaneous. This means that in a loan, the
creditor should release the full loan amount and the debtor repays it when it
becomes due and demandable.28
[note the holding of the SC that loan is a reciprocal obligation and what is the
nature of a reciprocal obligation;
In its assailed decision, the CA found and held thusly:
xxxx
x x x It is undisputed that appellee obtained a loan from appellant, and as
security, executed real estate and chattel mortgages. However, it was never
established that appellee was already in default. Appellant, in a telegram to
the appellee reminded the latter to make good on its construction works,
otherwise, it would foreclose the mortgage it executed. It did not mention that
appellee was already in default. The records show that appellant did not
make any demand for payment of the promissory note.
[note SC’s finding that Guarina was not established to be already in default;
note how a demand is supposed to have been made – it must make a
demand for payment]
It appears that the basis of the foreclosure was not a default on the loan but
appellee’s failure to complete the project in accordance with appellant’s
standards. In fact, appellant refused to release the remaining balance of the
approved loan after it found that the improvements introduced by appellee
were below appellant’s expectations.
The loan agreement between the parties is a reciprocal obligation. Appellant
in the instant case bound itself to grant appellee the loan amount of
₱3,387,000.00 condition on appellee’s payment of the amount when it falls
due. Furthermore, the loan was evidenced by the promissory note which was
secured by real estate mortgage over several properties and additional
chattel mortgage. Reciprocal obligations are those which arise from the
same cause, and in which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent upon the obligation of the other
(Areola vs. Court of Appeals, 236 SCRA 643). They are to be performed
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfilment of the other (Jaime Ong vs. Court of Appeals, 310
SCRA 1). The promise of appellee to pay the loan upon due date as well as
to execute sufficient security for said loan by way of mortgage gave rise to a
reciprocal obligation on the part of appellant to release the entire approved
loan amount. Thus, appellees are entitled to receive the total loan amount as
agreed upon and not an incomplete amount.
[note SC’s explanation of what a reciprocal obligation is]
The appellant did not release the total amount of the approved loan.
Appellant therefore could not have made a demand for payment of the loan
since it had yet to fulfil its own obligation.
[note what the SC says is the effect of the lender’s failure to release the total
amount of the approved loan;]
Moreover, the fact that appellee was not yet in default rendered the
foreclosure proceedings premature and improper.
[note what the effect is of a foreclosure when the mortgagor is in not yet in
default;]

The properties which stood as security for the loan were foreclosed without
any demand having been made on the principal obligation. For an obligation
to become due, there must generally be a demand. Default generally begins
from the moment the creditor demands the performance of the obligation.
Without such demand, judicial or extrajudicial, the effects of default will not
arise (Namarco vs. Federation of United Namarco Distributors, Inc., 49
SCRA 238; Borje vs. CFI of Misamis Occidental, 88 SCRA 576).
[note SC’s holding as to when the debtor becomes in default; note that [from
your previous study of the law on obligations], demand is not needed to put
the debtor in default when there is a waiver by the debtor of demand to put
him in default; usually in contracts drafted by banks or other creditors a
stipulation waiving such demand is written in the contract; it is interesting to
note why no such waiver of demand is made in DBP’s contract with Guarina,
or why DBP did not make a demand for payment, these are matters that the
bank’s lawyer should have known and should have been watchful of]
Xxxx
Appellant also admitted in its brief that it indeed failed to release the full
amount of the approved loan. As a consequence, the real estate mortgage of
appellee becomes unenforceable, as it cannot be entirely foreclosed to
satisfy appellee’s total debt to appellant (Central Bank of the Philippines vs.
Court of Appeals, 139 SCRA 46).
[note that when the lender failed to release the full amount of the approved
loan, it cannot foreclose the mortgage executed to secure the total
indebtedness of the mortgagor;]
Since the foreclosure proceedings were premature and unenforceable, it
only follows that appellee is still entitled to possession of the foreclosed
properties. However, appellant took possession of the same by virtue of a
writ of possession issued in its favor during the pendency of the case. Thus,
the trial court correctly ruled when it ordered appellant to return actual
possession of the subject properties to appellee or its representative and to
pay appellee reasonable rents.
However, the award for attorney’s fees is deleted. As a rule, the award of
attorney’s fees is the exception rather than the rule and counsel’s fees are
not to be awarded every time a party wins a suit. Attorney’s fees cannot be
recovered as part of damages because of the policy that no premium should
be placed on the right to litigate (Pimentel vs. Court of Appeals, et al., 307
SCRA 38).29
[Note this rule regarding attorney’s fees.]
xxxx
We uphold the CA.
To start with, considering that the CA thereby affirmed the factual findings of
the RTC, the Court is bound to uphold such findings, for it is axiomatic that
the trial court’s factual findings as affirmed by the CA are binding on appeal
due to the Court not being a trier of facts.
[Note this rule regarding how the findings of the trial court when affirmed by
the CA are held as binding by SC, SC not being a trier of facts;]
Secondly, by its failure to release the proceeds of the loan in their entirety,
DBP had no right yet to exact on Guariña Corporation the latter’s compliance
with its own obligation under the loan. Indeed, if a party in a reciprocal
contract like a loan does not perform its obligation, the other party cannot be
obliged to perform what is expected of it while the other’s obligation remains
unfulfilled.30 In other words, the latter party does not incur delay.31
[note the effect when a party to a loan does not perform its obligation, noting
the nature of the contract of loan as a reciprocal obligation;
Still, DBP called upon Guariña Corporation to make good on the construction
works pursuant to the acceleration clause written in the mortgage contract
(i.e., Stipulation No. 26),32 or else it would foreclose the mortgages.
DBP’s actuations were legally unfounded. It is true that loans are often
secured by a mortgage constituted on real or personal property to protect the
creditor’s interest in case of the default of the debtor. By its nature, however,
a mortgage remains an accessory contract dependent on the principal
obligation,33 such that enforcement of the mortgage contract will depend on
whether or not there has been a violation of the principal obligation. While a
creditor and a debtor could regulate the order in which they should comply
with their reciprocal obligations, it is presupposed that in a loan the lender
should perform its obligation – the release of the full loan amount – before it
could demand that the borrower repay the loaned amount.
[note what SC says on when the parties in a reciprocal obligation should
perform their obligations;]
In other words, Guariña Corporation would not incur in delay before DBP
fully performed its reciprocal obligation.34
Considering that it had yet to release the entire proceeds of the loan, DBP
could not yet make an effective demand for payment upon Guariña
Corporation to perform its obligation under the loan. According to
Development Bank of the Philippines v. Licuanan,35 it would only be when a
demand to pay had been made and was subsequently refused that a
borrower could be considered in default,
[note this jurisprudence cited by the SC on when the borrower becomes in
default – after demand for payment is made and there is refusal or failure to
pay;]
and the lender could obtain the right to collect the debt or to foreclose the
mortgage.1âwphi1 Hence, Guariña Corporation would not be in default
without the demand.
Assuming that DBP could already exact from the latter its compliance with
the loan agreement, the letter dated February 27, 1978 that DBP sent would
still not be regarded as a demand to render Guariña Corporation in default
under the principal contract because DBP was only thereby requesting the
latter “to put up the deficiency in the value of improvements.”36
[note the nature or kind of demand that DBP made, it was not a demand for
the payment of the obligation;]
Under the circumstances, DBP’s foreclosure of the mortgage and the sale of
the mortgaged properties at its instance were premature, and, therefore, void
and ineffectual.37
Being a banking institution, DBP owed it to Guariña Corporation to exercise
the highest degree of diligence, as well as to observe the high standards of
integrity and performance in all its transactions because its business was
imbued with public interest.38 
[note this case which involves a loan and mortgages securing the loan where
the SC held that DBP (a bank) is required to exercise the highest degree of
diligence in the performance of said transaction; there are SC decisions that
hold that the banks are required to exercise the highest degree of degree
only in the exercise of it deposit function and the function involved here is not
a deposit function but a loan or mortgage transaction]
The high standards were also necessary to ensure public confidence in the
banking system, for, according to Philippine National Bank v. Pike:39 “The
stability of banks largely depends on the confidence of the people in the
honesty and efficiency of banks.” Thus, DBP had to act with great care in
applying the stipulations of its agreement with Guariña Corporation, lest it
erodes such public confidence. Yet, DBP failed in its duty to exercise the
highest degree of diligence by prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the mortgaged properties
despite Guariña Corporation not being yet in default. DBP wrongly relied on
Stipulation No. 26 as its basis to accelerate the obligation of Guariña
Corporation, for the stipulation was relevant to an Omnibus Agricultural
Loan, to Guariña Corporation’s loan which was intended for a project other
than agricultural in nature.
[This a critical matter – the SC holding that the stipulation alleged by DBP to
have given it the right to make the loan immediately demandable;
foreclosure can be proper not only for non-payment of the obligation but
also for other violation of the contracts between the parties; but note that,
here, the SC found that Stipulation No. 26 could not be relied on because it
was not applicable to the loan of Guarina; note this case also to underscore
the duty of a lawyer to carefully draft the documents executed by a lawyer’s
client;]
Even so, Guariña Corporation did not elevate the actionability of DBP’s
negligence to the CA, and did not also appeal the CA’s deletion of the award
of attorney’s fees allowed by the RTC.1âwphi1 With the decision of the CA
consequently becoming final and immutable as to Guariña Corporation, we
will not delve any further on DBP’s actionable actuations.
[Note this statement of the SC, a reminder for lawyers to be thorough in their
handling of the case for their clients; ensuring that all efforts are taken for
the protection of the interest of the clients.]
2.
The doctrine of law of the case
did not apply herein
DBP insists that the decision of the CA in C.A.-G.R. No. 12670-SP already
constituted the law of the case. Hence, the CA could not decide the appeal in
C.A.-G.R. CV No. 59491 differently.
Guariña Corporation counters that the ruling in C.A.-G.R. No. 12670-SP did
not constitute the law of the case because C.A.-G.R. No. 12670-SP
concerned the issue of possession by DBP as the winning bidder in the
foreclosure sale, and had no bearing whatsoever to the legal issues
presented in C.A.-G.R. CV No. 59491.
Law of the case has been defined as
[Note – here, the SC explains what is meant by law of the case]
the opinion delivered on a former appeal, and means, more specifically, that
whatever is once irrevocably established as the controlling legal rule of
decision between the same parties in the same case continues to be the law
of the case, whether correct on general principles or not, so long as the facts
on which such decision was predicated continue to be the facts of the case
before the court.40
The concept of law of the case is well explained in Mangold v. Bacon,41 an
American case, thusly:
The general rule, nakedly and boldly put, is that legal conclusions
announced on a first appeal, whether on the general law or the law as
applied to the concrete facts, not only prescribe the duty and limit the power
of the trial court to strict obedience and conformity thereto, but they become
and remain the law of the case in all other steps below or above on
subsequent appeal. The rule is grounded on convenience, experience, and
reason. Without the rule there would be no end to criticism, reagitation,
reexamination, and reformulation. In short, there would be endless litigation.
It would be intolerable if parties litigants were allowed to speculate on
changes in the personnel of a court, or on the chance of our rewriting
propositions once gravely ruled on solemn argument and handed down as
the law of a given case. An itch to reopen questions foreclosed on a first
appeal would result in the foolishness of the inquisitive youth who pulled up
his corn to see how it grew. Courts are allowed, if they so choose, to act like
ordinary sensible persons. The administration of justice is a practical affair.
The rule is a practical and a good one of frequent and beneficial use.
The doctrine of law of the case simply means, therefore, that when an
appellate court has once declared the law in a case, its declaration continues
to be the law of that case even on a subsequent appeal, notwithstanding that
the rule thus laid down may have been reversed in other cases. 42 For
practical considerations, indeed, once the appellate court has issued a
pronouncement on a point that was presented to it with full opportunity to be
heard having been accorded to the parties, the pronouncement should be
regarded as the law of the case and should not be reopened on remand of
the case to determine other issues of the case, like damages.43 But the law
of the case, as the name implies, concerns only legal questions or issues
thereby adjudicated in the former appeal.
The foregoing understanding of the concept of the law of the case exposes
DBP’s insistence to be unwarranted.
To start with, the ex parte proceeding on DBP’s application for the issuance
of the writ of possession was entirely independent from the judicial demand
for specific performance herein. In fact, C.A.-G.R. No. 12670-SP, being the
interlocutory appeal concerning the issuance of the writ of possession while
the main case was pending, was not at all intertwined with any legal issue
properly raised and litigated in C.A.-G.R. CV No. 59491, which was the
appeal to determine whether or not DBP’s foreclosure was valid and
effectual. And, secondly, the ruling in C.A.-G.R. No. 12670-SP did not settle
any question of law involved herein because this case for specific
performance was not a continuation of C.A.-G.R. No. 12670-SP (which was
limited to the propriety of the issuance of the writ of possession in favor of
DBP), and vice versa.
3.
Guarifia Corporation is legally entitled to the
restoration of the possession of the resort complex
and payment of reasonable rentals by DBP
Having found and pronounced that the extrajudicial foreclosure by DBP was
premature, and that the ensuing foreclosure sale was void and ineffectual,
the Court affirms the order for the restoration of possession to Guarifia
Corporation and the payment of reasonable rentals for the use of the resort.
The CA properly held that the premature and invalid foreclosure had unjustly
dispossessed Guarifia Corporation of its properties. Consequently, the
restoration of possession and the payment of reasonable rentals were in
accordance with Article 561 of the Civil Code, which expressly states that
one who recovers, according to law, possession unjustly lost shall be
deemed for all purposes which may redound to his benefit to have enjoyed it
without interruption.
WHEREFORE, the Court AFFIRMS the decision promulgated on March 26,
2003; and ORDERS the petitioner to pay the costs of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice

TERESITA J.
MARTIN S.
LEONARDO-DE
VILLARAMA, JR.
CASTRO
Associate Justice
Associate Justice
BIENVENIDO L. REYES
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Court’s Division.
MARIA LOURDES P.A. SERENO
Chief Justice

Footnotes
1
 Rollo, at 36-44; penned by Associate Justice Juan Q. Enriquez, Jr. (retired),
and concurred in by Associate Justice Rodrigo V. Cosico (retired) and
Associate Justice Edgardo F. Sundiam (retired/deceased).
2
 CA rollo, at 23-34; penned by Judge Bartolome M. Fanuñal.
3
 Rollo, p. 37.
4
 Records, Vol. 1, p. 8.
5
 Id. At 9-10.
6
 Rollo, pp. 37-38.
7
 Id. At 38.
8
 Records, Vol. 1, pp. 23-24.
9
 Id. At 25.
10
 Rollo, p. 38.
11
 Id.
12
 Records pp. 1-7
13
 Id. At 30-31.
14
 Id. At 40-46.
15
 Id. At 55-57.
16
 Rollo, pp. 38-39.
17
 Id. At 39.
18
 CA rollo, p. 34.
19
 Id. At 49-51.
20
 Supra note 1.
21
 Rollo, p. 43.
22
 Id. At 23.
23
 Id. At 25.
24
 Id. At 28-29.
25
 Id. At 127-137.
26
 Article 1953, in relation to Article 1933, Civil Code.
27
 IV Tolentino, The Civil Code of the Philippines, p. 175 (1999).
28
 Subic Bay Metropolitan Authority v. Court of Appeals, G.R. No. 192885,
July 4, 2012 675 SCRA 758, 766.
29
 Supra note 1, at 41-43.
30
 Cortes v. Court of Appeals, G.R. No. 126083, July 12, 2006, 494 SCRA
570, 576.
31
 Article 1169, Civil Code; IV Tolentino, op. cit., at 109.
32
 Records, Volume 2, at 646-a.
Stipulation No. 26 reads:
26. That the Mortgagee reserves the right to reduce or stop
releases/advances if after inspection and verification the
accomplishment of the financed project does not justify giving the full
amount, or if the conditions of the project do not show improvement
commensurate with the amount already advanced/released. In such
an event or in the event of abandonment of the project, all
advances/releases made shall automatically become due and
demandable and the Mortgagee shall take such legal steps as are
necessary to protect its interest.
33
 Rigor v. Consolidated Orix Leasing and Financing Corporation, 387 SCRA
437, 444.
34
 Selegna Management and Development Corporation v. United Coconut
Planters Bank, G.R. No. 165662, May 3, 2006, 489 SCRA 125, 138.
 35
 G.R. No.150097, February 26, 2007, 516 SCRA 644.
36
 Supra note 8.
37
 Development Bank of the Philippines v. Licuanan, supra, note 35, at 654.
38
 Comsavings Bank (now GSIS Family Savings Bank) v. Capistrano, G.R.
170942, August 28, 2013; citing Philippine National Bank v. Chea Chee
Chong, G.R. Nos. 170865 and 170892, April 25, 2012, 671 SCRA 49, 62-63;
Solidbank Corporation v. Arrieta, G.R. No. 152720, February 17, 2005, 451
SCRA 711, 720; and Philippine Commercial International Bank v. Court of
Appeals, G.R. Nos. 121413, 121479 and 128604, January 29, 2001, 350
SCRA 446, 472.
39
 G.R. No. 157845, September 20, 2005, 470 SCRA 328, 347.
40
 Kilosbayan, Incorporated v. Morato, G.R. No. 118910, July 17, 1995, 246
SCRA 540, 559, citing People v. Pinuila, 103 Phil. 992, 999 (1958).
41
 237 Mo. 496, cited and quoted in Zarate v. Director of Lands, 39 Phil. 747,
750 (1919).
42
 Zarate v. Director of Lands, 39 Phil. 747, 750 (1919).
43
 Bachrach Motor Co.v. Esteva, 67 Phil 16 (1938).

The Lawphil Project – Arellano Law Foundation

CHAPTER 1 Commodatum 

Section 1 Nature of Commodatum

What right does the bailee acquire under a contract of commodatum

Will the bailee have the right to the fruits of the thing in commodatum?

Is the bailee obliged to pay compensation for the use of the thing in commodatum;
what is the effect of the obligation to pay compensation for the use of the thing in
commodatum;

ARTICLE 1935. The bailee in commodatum acquires the use of the thing loaned
but not its fruits;
if any compensation is to be paid by him who acquires the use,
the contract ceases to be a commodatum. (1941a) 

Notes
  Note – under Art. 1940, a stipulation allowing the bailee to enjoy the fruit shall be
valid; this is just an exception, not the rule; but the primary intention must still be
the use of the property not the enjoyment of the fruits;

May consumable goods be the subject of commodatum?

ARTICLE 1936.
Consumable goods may be the subject* of commodatum
if the purpose of the contract is not the consumption of the object,
as when it is merely for exhibition. (n) 
*Note that in this article, the law speaks of the thing as the “subject” of commodatum; in
Art. 1937, the law speaks of the thing involved as “object” of the contract of
commodatum;
Notes
 TF - A thing that is consumable in nature may properly be an object in a contract
of commodatum.

What kind of property may the object in commodatum be?

ARTICLE 1937.

Movable or immovable property may be the object* of commodatum. (n)

*Note that in this article, the law speaks of the thing as the “object” of commodatum, but
Art. 1936, the law speaks of thing in commodatum as “subject” commodatum.” The law
appears to use both terms in referreing to the thing involved in commodatum.
[Supposedly, the “subject” is the person or thing doing something; the doer of the action.
The “object” (direct object) the thing acted upon, having something done to it. There may
also be so-called “indirect object” – usually the recipient of the direct object.]

Notes
 Note the definition of movable and immovable property;

 Case – an owner of a parcel of land allowed it to be used by his brother who built a
warehouse thereon and occupied the lot for 30 years without payment of rental;
when the owner demanded for the return of the property, the brother refused to
return the property; among the issues raised is the absence of stipulation on the
 return of the property; the contract was deemed by the SC as commodatum;

 If no period was agreed upon for the use, when can the owner demand the return of
the thing?

Must the bailor be the owner of the object in commodatum?

Art. 1938 The bailor in commodatum need not be the owner of the thing loaned. (n)
 

Notes

 Why is the bailor not required to be the owner of the thing loaned;


TF - The bailor in commodatum or the creditor in mutuum need not be the owner
of the object lent because in both contracts there is afterall an obligation to return
on the part of the bailee or the debtor.

What is the character of commodatum (in terms of whether or not it is personal);

What is meant by or what is the effect of commodatum being purely personal in

character?

Art. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract; 

(2) The bailee can neither lend nor lease the object of the contract to a third person.

However, the members of the bailee's household may make use of the thing loaned,

unless

there is a stipulation to the contrary,

or unless the nature of the thing forbids such use. (n) 

Notes
 Under Art. 1178*, NCC, all rights acquired in virtue of an obligation are
transmissible; may the bailee allow the use of the object in commodatum by a third
person?

*Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary. (1112)

 A and B are bailees in a contract of commodatum, in case A dies, is the contract of

commodatum extinguished? No, unless there is a stipulation to the contrary;


TF - Death of either the bailor or the bailee in commodatum extinguishes the
contract. Thus, as a rule, where A and B are bailees in a contract of commodatum,
in case A dies the contract of commodatum is extinguished

 Who can use the object in commodatum?

Will a stipulation in a contract of commodatum which allows the bailee the use of
fruits be valid?
ARTICLE 1940.

A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n) 

Notes
 In commodatum, to whom does the fruits of the thing loaned belong? Why? As a
rule, the fruits of a property pertain to the owners;

See Article 441 NCC. To the owner belongs: (1) The natural fruits; (2) The
industrial fruits; (3) The civil fruits. (354)

 Is it possible in a contract of commodatum for the bailee to have a right to the fruits
of the thing loaned? [This is what Art. 1940 deals with as a matter of exception; the
primary intention must still be a contract of commodatum.]

 Problem: Without any compensation, A allowed B the possession and use of a

parcel of land in order that B may be able to cultivate the land and have a source of
income for the sustenance of B’s family. What contract is there between A and B?

TF - Without any compensation, A allowed B the possession and use of a parcel of

land in order that B may be able to cultivate the land and have a source of income
for the sustenance of B’s family. The contract between them is necessarily a
commodatum in view of the gratuitous possession and use of the property by B.

Sec. 2 Obligations of the Bailee 

What duty is imposed by law on the bailee under Art. 1941?

In a contract of commodatum, who is obliged to pay for the ordinary expenses for the
use and the preservation of the thing loaned?

ARTICLE 1941. The bailee is obliged to pay

for the ordinary expenses for

the use

and preservation of the thing loaned. (1743a) 

Notes
 Note that the bailee has the duty to return the identical thing delivered to him by the
bailor; thus, he is obliged to take care of the thins;

 In connection with the duty of the bailee to preserve the object in commodatum,
what is the degree of diligence required by law for the bailee to exercise?
 See Article 1163.  Every person obliged to give something is also obliged to take
care of it with the proper diligence of a good father of a family, unless the law or the
stipulation of the parties requires another standard of care.

 What if the expenses needed for preservation are not ordinary?

See rule ARTICLE 1949 [NCC] on ”extraordinary expenses”
The bailor shall refund the extraordinary expenses during the contract
for the preservation of the thing loaned,
provided the bailee brings the same
to the knowledge of the bailor before incurring them,
except when they are so urgent
that the reply to the notification cannot be awaited without danger. 

If the extraordinary expenses arise

on the occasion of the actual use of the thing by the bailee,
even though he acted without fault,
they shall be borne equally by both the bailor and the bailee,
unless there is a stipulation to the contrary. (1751a) 


TF - In the absence of a stipulation to the contrary , the bailee even though he
acted without fault will the liable for extraordinary expenses arising on the
occasion of the actual use of the thing by the bailee.

As a rule in obligations, who is liable for loss of the thing through a fortuitous event?

In commodatum, will the bailee be liable for loss of the thing loaned due to fortuitous
even?

ARTICLE 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event: 

[in the following instances there is improper conduct on the part of the bailee which makes
him liable for loss due to fortuitous event]
(1) If he devotes the thing to any purpose different from that for which it has been loaned;
[there is bad faith here]
(2) If he keeps it longer than
the period stipulated,
or after the accomplishment of the use for which the commodatum has been
constituted; [here, the bailee is guilty of mora or default]
(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; [here, the law presumes that the parties intended the bailee to
be liable for loss due to fortuitous event]

(4) If he lends or leases the thing to a third person, who is not a member of his
household; [here, bailee violates the pure personal character of commodatum; there is abuse
of trust];
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the
latter. [Bailee’s act in saving his own property instead of the property borrowed is deemed
equivalent to an act of ingratitude; bailee ignored the liberality of the bailor in choosing to
save his own property. (1744a and 1745)
Notes

TF - In consideration of commodatum being gratuitous in character, the bailee will
be liable for loss caused by fortuitous event.

 Under Art. 1174, NCC, “no person shall be responsible for those events which
could not be foreseen, or which though foreseen, were inevitable.

 Q? - A lent B his car without compensation to enable B to drive from Naga city to
Legazpi City and back. On the way back to Naga City, the car was hit by lightning
causing the total destruction of the car. Who shall be liable for the damage?

 Loss, def. – when it perishes, or goes out of commerce, or disappears in such a way
that its existence is unknown or cannot be recovered (Art. 1189);

Bailee is not liable for deterioration due to the use of the thing and without his fault

ARTICLE 1943.

The bailee does not answer for the deterioration of the thing loaned

due only to the use thereof and without his fault. (1746) 

Notes
 When is there deterioration of the thing loaned?

 Is the bailee liable for the deterioration of the thing loaned due only to the use
thereof and without his fault?
Can the bailee retain the thing loaned against the bailor on the ground that the bailor
owes the bailee something?

ARTICLE 1944.

The bailee cannot retain the thing loaned

on the ground that the bailor owes him something,

even though it may be by reason of expenses.

However, the bailee has a right of retention for damages mentioned in article 1951. (1747a) 
Notes
 Problem: A lent B his laptop, to be returned after a month. When A asked for the
return of the laptop, B refused to return it to A. According to B, he will not return it
to A unless A first pay B a loan granted by B to A which has remained unpaid for
over a year. A came to you for advice. What will you tell him?

 What if what the bailor owes the bailee is the reimbursement for expenses for which
the bailor is liable;

 What if it were for extraordinary expenses for the preservation of the thing loaned;

 Is there an instance when the bailee may rightfully refuse to return the thing
borrowed?

What is the reason why, as a rule, the bailee cannot retain the object in
commodatum? Why does the law not give the bailee a right of retention as a general
rule? Bailment implies a trust that the thing shall be returned to the bailor when the
time agreed upon has expired or when the purpose is accomplished;

TF - In a contract of commodatum, ownership of the thing delivered by the bailor
to the bailee is not transferred. Consequently, the bailee cannot have a right to
retain the thing against the bailor.
When there are two or more bailees to whom a thing is loaned in the same contract,
are they jointly or solidarily liable?

ARTICLE 1945.

When there are two or more bailees

to whom a thing is loaned

in the same contract,

they are liable solidarily. (1748a) 

Notes
 A and B borrowed C’s newly purchased car for a trip that A and B will take to
Manila. C initially hesitated to lend the car but later on reconsidered and allowed A
and B to use the car, telling them that the car is worth P1.5 million. On the way back
to Naga City, the car met an accident due to A’s reckless driving. C demanded for
the payment of the value of the car. Since A did not have any money, C demands
that B pay him P1.5 million. Can B be compelled to pay to C the entire amount
being demanded by C?


TF - X and Y borrowed W’s newly purchased stereo set for a party activity. W
initially hesitated to lend the set but later on reconsidered and allowed X and Y to
use the set, telling them that is worth P50 thousand. Due to X’s wrongful
handling of the set it got destroyed beyond repair. W demanded for the payment
of the value of the set. Since X did not have any money, W can demand that Y
pay him the total value of the object.

 Note, solidary obligation, where each one of the debtors is obliged to pay the entire
obligation (passive solidarity), and where each one of the creditors has the right to
demand from any of the debtors, the payment or fulfilment of the entire obligation
(active solidarity);

 Art. 1945 is an exception to the general rule on “joint obligations” that where there
are two or more debtors, who concur in one and the same obligation the obligation
shall be joint, see Art. 1207;

Arts. 1207
“The concurrence of two or more creditors or of two or more debtors
in one and the same obligation
does not imply that each one of the former has a right to demand,
or that each one of the latter is bound to render,
entire compliance with the prestations.
There is a solidary liability only
when the obligation expressly so states,
or when the law
or the nature of the obligation requires solidarity;”

and 1208 –
… presumed as divided into as many equal shares
as there are creditors or debtors, the credits or debts being considered distinct from
one another;