Credit Transactions

I.                    Credit Transactions

A.      Credit, defined

-          It means the ability of an individual to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period

B.      Credit transactions, defined

-          It includes all transactions involving the purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future.

C.      Distinguished from Bailments, Secured Transactions

Bailment

-          The delivery of property of one person to another in trust for a specific purpose, with a contract, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it.

Security

-          Something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property.

D.      Scope of Credit Transactions

-          Bailment contracts

-          Guaranty and suretyship

-          Pledge

-          Mortgage

-          Antichresis

-          Concurrence and preference of credits

II.                  Loan

A.      Definition

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.

B.      Kinds of loan

	Commodatum	Simple Loan
Subject Matter	Not consumable	Money or other consumable thing
Gratuitous?	Essentially gratuitous	May be gratuitous or with stipulation to pay interest
ownerhsip	Retained by the lender	Passes to the borrower
Obligation of borrower	Borrower must return the same thing loaned	Borrower should pay the same amount of the same kind and quality
Kind of property	Real or personal property	Personal only
Purpose	Temporary use or possession	Consumption
When lender may demand	Before the expiration of the term in case of urgent need	May not demand the return of the thing before the lapse of the term agreed upon
Loss of the thing	Suffered by the lender	Suffered by the borrower even if through fortuitous event
Punishment (Do not return the thing)	Estafa	Civil liability for breach of the obligation to pay.

C.      Characteristics  of the contract of loan

1.       Real contract

The delivery of the thing loaned is necessary for the perfection of the contract.

2.       Unilateral

Once the subject matter has been delivered, it creates obligation on the part of only one of the parties (borrower).

                Nature of commodatum

1.       The bailee acquires the use of the thing but not its fruits, unless there is a stipulation to the contrary.

2.       It is essentially gratuitous

3.       The purpose of the contract is the temporary use of the thing loaned

4.       The subject matter is generally non-consumable real or personal property

5.       The lender need not be the owner of the thing loaned.

6.       It is purely personal in character.

a.       The death of either party extinguishes the contract unless there is a stipulation for commodatum to subsist until the purpose is accomplished.

b.      The borrower cannot lend or lease the thing to a third person. However, members of the borrower’s household may make use of the thing loaned except:

i.                     If there is a stipulation to the contrary;

ii.                   If the nature of the thing forbids it use.

Cases:

Catholic Vicar Apostolic vs CA

September 21, 1988

«  The bailee’s failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum.

Republic vs Bagtas

October 25, 1962

«  A contract of commodatum is essentially gratuitous. If the breeding fee be considered compensation, then the contract would be a lease of bull. Under Article 1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry o the contract. And even if the contract be commodatum, still the appellant is liable.

Saura Import & Export Co. Inc. vs Development Bank of the Phil.

April 27, 1972

«  Where an application for a loan of money was approved by resolution of the defendant corporation and the corresponding mortgage was executed and registered, there arises a perfected consensual contract of loan.

«  Extinguishment of obligations by mutual desistance. Mutuo disenso (Manresa) – which is a mode of extinguishing obligations. It is a concept that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.

Herrera vs Petrophil Corporation

December 29, 1986

«  The contract between the parties is one of lease and not of loan.

«  No usury where there was no money given by defendant to plaintiff, nor did it allow him to use its money already in his possession, and there was neither loan nor forbearance but a mere discount.

«  Discount vs loan or forbearance. Discount does not have to be repaid while loan or forbearance is subject to repayment and is therefore governed by the laws on usury.

«  Requirements to constitute usury:

1.       There must be loan or forbearance

2.       The loan must be of money or something circulation as money

3.       It must be repayable absolutely and in all events

4.       Something must be exacted for the use of the money in excess of and in and in addition to interest allowed by law.

«  Elements of Usury

1.       A loan, express or implied

2.       An understanding between the parties that the money lent shall or may be returned

3.       That for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be

4.       A corrupt intent to take more than the legal rate for the use of money loaned.

Integrated Realty Corporation vs PNB

June 28, 1989

D.      Subject Matter

Republic vs Court of Appeals

November 26, 1986

«  The Occupancy of the US Navy was not in the concept of owner. It partakes of the character of a commodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-in-interest. One’s ownership of a thing may be lost by prescription by reason of another’s possession if such possession be under claim of ownership, not where the possession is only intended to be transient.

Quintos and Ansaldo vs Beck

November 3, 1939

«  The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff.

«  Expenses for deposit of furniture. As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter’s demand, the court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant’s behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture because the defendant wanted to retain the three gas heaters and the four electric lamps.

«  The defendant was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff’s demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

Republic vs Grijaldo

December 31, 1965

«  The obligation of the appellant under promissory notes was not to deliver a determinate thing, namely, the crops to be harvested from his land, but to pay a generic thing – the amount of money representing the total sum of his loans, with interest. The chattel mortgage on the crops simply stood as a security for the fulfillment of appellant’s obligation covered by promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

E.       Rights and obligations of Bailor and Bailee

De los Santos vs Jarra

February 10, 1910

«  In  a contract of commodatum whereby one of the parties thereto delivers to the other a thing that is not perishable, to be used for a certain time and afterwards returned, it is the imperative duty of the bailee, if he should be unable to return the thing itself to the owner, to pay damages to the latter if, through the fault of the bailee, the thing loaned was lost or destroyed, inasmuch as the bailor retains the ownership thereof.

Mina vs Pascual

October 14, 1913

«  A sale of a land belonging to another, on which a building of the vendor’s is located, is null and void, for the vendor cannot sell or transfer property that does not belong to him.

Briones vs Cammayo

October 4, 1971

F.       Modes of Extinguishment

III.                Deposit

IV.                Guaranty and Suretyship

V.                  Provisions common to pledge and mortgage

Article 2085. The following requisites are essential to the contracts of pledge:

1.       That they be constituted to secure the fulfillment of a principal obligation;

2.       That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

3.       That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

VI.                Pledge

A.      In General

1.       Pledge

-          It is a contract by virtue of which the debtor delivers to the creditor or to third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all  the fruits and accessions.

2.       Kinds of Pledge

a.       Voluntary or conventional

It is created by the agreement of the parties.

b.      Legal

It is created by operation of law.

3.       Characteristics of pledge

a.       Real contract

It is perfected by the delivery of the thing pledged by the debtor/pledgor to the creditor/pledge, or to a third person by common agreement.

b.      Accessory contract

It has no independent existence of its own.

c.       Unilateral contract

It creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfillment of the principal obligation

d.      Subsidiary

The obligation incurred does not arise until the fulfillment of the principal obligation which is secured.

4.       Extent of Pledge

Unless there is stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. (Art 2102)

B.      Essential Requisites

1.       Article 2085

2.       That the thing pledged be placed in the possession of the creditor, or of third person by common agreement

Formal Requisites

No form but a pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (Art 2096)

Yuliongsu vs PNB

February 17, 1968

«  The pledge can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In this case, the pledgor is regarded as holding the pledge property merely as trustee for the pledge.

«  Constructive delivery is sufficient. The type of delivery will depend upon the nature and circumstances of each case.

Manila Surety & Fidelity vs Velayo

October 26, 1967

«  Sale of the thing pledged. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale.

C.      Rights and Obligations of the Pledgor (debtor or third person)

Rights of the Pledgor

1.       To demand the return in case of reasonable grounds to fear destruction or impairment of the thing without the pledgee’s fault, subject to duty of replacement

Requisites:

a.       Pledgor has reasonable grounds to fear destruction or impairment of the thing pledged;

b.      No fault on the part of the pledgee;

c.       Pledgor offers another thing which is of the same kind and quality as the former;

d.      Pledgee does not choose to exercise his right to cause the thing to be sold at public auction.

2.       To bid and be preferred at the public auction (Art 2113).

3.       To alienate the thing pledged provided the pledgee consents to the sale (Art 2097).

4.       To ask the thing pledged be deposited in one of the following cases:

a.       If the creditor uses the thing without authority (Art 2104).

b.      He misuses the thing

c.       The thing is in danger of being lost or impaired because of negligence or willful act of the pledge (Art 2106).

Pactum Commissorium

-          Stipulation whereby the thing used as security shall automatically become the property of the creditor in the event of non-payment of the principal obligation in due time.

-          The creditor would be able to acquire ownership of the property given as security without need of public sale or foreclosure required by law.

-          Requisites:

a.       There should be a pledge, mortgage or antichresis of property.

b.      There is a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment of principal obligation.

GR:         Pactum commissorium is forbidden by law and any stipulation to that effect is declared null and void.

Reason:        The amount of the loan is ordinarily less than the real value of the thing pledged or mortgaged.

XPN:      The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold (Art2112).

-          The creditor shall be obliged to give an acquittance to his entire claim and be considered as full payment of the claim.

Permissible stipulations:

1.       Subsequent modification of original contract

2.       Subsequent voluntary cession of property (Novation)

3.       Promise to assign or sell

4.       Authority to take possession of property upon foreclosure.

Obligations of the pledgor

1.       To advise the pledgee of the flaws of the thing.

2.       Not to demand the return of the thing until after full payment of the debt, including interest due thereon and expenses incurred for its preservation.

D.      Rights and Obligations of the Pledgee (Creditor)

Rights of the Pledgee

1.       Option to demand replacement or immediate payment of the debt in case of deception as to substance or quality.

2.       To sell at public auction in case of reasonable grounds to fear destruction or impairment of the thing without his fault (Art 2108)

3.       To bring actions pertaining to the owner or to defend it against third persons (Art 2103.2)

4.       To choose which of the several things pledged shall be sold

5.       To collect and receive amount due on credit pledged

6.       To bid at the public auction, unless he is the only bidder (Art 2113.2)

7.       To appropriate the thing in case of failure of the second public auction (Art 2112)

8.       To apply said fruits, interests or earnings to the interest, if any, then to the principal of the credit

9.       To retain excess value received in the public sale

10.   To retain the thing until full payment of the debt

11.   To be reimbursed for the expenses made for the preservation of the thing pledged

12.   To object to the alienation of the thing

13.   To possess the thing

14.   To sell at public auction in case of non-payment of debt

Obligations of the pledgee

1.       Take care of the thing with the diligence of a good father of a family and be liable for the loss or deterioration of such (Art 2099)

2.       Not to use the thing unless authorized by the owner or its preservation requires its use.

3.       Not to deposit the thing with a third person unless so stipulated

4.       Responsibility for acts of agents and employees as regards the thing

5.       To advise pledgor of danger to the thing

6.       To advise the pledgor of the result of the public auction

7.       To return the thing upon payment of debt

E.       Modes of Extinguishment of pledge

1.       Payment of the debt

2.       Sale of the thing pledge at public auction

3.       Appropriation (Art 2112)

4.       Return of the thing pledged by the pledgee to the pledgor (Art 2110)

5.       Statement in writing by the pledge that he renounces or abandons the pledge (Art 2111)

Indivisibility of pledge (Art 2089)

-          A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

VII.              Chattel Mortgage

A.      In General

1.       Definition and Purpose

Article 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is pledge and not a chattel mortgage.

2.       Characteristics of Chattel Mortgage

a.       Accessory contract

It is for the purpose of securing the performance of a principal obligation.

b.      Formal Contract

Registration in the Chattel mortgage Register is indispensable for its validity.

c.       Unilateral contract

It produces only obligations on the part of the creditor to free the thing from the encumbrance upon fulfillment of the obligation.

3.       Extent of Mortgage

a.       Coverage extends only to property described therein.

b.      Stipulation including after-acquired property

Where the after acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods.

B.      Essential Requisites

Formal Requisites

Affidavit of Good Faith

-          Oath in a contract of chattel mortgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the condition thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for purpose of fraud.

-          Purpose:

Transforming an already valid mortgage into preferred mortgage.

-          Effect of absence:

Its absence vitiates the mortgage only as against third persons without notice like creditors and subsequent encumbrances.

Not necessary for the validity of the chattel mortgage

Piansay vs David

October 30, 1964

«  Where the chattel mortgage and sale in favor of a party had been annulled in the decision in one case, which order became final and executor, it is held that said party is now barred from asserting against the same adverse party in another case that the said chattel mortgage and sale are valid.

«  Chattel mortgage on a house cannot bind third persons not parties to said contract.

Makati Leasing and Finance Corp vs Wearever Textile

May 16, 1983

«  Where the chattel mortgage is constituted on machinery permanently attached to the ground the machinery is to be considered as personal property and the chattel mortgage constituted thereon is not null and void, regardless of who owns the land.

«  The parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

«  Execution of chattel mortgage on machinery permanently attached to the ground is only an equitable ground for rendering the contract voidable provided that the mortgagor has not been benefited by the contract.

«  Return by mortgage creditor of property seized on replevin does not make moot and academic the action for judicial foreclosure where the return was expressly made to be without prejudice.

C.      Rights and Obligations of the Mortgagor (Debtor or Third person)

D.      Rights and Obligations of the Mortgagee (Creditor)

Northern Motors vs Coquia

December 15, 1975

«   

E.       Modes of Extinguishment

VIII.            Real Estate Mortgage

Lanuza vs De Leon

June 6, 1967

«  A conveyance of conjugal real property made by the husband without the wife’s consent is merely voidable.

«  Preference of credits: Unrecorded mortgage is inferior to recorded mortgage of a later date.

While a pacto de retro sale of a house, which is in reality an equitable mortgage, is valid between the parties, it cannot prevail over a subsequent recorded mortgage over the same property.

Preference of mortgage credits is determined by the priority of registration, following the maxim prior tempore, potior jure.

IX.                Antichresis

Article 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of interest, if owing, and thereafter to the principal of his credit.

A.      Characteristics o the contract

1.       Accessory

-          It secures the performance of a principal obligation.

2.       Formal contract

-          It must be in writing to be valid.

Antichresis	Pledge
Real property	Personal property
Perfected by mere consent	Perfected by the delivery of the thing pledged
Consensual contract	Real contract
Debtor loses control of the subject matter of the contract	Debtor loses control of the subject matter of the contract

Antichresis	Real Mortgage
The property is delivered to the creditor	The debtor usually retains possession of the property
The creditor acquires only the right to receive fruits of the property	The creditor has a real right over the property
The creditor is obliged to pay the taxes and charges upon the estate	The creditor has no such obligation
Application of the fruits to the payment of interest	None
Real Property	Real Property

Obligation of the antichretic creditor

1.       Payment of taxes and charges upon the estate

2.       Application of the fruits of the estate

Right of the antichretic debtor

1.       To comple the creditor to reacquire the property

Remedy of creditor in case of nonpayment of debt

1.       Action for specific performance

2.       Foreclosure of mortgage (R68)

X.                  Concurrence and Preference of Credit

A.      General Provisions

Concurrence of credits

-          Implies the possession by two or more creditors of equal rights and privileges over the same property or all of the property of the debtor.

Preference of credit

-          It is the right held by a creditor to be preferred in the payment of his claim above others out of the debtor’s assets.

Article 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law.

Exempt property

1.       Present property

-          Family home

-          The right to receive support

-          R39.13

2.       Future property

-          On account of the debtor’s insolvency

3.       Property in custodia legis and of public dominion

-          Those owned by municipal corporations necessary for governmental purposes

Article 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this code.

                By virtue of the above provisions, the Civil Code prevails in case of conflict with special laws on insolvency (Act No 1956, The Insolvency Law) unless otherwise provided.

Article 2238.

Exemption of conjugal partnership or absolute community of property

1.       The partnership or community subsists; and

2.       The obligations of the insolvent spouse have not redounded to the benefit of the family

Article 2239.

Rule involving undivided share or interest of a co-owner

                One of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets.

Article 2240.

Rule involving property held in trust

                Property held in trust by the insolvent debtor should be excluded from the insolvency proceedings.

B.      Classification of credits

General categories of credit

1.       Special preferred credits (Art 2241 and 2242)

2.       Ordinary preferred credits (Art 2244)

3.       Common credits (Art 2245)

Refectionary credit

-          It is primarily an indebtedness incurred in the repair or reconstruction of something previously made, such repair or construction being made necessary by the deterioration or destruction of the thing as it formerly existed.