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UNIVERSITY OF ASIA AND THE PACIFIC Institute of Law and Governance School of Law A COMPILATION OF BAR QUESTIONS AND SUGGESTED ANSWERS CREDIT TRANSACTION Semester AY 1 Contents CONTRACT OF LOAN...............................................................................................................

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UNIVERSITY OF ASIA AND THE PACIFIC Institute of Law and Governance School of Law

A COMPILATION OF BAR QUESTIONS AND SUGGESTED ANSWERS CREDIT TRANSACTION Semester AY 2018-2019

1 Contents CONTRACT OF LOAN....................................................................................................................................0 COMMODATUM..........................................................................................................................................3 SIMPLE LOAN.............................................................................................................................................10 DEPOSIT.....................................................................................................................................................20 PERSONAL SECURITY: GUARANTY AND SURETYSHIP.................................................................................27 REAL SECURITY..........................................................................................................................................29 REAL ESTATE MORTGAGE...........................................................................................................................38 PLEDGE......................................................................................................................................................55 LETTER OR CREDIT AND TRUST..................................................................................................................61 ANTICHRESIS..............................................................................................................................................67 CHATTEL MORTGAGE.................................................................................................................................71 FINANCIAL LEAESE.....................................................................................................................................87 ANTI MONEY LAUNDERING.......................................................................................................................89 BANK SECRECY LAW...................................................................................................................................91 FINANCIAL DISTRESS - INSOLVENCY...........................................................................................................95 TRUST RECEIPTS LAW..............................................................................................................................101 TRUST RECEIPTS LAW..............................................................................................................................109 WAREHOUSE RECEIPTS LAW...................................................................................................................110

CONTRACT OF LOAN 1996 BAR EXAMINATION TOPIC: SIMPLE LOAN

QUESTION:

In the province, a farmer couple borrowed money from the local merchant. To guarantee payment, they left the Torrens Title of their land with the merchant, for him to hold until they pay the loan. Is there a: a. Contract of pledge b. Contract of mortgage c. Contract of antichresis d. None of the above? Explain. SUGGESTED ANSWER : None of the above

a. In this case, there is no pledge. Under 2094 of the NCC, all movables, which are within commerce, may be pledged, provided they are susceptible of possession. If at all, there was a pledge of the paper or document constituting the Torrens Title, as a movable by itself, but not of the land, which the title represents.

b. There is no mortgage because no deed or contract was executed in the manner required by law for a mortgage (Arts. 2085 to 2092, NCC; 2124 to 2131, NCC). Specifically, under Article 2125, the law provides that it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

c. There is no contract of antichresis because no right to the fruits of the property was given to the creditor (Art. 2132 NCC). In this case, the farmer couple simply left the Torrens Title of their land for the latter to hold.

d. A contract of simple loan was entered into with security arrangement agreed upon by the parties, which is not one of those mentioned above.

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2013 BAR EXAMINATION QUESTION: Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment, Lito executed a chattel mortgage on a Toyota Avanza and a real estate mortgage on a 200square meter piece of property. (A) Would it be legally significant - from the point of view of validity and enforceability - if the loan and the mortgages were in public or private instruments? (6%) SUGGESTED ANSWER: As regards the loan, it is valid and enforceable whether it is in a public or a private instrument, but the same is not true if the contract involves mortgages. The laws do not require a contract of loan to be executed in a public instrument for its validity and enforceability. A contract of loan, once constituted, is binding between the parties. However, a mortgage on a personal property (in this case, the car) is required to be in a public instrument to bind third persons, not for it to be valid and enforceable. On the other hand, a real estate mortgage (in this case, the land) must be in a public instrument for its validity and enforceability by virtue of Article 1358 of the New Civil Code. Under the law, if the contract involves creation, transmission, modification or extinguishment of real rights over immovables, it must appear in a public instrument. Thus, a chattel mortgage is still valid and enforceable even if it is in a private instrument, but a real estate mortgage is validly constituted only if it is in a public instrument. Article 2125 of the New Civil Code provides that it is indispensable, that the document in which the mortgage appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The article further provides that the persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. Thus, unlike a simple loan or mutuum or a chattel mortgage, a contract of real estate mortgage, to be valid and enforceable, must be executed in a public instrument and must be recorded in the Registry of Property.

2 2016 BAR EXAMINATION QUESTION: B Bank, a large universal bank, regularly extends revolving credit lines to business establishments under what it terms as socially responsible banking and private business partnership relations. All loans that are extended to clients have a common "Escalation Clause," to wit: "B Bank hereby reserves its right to make successive increases in interest rates in accordance with the bank's adopted policies as approved by the Monetary Board; Provided that each successive increase shall be with the written assent of the depositor.” [a] X, a regular client of the bank, contends that the "Escalation Clause" is unfair, unconscionable and contrary to law, morals, public policy and customs. Rule on the issue and explain. (2.5%) [b] Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the right to make reasonable increases in interest rates in accordance with bank policies as approved by the Monetary Board; Provided, there shall be corresponding reasonable decreases in interest rates as approved by the Monetary Board." Would this be valid? Explain. (2.5%) SUGGESTED ANSWER: [a] The “escalation clause” is valid because each successive increase shall be with the written assent of the depositor. This stipulation does not violate the principle of mutuality of contracts and it would only have been void if the supposed consent is given prior to the increase in interest rate. [b] An escalation clause with a de-escalation clause is valid provided that the client’s consent is still secured prior to any increase in interest rate; otherwise, the escalation clause is void.

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COMMODATUM 1993 BAR EXAMINATION QUESTION: A, upon request, loaned his passenger Jeepney to B to enable B to bring his sick wife from Paniqui. Tarlac to the Philippine General Hospital in Manila for treatment. On the way back to Paniqui, after leaving his wife at the hospital, people stopped the passenger Jeepney. B stopped for them and allowed them to ride on board, accepting payment from them just as in the case of ordinary passenger Jeepney’s plying their route. As B was crossing Bamban, there was an onrush of Lahar from Mt Pinatubo, the Jeep that was loaned to him was wrecked. 1) What do you call the contract that was entered into by A and B with respect to the passenger Jeepney that was loaned by A to B to transport the latter's sick wife to Manila? 2) Is B obliged to pay A for the use of the passenger jeepney? 3) Is B liable to A for the loss of the Jeepney? SUGGESTED ANSWERS: 1) The contract is called "commodatum". Article 1933 of the New Civil Code provides: Commodatum is a contract by which one of the parties delivers to another something not consumable so that the latter may use it for a certain time and return it. In the case, A delivered his jeepney to B so that B may use it to bring his sick wife from Paniqui. Tarlac to the Philippine General Hospital in Manila for treatment. Therefore, there is commodatum. 2) No. Article 1933 of the New Civil Code provides that commodatum is essentially gratuitous. Therefore, B is not obliged to pay A for the use of the passenger Jeepney. 3) Yes. Article 1942 of the New Civil Code provides that the bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned. In the case, B devoted the thing to a purpose different from that for which it has been loaned. B allowed passengers to ride on board and accepted payment from them. Therefore, B would be liable for the loss of the Jeepney.

4 1998 BAR EXAMINATION QUESTION: 1. Distinguish usufruct from commodatum and state whether these may be constituted over consumable goods (2%) 2. Distinguish consensual from real contracts and name at least four (4) kinds of real contracts under the present law. (3%) SUGGESTED ANSWERS:

1. Usufruct is constituted by law, by contract, by testamentary succession, or by prescription (Art. 1933, Civil Code). Usufruct creates a real right to the fruits of another’s property, while commodatum creates only a purely personal right to use another’s property, and requires a stipulation to enable the bailee to “make use” of the fruits (Arts. 1939 & 1940, Civil Code).

Usufruct may be onerous while commodatum is always or essentially gratuitous (Arts. 1933 & 1935, Civil Code). The contract constituting usufruct is consensual, while commodatum is a real contract (perfected only by delivery of the subject matter thereof). However, both involve the enjoyment by a person of the property of another, differing only as to the extent and scope of such enjoyment (jus fruendi in one and jus ustendi in the other); both may have a subject matter either an immovable or a movable; and, both may be constituted over consumable goods (Arts. 574 & 1936, Civil Code).

A consumable thing may be the subject-matter of an abnormal usufruct but in a normal usufruct, the subject-matter may be used only for exhibition. A commodatum of a consumable thing may be only for the purpose of exhibiting, not consuming it.

2. Consensual contracts are those which are perfected by mere consent (Art. 1315, Civil Code). Real contracts are those which are perfected by the delivery of the object of the obligation. (Art. 1316, Civil Code). Examples of real contracts are deposit, pledge, commodatum and simple loan (mutuum).

5 2004 BAR EXAMINATION QUESTION Distinguish briefly but clearly between: mutuum and commodatum SUGGESTED ANSWER In commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. In mutuum, one of the parties delivers to another money or other consumable things, upon the condition that the same amount of the same kind and quality shall be paid. Commodatum is essentially gratuitous while mutuum may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Commodatum is purely personal in character; the death of lender or borrower extinguishes commodatum. The death of the lender does not extinguish the loan.

6 2005 Bar Examination QUESTION: Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the understanding that the latter could use it for one year for his personal or family use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount of P15,000.00. After using the vehicle for two weeks, Tito discovered that it consumed too much fuel. To make up for the expenses, he leased it to Annabelle. Two months later, Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while being driven by Tito, the van was accidentally damaged by a cargo truck without his fault. 1. Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%) 2. Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito? Explain. (2%) 3. Does Pedro have the right to retrieve the van even before the lapse of one year? Explain. (2%) 4. Who shall bear the expenses for the accidental damage caused by the cargo truck, granting that the truck driver and truck owner are insolvent? Explain. (2%) SUGGESTED ANSWER: 1. No. Z’s demand for the bank to re-convey X’s house to him or pay X’s loan plus interest is legally infirm for Z only has a personal right against X by virtue of their unregistered chattel mortgage. Z does not have a real right over X’s house and cannot defeat the bank’s claim as the latter’s mortgage was annotated on the Torrens Certificate of Title. Moreover, the classification of the house as movable property susceptible to chattel mortgage is only controlling for the parties involved, in this case X and Z, and the bank can rely on the clean title of the house and lot. Without the factual finding that the bank knew of or was grossly negligent in not inquiring about past transactions on X’s house, the bank is a mortgagee in good faith. Therefore, Z has no right of action against the bank as the latter had dealt with X in good faith and there is no privity of contract between Z and the bank. 2. Tito must also pay for the ordinary expenses for the use and preservation of the thing loaned. He must pay for the gasoline, oil, greasing and spraying. He cannot ask for reimbursement because he has the obligation to return the identical thing to the bailor. Under Article 1941 of the Civil Code, the bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. 3. No, Pedro does not have the right to retrieve the van before the lapse of one year. The parties are mutually bound by the terms of the contract. Under the Civil Code, there are only 3 instances when the bailor could validly ask for the return of the thing loaned even before the expiration of the period. These are when: (1) a precarium contract was entered (Article 1947); (2) if the bailor urgently needs the thing (Article 1946); and (3) if the bailee commits acts of ingratitude (Article 1948). Not one of the situations is present in this case. 4.Generally, extraordinary expenses arising on the occasion of the actual use of the thing loaned by the bailee, even if incurred without fault of the bailee, shall be shouldered equally by

7 the bailor and the bailee. (Art. 1949 of the Civil Code). However, if Pedro had an urgent need for the vehicle, Tito would be in delay for failure to immediately return the same, then Tito would be held liable for the extraordinary expenses.

8 2007 BAR EXAMINATION QUESTION: 1. The parties to a bailment are the: a) Bailor; b) Bailee; c) Commodatario; d) All of the above; e) Letters a and b

SUGGESTED ANSWER: e. Letters a and b

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

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2013 BAR EXAMINATION QUESTION AND SUGGESTED ANSWER IV. Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz delivered the car, Jose brought it to Mitsubishi Cubao for maintenance check up and incurred costs of P8,000. Seeing the car's peeling and faded paint, Jose also had the car repainted for P10,000. Answer the two questions below based on these common facts. IV. (1) After the bar exams, Cruz asked for the return of his car. Jose said he would return it as soon as Cruz has reimbursed him for the car maintenance and repainting costs of P 18,000. Is Jose's refusal justified? (1%) (A) No, Jose's refusal is not justified. In this kind of contract, Jose is obliged to pay for all the expenses incurred for the preservation of the thing loaned. (B) Yes, Jose's refusal is justified. He is obliged to pay forall the ordinary and extraordinary expenses, but subject to reimbursement from Cruz. (C) Yes, Jose's refusal is justified. The principle of unjust enrichment warrants the reimbursement of Jose's expenses. (D) No, Jose's refusal is not justified. The expenses he incurred are useful for the preservation of the thing loaned. It is Jose's obligation to shoulder these useful expenses. IV. (2) During the bar exam month, Jose lent the car to his girlfriend, Jolie, who parked the car at the Mall of Asia's open parking lot, with the ignition key inside the car. Car thieves broke into and took the car. Is Jose liable to Cruz for the loss of the car due to Jolie's negligence? (1%) (A) No, Jose is not liable to Cruz as the loss was not due to his fault or negligence. (B) No, Jose is not liable to Cruz. In the absence of any prohibition, Jose could lend the car to Jolie. Since the loss was due to force majeure, neither Jose nor Jolie is liable. (C) Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's consent, Jose must bear the consequent loss of the car. (D) Yes, Jose is liable to Cruz. The contract between them is personal in nature. Jose can neither lend nor lease the car to a third person

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11 SIMPLE LOAN

1988 BAR EXAMINATION

QUESTION A) Define alternative and facultative obligations B) Define joint and solidary obligations C) A, B, and C borrowed Php 12,000 from X. This debt is evidenced by a promissory note wherein the three bound themselves to pay the debt jointly and severally. However, according to the note, A can be compelled to pay only on June 15, 1964, while C can be compelled to pay only on June 15, 1966. One June 15, 1962, X made a demand upon A to pay the entire indebtedness but the latter paid only Php 4,000.00. Subsequently, because of A’s refusal to pay the balance, X brought an action against him for collection of the amount. Will such an action prosper? Reasons.

SUGGESTED ANSWER A) Alternative Obligations refer to those which comprehend several objects or prestations which are due, but the payment or performance of one of them would be sufficient. Facultative Obligations are those where only one object or prestation has been agreed upon by the parties to the obligation, but the obligor may render another in substitution. B) A joint obligati...