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1 CREDIT TRANSACTIONS INTRODUCTION Meaning and scope of credit transactions. (1) Credit transactions include 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. (2) By the use of credit, more exchanges are possib...

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CREDIT TRANSACTIONS INTRODUCTION Meaning and scope of credit transactions. (1) Credit transactions include 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. (2) By the use of credit, more exchanges are possible, persons are able to enjoy a thing today but pay for it later, and through the banking system, actual money transfer is eliminated by cancellation of debts and credits. (see Principles of Economics, 9th ed., by C.L. James, p. 130, Barnes & Noble College Outline Series.) (3) Credit transactions are really contracts of security. They are of two types: (a) Secured transactions or contracts of real security. — Those supported by a collateral or an encumbrance of property;1 and (b) Unsecured transactions or contracts of personal security. — Those the fulfillment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety. 1 The encumbrance is effected as follows: in pledge, by placing the movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of the interest and principal obligation. (Acme Shoe Rubber & Plastic Corp. vs. Court of Appeals, 260 SCRA 714 [1996].)

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COMMENTS AND CASES ON CREDIT TRANSACTIONS

(4) Bailment contracts, together with the other related subjects such as usury (Act No. 2655, as amended [The Usury Law].), the contracts of guaranty and suretyship, mortgage, antichresis, and concurrence and preference of credits (Arts.* 2236-2251.), all make up the so-called “credit transactions.” Meaning and kinds of security. The term security is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property. The security, as herein before intimated, may be personal security, as when an individual becomes a surety or a guarantor; or a property or real security, as when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss. Thus, a secured creditor is one who holds a security from his debtor for payment of the latter’s debts. (see Navoa vs. Court of Appeals, 251 SCRA 545 [1995].) Meaning of bailment. The word “bailment” comes from the French word “bailler,” meaning “to deliver.” It may be defined as the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. (3 R.C.L. 73.) Creation of bailment. In general, bailment may be said to be a contractual relation. To be legally enforceable, it must contain all the elements of a valid contract. (see Art. 1318.)

*Unless otherwise indicated, refers to article in the Civil Code.

INTRODUCTION

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It does not necessarily mean that an agreement is always necessary to create bailment. It may be created by operation of law. (see Art. 1996; 8 Am. Jur. 2d 950.) Parties in bailment. The parties to a bailment are the: (1) Bailor (Comodatario2). — the giver; the party who delivers the possession or custody of the thing bailed; and (2) Bailee (Comodante3). — the recipient; the party who receives the possession or custody of the thing thus delivered. Kinds of contractual bailment. There are several kinds of bailment creating different rights and obligations on the part of the bailor and the bailee although the different kinds are of the same general character. In every bailment, there is an obligation on the part of the bailee to restore the subject of the bailment in the same or in altered form or to account therefor. (Ibid., 189.) The classification is generally with reference to compensation under which bailments are divided into three heads, namely: (1) Those for the sole benefit of the bailor; (2) Those for the sole benefit of the bailee; and (3) Those for the benefit of both parties. Under the first kind belongs gratuitous deposit (Art. 1965.) and mandatum. The latter is a bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same; as simply to carry it, or keep it, or otherwise to do something with respect to it gratuitously. (see ibid., 910.) As regards the second group, we have commodatum and gratuitous simple loan or mutuum. (Art. 1933.)

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In Spanish law; commodans in Roman law. In Spanish law; commodatarius in Roman law.

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COMMENTS AND CASES ON CREDIT TRANSACTIONS

The third type includes deposit for a compensation (Art. 1965.), including involuntary deposit (see Arts. 1996[2], 1997, par. 2.), pledge (Arts. 2085, 2903.), and bailments for hire. The first two kinds are the gratuitous bailments. In such bailments, there is really no consideration for they are considered more as a favor by one party to the party benefited; but the law imposes definite obligations upon both the bailor and the bailee. The third kind, usually results from bailments involving business transactions. These bailments are known as mutual-benefit bailments. Kinds of bailment for hire. Bailment for hire (locatio et conductio) arises when goods are left with the bailee for some use or service by him and is always for some compensation. This specie of bailment has been subdivided as follows: (1) Hire of things (locatio rei). — where goods are delivered for the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.); (2) Hire of service (locatio operis faciendi). — where goods are delivered for some work or labor upon it by the bailee (i.e., contract for a piece of work, Art. 1713.); (3) Hire for carriage of goods (locatio operis mercium vehendarum). — where goods are delivered either to a common carrier (Art. 1732.) or to a private person for the purpose of being carried from place to place (see 6 Am. Jur. 180-182.); and (4) Hire of custody (locatio custodiae). — where goods are delivered for storage. (Arts. 1507-1520; Act No. 2137 [The Warehouse Receipts Law].) — oOo —

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I LOAN* (Arts. 1933-1961.) GENERAL PROVISIONS 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 ownerships of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)

Definition of contract of loan. The above provision defines two kinds of loan and gives their characteristics. Governing law. Like any other contract, the contract of loan is governed by the rules as to the requisites and validity of contracts in general. *Title XI, Book IV, Civil Code. 5

COMMENTS AND CASES ON CREDIT TRANSACTIONS

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Art. 1933

Our law formerly made a distinction between civil loans governed by the old Civil Code and commercial loans regulated by the Code of Commerce. This distinction has been abolished (see Art. 2270[2].) and all loans are now primarily governed by the applicable articles (Arts. 1933-1961.) in Title XI, Book IV, subject to its transitional provisions. (Arts. 2252-2269.) Title V, Articles 311-314 of the Code of Commerce which are the provisions on commercial loans are repealed. Characteristics of the contract. The contract of loan is: (1) a real contract because the delivery of the thing loaned is necessary for the perfection of the contract (Art. 1934; see also Art. 1316.); and (2) a unilateral contract because once the subject matter has been delivered, it creates obligations on the part of only one of the parties, i.e., the borrower. Cause or consideration in a contract of loan. In a contract of loan, the cause is: (1) as to the borrower, the acquisition of the thing; and (2) as to the lender, the right to demand its return or its equivalent. Kinds of loan. There are two kinds of loan, namely: (1) Commodatum. — where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for a certain time and return the identical thing; and (2) Simple loan or mutuum. — where the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality. A thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature, like rice, gasoline, money, fruit, firewood, etc. (see Art. 418.)

Art. 1933

LOAN General Provisions

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Commodatum and mutuum are Roman terms. Loans distinguished from credit. The credit of an individual means his ability 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. A loan (mutuum) means the delivery by one party (lender/ creditor), and the receipt by the other party (borrower/debtor) who become the owner, of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same amount of the same kind and quality, with or without interest. The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit.” (People vs. Concepcion, 44 Phil. 126 [1922].) Meaning of credit as opposed to debt. The term “credit,” in its usual meaning, is a sum credited on the books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment. It is the correlative to debt or indebtedness, and that which is due to any person as distinguished from that which he owes. (Republic vs. First National City Bank of New York, 3 SCRA 851 [1961].) It is a debt considered from the creditor’s standpoint. (Black’s Law Dictionary, 4th ed., p. 441.) It may consist of money, goods, or services. Loan distinguished from discounting of paper. To discount a paper is a mode of loaning money, with these distinctions: (1) In a discount, interest is deducted in advance (see Sec. 5, The Usury Law, infra.), while in a loan, interest is usually taken at the expiration of a credit; and

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COMMENTS AND CASES ON CREDIT TRANSACTIONS

Art. 1933

(2) A discount is always on a double-name paper,1 while a loan is generally, on a single-name paper.2 (People vs. Concepcion, 44 Phil. 126 [1922].) Thus, on a loan of P1,000.00 at 16% interest, the borrower would pay P1,160.00 at the end of the year. If the note is discounted, the interest is deducted from the principal in advance. The borrower would receive P840.00 but would pay back P1,000.00 at the end of the year. The P160.00 is called the discount and P840.00 is called the proceeds. Discounting is slightly more expensive for the borrower because interest is calculated on the amount loaned (P1,000.00) and not on the amount actually received. In general, discount and interest rates for similar loans are identical.3 (Principles of Economics, by C.J. James, supra, pp. 131-132.) ILLUSTRATIVE CASE: Credit was extended by PNB to a partnership, the only security required consisted of demand notes which were paid, together with interest, on maturity. Facts: By telegrams and a letter of confirmation to the manager of the branch of PNB (Philippine National Bank), C, President and member of the board of directors of PNB, authorized an extension of credit in favor of partnership X, of which the wife of C is a partner, in the amount of P300,000.00. The special authorization given was essential in view of prior memorandum order of C limiting the discretional power of the local manager to grant loans and discount negotiable documents to P5,000.00. Pursuant to the authorization by C, credit aggregating P300,000.00 was granted the firm, the only security required consisting of six (6) demand notes. The notes, together with 1 One on which two signatures appear with both parties liable for payment. (Webster’s 3rd New Int. Dictionary) 2 A promissory note with no indorsement other than the signature of the maker. (Ibid.) 3 A provision for the payment of rentals in advance with the lessee getting a rebate or discount cannot be construed as a repayment of a loan because there is no grant or forbearance of money. The difference between a discount and a loan or forbearance is that the former does not have to be repaid, while the latter is subject to repayment. (Herrera vs. Petrophil Corporation, 146 SCRA 385 [1986].)

Art. 1933

LOAN General Provisions

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the interest, were taken up and paid about two (2) months later. Under the law (Sec. 35, Act No. 2747.), the PNB “shall not directly or indirectly grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks.” Issues: (1) Was the granting of a credit of P300,000.00 to partnership X a loan within the meaning of Section 35 or only a concession of credit? (2) Were the demand notes signed by the firm a loan or a discount? Held: (1) The concession of a credit necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit.” (2) The demand notes signed by the firm were not discount papers but were mere evidences of indebtedness, because (a) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (b) they were single-name and not double-name paper. C violated the prohibition. (People vs. Concepcion, supra.)

Commodatum and mutuum (simple loan) distinguished. It is relatively simple to determine whether a given loan is commodatum or mutuum by bearing in mind the following principal points of distinction: (1) Commodatum ordinarily involves something not consumable (see Art. 1936.), while in mutuum, the subject matter is money or other consumable thing; (2) In commodatum, ownership of the thing loaned is retained by the lender (Art. 1933.), while in mutuum, the ownership is transferred to the borrower; (3) Commodatum is essentially gratuitous (ibid.), while mutuum may be gratuitous or it may be onerous, that is, with stipulation to pay interest; (4) In commodatum, the borrower must return the same thing loaned (ibid.), while in mutuum, the borrower need only pay the same amount of the same kind and quality;

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COMMENTS AND CASES ON CREDIT TRANSACTIONS

Art. 1934

(5) Commodatum may involve real or personal property (Art. 1937.), while mutuum refers only to personal property; (6) Commodatum is a loan for use or temporary possession (Art. 1935.), while mutuum is a loan for consumption; (7) In commodatum, the bailor may demand the return of the thing loaned before the expiration of the term in case of urgent need (Art. 1946), while in mutuum, the lender may not demand its return before the lapse of the term agreed upon; and (8) In commodatum, the loss of the subject matter is suffered by the bailor since he is the owner (Art. 1942; Art. 1174.), while in mutuum, the borrower suffers the loss even if caused exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay. It may also be said that while commodatum is purely personal in character (see Art. 1939.), mutuum is not so. Kinds of commodatum. Commodatum is divided into: (1) ordinary commodatum (Art. 1933.); and (2) precarium. — one whereby the bailor may demand the thing loaned at will. (see Art. 1947.) ART. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

Delivery essential to perfection of loan. The rule contained in the above article is a necessary consequence of the fact that commodatum and mutuum are real contracts which require the delivery of the subject matter thereof for their perfection.4 4 Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (n)

Art. 1934

LOAN General Provisions

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Delivery is necessary in view of the purpose of the contract which is to transfer either the use or ownership of the thing loaned. Binding effect of accepted promise to lend. It does not mean that a promise to lend would be without efficacy and judicial value. An accepted promise to make a future loan is a consensual contract5 and, therefore, binding upon the parties but it is only after delivery, will the real contract of loan arise. Thus: (1) Application for loan approved by corporation. — Where an application for a loan of money was approved by resolution of the corporation (lender) and the corresponding mortgage was executed and registered, there arises a perfected consensual contract of loan. While a perfect contract of loan can give rise to an action for damages, said contract does not constitute the real contract of loan. (Saura Import and Export Co., Inc. vs. Development Bank of the Phils., 44 SCRA 445 [1972]; see BPI Investment Corp. vs. Court of Appeals, 377 SCRA 117 [2002].) (2) Mortgage executed by virtue of loan granted. — Where the mortgage deed was executed for and on condition of the loan granted to the mortgagors, the fact that the latter did not collect from the mortgagee bank the consideration of the mortgage on the date it was executed but six (6) days later when the mortgagors and their co-maker signed the promissory note is immaterial. A contract of loan being consensual, it was perfected at the same time that the contract of mortgage was executed, the promissory note being only an evidence of an indebtedness and did not indicate lack of consideration of the mortgage at the time of its execution. (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983].)

5 Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)

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COMMENTS AND CASES ON CREDIT TRANSACTIONS

Art. 1934

(3) Only partial amount released under a loan agreement secured by mortgage. — Where a bank and a borrower undertook reciprocal obligations by entering an P80,000.00 loan agreement on April 28, 1965 when the borrower executed a real estate mortgage, but the bank was able to release only P17,000.00, the bank was held in default for P63,000.00 to the borrower. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other, and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay. (see Art. 1169.) Here, the promise of the borrower to pay, and he signified his willingness to pay when he execut...