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INTRODUCTIONMEANING AND SCOPE OF CREDIT TRANSACTIONSCredit 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.TWO TYPES OF CREDIT TRANSACTIONS/ CONTRACTS OF SECURITY1. Secured transactions or...

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INTRODUCTION MEANING AND SCOPE OF CREDIT TRANSACTIONS 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. TWO TYPES OF CREDIT TRANSACTIONS/ CONTRACTS OF SECURITY

1. Secured transactions or contracts of real security – supported by a collateral or an encumbrance of property

2. Unsecured transactions or contracts of personal security – fulfillment by the debtor is supported only by a promise to pay or the personal commitment of another EXAMPLES OF CREDIT TRANSACTIONS 1. Bailment contracts 2. Contracts of guaranty and suretyship 3. Mortgage 4. Antichresis 5. Concurrence and preference of credits MEANING OF SECURITY Security (def). Something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of protecting some interest in property. KINDS OF SECURITY

1. Personal Security - when an individual becomes a surety or a guarantor 2. Property or Real Security – 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. BAILMENT Bailment (def). 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. To be legally enforceable, a bailment must contain all the elements of a valid contract, which are consent, object, and cause or consideration. However, a bailment may also be created by operation of law.

PARTIES IN BAILMENT

1. Bailor – the giver; the one who delivers the possession of the thing bailed 2. Bailee – the recipient; the one who receives the possession or custody of the thing delivered KINDS OF BAILMENT 1. For the sole benefit of the bailor Examples: gratuitous deposit and mandatum (bailment of goods where the bailee gratuitously undertakes to do some act with respect to the property)

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 Ex. My tito from the States makes padala a balikbayan box filled with spam through another relative who’s flying to the Philippines on vacation. It only benefits my tito (the bailor). Or, Helen deposits Polsci’s baby chair with the mysterious little guy who doesn’t smile in the bag depository counter outside the lib. In this case, only Helen benefits (based on a true story). 2. For the sole benefit of the bailee Examples: commodatum and gratuitous simple loan or mutuum  Ex. Xilca borrows my white blouse because she forgot to bring clothes to change from her Pasay City Jail outfit. Only Xilca is benefited, not me. Or, Xilca borrows P10 from me without interest. 3. For the benefit of both parties Examples: deposit for a compensation, involuntary deposit, pledge, bailments for hire  Ex. Ansky pawns her huge diamond earrings at Villarica Pawnshop. The pawnshop gives her P10,000 and a pawn ticket. Both parties benefit – Ansky gets fast cash, while the pawnshop gets to keep the huge diamond earrings to make sure that Ansky pays, and in case she doesn’t they can sell the earrings. 1 and 2 are gratuitous bailments. There is no consideration because they are considered more as a favor by one party to the other. Bailments under number 3 are mutual-benefit bailments, and they usually result from business transactions. BAILMENT FOR HIRE Bailment for hire arises when goods are left with the bailee for some use or service by him always for some compensation. KINDS OF BAILMENT FOR HIRE

1. Hire of things – goods are delivered for the temporary use of the hirer 2. Hire of service – goods are delivered for some work or labor upon it by the bailee 3. Hire for carriage of goods – goods are delivered either to a common carrier or to a private person for the purpose of being carried from place to place

4. Hire of custody – goods are delivered for storage

I. LOAN GENERAL PROVISIONS Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon 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. 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.

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ESSENTIAL ELEMENTS OF A CONTRACT Consent of the parties Object Cause or Consideration

IN THE CONTEXT OF A LOAN Borrower and Lender Property For the lender: right to demand the return of the thing For the borrower: acquisition of the thing

CHARACTERISTICS OF THE CONTRACT OF LOAN

1. A real contract – the delivery of the thing loaned is necessary for the perfection of the contract

2. A unilateral contract – once the subject matter has been delivered, it creates obligations on the part of only one of the parties (the borrower) CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN 1. As to the borrower: the acquisition of the thing 2. As to the lender: the right to demand its return or of its equivalent KINDS OF LOAN

1. Commodatum – where the lender delivers to the borrower a non-consumable thing so that the latter may use it for a certain time and return the identical thing

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. LOANS DISTINGUISHED FROM CREDIT Credit 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. Loan means the delivery by one party and the receipt by the other party of a given sum of money or other consumable thing upon an agreement to repay the same amount of the same kind and quality, with or without interest. Õ The concession of a credit necessarily involves the granting of loans up to the limit of the amount fixed in the credit. As opposed to debt, credit is a debt considered from the creditor’s standpoint. It is that which is due to any person.

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DISTINCTIONS BETWEEN COMMODATUM AND SIMPLE LOAN

SUBJECT MATTER

COMMODATUM Not consumable

OWNERSHIP GRATUITOUS?

Retained by the lender Gratuitous

PAYMENT BY BORROWER

Borrower must return the same thing loaned

KIND OF PROPERTY PURPOSE WHEN LENDER MAY DEMAND

Real or personal Temporary use or possession Lender may demand return of the thing before the expiration of the term in case of urgent need Suffered by the lender (since he is the owner)

LOSS OF THE THING

SIMPLE LOAN Money or other consumable thing Transferred to the borrower Default rule is that it is gratuitous BUT the parties may stipulate interest, in which case, it becomes onerous Borrower need only pay the same amt of the same kind and quality Personal only Consumption Lender may not demand return of the thing before the lapse of the term agreed upon Suffered by the borrower even if through fortuitous event

Õ In commodatum, if you do not return the thing when it is due, you will be liable for estafa because ownership of the property is not transferred to the borrower. Õ In loan, the borrower who does not pay is not criminally liable for estafa. His liability is only a civil liability for the breach of the obligation to pay. This is because in loan, ownership of the thing is transferred to the borrower, so there is no unlawful taking of property belonging to another. ACCEPTED PROMISE TO MAKE A FUTURE LOAN Borrower goes to Lender and asks if he could borrow P10K at 6% interest per annum. Lender says okay, I will lend you the money. This is an accepted promise to make a future loan. It is a consensual contract and is binding upon the parties. But is there a contract of loan at this point? No, because loan is a real contract and is perfected only upon delivery of the thing. FORM OF LOAN There are no formal requisites for the validity of a contract of loan except if there is a stipulation for the payment of interest. A stipulation for the payment of interest must be in writing.

CHAPTER 1 COMMODATUM Art. 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. KINDS OF COMMODATUM 1. Ordinary commodatum 2. Precarium – one whereby the bailor may demand the thing loaned at will

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NATURE OF COMMODATUM ÕCommodatum in simple terms is hiram – A agrees to lend his guard dog to his friend B for a week for free. B is entitled to use the dog for this period. At the end of the week, B must return the dog to A. If the dog gives birth while it is in the custody of B, the puppies (fruits) belong to A.

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 for a certain time. (So if the bailee is not entitled to use the thing, it is not commodatum but it may be a deposit.)

4. The subject matter is generally non-consumable real or personal property, though consumable goods may also be the subject of commodatum if the purpose is not the consumption of the object (ex. Display of a bottle of wine).

5. The lender need not be the owner of the thing loaned. It is enough that he has possessory interest in the thing or right to use it which he may assert against the bailee and third persons though not against the rightful owner. (Ex. A lessee may sublet the thing leased).

6. It is purely personal in character. The consequences of this are the following: a. The death of either party extinguishes the contract unless there is a contrary stipulation for the 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; or ii. if the nature of the thing forbids it.

7. The parties may stipulate that the borrower may use the fruits of the thing, but this must only be incidental to the use of the thing itself (because if it is the main cause, the contract may be one of usufruct).

OBLIGATIONS OF THE BORROWER

1. Liability for ordinary expenses – The borrower should defray the expenses for the use and preservation of the thing loaned.

2. Liability for loss of the thing – The general rule is the borrower is not liable for loss or damage due to a fortuitous event. The owner bears the loss. But in the following cases, the borrower is liable for loss through a fortuitous event:

a. if he devotes the thing to a purpose different from that for which it was loaned (bad faith)  this is a breach of the tenor of the obligation

b. if he keeps it longer than the period stipulated or after the accomplishment of the use for which the commodatum has been constituted (delay)

c. 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  this is equivalent to an assumption of risk;

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d. if he lends or leases the thing to a third person who is not a member of his household  also a breach of the tenor of the obligation;

e. if, being able to save either the thing borrowed or his own thing, he chose to save his own (ingratitude).

3. Liability for deterioration of the thing - The borrower is not liable for the ordinary deterioration or wear and tear of the thing that comes as a natural consequence of its use. This is borne by the lender. Reason: Because the lender retains ownership so he should bear the loss from ordinary deterioration. Also, because the purpose of commodatum is for the borrower to use the thing. Deterioration is a natural result of such use.

4. Obligation to return the thing loaned – The borrower must return the thing as soon as the period stipulated expires or the purpose has been accomplished. He cannot keep the thing as security for anything that the lender may owe him, except for a claim for damages suffered because of the flaws of the thing loaned. So for example, Xilca earlier won a bet with Cayo, as a result of which, Cayo owes her a tuna sandwich. Cayo loaned Alvin Ang’s Frisbee to Xilca for 10 days. At the end of the 10 days, Xilca cannot refuse to return Alvin Ang’s frisbee to Cayo and hold it hostage until Cayo delivers the sandwich. Why? Because Xilca’s obligation as a borrower is to return the thing after the period expires, and she cannot keep it as a security for anything that Cayo may owe her. Or, Xilca borrows Kim Chong’s car for 10 days. While the car is in Xilca’s possession, a tire explodes. Xilca has to buy a new tire for P3,000. At the end of the 10 days, Xilca refuses to return the car unless Kim Chong pays her the P3,000. Can Xilca refuse to return? No. In this case, Kim Chong owes Xilca P3,000 as an extraordinary expense for the preservation of the thing. But even if Kim Chong owes Xilca money in connection with the thing that he loaned, Xilca still cannot retain the car as security. Exception: If the thing loaned has hidden defects and the borrower suffers damages as a result of the hidden defect, the borrower can claim damages against the lender. Pending payment of the damages by lender to borrower, borrower can keep the thing as a security. (see discussion below)

5. Liability of two or more bailees – When there are two or more borrowers to whom a thing is loaned in one contract, there liability is solidary. OBLIGATIONS OF THE LENDER

1. Obligation to respect the duration of the loan – The lender cannot demand the return of the thing until after the expiration of the period or after the accomplishment of the use for which the commodatum was constituted. However, he may demand its return or temporary use if he should have urgent need of the thing.

2. Precarium – Precarium is a kind of commodatum where the lender may demand the thing at will. Precarium exists in the following cases: a.

If there is no stipulation as to the duration of the contract or to the use to which the thing loaned should be devoted

b.

If the use of the thing is merely tolerated by the lender

BUT, the lender may not demand the thing capriciously, arbitrarily, or whimsically, since this would give rise to an action on the part of borrower for abuse of right under Articles 19, 20, and 21. Sheryl IID 2002

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3. Right to demand return of thing for acts of ingratitude – If the borrower commits any of the acts enumerated in Art. 765 of the Civil Code, the lender may demand the immediate return of the thing from the borrower. (This applies to ordinary commodatum, since in precarium the lender can demand at will, subject to the provisions against abuse of right) 4. Obligation to refund extraordinary expenses

a. Extraordinary expenses for the preservation of the thing – The lender should refund the borrower the extraordinary expenses for the preservation of the thing, provided that the borrower informs the lender before incurring the expense, unless the need is so urgent that the lender cannot be notified without danger.

b. Extraordinary expenses arising from actual use of the thing – Extraordinary expenses arising on the occasion of the actual use of the thing shall be borne by the lender and borrower on a 50-50 basis, unless there is a contrary stipulation. 5. All other expenses are for the account of the borrower.

6. Liability for damages for known hidden flaws - Requisites: (F-HADD) a. b. c. d. e.

There is a flaw or defect in the thing loaned; The flaw or defect is hidden The lender is aware of the flaw The lender does not advise the borrower of the flaw The borrower suffers damages by reason of the flaw or defect

The lender is penalized for his failure to disclose a hidden flaw which causes damage because he is in a position to prevent the damage from happening. (HOT TIP) Example: Borrower borrows a 1970 Mitsubishi Lancer from Lender. Unfortunately, Lender forgets to tell borrower that the car has a tendency to overheat after 10 minutes. So Borrower drives, and after 10 minutes, the car stalls and overheats. Borrower opens the hood and sees lots of steam. He opens the radiator cap to put water inside. Radiator water scalds his face, and he suffers from burns. Can he claim damages from Lender and can he keep the car as security? No, because in this case, Buyer should have known. He was, at least, in a position to know that the car just might be prone to overheating since it was old already. And when he opened the hood and saw lots of steam, he should have known that if he opened the radiator, very hot water would spray out. He should have taken precautions when he opened the hood or he should have gone to a gas station or mechanic to have it fixed. But since he was negligent, he has only himself to blame for the damage caused. The defect was not really hidden since Borrower was in a position to know of it even if Lender did not inform him. Had he been more careful, he would not have been scalded. ABANDONMENT OF THING BY THE LENDER Can the lender tell Borrower: I don’t want to pay for the extraordinary expenses and damages that I owe you. Just keep the thing, and let’s forget about my obligation. No. The lender cannot exempt himself from the payment of the expenses or damages by abandoning the thing to the borrower. This is because the expenses and damages may exceed the value of the thing loaned, and it would, therefore, be unfair to allow the lender to just abandon the thing instead of paying for the expenses and damages.

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CHAPTER 2 SIMPLE LOAN OR MUTUUM DEFINITION Simple loan (def). A contract whereby one of the parties delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid. A simple loan involves the payment of the equivalent and not the identical thing because the borrower acquires ownership of the thing loaned. The term “return” is not used since the distinguishing character of the simple loan from commodatum is the consumption of the thing. CONSIDERATION What is the consideration in this kind of contract? The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan. NO CRIMINAL LIABILITY FOR ESTAFA FOR FAILURE TO PAY There is no criminal liability for failure to pay a simple loan because the borrower acquires ownership of the thing. FUNGIBLE AND CONSUMABLE THINGS Fungible things (def). Those which are usually dealt with by number, weight, or measure, so that any given unit or portion is treated as the equivalent of any other unit or portion. Those which may be replaced by a thing of equal quality and quantity. (ex. Rice, oil, sugar). If it cannot be replaced with an equivalent thing, then it is ...