CREDIT TRANSACTIONS • May be an express or implied contract
Key Notes and Lectures – Atty. Lerma • Parties to bailment—
Credit Transactions Book – De Leon (2013)
With Help from Notes by Mickey Ingles
INTRODUCTION
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
Credit transactions are usually contracts of security
• Security – something given, deposited or serving as means to
ensure the fulfillment or enforcement of an obligation or of
protecting some interest in property
Two Types of Credit Transactions
• Secured transactions or contracts of real security
o Supported by a collateral or an encumbrance of
property
o Ex. Pledge, mortgage, antichresis, etc.
• Unsecured transactions or contracts of personal security
o Secured or supported only by a promise to pay or the
personal commitment of another
o Ex. Guarantor/surety
Bailment
The delivery of property of one person to another in trust for a specific
purpose; returned when special purpose is accomplished
• With a contract, express or implied, that the trust shall be
faithfully executed & the property returned or duly accounted for
when the special purpose is accomplished or kept until the
bailor reclaims it
• Generally only involves personal or movable property
o BUT commodatum, a form of bailment, can involve
movable or immovable property
• May be by contractual relation or by operation of law
• “Bailment” is more specific & falls within the umbrella of “credit
transactions”
• No purchase is involved
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
(1) Bailor (comodatario) – the giver; the party who delivers
the possession or custody of the thing bailed
(2) Bailee (comodante) – the recipient; the party who
receives the possession or custody of the thing bailed
• In bailment, there is also involved a substantial measure of
control over the property, rather than just mere custody
Kinds of Contractual Bailment
(1) Those for the sole benefit of the bailor
• Gratuitous deposit
• Mandatum – bailment of gods without recompense
• Gratuitous, with obligations imposed by law
(2) Those for the sole benefit of the bailee
• Commodatum
• Gratuitous simple loan or mutuum
• Gratuitous, with obligations imposed by law
(3) Those for the benefit of both parties (mutual-benefit bailments)
• Deposit for a compensation
• Usually resulting from business transactions
• Ex. involuntary deposit, bailments for hire, pledge
Kinds of Bailment for Hire (locatio et conductio)
• Arises when goods are left with the bailee for some use or
service by him; always for some compensation
(1) Hire of things (locatio rei) – where goods are delivered for
the temporary use of the hirer (i.e., lease)
(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)
(3) Hire for carriage of goods (locatio operis mercium
vehendarum) – where 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 for custody (locatio custodiae) – where goods are
delivered for storage
Lerma’s Lectures
Bailment involves a specific purpose + return of the same thing or same
quantity of same kind of same type. It involves the duration & purchase;
thus, it’s more specific [than credit transactions]. There is no purchase
involved, only lending.
TITLE XI. 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 the condition
that the same amount of the same kind & 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.
Cause/Consideration in a Contract of Loan
• As to the borrower – the acquisition of the thing
• As to the lender – the right to demand its return or its
equivalent
2. Unilateral – once the subject matter has been delivered, it
creates obligations on the part of only one of the parties (i.e.,
the borrower)
Credit v. Loan
• Credit – ability to borrow money or things by virtue of the trust
or confidence reposed by the lender in the borrower that he will
pay as promised within a specified period
o The concession of a “credit” necessarily involves the
granting of “loans” up to the limit of the amount fixed in
the “credit”
• Loan (mutuum) – the delivery by one party & the receipt by the
other, the latter becoming the owner, of a given sum of money
or other consumable upon agreement that such will be repaid in
the same amount of the same kind & quality, with or without
interest
Credit v. Loan (Illustrative Example)
If bank gives you credit of P300,000, the bank believes that you have,
based on your money, assets, etc. that that is the extent of their trust in
your ability to pay them back. It helps them determine how much of a
loan they would be willing to grant you.
If bank gives you a loan of P300,000, the bank will loan you P300,000
and you may have to pay interest as well.

Two Kinds of Loan Credit v. Debt

1. Commodatum – the bailor will deliver to the bailee a non- • Credit – the sum credited on the books of a company to a
consumable thing so that the bailee may use it for a certain person who seems to be entitled to it; implies the ability to
time & return the identical thing make a promised payment
2. Simple loan or mutuum – the lender delivers to the borrower o Debt considered from the creditor’s standpoint
money or other consumable thing upon the condition that the • Debt – the amount owed by a debtor to his creditor
latter shall pay the same amount of the same kind & quality
• Consumable – when it is consumed when used in a Discount (mode of loaning money) Loan
manner appropriate to its nature or purpose (e.g. rice, Interest is deducted in advance Interest is usually taken at the
gas, money, fruitwood, etc.) expiration of the credit
Double-name paper – one in which Single-name paper – no
Characteristics of the Contract 2 signatures appear with both indorsement other than the
1. Real – delivery of the thing loaned is necessary for the parties liable for payment signature of the maker
perfection of the contract Slightly more expensive for the Interest is deducted at expiration
borrow, as interest is calculated on of the credit, making it cheaper

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

the loan & not on the amount People v. Concepcion
actually received • Facts: X is the President of PNB. He authorized an extension of
credit of P300,000 to a partnership which is 50% owned by his
Illustration: Discounting a Paper v. Loan wife. A law, however, states that as President of PNB he cannot
On a loan of P1,000 at 16% interest p.a. directly or indirectly extend loans to himself.
• If loan – the borrower would pay P1,160 at the end of the year. • Held: The extension of credit is essentially a loan. The
• If discounted – the interest is deducted from the principal in concession of a “credit” necessarily involves the granting of
advance & thus would only receive P840, needing to pay back “loans” up to the limit of the amount fixed in the “credit.”
P1,000 at the end of the year Though the loan was granted to a partnership partly owned by
o Discount – P160 his wife, it was still considered an indirect loan.
o Proceeds – P840
De los Santos v. Jarra
Commodatum Mutuum • Facts: X lent Y 10 1st class carabaos. Y died without ever giving
Subject Ordinarily involves Money or other consumable them bank. X sued Y’s estate.
Matter something not thing • Held: This is a contract of commodatum & X is entitled to the
consumable carabaos themselves or their value if the carabaos have died.
Ownership Retained by the lender Transferred to the borrower
Consideration Essentially gratuitous May be gratuitous, but may Art. 1934. An accepted promise to deliver something by way
also be onerous (with of commodatum or simple loan is binding upon parties, but
stipulated interest) the commodatum or simple loan itself shall not be perfected until the
Property May involve real or Only personal property delivery of the object of the contract.
Involved personal property
Possession Use or temporary Consumption Gratuitous Loan
possession If the loan promised is gratuitous, since there is no consideration, the
Demand May be before expiration Lender may not demand owner may terminate the arrangement, provided he acts in good faith, to
of the term in case of return before the lapse of protect his interest
urgent need the term agreed upon
Loss Suffered by bailor, since Borrower suffers the loss Accepted Promise to Lend has Binding Effect
he is the owner even if caused exclusively by An accepted promise to make a future loan is a consensual contract; it
a fortuitous event; he is NOT has binding effect upon the parties but it is only after delivery that the
discharged from duty to pay real contract of loan will arise
Personal Purely personal in Not purely personal
character Class Scenario
Q: X agrees to lend Y P100,000 and signs the promissory note and
Kinds of Commodatum hands it to Y. What is this contract between the two parties called?
A: There is a contractual relationship. It’s only an accepted promise to
• Ordinary commodatum
loan. But the accepted promise to loan will only turn into a real contract
• Precarium – one whereby the bailor may demand the thing
of loan only by delivery. BUT there is a contract & Y can ask for damages
loaned at will
if X does not deliver the P100,000.
Case Doctrines

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

Case Doctrines
Saura Import v. DBP
• Facts: X applied for a loan with DBP for the building of X’s
factory & for the purchase of machinery. X already bought the
machines under a letter of credit with Prudential. DBP approved
the loan via board resolution; however, it did so with the
promise that X’s goods would all be locally produced. The loan
would be secured by the mortgage on the factory & machinery
bought by X. Later, however, DBP found out that X could not
fulfill its requirements (i.e., that the items would be locally
produced) so X decided to cancel the mortgage. X failed to pay
Prudential & now wants to sue DBP for reneging on their
contract. DBP insists there was no contract.
• Held: There was a perfected consensual contract of loan. But
the parties mutually desisted, & by their mutual desistance, the
contract was extinguished. Thus, DBP cannot be held liable.
Naguait v. CA
• Facts: X loaned P100,000 from Y through a check. X paid Y
back with a check as well, with a mortgage attached. However,
X’s check bounced when Y tried to encash it. When Y made a
demand on X, X said he never encashed the check given by Y, &
thus could not be made liable. Y tried to foreclose on the
mortgage.
• Held: Y cannot foreclose, as the loan was not perfected. The
Civil Code provides that the delivery of checks shall produce the
effect of payment only when they have been cashed. It is only
after the checks have been produced the effect of payment that
the contract of loan may have been perfected.
CHAPTER 1. – COMMODATUM
Section 1. - Nature of 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.
Commodatum Essentially Gratuitous
If any compensation is to be paid by the borrow to acquire the use of the
thing, it becomes a lease contract; if the consideration is service, an
innominate contract will result
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• As a result, commodatum is not enforceable as contract
• Any agreement to lend property by way of commodatum at a
future time would be terminable at any time by the owner
without giving rise to action for damages
• Ex. When a borrower must pay a breeding fee for carabaos
borrowed, the contract is a lease
Extent of Bailor’s Right to Use
Right is limited to the thing loaned but not its fruits, unless the contrary
is stipulated
Purpose of the Contract
Temporary use of the thing loaned for a certain time
• If the bailee is not entitled to use the thing, the contract may be
a deposit
Case Doctrines
Republic v. Bagtas
• Facts: X borrowed 3 bulls from the government, for breeding
purposes, subject to a 10% breeding fee for 1 year. After 1 year,
X offered to buy the bulls at a discounted price, which the
government refused. The bulls then died in a Huk raid. X claims
he is not liable, since it was commodatum.
• Held: The contract is a commodatum, which ordinarily would
mean that the bailee is not liable for fortuitous events. But X is
liable, despite the occurrence being force majeure, because he
did not return the bulls at the expiration of the certain time
given.
Pajuyo v. CA
• Facts: X allowed Y to live in X’s house, as long as Y kept the
house clean & maintained it. X now wants Y out and he claims
that the contract between them was one of commodatum which
was a precarium—thus, the non-consumable thing (i.e., the
house) should have been demandable at will.
• Held: The fact that Y was tasked to keep the house clean &
maintain it is already considered a forbearance, which is
contrary to the essentially gratuitous nature of the contract of
commodatum; thus, this is no longer a commodatum contract,
but a contract of loan.
Lerma’s Lecture: The contract in Pajuya is actually a commodatum. It’s
technically use and preservation of the property (recall that ordinary
expenses is charged to the bailee in a commodatum). Any bailee in a
commodatum needs to maintain the property. If X lends Y an iPad, Y is
supposed to take care of it so that the iPad does not break and is kept
well. BUT for the purposes of THE BAR, Pajuyo v. CA still prevails.
Art. 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.
Case Doctrines
Producers Bank v. CA
• Facts: X approached Y, claiming he needed help to get his
business incorporated. X needed Y to put some money in the
bank under his & Y’s account, so that X would be able to show
authorities that he had money in the bank enough to
incorporate. Y agreed, using a check to make the deposit.
However, when Y checked the account again, X had already
withdrawn all the money.
• Held: The contract was one of commodatum though it involved
a consumable thing, because the money was meant only for
exhibition, as per the agreement of X & Y. Y thus had no right to
use the money & must now pay X.
Lerma’s Lecture: In this case, X lent P200,000 via check. Was Y tasked
to return the exact same check? No. So is the case correct? NO,
because what was asked to be returned was not actually the original
money given.
WHEN YOU INCORPORTE, one of the incorporators, X, will be asked to be
a treasurer-in-trust. Said incorporator X will deposit money for the
account on his name and also on the name of the corporation. That
amount deposited cannot be touched until the SEC will look into the
account and verify WON the amount is there. If the amount is there, SEC
will approve the incorporation. That was the initial purpose of lending
the money.
Art. 1937. Movable or immovable property may be the object
of commodatum.
Subject Matter of the Contract
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Generally non-consumable things, whether real or personal
• Real property & commodatum – when a person allows another
to build a warehouse on his land so that the latter may use the
property for a certain period without payment of rentals
o If not time for use is specified, the contract is a
precarium
o If rental is paid, the contract is a lease1
• If the purpose of the contract is not the consumption of the
object but just the exhibition of it, consumable goods may be
the subject of commodatum
Art. 1938. The bailor in commodatum need not be the owner of the
thing loaned.
Bailor Need Not be Owner
It is sufficient that the bailor has such possessory interest in the subject
matter or right to its use which he may assert against the bailee & third
persons although not against the rightful owner
• A lessee of a thing or a usufructuary may lend the thing
• A lessee may sublet the thing leased, where there is no express
prohibition in the lease contract
• BUT the bailee or borrower himself MAY NOT lend or lease the
thing loaned to him to a third person
Class Scenario
Q1: X lent Y an iPad on commodatum. It turns out that X is not the
owner, but Z is. Is the relationship between X & Y still a commodatum?
A: YES.
Q2: What if X stole the iPad from Z, who should Y return the iPad to &
why?
A: Z, because X never obtained possessory interest.
Art. 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the
contract;
1 Art. 1643. In the lease of things, one of the parties binds himself to give another r the
enjoyment or use of a thing for a price certain, & for a period which may be definite or
indefinite. However, no lease for more than 99 years shall be valid.
 (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.
Commodatum: Purely Personal in Character
Art. 1393 lists an exception to the general rule that all rights acquired by
virtue of an obligation are transferable.
• Unlike mutuum, commodatum is purely personal, the lender
considering the character, credit & conduct of the borrower
• BUT if there are 2 or more borrowers, the death of one does not
extinguish the contract in the absence of stipulation to the
contrary
Right of the Bailee to Lend the Thing Loaned to Third Persons
General Rule: The bailee can neither lend nor lease the object of the
contract to a third person, unless:
(1) There is stipulation to the contrary; or
(2) The use of the thing loaned is extended to just members of the
household (who are not considered third persons), EXCEPT—
a. If there is stipulation to the contrary; or
b. Of the nature of the thing forbids such use (e.g. dress)
Class Discussion
Practical perspective: Why is commodatum purely personal in
character? Because the bailor takes personal characteristics of the
bailee into consideration before he entrusts the thing & because it’s for
free.
Members of the household pertain to your actual family members; yet
this is actually an arguable idea.
Class Scenarios
Q1: X lends Y an antique sword. Y’s son starts playing with said antique
sword. Did Y violate the commodatum?
A: YES, because the nature of the thing would forbid Y from allowing the
son to use it.
Q2: X is a dentist. Y, also a dentist, lends X a dentist chair to be used in
X’s home clinic. Can members of the family use the dentist chair?
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
A: NO. The nature of the dentist chair does not allow people who are not
dentists to use the chair.
Art. 1940. A stipulation that the bailee may make use of the fruits of the
thing loaned is valid.
Use of Fruits
General Rule: The bailee is entitled to only the use of the thing loaned &
not its fruits
• Ex. Where an animal is the thing loaned, its young subsequently
born are not included in the contract, & belong to the bailor
• EXCEPT – If there is stipulation to the contrary
BUT: The right to the enjoyment of the fruits must only be incidental to
the use of the thing, otherwise the contract may be a usufruct.
SECTION 2. - Obligations of the Bailee
Art. 1941. The bailee is obliged to pay for the ordinary expenses for the
use & preservation of the thing loaned.
Liability for Ordinary Expenses
The borrower must take good care of the thing with the diligence of a
good father of a family.
• Ex. If B borrows the car of L, B must pay for the gas, motor oil,
washing, etc. B cannot demand reimbursement for such
expenses.
Class Scenario
Q1: X lent Y his iPhone to Y. What does Y have to pay for?
A: The “load” that Y will use or whatever billings.
Q2: What if Y decides to bejewel the iPhone, must X pay?
A: NO. This is not an expense for use or preservation.
Art. 1942. The bailee is liable for the loss of the thing, even if it should
be through a fortuitous event: (DKALS)
(1) If he Devotes the thing to any purpose different from that for
which it has been loaned;
(2) If he Keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted;
 (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;
(4) If he Lends or leases the thing to a third person, who is not a
member of his household;
(5) If, being able to Save either the thing borrowed or his own thing,
he chose to save the latter.
General Rule
Bailee is NOT liable for loss or damage due to a fortuitous event.
• EXCEPT as listed in Art. 1942
Class Scenarios
Q1: X lends Y an iPhone, but also gives Y the receipt showing how much
the iPhone cost.
A: This is appraisal.
Q2: X lends Y an iPhone six months ago. It was supposed to be returned
tomorrow, but today it was struck by lightning. When it got struck by
lightning, Y was using it himself. BUT yesterday, Y let her yaya use it. Is Y
liable to pay for the iPhone because Y let her yaya use it even if the
phone was destroyed in Y’s possession and not her yaya’s?
A: YES. WON the thing was destroyed while in someone else’s
possession, the trust was violated.
Art. 1943. The bailee does not answer for the deterioration of the thing
loaned due only to the use thereof & without his fault.
Ordinary Wear & Tear
Depreciation caused by the reasonable & natural use of the thing is
borne by the bailor, unless there is stipulation to the contrary.
• BUT the bailee is liable if:
o He is guilty of fraud or negligence; or
o He devotes the thing to any purpose different from that
for which it has been loaned
Class Scenario
Q: If X lent Y a phone and Y returned it but there were minor scratches.
Is Y liable?
A: NO. That’s just ordinary wear and tear.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Art. 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 Art. 1951.
Obligation to Return the Thing Loaned
General Rule: The borrow has no right to retain the thing loaned as
security for claims he has against the lender, even though they may be
by reason of extraordinary expenses
• EXCEPT – when it is kept for a claim for damages suffered
because of flaws of the thing loaned
Effect of Failure to Return or Adverse Claim of Bailee
• Mere failure to return the subject matter of the commodatum to
the bailor does not constitute adverse possession on the part of
the bailee who holds the same in trust
• Declaring lots that were just borrowed from another for tax
declaration purposes can be considered an adverse claim
which cannot, however, ripen into title through ordinary
acquisitive prescription
Right of Retention for Damages
The bailee’s right extends no further than to retention of the thing
loaned until he is reimbursed for the damages suffered by him.
• Bailee cannot lawfully sell the thing to satisfy the damages
Class Scenarios
Q1: X lent Y his phone for 6 months. Prior to the lapse, Y lent X money,
due one day before the phone was supposed to be returned to X. X did
not pay and it is now the time that Y must return the phone to X. Must
the phone still be returned?
A: YES.
Q2: X lent Y his phone. Suddenly the phone exploded. Who pays for the
exploding phone?
A: X, because it’s an extraordinary expense.
Art. 1945. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily.
 SECTION 3. - Obligations of the Bailor
Art. 1946. The bailor cannot demand the return of the thing loaned till
after the expiration of the period stipulated, or after the accomplishment
of the use for which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor.
Instances Where the Thing Loaned is Returned (PAPUA)
(1) After the Period of time agreed upon has passed
(2) Accomplishment of purpose for which the thing was loaned
(3) Precarium – when possession of the thing is by tolerance or
there is no time or purpose specified for the thing
(4) Urgent need – suspends the commodatum
(5) Acts of ingratitude are committed by the borrower
Obligation to Respect Duration of Loan
Primary obligation of bailor: to allow the bailee to use the thing loaned
for the duration of the period stipulated or until the accomplishment of
the purpose for which the commodatum was constituted
• He is bound by the terms of the commodatum, which is for a
certain time
• BUT the bailor may demand the return or temporary use of the
thing, which may be permanent or temporary, if he has urgent
need for it or the bailee commits acts of ingratitutde
Art. 1947. The bailor may demand the thing at will, & the contractual
relation is called a precarium, in the ff. cases: (DUTO)
(1) If neither the Duration of the contract nor the Use to which the
thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely TOlerated by the owner.2
Precarium
A kind of commodatum where the bailor may demand the thing at will
• A contract where the owner of a thing, at the request of another
person, gives the latter the thing for use as long as the owner
shall please
2 De Leon: Owner here should be bailor.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• Thing is subject to revocation by the bailor at any time, whether
or not the use for which the thing has been loaned has been
accomplished
• As opposed to ordinary commodatum, where possession of the
bailee is more secure & depends on the expiration or the period
agreed upon or the accomplishment of the purpose
Case Doctrines
Mina v. Pascual
• Facts: X let Y, his brother, use his land. Y built a warehouse on
X’s land. Both of them died. Meanwhile, one of Y’s heirs sold a
portion of the lot.
• Held: This is not a commodatum because there was no specific
period given for the lending of the thing.
• General Commentary of Legal Scholars: This is actually a
commodatum, & it’s a precarium.
Quintos v. Beck
• Facts: X leased Y his house. In the terms of the lease, X allowed
Y to make use of the furniture inside the home, as long as Y
returned the furniture upon X’s demand. When the period of the
lease ended, X sold the lot to Z, & told Y to surrender all the
furniture. Y said OK, but also said he wanted to keep some
heaters & lamps. Furthermore, Y said that X could just swing by
and pick them up.
• Held: The contract, being one of precarium, meant the furniture
was demandable at will & Y should have given them all back,
completely, to X, at the latter’s house. Y did not comply with this
obligation when he merely placed the things at the disposal of X
without physically returning them.
Art. 1948. The bailor may demand the immediate return of the thing if
the bailee commits any act of ingratitude specified in Art. 765.
Art. 765: Acts of Ingratitude (OIR)
(1) If the bailee should commit Offenses against the person, the
honor or the property of the bailor, or of his wife, or children
under his parental authority
(2) If the bailee Imputes to the bailor any criminal offense, or any
act involving moral turpitude, even though he should prove it,
 unless the crime or act has been committed against the bailee
himself, his wife or children under his authority
(3) If the bailee unduly Refuses the support when the bailee is
legally or morally bound to give support to the bailor
Applies in Ordinary Commodatum
In the case of precarium, the bailor can always demand the thing at will.
Art. 1949. 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 & the bailee, unless there is a
stipulation to the contrary.
Extraordinary Expenses for Preservation
The expenses will be borne by the bailor (e.g., expenses for repairing a
borrowed house damaged by a typhoon)
• If incurred by the bailee, the bailor must refund them provided
the bailee brings the same to the knowledge of the bailor before
incurring them
• Notice is required as bailor has the discretion to decide what
can be done with his property
o EXCEPT when they are so urgent that the reply cannot
be awaited without danger
• The right of the bailee to reimbursement is subject to the 2nd
par. of Art. 1949.
Extraordinary Expenses Arising from Use
The bailor & bailee bare the amount on a 50-50 basis when the
expenses caused by a fortuitous event arise on the occasion of the
actual use of the thing loaned (i.e., a borrowed jeep was damaged in a
collision)
• BUT the parties, by stipulation, may provide for a different
arrangement
Extraordinary Expenses Ordinary Expenses
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Not ordinarily needed for use & preservation Use & preservation
Borne by bailor Borne by bailee
Art. 1950. If, for the purpose of making use of the thing, the bailee
incurs expenses other than those referred to in Art. 1941 & 1949, he is
not entitled to reimbursement.
No Obligation for Bailor to Assume Other Expenses
All other expenses are to be borne by the bailee for the purpose of
making use of the thing (e.g., an extra tire on reserve for a trip) which
are not actually necessary for use & preservation are to be borne by the
bailee, including expenses for ostentation
Art. 1951. The bailor who, knowing the flaws of the thing loaned, does
not advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof.
Requisites for Liability to Pay Damages for Known Hidden Flaws
(FHANS)
(1) There is a Flaw or defect in the thing loaned;
(2) The flaw or defect is Hidden;
(3) The bailor is Aware thereof;
(4) He does Not advise the bailee of the same; &
(5) The bailee Suffers damages by reason of said flaw or defect
Liability of Bailor
The bailor is made liable for his bad faith, like a pledgor.
• The bailee is given the right of retention until he is paid
damages
• BUT where bailor does not know of the flaw, he cannot be held
liable
Art. 1952. The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the bailee.
CHAPTER 2. – SIMPLE LOAN OR MUTUUM
Art. 1953. A person who receives a loan of money or any other fungible3
3 For purposes of this class, this is the same as a consumable.
thing acquires the ownership thereof, & is bound to pay to the creditor • WON a thing is consumable depends on its nature
an equal amount of the same kind & quality. • WON a thing is fungible depends on the intent of the parties
• Ex. Wine is consumable by nature, but it is non-fungible if the
Simple loan or mutuum intention is to use it merely for display or exhibition
A contract whereby one party delivers to another money or other
consumable thing with the understanding that the same amount of the Case Doctrines
same kind & quality will be paid Republic v. Grijaldo
• Implies the return of the equivalent only, & not the identical • Facts: X obtained crop loans from the bank—these are loans of
thing money which are secured by mortgaged crops growing on X’s
• The borrower acquires ownership of the thing loaned land. Before X could pay the loans, however, WW2 came & his
• A loan of money, however, may be payable in kind crops were destroyed during the war. X now claims his
• The use of the word “to pay” implies consumption of the thing obligation to pay the loan was extinguished via force majeure.
loaned • Held: X is still liable to pay the loan to the bank. In an obligation
• May include the accessory duty of paying interest to deliver a generic thing, the loss or destruction of anything of
• Bilateral – the promise of borrower to pay is the consideration the same kind does not extinguish the obligation. Money is
giving rise to the obligation of the lender to furnish the loan consumable & generic, thus, it can never be destroyed by
fortuitous event. Furthermore, the crops were just the securities
Rent Simple Loan on the loan, not the loan itself.
Ownership Delivery of something Delivery of money or
non-consumable, to be some other consumable Martinez v. Ramos
used by the borrower & thing to another with a • Facts: X lent Y money. The document evidencing Y’s loan said, “I
returned to the lender; promise to repay the have received P3,000 from X which I will return in 3 years.” Y,
the owner simply loses equivalent amount of however, did not want to pay when X made a demand. Y
control over the property the same kind or claimed that the money was actually used to finance his
but does not loser quality; loses ownership parents’ business, & he only signed on their behalf.
ownership • Held: Y must pay X back. Whatever contract Y had with others
Relationship Landlord-tenant Obligor-obligee did not change the nature of his debt to X, given that an
Compensation Owner of the thing Creditor receives obligation is binding between the parties that agree to it, & do
receives compensation payment for his loan not involve third parties not privy to the contract. Further, The
or price either in money, contract states that Y, and nobody else, will return to X the
chattel, provisions from money. Obligations arising from contracts have legal force
the occupant in return between the contracting parties & must be fulfilled in
for its use accordance with their stipulations.

Fungible Things Art. 1954. A contract whereby one person transfers the ownership of
Things which are usually dealt with by number, weight or measure such non-fungible things to another with the obligation on the part of the
as rice, oil, sugar, etc. so that any given unit or portion is treated as the latter to give things of the same kind, quantity, & quality shall be
equivalent of any other unit or portion considered a barter.

Fungible v. Consumable Barter

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

Under Art. 1954, barter pertains to the transfer of ownership of a non- o A check is not legal tender & cannot constitute valid
fungible thing; however, there are other definitions of barter which tender of payment
include fungible things, but which are covered by different provisions in • Loan of fungible thing – If what was loaned was a fungible thing
the Civil Code (i.e., Art. 1638) other than money, the borrower must pay the lender another:
(1) Another thing of the same kind, quality & quantity; if
Barter Loan this is impossible—
Subject Matter Non-fungible (non- Mutuum – money or other (2) The borrower shall pay for its value at the time of the
consumable) things fungible thing perfection of the loan
Thing Returned The equivalent of the Commodatum – bailee is • Ex. D borrowed from C 2 sacks of rice of a
thing is given in return bound to return the certain kind & quality. At the time the loan was
for something received identical thing borrowed perfected, the price of each sack was P1,400.
Consideration Always onerous; Mutuum – may be If the rice is not available for some reason on
technically a mutual gratuitous due date, D should pay C P2,800 for the 2
sale Commodatum – always sacks.
gratuitous
Art. 1956. No interest shall be due unless it has been expressly
Art. 1955. The obligation of a person who borrows money shall be stipulated in writing.
governed by the provisions of Art. 1249 & 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes Requisites for Charging Interest (EWL)
another thing of the same kind, quantity & quality, even if it should (1) The payment of interest must be Expressly stipulated
change in value. In case it is impossible to deliver the same kind, its (2) The agreement must be in Writing
value at the time of the perfection of the loan shall be paid. (3) The interest must be Lawful

Form of Payment Types of Interest

Object of simple loan may be either money or consumable or fungible
thing
• Loan of money – payment must be in the currency stipulated, if
it is possible to deliver such currency
o If not, it is payable in the currency which is legal tender
in the Philippines
o In case of extraordinary inflation or deflation, the basis
of payment will be the value of the currency at the time
of the creation of the obligation
§ Ex. D borrowed P50,000 from C, payable in 5
years. At maturity, value of the P50,000
dropped to P25,000 due to deflation.
In this case, the basis for payment will be the
equivalent of the currency 5 years ago & D will
be liable to pay C P100,000, unless there is
agreement to the contrary
• Monetary interest – compensation for the use of money, as
agreed by the parties; must be stipulated in writing
• Compensatory interest – imposed by law or by the courts as
penalty or indemnity for damages; may be granted despite
absence of stipulated interest
Existence of Stipulation to Pay Interest
• If a particular interest rate has been stipulated by the parties,
that interest, not the legal rate of interest, shall be applied
• If the exact rate of interest is not mentioned but the parties
agreed that there would be interest, the legal rate of 6% shall
be payable
• No increase in interest shall be due unless the increase has
also been expressly stipulated

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

 • Sales invoices or slips issued by a store to customers, stating
interests & attorney’s fees, do not constitute express stipulation
without the signature of the obligor
o Obligor would only be liable for 6% interest under Art.
2209 if he incurs in delay
• It is only in contracts of loan, with or without security, that
interest may be stipulated & demanded
• Extending the loan does not equate to extending the application
of interest on said loan past the original maturity date, unless
the parties again so stipulate
• Choosing to buy a lot by installment necessarily entails paying
the interest, whether paying interest is disclosed in the contract
or not
Liability for Interest in the Absence of Stipulation
• Indemnity for damages – under Art. 2209, if the obligation
consists in the payment of a sum of money, & the debtor incurs
in delay, the indemnity for damage shall be:
o The one stipulated by the parties; in the absence
thereof—
o The legal interest, at 6% p.a.4
*NOTE: Interest under Art. 2209 is not limited to loans or
forbearances; it includes—
o Default in the payment of price or consideration under
a contract of sale
o An action for damages for injury to persons & loss of
property, &
o Actions for unpaid insurance claims
• Interest accruing from unpaid interest – interest stipulated shall
earn interest from the time it is judicially demanded, although
the obligation may be silent on that point
o Where a court’s judgment which did not provide for
payment of interest has become final, no interest may
be awarded
• Ex. D loaned from C P10,000.
o If 18% int. p.a. was agreed upon & D incurs in delay, D
will be liable to pay the interest agreed upon (18%) as
damages, & not for the use of money
4 Check usury part of Reviewer for full discussion on application of interest rates.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
§ If this is judicially demanded 6 months after D
incurred in delay, the interest due shall earn
legal interest (6% p.a.) from the time there is
judicial demand that time until payment is
made
o If no int. is stipulated, then no interest is due. If D
incurs in delay, he is liable to pay at the current legal
rate of 6% p.a.
Interest is Separate & Distinct from Penalty
• A penalty stipulation is not necessarily preclusive of interest; if
there is an agreement for both penalty & interest, these may be
separately demanded
o But penalty may be reduced if it is unconscionable &
iniquitous
Case Doctrines
Tan v. Valdehueza
• Facts: X & Y entered into a pacto de retro sale, where Y was the
vendor a retro. Y failed to redeem, so X filed a case for
consolidation of ownership. There was no stipulation of interest
in their contract, but the trial court adjudged that Y should pay
interest on the prices of the lots.
• Held: It was wrong for the lower court to impose interest on the
price of the lots, as no interest was expressly stipulated
between the parties. Furthermore, X’s petition was for
consolidation of ownership, not for a claim of sum of money.
However, SC imposed 6% int. p.a. from the finality of the
decision.
Jardenil v. Solas
• Facts: X loaned Y money. In their agreement, Y would pay
interest & the debt would mature on Mar. 31, 1934, & there
was interest stipulated at 12% p.a. The agreement also allowed
for an extension period of 1 year. Y made use of the grace
period, but X wants to be paid 12% p.a. for the grace period as
well.
• Held: X is not entitled to interest for the grace period, as the
contract did not expressly stipulate that the interest would also
be extended throughout the grace period if the extension of the
 loan is exercised. Thus, interest can only be charged for the
period agreed upon in the contract, that is, until Mar. 31, 1994.
After that, no interest is due on the principal.
Soncuya v. Azarraga
• Facts: X represented Y in a case, & the latter became indebted
to X. To pay the debt, Y mortgaged his lands & allowed X to live
on it until the expiration of 5 years, after which Y should have
already fully paid his debt. When the debt became due, Y asked
for an extension & agreed, after negotiating with X, to pay
interest of 12% p.a. What kind of contract is this?
• Held: The contract is a contract of loan; it is only in loans that
interest can be stipulated. In this case, whatever the contract
between X & Y used to be, it is now to be considered a loan, &
interest may be validly stipulated & paid.
Royal Shirt v. Co Bon Tic
• Facts: X & Y entered into an agreement where Y would sell X’s
shoes. It was agreed that Y would own the shoes & pay for price
of all of them, regardless of whether or not they were sold. In
the receipt that evidenced the transaction, it was stipulated that
there would be payment of 12% int. for late payment. However,
Y never signed the receipt.
• Held: Had Y signed the receipt, he would be liable for 12% int.
for the late payment. However, since he did not, it cannot be
said that Y had knowledge & fully consented to the imposition
of such interest. Thus, Y is only liable at the legal rate of 6% int.
Arwood Industries v. DM Consunji
• Facts: X was building a condominium for Y. Y failed to make the
payments for the condo. Their contract stipulated that in case of
default there would be 2% int. per month on the unpaid
balance. Y protests the imposition of this interest.
• Held: The interest is valid, as the contract is the law between
the parties. Y was in delay from the time that X finished
constructing the condo & Y failed to pay; thus, X is entitled to
damages, in the form of the 2% int. per month.
Overseas Bank v. Cordero
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• Facts: Ramos made a time deposit with Overseas Bank, which
thereafter was suspended by the Central Bank (CB). Ramos
wants to claim the interest on his time deposit.
• Held: Ramos cannot claim interest for the period of suspension
of the bank. What enables a bank to pay stipulated interest on
money deposited with it is that thru the other aspects of its
operation, it is able to generate funds to cover the payment of
such interest. Unless a bank can engage in banking & financing
activities from which it can derive income, it is inconceivable
how it can carry on as a depository obligated to pay stipulated
interest. It should be deemed read into every contract of deposit
with a bank that the obligation to pay interest on the deposit
ceases the moment the operation of the bank is completely
suspended by the duly constituted authority, the Central Bank.
Ramos v. CB
• Facts: In a previous ruling (Tapia), SC held that a suspended
bank is not liable to pay the interests of time deposits during
the period of its closure or the suspension of its banking
operations. CB contests.
• Held: Tapia ruling was upheld, & thus banks, while still liable to
pay the principals of time deposits, are not liable for interest on
these deposits during the period of their suspension.
Lirag v. SSS
• Facts: SSS entered into a Purchasing Agreement with X Corp. It
was stipulated there that SSS would buy P1M worth of X Corp.’s
shares, but X Corp. would buy back the shares at various
stipulated periods, while paying dividends at 8% p.a. The
contract also came with an acceleration clause. X Corp. failed to
buy back the shares in one of the promised periods, so SSS
demanded the full sum plus dividends. On the issue of the
dividends, X Corp. opposed, saying that a shareholder cannot
demand dividends when the company has made no profits.
• Held: The transaction was actually a loan, & the dividends
actually served as interest. The 8% p.a. was not meant to
fluctuate, & the payments were due at specified periods. Thus,
SSS had the right to demand the payments plus interest.
Art. 1957. Contracts & stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury.
Usurious Contracts Declared Void
• Form of contract is not conclusive; parol evidence may be
admissible to show that a written document was meant to cover
usury
• BUT in such a case, the contract would only be void as to the
interest involved, so that the loan becomes without stipulation
to pay interest
• Amount paid under usurious agreement is recoverable by the
debtor, since the payment is deemed to have been made under
restraint, rather than voluntarily
Case Doctrines
Angel Jose v. Chelda Enterprises
• Facts: X lent Y about P40,000 with 2% int. per month. The trial
court ruled that the interest rates were usurious.
• Held: X can still recover the principal amount. Art. 1420 of the
Civil Code states that in case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may be
enforced. Thus, the principal can still be enforced as against the
borrower. HOWEVER, as to the interest, the whole amount of the
interest, & not just the usurious part of it, is void & cannot be
recovered by X. Thus, X can recover only P40,000, with no
interest.
Art. 1958. In the determination of the interest, if it is payable in kind, its
value shall be appraised at the current price of the products or goods at
the time & place of payment.
Illustrative Example
B borrowed P10,000 from L payable in palay in 1 year which shall be
appraised at the current market price at the time & place of payment.
When the contract was entered into, the price of palay was P1,000. On
the due date, the price is P1,500.
• In this case, the value of the palay shall be appraised at P1,500
per cavan.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Art. 1959. Without prejudice to the provisions of Art. 2212, interest due
& unpaid shall not earn interest. However, the contracting parties may
by stipulation capitalize the interest due & unpaid, which as added
principal, shall earn new interest.
When Unpaid Interest Earns Interest
General Rule: Accrued interest does not earn interest except—
(1) When interest is judicially demanded (Art. 2212)
(2) When there is express stipulation made by the parties
• Compounding interest – when the interest due & unpaid
is added to the principal & the resulting total amount
shall earn interest; allowed even under Usury Law, so
long as there is express stipulation
Case Doctrines
Cu-Unjieng v. Mabalacat
• Facts: X loaned money from Y. The contract between them
stated that there would be: “Interest, to be computed upon the
still unpaid capital of the loan, shall be paid monthly, at the end
of each month.” Y contests that this means there was
compounded interest.
• Held: This is NOT compounded interest; it merely meant that the
computation of the interest would be based on the unpaid
balance of each month, which is not the equivalent of
compounded interest. Thus, no compounded interest may be
imposed by Y.
Art. 1960. If the borrower pays interest when there has been no
stipulation therefor, the provisions of this Code concerning solutio
indebiti, or natural obligations, shall be applied, as the case may be.
Recovery of Unstipulated Interest Paid
If unstipulated interest is paid by mistake, the debtor may recover
• BUT where there is stipulation that is not In writing, & the debtor
pays the interest voluntarily as he feels morally obliged to do so,
there can be no more recovery as in the case of natural
obligations (Art. 1423)
Case Doctrines
Velez v. Balzarra
 • Facts: X extended 5 loans to Y, which were secured by
mortgages to 7 parcels of land belonging to Y. During the period
of the loan, X lived on the land. Y paid X periodically, but X
insisted that these should be applied as rent & interest, & not
as the principal on the loan.
• Held: There was no express stipulation in the contract as to
interest; thus, no interest could be charged. Furthermore, X was
allowed enjoyment of the land, The amount must therefore be
applied to the principal. As such, Y had already overpaid & is
entitled to reimbursement from X. The two requisites for solutio
indebiti are present: (1) there is no right to collect these excess
sums; and (2) the amounts have been paid through mistake by
defendants.
Art. 1961. Usurious contracts shall be governed by the Usury Law &
other special laws, so far as they are not inconsistent with this Code.
Usury Law Now Legally Non-Existent
• The effectivity of the Usury Law has been suspended by the
Central Bank
o SC: “The CB Circular did not repeal nor in any way
amend the Usury Law, but simply suspended the
latter’s effectivity.”
• Interest rate chargeable now depends on the agreement of the
parties
• BUT where interest rate is excessive, even if voluntarily
assumed, the courts may declare the rate illegal & reduce the
same as reason & equity demand
USURY LAW & RELATED CIRCULARS
CB Circular No. 905
The Circular, effective on Jan. 1, 1983, lifted the ceiling rates in the
Usury Law, & approved the ff. regulations governing interest rates in the
absence of express stipulation in a contract:
• 12% p.a. – For loans or forbearances of any money, goods or
credit, & judgments (as earlier implemented by CB Circular No.
416 as of July 29, 1974)
• The Circular was also given retroactive effect
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
If the Monetary Board chooses to restore the ceiling rates, the Usury Law
will apply again.
• The Circular did not amend or repeal the Usury Law; it only
suspended the Law’s effectivity
• The Circular is of doubtful legality because the Usury Law only
authorized the Monetary Board to fix the maximum rate & to
change the rate depending on prevailing socio-economic
conditions
Usury
Contract where 2 parties agree to pay or receive something in excess of
the amount allowed by law for the loan or forbearance of money, goods
or chattels
• Elements (LUUT):
(1) A Loan or forbearance
(2) An Understanding between the parties that the loan
shall or may be returned
(3) An Unlawful intent to take more than the legal rate for
the use of money or its equivalent
(4) The Taking or agreeing to take for the use of the loan of
something in excess of what is allowed by law
Usury Law (Act No. 2566)
Involves 2 transactions only:
• Loan – understood as mutuum, excluding commodatum
• Forbearance – the contractual obligation of the creditor to
forbear during a given period to require the debtor to pay an
existing debt then due & payable
o Giving time for the payment of a debt; in substance,
also a loan
Where there is no loan or forbearance, there is no usury.
• Rentals are not loans
• Compensation for the past use of money does not count
• Discounts are not considered to be loans
Usury statutes are to be applied prospectively only
• In the absence of stipulation.
• Contracts previously non-usurious – cannot be made usurious
by a law, so that a person may collect usurious rates after the
 adoption of the Usury Law if that was what was stated in their
contract
• Contracts previously usurious – where a person is made liable
to pay 60% interest before the effectivity of the Usury Law,
contrary to the older Usury Law, the borrower is liable only to
pay the legal rate of 6% p.a. both for the period prior to & after
the date the law became effective.
Sec. 1. The rate of interest for the loan or forbearance of any money
goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be 6% p.a. or such rate
as may be prescribed by the Monetary Board of the Central Bank of the
Philippines for that purpose in accordance with the authority hereby
granted.
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions.
In the exercise of the authority herein granted, the Monetary Board may
prescribe higher maximum rates for loans of low priority, such as
consumer loans or renewals thereof as well as such loans made by
pawnshops finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily
be uniform. The Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.
Sec. 2. No person or corporation shall directly or indirectly take or
receive in money or other property, real or personal, or choses in action,
a higher rate of interest or greater sum or value, including commissions,
premiums, fines and penalties, for the loan or renewal thereof or
forbearance of money, goods, or credits, where such loan or renewal or
forbearance is secured in whole or in part by a mortgage upon real
estate the title to which is duly registered, or by any document conveying
such real estate or an interest therein, than 12% p.a. or the maximum
rate prescribed by the Monetary Board and in force at the time the loan
or renewal thereof or forbearance is granted: Provided, That the rate of
interest under this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may likewise apply
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
to loans secured by other types of security as may be specified by the
Monetary Board.
Sec. 3. No person or corporation shall directly or indirectly demand,
take, receive or agree to charge in money or other property, real or
personal, a higher rate or greater sum or value for the loan or
forbearance of money, goods, or credits where such loan or forbearance
is not secured as provided in Section two hereof, than 14% p.a. or the
maximum rate or rates prescribed by the Monetary Board and in force at
the time the loan or forbearance is granted.
Interest/Forbearance
Interest – the compensation allowed by law or fixed by the parties for
the loan or forbearance of money, goods or credits
• Subjecting a contract to conditions is not the equivalent of
charging interest
Forbearance – a contractual obligation of a lender of credit to refrain,
during a certain period of time, from requiring the borrower or debtor to
repay a loan or debt then due or payable
• Arrangements other than loan agreements where a person
acquiesces to the temporary use of his money, goods or credits
pending the happening of certain events or fulfillment of certain
conditions
Kinds of Interest
(1) Simple interest – the interest paid for the principal at a certain
rate fixed or stipulated by the parties
(2) Compound interest – the interest imposed upon the interest
due & unpaid
• The accrued interest is added to the sum & the whole
is treated as a new principal upon which the interest
for the next period is calculated
• New principal = (principal + unpaid accrued interest)
(3) Lawful interest – the interest the law allows or does not
prohibit; within the maximum prescribed by law
(4) Unlawful interest – an interest stipulated that is beyond the
maximum fixed by law
(5) Legal interest – that which the law directs to be charged in the
absence of any agreement as to the rate between the parties
Interest Stipulated
• Courts can reduce equitably liquidated damages, whether
intended as an indemnity or penalty (Art. 1229)
Penalty & Interest
• Penalty is separate from interest & they may be demanded
separately when it comes to unsecured loans
• When it comes to secured loans, penalties are already included
in the computation of interest
Application of Interest
(1) Interest to be applied is:
• That which is stipulated by the parties; if none, either—
o Art. 2209. If the obligation consists in the payment
of a sum of money, & the debtor incurs in delay,
the indemnity for damages shall be the legal
interest of 6% p.a., awarded at the court’s
discretion
o CB Circular No. 416 – for forbearances & loans of
money, goods or credit & judgments related to
forbearances & loans, interest is 12% p.a. effective
July 29, 1974.
§ Has been held to apply to the payment of
unliquidated cash advances to an
employee by her employer
§ Also applies to the return of money paid by
a buyer of a leasehold right
o BSP-MB Circular No. 799 – effective July 1, 2013
& applied prospectively, it fixed the rate for
forbearances, loans & judgments on forbearances
& loans at 6% p.a.
o NOTE: This now applies to interest on
interest, finality of judgment, & judgments
on loans & forbearances
• Art. 2212. Interest stipulated shall earn legal interest
from the time it is judicially demanded, although the
obligation may be silent on that point.
(2) Interest begins to run from:
• For interest for loans or forbearances, from the time of
extrajudicial or judicial demand
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
For interest pertaining to damages, from the time of
•
judicial or extrajudicial demand; however, if the
demand cannot be ascertained with reasonable
certainty,5 then—
o From the date of the rendition of the judgment by
the trial court
(3) The base amount for the computation of interest is always the
amount adjudged by the court
(4) From the time the judgment has been rendered by the trial
court until the finality of the decision, the interest shall be at
6%/12% p.a. or the stipulated interest, whichever the court
adjudged.
(5) Whether or not interest adjudged by the trial court initially is at
6%/12% or that stipulated by the parties, 12% interest p.a. will
be imposed from the finality of the decision until payment by
the debtor is made, as that delay in payment of the judgment is
considered a forbearance of credit
• The 12% interest here will be applied to the amount
adjudged by the court
Case Doctrines
Reformina v. Tomol
• Facts: In an Action for Damages where X’s boats were damaged
by a fire caused by Y, the court ruled that was indebted to X, &
must pay the sum with legal interest. X insists that the legal
interest on the sum should be computed at 12%.
• Held: It should only be 6% pursuant to Art. 2209 which imposes
that in the absence of express stipulation, a legal interest of 6%
per annum in obligations not constituting a loan or forbearance
of money. The 12% int. is imposable only on loans, forbearances
& judgments on loans & forbearances, pursuant to the powers
granted by law to the Monetary Board.
First Metro Investment v. Este del Sol
5 This is to be interpreted in relation to Art. 1169: No interest shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. In assigned case PNB v. CA, the plaintiff was able to show the
damages suffered—P98,691.90—representing 23 checks that were misappropriated by
the plaintiff’s agents. Thus, as the amount could be established with reasonable certainty,
SC applied the interest on said amount starting from the date of judicial demand & not
from the date of the decision of the trial court.
 • Facts: X loaned Y P7.38M with 16% int. p.a. Furthermore, X
required that Y pay an underwriting fee, consultancy fee &
supervision fee, even if X did not actually provide any services
that would merit such fees. All the amounts due were also set to
mature on the same date.
• Held: The fees were an attempt to circumvent the law on usury.
As such, the entire interest is void, & X can now only claim the
principal.
David v. CA
• Facts: X defaulted on paying a loan to Y. The trial court ruled in
favor of X & computed legal interest, but no compound interest.
X insists there should be compound interest. Furthermore,
when X filed for a re-computation of interest, thus suspending
the execution of the judgment, CB Circular No. 416 had taken
effect on July 29, 1974, raising legal interest from 6% to 12%.
• Held: Because there was no stipulation on compounded
interest, compounded interest is not due. The interest, however,
was correctly modified by the judge, as the CB Circular is a
supervening event which affects the judgment if the case is still
pending. Thus, from the time of filing until July 28, 1974,
interest was at 6%, & then at 12% from July 29, 1974 until Apr.
3, 1993.
Investors v. Autoworld
• Facts: X approached Y, asking for a loan for X’s company,
Autoworld. Y said he didn’t do loans, but was willing to do an
“Installment Paper Purchase,” where X would execute a
Contract to Sell of a parcel of land to Autoworld, & Autoworld
would give X receivables, which X would sell to Y at a discounted
value. Y would then “flow back” the amount to X.
• Held: The interest was declared void & X was only obliged to pay
the original amount of the loan. If from a construction of the
whole transaction it becomes apparent that there exists a
corrupt intention to violate the Usury Law, the courts should &
will permit no scheme, however ingenious, to becloud the crime
of usury.
Mendoza v. CA
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• Facts: The bank extended loans to Y through 2 promissory
notes. The notes stipulated: "Interest shall be at the rate of 9%
per annum from the date(s) of the draft(s) to the date(s) of
arrival of payment therefor in New York. The Bank, however,
reserves the right to raise the interest charges at any time
depending on whatever policy it may follow in the future."
• Held: Such stipulation of the bank is void. Y did not agree to the
increase in the stipulated interest rate. The unilateral
determination and imposition of increased interest rates by a
bank is violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.
Solangon v. Salazar
• Facts: Contract imposed 72% interest rate p.a. (or 6% int. per
month).
• Held: Even an interest at 5.5% per month on a P500,000 loan
was deemed by SC (in a previous case) to be excessive,
iniquitous, unconscionable & exorbitant even if it cannot be
declared usurious. SC reduced the interest rate to 12% p.a.
Despite lifting of the ceiling on interest rates by the CB Circular
905, nothing in the said circular would grant lenders carte
blanch authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their
assets.
Spouses Pascual v. Ramos
• Facts: The contracts here stipulated 7% int. per month & 5% int.
per month on 2 separate loans.
• Held: This contract is valid because the parties freely agreed to
such stipulation. Absent any evidence of fraud, undue influence,
or any vice of consent, the interest agreed upon is binding upon
them. The Court is not in a position to impose upon parties
contractual stipulations different from what they have agreed
upon.
Eastern Shipping Lines Inc. v. CA as discussed by Atty. Lerma
*NOTE: The case was decided before the effectivity of BSP-MB Circular
No. 799 (July 1, 2013) which applied prospectively the rate of 6% int.
p.a. as legal interest for loans, forbearances & judgments on loans &
forbearances.
 I. When an obligation is breached, the contravenor is liable for
damages under the Civil Code
II. In case interest is awarded as actual or compensatory damage,
the rate of interest, as well as the accrual thereof, is imposed as
follows:
1. When obligation breached is a loan or sum of money
i. Stipulation
ii. No stipulation – 12%* from the time there is a
result, which starts from extrajudicial or
judicial demand due to non-payment6
iii. Interest stipulated shall earn interest when it is
judicially demanded
2. Not a loan or forbearance of money
i. What is expressly stipulated
ii. No stipulation – 6%, & the starting period
depends on demand
1. Reasonable certainty of demand –
runs from judicial or extrajudicial
demand
2. No reasonable certainty of demand –
runs from the time judgment is made
iii. Quantifiable damage must be established by a
certain date, because in order for interest to
exist, there must be a principal that the
interest can be tacked on
3. Non-payment of award that is awarded by final
judgment is considered a loan or forbearance which
would set the interest at 12%*
Direct Quote from Eastern Shipping Case
Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of
thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable
damages.
6 There should always be demand before default begins
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
II. With regard particularly to an award of interest in the
concept of actual & compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or
extrajudicial demand under & subject to the provisions
of Art. 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
1. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall
be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
RCBC v. Alfa RTW Calculation of Amounts Due
Facts: In the case, the parties stipulated the ff.:
 •16% interest p.a. from date of execution of the Trust Receipt7
until paid
• 2% interest p.a. from date of execution of the Trust Receipt until
paid
• 6% interest p.a. as penalty for the amount due & unpaid
• 10% attorney’s fees
Relevant dates include: Rodszzen v. Far East Bank
• Sometime in 1981 – date of execution of the Trust Receipt • Facts: The bank claimed that 12% interest should apply, rather
• March 9, 1982 – date of demand letter than 6%, as the transaction was a loan.
• March 12, 1982 – date of filing of complaint in RTC • Held: Although the sum of money involved in this case was
• August 19, 1991 – date that RTC promulgated its decision payable to a bank, the present factual milieu clearly shows that
• December 14, 2001* –finality of SC’s judgment it was not a loan or forbearance of money. Petitioner is bound to
pay interest at 6% p.a., computed from April 7, 1983, the time
*NOTE: This was the date that the judgment was released by the SC and technically not respondent bank demanded payment from petitioner. From the
the date of finality in the case, but is used here to serve as an illustrative example
finality of the judgment until its satisfaction, the interest shall
be 12% p.a.
Breakdown Input Amount
• Lerma’s Lecture: It was actually a SALE transaction.
Total Amount Due [Principal] + [Interest] + [Service Charge] +
o Rodszzen, buyer, applied for letter of credit from Far
as of Dec. 14, [Penalty] + [Interest on Interest]
East Bank
2001
o Ekman, the seller, will deliver the products to Rodszzen
[Principal] Principal & then, they go to Far East Bank to ask for payment
[Interest] [Principal] x 16% p.a. x no. of years from o Far East Bank will pay Ekman as an advance
“sometime in 1981” to Dec. 14, 2001 o Rodszzen will pay Far East Bank the money Far East
Service Charge [Principal] x 2% p.a. x no. of years from “sometime paid Ekman for the products bought
in 1981” to Dec. 14, 2001 o This transaction is NOT A LOAN though it appears to be
Penalty [Principal] x 6% p.a. x no. of years from March 9, a loan. The reason is that based on the totality of the
1982 until Dec. 14, 2001 transaction, it is actually a SALE and NOT A LOAN.
Interest on [Interest] from March 12, 1982 until Dec. 14, o This is just a funky way by which the seller is paid.
Interest 2001 x 12% p.a. x no. of years until Dec. 14, 2001
Interest on Total [Total Amount Due as of Dec. 14, 2001] x 12% p.a. Plantilla v. Baliwag
Amount Due until until paid • Facts: The sheriff, rather than the judge, decided on which
Paid interest rate to impose.
Attorney’s fees 10% x [Total Amount Due as of Dec. 14, 2001] • Held: The judge should have decided, not the sheriff. The judge,
who has the best view of all the evidence, should decide on the
proper interest, & the sheriff should merely execute the writ of
the judge.

7A trust receipt is a security transaction intended to aid in financing importers and retail PNB v. CA
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except thru
• Facts: 23 checks were misappropriated by X’s agents. Thus, X is
utilization, as collateral, of the merchandise imported or purchased. suing them. The contract is a contract of sale.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

 • Held: X must be paid 6% legal int. p.a.; when the judgment Scenarios Applying Interest Rules
becomes final, int. p.a. will be at 12%. X was able to show the
damages suffered—P98,691.90—representing 23 checks that
were misappropriated by the plaintiff’s agents. Thus, as the
amount could be established with reasonable certainty, SC
applied the interest on said amount starting from the date of
judicial demand & not from the date of the decision of the trial
court.

Nacar v. Gallery Frames

• Facts: The question involved the proper computation of interest,
given the New Circular during the litigation which changed the
interest rate from 12% for loans or forbearances to 6%.
• Held: 12% prior to July 13, 2013; 6% starting July 1, 2013. In
the absence of an express stipulation as to the rate of interest
that would govern the parties, the rate of legal interest for loans
or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be 12% but will now be six
percent 6% per annum effective July 1, 2013, pursuant to
Resolution No. 796. It should be noted, nonetheless, that the
new rate could only be applied prospectively and not
retroactively. Consequently, the 12% per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of 6% per annum shall be the prevailing rate of
interest when applicable.
• The proper computation as held by SC:
(1) Back wages computed from the time petitioner was
illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court became final Reasons:
and executory.
(2) Interest of 12% p.a. of the total monetary awards, (1) The P50K serves as an unliquidated claim arising from a claim other
computed from May 27, 2002 to June 30, 2013 and 6% than a loan or forbearance. As such, it is only fully ascertainable &
p.a. from July 1, 2013 until their full satisfaction. liquidated as of the rendering of the judgment of the court. Thus, legal
interest of 6% arising from the claim of damages can only begin to run
from the rendering of judgment of the court.
(2) The 18% penalty interest is stipulated in their contract to begin when
there is delay. Thus, the penalty will set in from the time X made an
extrajudicial demand on Y, resulting in the latter’s default. Interest will
only begin to run from there, as agreed upon by the parties.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

(3) The 500K is a liquidated claim that can already be established with
reasonable certainty as of the time of extrajudicial demand. According to
Eastern Shipping Lines, when the amount of the claim can be
established with reasonable certainty, interest will begun to run from
either judicial or extrajudicial demand.
(4) The total due as of the date of final judgment will be combined, and
the total amount will earn 6% int. p.a. as of the date of the finality of
judgment, until the amount is finally paid.
Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly
stipulate, charge, demand, take or receive any higher rate or greater
sum or value for any loan or forbearance than two and one-half per
centum per month when the sum lent is less than one hundred pesos;
two per centum per month when the sum lent is one hundred pesos or
more, but not exceeding five hundred pesos; and fourteen per centum
per annum when it is more than the amount last mentioned; or the
maximum rate or rates prescribed by the Monetary Board and in force at
the time the loan or forbearance is granted. A pawnbroker or
pawnbroker's agent shall be considered such, for the benefits of this Act,
only if he be duly licensed and has an establishment open to the public.
It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the
pawn offered by a person into two or more fractions in order to collect
greater interest than the permitted by this section.
It shall also be unlawful for a pawnbroker or pawnbroker's agent to
require the pawner to pay an additional charge as insurance premium
for the safekeeping and conservation of the article pawned.
Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend
the effectivity of, interest rate ceilings on certain types of loans or
renewals thereof or forbearances of money, goods, or credit, whenever
warranted by prevailing economic and social conditions.
Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates
of interest under this Act, the Monetary Board shall be guided by the
following:
(1) The existing economic conditions in the country and the general
requirements of the national economy;
(2) The supply of and demand for credit;
(3) The rate of increase in the price levels; &
(4) Such other relevant criteria as the Monetary Board may adopt.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Sec. 5. In computing the interest on any obligation, promissory note or
other instrument or contract, compound interest shall not be reckoned,
except by agreement: Provided, That whenever compound interest is
agreed upon, the effective rate of interest charged by the creditor shall
not exceed the equivalent of the maximum rate prescribed by the
Monetary Board, or, in default thereof, whenever the debt is judicially
claimed, in which last case it shall draw six per centum per annum
interest or such rate as may be prescribed by the Monetary Board. No
person or corporation shall require interest to be paid in advance for a
period of more than one year: Provided, however, That whenever interest
is paid in advance, the effective rate of interest charged by the creditor
shall not exceed the equivalent of the maximum rate prescribed by the
Monetary Board.
Sec. 6. Any person or corporation who, for any such loan or renewal
thereof or forbearance, shall have paid or delivered a higher rate or
greater sum or value than is hereinbefore allowed to be taken or
received, may recover the whole interest, commissions, premiums
penalties and surcharges paid or delivered with costs and attorneys'
fees in such sum as may be allowed by the court in an action against the
person or corporation who took or received them if such action is
brought within two years after such payment or delivery: Provided,
however, That the creditor shall not be obliged to return the interest,
commissions and premiums for a period of not more than one year
collected by him in advance when the debtor shall have paid the
obligation before it is due, provided such interest, and commissions and
premiums do not exceed the rates fixed in this Act.
Borrower’s Right to Recover Usurious Interest
• A borrower who has paid or delivered usurious interest may
recover the entire interest he paid with costs & attorney’s fees
• The stipulation imposing interest is deemed entirely void
• Ex. During the effectivity of the usury law, X loaned Y money
with 50% interest p.a. In court, Y will be able to recover the
entire 50% and not just 50% minus 12% (the lawful interest
rate)
• The debtor will recover not only the interest paid, but the legal
interest on said amount, from the date of payment
• Pari delicto does not apply in usury cases
 • The right to recover is given only to the borrower who has
already paid or delivered the usurious interest
Sec. 7. All covenants and stipulations contained in conveyances,
mortgages, bonds, bills, notes, and other contracts or evidences of
debts, and all deposits of goods or other things, whereupon or whereby
there shall be stipulated, charged, demanded, reserved, secured, taken,
or received, directly or indirectly, a higher rate or greater sum or value
for the loan or renewal or forbearance of money, goods, or credits than
is hereinbefore allowed, shall be void: Provided, however, That no merely
clerical error in the computation of interest, made without intent to
evade any of the provisions of this Act, shall render a contract void:
Provided, further, That parties to a loan agreement, the proceeds of
which may be availed of partially or fully at some future time, may
stipulate that the rate of interest agreed upon at the time the loan
agreement is entered into, which rate shall not exceed the maximum
allowed by law, shall prevail notwithstanding subsequent changes in the
maximum rates that may be made by the Monetary Board: And Provided,
finally, That nothing herein contained shall be construed to prevent the
purchase by an innocent purchaser of a negotiable mercantile paper,
usurious or otherwise, for valuable consideration before maturity, when
there has been no intention on the part of said purchaser to evade the
provisions of this Act and said purchase was not a part of the original
usurious transaction. In any case, however, the maker of said note shall
have the right to recover from said original holder the whole interest
paid by him thereon and, in case of litigation, also the costs and such
attorney's fees as may be allowed by the court.
Usurious Loans Void Only with respect to Interest
The loan is to be considered without stipulation but will still be valid; only
the usurious interest will be declared void
• Debtor will not have the right to recover the principal & the
creditor may seek action on the principal
• Creditor will not get even legal interest, however; he will just get
the principal
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum rate
of interest is increased by law or by the Monetary Board: Provided, That
such stipulation shall be valid only if there is also a stipulation in the
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
agreement that the rate of interest agreed upon shall be reduced in the
event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board: Provided, further, That the adjustment in the
rate of interest agreed upon shall take effect on or after the effectivity of
the increase or decrease in the maximum rate of interest.
Escalation Clauses in Loans
• The unilateral determination & imposition of increased interest
by the lender will be violative of the principle of mutuality of
contracts under Art. 1308 of the Civil Code
• Sec. 7-a deals with stipulations providing for adjustments in the
interest rate agreed upon in the event that there is a change in
the legal rate of interest effected by law or the Monetary Board
• Valid only if the escalation clause includes a de-escalation
clause—thus, if the interest rate standard agreed upon
increases, or decreases, it will apply to the contract
• But if the clause “authorizes the creditor to increase the rate of
interest in the event of changes in the prevailing market rates,”
it cannot be said to be dependent solely on the will of the
creditor
o In this case, both an increase & decrease can be
applied by the parties, making it fair and valid
Sec. 8. All loans under which payment is to be made in agricultural
products or seed or in any other kind of commodities shall also be null
and void unless they provide that such products or seed or other
commodities shall be appraised at the time when the obligation falls due
at the current local market price: Provided, That unless otherwise stated
in a document written in a language or dialect intelligible to the debtor
and subscribed in the presence of not less than two witnesses, any
contract advancing money to be repaid later in agricultural products or
seed or any other kind of commodities shall be understood to be a loan,
and any person or corporation having paid otherwise shall be entitled in
case action is brought within 2 years after such payment or delivery to
recover all the products or seed delivered as interest, or the value
thereof, together with the costs and attorney's fees in such sum as may
be allowed by the court. Nothing contained in this section shall be
construed to prevent the lender from taking interest for the money lent,
provided such interest be not in excess of the rates herein fixed.
Paying Interest in Kind Q: Was there a deposit during the 2-year period?
• Reduce the medium of payment to its equivalent in pesos at the A: NO. This is more like an agency.
time the obligation falls due at the current local market place
Deposit Mutuum
Title XII. – DEPOSIT Principal purpose Safekeeping Consumption
Can be demanded At will by depositor Only at the expiration of
CHAPTER 1. – DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS the period granted to the
debtor
Art. 1962. A deposit is constituted from the moment a person receives a Property Movable or Only money or other
thing belonging to another, with the obligation of safely keeping it and of immovable (judicial fungible things
returning the same. If the safekeeping of the thing delivered is not the deposit)
principal purpose of the contract, there is no deposit but some other
contract. Deposit Commodatum
Principal purpose Safekeeping Transfer of Use
Characteristics of Deposit Kind Could be gratuitous Essentially & always
• Real – perfected by delivery of the subject matter gratuitous
• When gratuitous – a unilateral contract because only the Property For extrajudicial Movables or immovable
depositary (depositorio) has an obligation deposit, only (primary requirement
• When for compensation – bilateral, giving rise to obligations for corporeal things being that it is non-
both depositary & depositor (depositante) (movables) consumable)

Safekeeping as Principal Purpose Case Doctrines

• Agency – where the balance of a commission remains in the
possession of the agent, the balance is converted into a deposit
& the agent may not misappropriate the same or may be
convicted of estafa
o UNLESS the parties agree that it shall be a loan
• Banking – if a depositor leaves U.S. dollars in the bank for
safekeeping, the bank cannot sell the dollars as this is a
deposit, even if the peso equivalent was supposedly credited in
the depositor’s account
Requisites for Depositary/Depositor
• Depositor need not be the owner, he just needs to have
possessory right
Q: X went abroad but he has a debt due in 2 years. So X told Y to pay his
debt; X gave Y the money to do pay it in 2 years. Y paid it. Is this a
deposit?
A: NO. This is more like an agency where X would pay off his debts.
Calibo v. CA
• Facts: X owns a tractor. X’s son used it as security for his
payment of rent to Y. Y kept the tractor at his house without
using it. When X made a demand, Y refused & told X to pay his
sons rentals first. Is this a deposit?
• Held: NO. In a contract of deposit, a person receives an object
belonging to another with the obligation of safely keeping it and
of returning the same. Y received the tractor not to safely keep
it but as a form of security. There is no deposit where the
principal purpose for receiving the object is not safekeeping.
Consequently, petitioner had no right to refuse delivery of the
tractor to its lawful owner.
Art. 1963. An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing.
Q: X and Y agree that Y will deliver to X the iPad of Y and the sole reason
is to keep the item away from Y’s kids. Is this a deposit?

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

A: NO. There is only an agreement and no delivery yet as deposit is a real
contract which is constituted only upon delivery. Thus there is no deposit
yet.
Q2: If Y gives the iPad the next day but X refuses, is this actionable?
A: YES. An agreement is a binding contract and since there was a
promise to accept.
Consensual Contracts
• Agreement to constitute a deposit –binding on the parties
• Contract for future deposit
Art. 1964. A deposit may be constituted judicially or extrajudicially.
Creation of Deposit
• May be made: (1) by the will of the parties, (2) by court order or
(3) by law
• The depositary cannot be the owner of the thing deposited
Kinds of Deposit
1. Judicial – attachment or seizure of property in litigation
2. Extrajudicial
a. Voluntary – the general rule; delivery is made by the
will of the depositor or by two or more persons each of
whom believes himself entitled to the thing deposited
b. Necessary – one made either:
• In compliance with a legal obligation
• On the occasion of calamity
• By travellers in hotels & inns
• By travellers with common carriers8
8 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of
the goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act of omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, & 5 of the preceding
article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as required in Art. 1733.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Art. 1965. A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in the
business of storing goods.
When Deposit Not Gratuitous
The general rule is that deposit is gratuitous but it is not essentially
gratuitous, save for the exceptions:
1. Contrary stipulation
2. Depositary engaged in business of storing goods (e.g.
warehouseman)
3. Where property saved from destruction without knowledge of
owner (involuntary deposit) – the depositary is entitled to just
compensation
Art. 1966. Only movable things may be the object of a deposit.
Objects Deposited
• Extrajudicial deposit – only movables, whether voluntary or
necessary
o If object may not be lost or stolen, then it’s likely
something else (e.g. the delivery of keys to a house is
an agency & not a deposit because losing the keys will
not lead to loss of the house, a real property)
• Judicial deposit – may cover movables & immovables
• Does not embrace incorporeal rights & actions
o Though deeds or documents evidencing these rights
can be the objects of deposit
Art. 1967. An extrajudicial deposit is either voluntary or necessary.
CHAPTER 2. – VOLUNTARY DEPOSIT
SECTION 1. – General Provisions
Art. 1968. A voluntary deposit is that wherein the delivery is made by the
will of the depositor. A deposit may also be made by two or more
persons each of whom believes himself entitled to the thing deposited
with a third person, who shall deliver it in a proper case to the one to
whom it belongs.
Voluntary v. Necessary Deposit
 • Voluntary – depositor may choose the depositary
• Necessary – lack of free choice in the depositor
Depositor Need Not Be Owner of Thing
• Generally, depositor is owner of the thing
• BUT it may belong to a carrier, commission agent, lessee, etc.
who deposits them temporarily in a depositor’s possession,
since the contract does not involve the transfer of ownership
• A depositary cannot dispute the title of the depositor to the
thing deposited as the former is in estoppel
Interpleader
• Action to compel two or more persons, each believing
themselves to be entitled to a thing, to settle their conflicting
claims by leaving the thing with a third person who will deliver it
to whom it belongs
• One of the depositors is not the owner; the court will decide who
the owner really is
Art. 1969. A contract of deposit may be entered into orally or in writing.
Art. 1970. If a person having capacity to contract accepts a deposit
made by one who is incapacitated,9 the former shall be subject to all the
obligations of a depositary, and may be compelled to return the thing by
the guardian, or administrator, of the person who made the deposit, or
by the latter himself if he should acquire capacity.
Art. 1971. If the deposit has been made by a capacitated person with
another who is not, the depositor shall only have an action to recover
the thing deposited while it is still in the possession of the depositary, or
to compel the latter to pay him the amount by which he may have
enriched or benefited himself with the thing or its price. However, if a
9 Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Art. 1327 is subject to the modifications determined
by law, and is understood to be without prejudice to special disqualifications established in
the laws.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
third person who acquired the thing acted in bad faith, the depositor
may bring an action against him for its recovery.
Q: X gives W, a kid, his iPhone for safekeeping. W sold X’s phone for
P100. The kid then spent P90 and then kept the P10.
A: X can collect the whole P100 from the minor, because that is the total
amount he sold it for & was benefited by.
Q2: What if W exchanged the thing for a lottery ticket and won P50M?
Can X claim the P50M?
A: Yes, because that’s the amount by which the child was enriched.
SECTION 2. – Obligations of the Depositary
Art. 1972. The depositary is obliged to keep the thing safely & to return
it, when required, to the depositor, or to his heirs & successors, or to the
person who may have been designated in the contract. His
responsibility, with regard to the safekeeping & loss of the thing, shall be
governed by the provisions of Title I of this Book.
If the deposit is gratuitous, the fact shall be taken into account in
determining the degree of care that the depositary must observe.
When Object Lost
• The depositary cannot excuse himself from liability in the event
of loss by claiming that he exercised the same amount of care
toward the thing deposited as he would toward his own, IF such
care is less than that required by the circumstances
Applicable Rules are the Rules on Obligations (Title I of Civil Code)
• Loss – he is liable is the loss occurs through his fault or
negligence, even if the thing was insured
o Loss while in depositary’s possession creates
presumption of depositary’s fault
• Required degree of care is greater when deposit is for
compensation, though even in gratuitous deposit there must be
care
• The depositary must exercise over the thing deposited the same
diligence as he would exercise over his property
o But it must be the care necessary, depending on the
object & the circumstances that is actually deposited
with the depositary

Return of Thing
• Thing must be returned when the depositor claims it, though the
parties may have stipulated a term
Case Doctrines
Bishop of Jaro v. Dela Peña
• Facts: X kept the money that Y was holding in trust, to be used
for a leprosarium. X put the money in his bank account & the
funds were co-mingled with his. Meanwhile, X was arrested for
being a supposed rebel & the Americans forfeited all his money.
Y wants to make X’s estate liable for the amount.
• Held: X is not liable. By placing the money in the bank & mixing
it with his personal funds, X did not thereby assume an
obligation different from that under which he would have lain if
such deposit had not been made, nor did he thereby make
himself liable to repay the money at all hazards. If the money
had been forcibly taken from his pocket or from his house by
the military forces of one of the combatants during a state of
war, it is clear that under the provisions of the Civil Code he
would have been exempt from responsibility. The fact that he
placed the trust fund in the bank in his personal account does
not add to his responsibility. Such deposit did not make him a
debtor who must respond at all hazards.
• Lerma agrees with the decision, though it is debatable.
Art. 1973. Unless there is a stipulation to the contrary, the depositary
cannot deposit the thing with a third person. If deposit with a third
person is allowed, the depositary is liable for the loss if he deposited the
thing with a person who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees.
Liability for Loss
A depositor is liable for the loss of the thing deposited if:
(1) He transfers the deposit with a third person without authority
although there is no negligence on his part & the third person
(2) He deposits the thing with a third person who is manifestly
careless or unfit although authorized, even in the absence of
negligence
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• BUT the depositor is not responsible in case the thing is
lost without the negligence of the third person with
whom he was allowed to deposit the thing if such
person is NOT manifestly careless or unfit
(3) The thing is lost through the negligence of his employees
whether the latter are manifestly careless or not
Class Scenario
Q: L deposited a laptop with B for a period of 30 days. Can L get the
laptop and give it to C?
A: Generally, no, without permission of B.
Q: If L & B agree that B can deposit it with a 3rd person. B deposits the
laptop with C, but C is a minor. C damages the laptop & the repairs are
worth P10,000. Who is liable for the damage?
A: B, because C is legally incapacitated.
Q: Must L prove that C was unfit?
A: No, his being unfit will be presumed as he is a minor.
Q: What if C is old but has a super low IQ?
A: It depends. Can he comprehend his duties as a depositary? If C is
clearly incapable of understanding the role, then definitely, B is liable.
Q: If C leaves the laptop in the drawer, will B be liable?
A: NO. This is normal. There is no manifest carelessness.
Q: What if C was the employee of B? What if B was a lawyer? Does the
fact that he is a lawyer matter?
A: B’s being a lawyer matters, because his business is to hold things in
trust for his client. If B were an owner of a restaurant & C is a waiter, L
must prove that C was manifestly careless or unfit to be able to make B
liable since B’s ownership of a restaurant has no bearing on the
relationship between L & B.
Art. 1974. The depositary may change the way of the deposit if under
the circumstances he may reasonably presume that the depositor would
consent to the change if he knew of the facts of the situation. However,
before the depositary may make such change, he shall notify the
depositor thereof & wait for his decision, unless delay would cause
danger.
Obligation Not to Change the Way of the Deposit
General Rule: The depositary must first notify the depositor & wait for
the latter’s decision if he plans to change the way of the deposit
• EXCEPT – if delay could cause danger

Class Scenario
Q: L has the laptop of N as N deposited it with L. Can L bring the laptop
to X’s house because of some danger in L’s house?
A: YES, if N agrees. Generally, the depositary must wait for the approval
of the depositor. BUT if there is an imminent danger, L can move it.
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter when
it becomes due, & to take such steps as may be necessary in order that
the securities may preserve their value & the rights corresponding to
them according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes.
Lerma’s Thoughts
This provision is now obsolete; these days all these certificates, bonds,
securities or instruments have the interests automatically deposited in
the account of the holder of such instrument & there is no need to
present the instrument to make the claim.
Collecting for Depositor
• Depositary must:
o Collect the interest when it becomes due
o Take such steps as may be necessary in order that the
securities may preserve their value & the rights
corresponding to it
• Depositary is bound to collect not only the interest but also the
capital itself when due
Contract for Rent of Safety Deposit Box
• Special kind of deposit; not an ordinary contract of lease of
things
• Not strictly governed by provisions of deposit
• Relationship is generally considered as bailee & bailor
• In the operation of the box, the box & contents thereof are in
the manual possession of the lessor
o BUT neither the lessor nor the rentor can be given
access to the contents of the box without the consent
& cooperation of the other
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• Any stipulation exempting a bank from liability in case of fraud,
negligence, delay or breach, when it is performing its duties as
a depositary, is void.
Case Doctrines
CA Agro v. CA
• Facts: X & Y entered into a contract where X would sell Y land.
Prior to full payment, both parties agreed to put the TCT in a
safety deposit box in a bank. When X tried to take the TCT out
once, it was no longer there. X sued the bank for damages. The
bank said it was not liable since the contract was one of lease &
in their agreement with X & Y regarding the “lease” of the safety
deposit box, it said they would not be liable for loss.
• Held: This is not a lease, but a special kind of deposit. Being a
deposit, exemptions from any & all liability in performing duties
as a depositary are void. However, the bank cannot be held
liable, because it was not shown that the bank was aware of the
agreement between X & Y & the fact that they had to bot be
there to withdraw the TCT.
Art. 1976. Unless there is a stipulation to the contrary, the depositary
may commingle grain or other articles of the same kind and quality, in
which case the various depositors shall own or have a proportionate
interest in the mass.
Class Scenarios
Q: X is a depositary. 3 separate people deposited with you various
amounts of sugar. X put it all in one pile & the 3 separate people
complained. Do the 3 people have a cause of action against you?
A: They may have a cause of action. If the sugar deposited were of
different kind and quality. Just because one deposits sugar doesn’t
mean that all deposits are the same. Same with everything else.
Q: Assuming the sugar was fungible, do they have a cause of action?
A: No, they no longer have a cause of action.
Art. 1977. The depositary cannot make use of the thing deposited
without the express permission of the depositor. Otherwise, he shall be
liable for damages. However, when the preservation of the thing
deposited requires its use, it must be used but only for that purpose.
Use of Thing for Preservation Art. 1978. When the depositary has permission to use the thing
General Rule: Unauthorized use would make a depositary liable for deposited, the contract loses the concept of a deposit and becomes a
damages. loan or commodatum, except where safekeeping is still the principal
• EXCEPT – The depositary may use the thing if it is necessary for purpose of the contract.
its preservation, even without the express permission of the The permission shall not be presumed, and its existence must be
depositor, but ONLY for that limited purpose proved.
o Ex. A depositary may use a radio received in deposit
occasionally to prevent the accumulation of moisture When Commodatum
• If the thing deposited is non-consumable & the depositary has
CLASS SCENARIOS permission to use the thing, it is not a contract of deposit, but
Q: X deposited an iPad with A for a period of 30 days. Can A use the commodatum, though was denominated as a deposit
iPad? • UNLESS safekeeping is still the principal purpose of the
A: X cannot make use of the iPad because it is a deposit & A needs the contract
permission of X to be able to use it.
Q: X deposits an iPad with A & says A can use it for 30 days. What is the When Loan
contract? • If the thing deposited is money or other consumable thing, the
A: It is commodatum. permission to use it will result in consumption & converts the
Q: What if X gives it to A and says, “use it for 30 days but please keep it contract into a simple loan or mutuum
safe”? • If safekeeping is still the primary purpose, it is an irregular
A: It is commodatum. deposit (e.g. bank deposits are in the nature of irregular
Q: Who determines the primary purpose of the contract? deposits but they are really loans governed by the law on loans)
A: Depends what was said at the time the deposit was constituted. If it
can be inferred that it was really for use, then it is not a deposit but a Irregular Deposit Mutuum
commodatum. When Demand Can May be demanded at Lender is bound by
Be Made of Thing will by the irregular the stipulations of the
Case Doctrines depositor contract & cannot
Javellana v. Lim seek restitution until
• Facts: X & Y were given P1,102 by Z, evidenced by a document time of payment
that said X & Y received the amount without interest & would Essential Cause or Only benefit is that The necessity of the
give the amount back to Z in 3 years. When the due date Benefit which accrues to the both parties; benefits
passed, X approached Z & begged for an extension, agreeing to irregular depositor them both
pay interest. X & Y failed to pay some of the amount even after Third Parties Depositor has No preference in the
the extension so Z filed a case for collection. X & Y’s defense is preference over other distribution of the
that the contract is a deposit, so they in fact already paid the creditors with respect debtor’s property
whole amount, as the amount Z is claiming includes interest. to the thing deposited
• Held: It is a contract of LOAN, because it was understood, as
between the parties, that X & Y could make use of the amount Permission to Use Money Not Presumed
& spend it. X & Y were not bound to return the same identical In deposit, the permission to use money is not presumed except when
bills of money, but just the same amount of the same kind & such use is necessary for the preservation of the thing deposited and
quality. the burden is on the depositary to prove the permission has been given.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


CLASS SCENARIO
Q: X gave Y P1,000 and said “I’m going away on a trip and coming back
in 30 days. Please keep my money.” Does Y have a right to use the
money?
A: NO.
Q: X gave Y the keys to his car, the manuals, insurance, etc. and the car
itself and said, “I’m going abroad for 3 years. Please keep my car safe.”
Can Y use it?
A: Only for the sake of preserving the car, but otherwise, he cannot make
use of the car as that would alter the principal purpose of the deposit
and turn it into a commodatum.
Case Doctrines
Gavieres v. Taverra
• Facts: The contract reads: "Received of X, P3,000, as a deposit
payable on two months' notice in advance, with 6% int. p.a. with
an hypothecation of the goods now owned by me or which may
be owned hereafter, as security of the payment. "In witness
whereof I sign in Binondo, January 31, 1859.”
• Held: This is a contract of loan, as it stipulates an interest.
Furthermore, the fact that it was collective after 2 months’
notice showed that X intended to give the other party the
opportunity to ensure availability of funds.
Baron v. David
• Facts: Y left 1,000 cavans of palay in X’s mill for selling. A fire
broke out in X’s mill. Now, X refuses to pay Y for the palay,
claiming that the palay was left in his mill as a deposit & he
could not be liable for force majeure.
• Held: The contract was NOT a deposit & X is liable to pay Y for
the palay. Evidence showed that X had only 300 cavans left in
his mill when the fire broke out, showing that he had sold the
rest. Even assuming arguendo that X kept the palay for future
sale & thus it was, at first, a deposit, nevertheless if it was
understood that the defendant might mill the palay and he has
in fact appropriated it to his own use, he is of course bound to
account for its value.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
U.S. v. Igpuara
• Facts: X is the agent of Y. Y gave X money to pay Z, evidenced by
a deposit certificate. However, when Z tried to get the money
from X a few months after the transaction between him & Y, X
gave the deposit certificate to Z as a negotiable instrument.
Subsequently, an estafa case was filed against X.
• Held: X is guilty of estafa for misappropriating funds held in
deposit for his principal. The fact that X did not surrender the
money showed that he had used it, which is not allowed in a
deposit. Also, the failure to claim at once or delay for sometime
in demanding restitution of the things deposited, which was
immediately due, does not imply such permission to use the
thing deposited as would convert the deposit into a loan.
Art. 1979. The depositary is liable for the loss of the thing through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have
been authorized to use the same.
General Rule
• The depositary is not liable for loss through a fortuitous event
without his fault; exceptions are provided above
Case Doctrines
Palacio v. Sudario
• Facts: X took 81 cattles of Y on deposit. Upon demand, X was
only able to return 40. X claimed fortuitous event, saying that
the missing animals had drowned in a flood.
• Held: X failed to sufficiently establish the flood & that the flood
was what killed the cattle. As a depositary, any loss of the thing
deposited is presumed to be his fault & he has the burden of
proving the fortuitous event, which in this case, he failed to do.
Thus, X is liable for the loss of the cattle on deposit.
• Lerma’s lecture: If thing is lost while in the hands of the
depositary, it is assumed to be the depositary’s fault. But if it’s
due to fortuitous event, then the depositary will be exempt. BUT
if you are going to raise fortuitous event as a means of denying
 liability, you must be able to prove it in court. You cannot simple
say “I lost it by fortuitous event and therefore I am not liable.”
You must prove that the fortuitous event did in fact occur.
Art. 1980. Fixed, savings, & current deposits of money in banks &
similar institutions shall be governed by the provisions concerning
simple loan.
Contract of Loan
• Bank deposits are really contracts of loan, where the depositor
loans money to the bank so that the bank can use the same for
its ordinary transactions and banking business
• They are “irregular deposits” because they earn interest
o Governed by rules on simple loan or mutuum & rules
on imposition of legal interest
• Bank need not return the exact same money that was
deposited; money is naturally commingled with other people’s
money, creating a single fund from which depositors are paid
Relation of Creditor and Debtor
• Bank is the debtor & agrees to pay the creditor-depositor upon
demand
• A bank’s failure to pay its obligation is not a breach of trust and
cannot constitution estafa through misappropriation
• The payment of a bank extinguishes so much of the obligation
of the bank as is represented by the check paid or honored by
the bank out of the latter’s deposit
• A bank can compensate or set off the deposit in its hands for
the payment of any indebtedness to it on the part of the
depositor
• Bank can be held liable to depositor for fraud, negligence or
delay based on internal banking rules
• When a bank is suspended, it still owes an obligation to its
depositors, but it may not be made liable to pay interest on the
deposit during the period of suspension
Q: In order for a valid offset to occur under the Civil Code, what needs to
exist?
A: Art. 1279. In order that compensation may be proper, it is necessary:
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
(1) That each one of the obligors be bound principally, & that he be
at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, & also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated & demandable;
(5) That over neither of them there be any retention or controversy,
commenced by 3rd persons & communicated in due time to the
debtor.
Case Doctrines
Gullas v. PNB
• Facts: Gullas deposited a U.S. Treasury Warrant with PNB which
turned out to be defective. PNB offset the amount under Gullas
account & sent him a notice that they had already offset his
account. However, Gullas didn’t receive the notice, as he was
out of town, & Gullas had issued checks on the account that
PNB offset. Gullas’ checks were dishonored, to his
embarrassment, & he now wants PNB to be liable.
• Held: PNB is liable. As a general rule, the Civil Code states that
PNB would have had a right to set off the deposits in its hands
for the payment of any indebtedness to it, on the part of a
depositor. However, the Negotiable Instruments Law contains
certain provisions which clearly define and establish the liability
of a general indorser in good faith. The general indorser of a
negotiable instrument engages that if he were dishonored, and
the necessary proceedings of dishonor are duly undertaken,
then he will pay the amount thereof, to the holder. This is clearly
seen in Sec. 66 of the Negotiable Instruments Law. The notice
is dishonor is vital in order to charge all indorsers, & the right of
action against the indorser does not accrue against him until
notice is given.
• Lerma’s Lecture: The bank’s primary purpose in keeping your
money is actually to use it. Offset cannot occur in a traditional
type of deposit, as in a normal deposit, you are not mutual
creditors and debtors, but depositors and depositaries. The fact
that the bank’s deposits are irregular is what allows the bank to
offset amounts deposited to them by depositors.
Serrano v. CB
 • Facts: X wants to get his money back from Overseas Bank,
which had its operations suspended. To make the claim, X
stated that Overseas Bank held the funds in trust for its
depositors, such as himself.
• Held: NO, bank deposits are not in the form of trusts & create
no fiduciary relationship. Bank deposits are in the nature of
irregular deposits. They are loans because they earn interest. All
kinds of bank deposits, whether fixed, savings, or current are to
be treated as loans and are to be covered by the law on loans.
Current and savings deposit are loans to a bank because it can
use the same. X is a creditor of the bank, & not its trustor-
beneficiary.
• Lerma’s Lecture: There is no constructive trust between a bank
and its depositors, because the relationship is debtor and
creditor and not really a contract of deposit.
Art. 1981. When the thing deposited is delivered closed and sealed, the
depositary must return it in the same condition, and he shall be liable for
damages should the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is proof to
the contrary.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputable to
the depositary, should there be no proof to the contrary. However, the
courts may pass upon the credibility of the depositor with respect to the
value claimed by him.
When the seal or lock is broken, with or without the depositary's fault, he
shall keep the secret of the deposit.
CLASS SCENARIO
Q: X deposited a locked bag with Y without giving Y the key. At 9PM in
the night, a strange odor so foul started to emanate from the bank,
giving Y a difficult time to study. Can Y open it?
A: NO. If Y does not have the key, X cannot do it.
Q: If Y returns the bag to X and the bag is unsealed, and X sues Y, will
the court grant X damages?
A: YES, given Art. 1981.
Q: What if through no fault of Y, the bag magically opens, but there is no
damage. Inside are documents showing that X has multiple families.
What is Y’s obligation under the Civil Code?
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
A: Y must keep the secret of the deposit, so Y cannot tell others about
the multiple families.
Q: X gave Y a locked bag filled with documents. X tells Y, “Please wipe
my laptop so that no moisture and no dust will go in. Keep it safe.” The
bag is locked, but X tells Y to please keep the laptop clean every 3 days.
Can Y open the bag?
A: YES, to follow X’s instructions.
Q: What if X did not give Y a key?
A: Y is presumed to have the authority provided that Y cannot fulfill the
obligations X requested of Y without Y opening the locked bag.
Art. 1982. When it becomes necessary to open a locked box or
receptacle, the depositary is presumed authorized to do so, if the key
has been delivered to him; or when the instructions of the depositor as
regards the deposit cannot be executed without opening the box or
receptacle.
Obligations of Depositary
(1) Return the thing deposited when delivered closed & sealed, in
the same condition
(2) Pay for damages should the seal or lock be broken through his
fault; his fault is presumed unless proven otherwise
(3) Keep the secret of the deposit when the seal or lock is broken,
with or without his fault
Credibility of Depositor’s Statement of Value
Serves only as prima facie evidence which may be rebutted
When Opening is Justified
(1) Presumed authority; or
(2) Necessity
Art. 1983. The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consist of money, the provisions relative to agents in
Art. 1896 shall be applied to the depositary.
Obligation to Pay Interest on Money Converted to Personal Use
Generally, when what is deposited is money, the depositary has no right
to make use thereof & thus is not liable to pay interest, EXCEPT—
• When depositary is in delay
 • Has used money without permission – from the day on which he
applies the money to his own use, & those which he still owes
after the extinguishment of the deposit.
Products, Accessories, Accessions
• Products – fruits
• Accessory – things for embellishment (e.g. adding decorations
or hydraulics to a car)
• Accession – something that is attached or incorporated into the
thing given that is not necessarily a product (e.g. in a car, the
side mirror is the accession)
Art. 1984. The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and
who its true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all responsibility
by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing has
not been lawfully acquired by the depositor, the former may return the
same.
Proof of Ownership Not Necessary
To constitute a deposit, it is not essential that the depositor is the owner
of the thing deposited.
For Paragraph 2 to Apply
(1) The thing deposited must have been stolen; &
(2) The depositary must know who the true owner is
Effect of Failure to Claim within 1 Month
• The 1 month period is meant to protect the depositary
o Depositary could unjustly be made liable for refusing to
return to the depositor
o The law, however, does not provide an answer for a
situation where the depositor demands the thing
before the expiry of 1 month but the depositary has
already discovered that the depositor is not the owner
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• If the thing is returned to the depositor after 1 month, the true
owner of the thing may still recover the thing through other legal
processes
CLASS SCENARIO
Q: X gives Y a car by way of deposit for a period of 30 days. Y says he will
not accept the deposit unless Y shows X a certificate of title. Can Y do
this?
A: NO as ownership need not be proved by the depositor.
Q: What if Y accepts the deposit & finds out in the news that the car was
stolen or has reason to believe that the stolen car on the TV was the
same car that is now in his possession, but Y cannot contact the real
owner as Y does not know that person. What will Y do?
A: Y may return the car to X.
Art. 1985. When there are 2 or more depositors, if they are not solidary,
& the thing admits of division, each one cannot demand more than his
share.
When there is solidarity or the thing does not admit of division, the
provisions of Art. 1212 & 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors,
the depositary shall return it only to the person designated.
Thing Divisible & Depositors Not Solidary
Each depositor can demand only his share proportionate to the deposit.
• Ex. If A & B deposited 150 & 300 cavans of rice, respectively, A
can only demand 150 cavans
Obligation is Solidary or Thing Deposited is Not Divisible
• Art. 1212 – Each of the solidary depositors may do whatever
may be useful to the others but not anything which may be
prejudicial to the latter
• Art. 1214 – The depositary may return the thing to any of the
solidary depositors unless a demand, judicial or extrajudicial, is
made by one of them, in which case delivery should be made to
him
CLASS SCENARIO
Q: X & Y tell Z to please keep the SCRAs they have for them until they
can enroll. X & Y are able to enroll. X goes back to Z & asks for the return
of the SCRAs. Should Z give it back?
A: A set of books are divisible so
Q: If X & Y deposit a bike with Z without telling Z what kind of deposit it
is, what rules apply?
A: Art. 1212 & 1214 will apply because the thing that is the subject of
the deposit does not admit of division. Thus, if X shows up to get the
bike, that is valid and Z can give the bike to X even if Y is not there,
because the thing is not divisible.
Lerma’s Lecture
If there are 2 or more depositors are joint & the thing is divisible each
one can get the share that the person is entitled to have.
If the thing belongs 2 or more depositors and it is solidary or it does not
admit of division, then one person can come to collect the entire
indivisible object or solidary obligation.
If the parties stipulate that the obligation is joint & the thing is
indivisible, then the depositary must wait for all the owners to come
forward and give the thing to them together.
Art. 1986. If the depositor should lose his capacity to contract after
having made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights.
CLASS SCENARIO
Q: What happens if X deposits a bike with Y and goes to jail because X
has a final judgment against him for murder. The time to return the
bicycle has fallen due. Who should you return it to?
A: X would be incapacitated, so the bike would go to the administrator of
his estate.
Art. 1987. If at the time the deposit was made a place was designated
for the return of the thing, the depositary must take the thing deposited
to such place; but the expenses for transportation shall be borne by the
depositor.
If no place has been designated for the return, it shall be made where
the thing deposited may be, even if it should not be the same place
where the deposit was made, provided that there was no malice on the
part of the depositary.
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
Lerma’s Lecture
There should be no malice with respect to the depositary in terms of him
choosing to move from one place to another.
Art. 1988. The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may
have been fixed.
This provision shall not apply when the thing is judicially attached while
in the depositary's possession, or should he have been notified of the
opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.
Time of Return
Generally dependent on the will of the depositor, who may even waive a
period set by him. However, the period is generally binding upon the
depositary.
• If deposit is for a compensation, the depositary is entitled to
compensation corresponding to the entire period.
When Depositary Not Obliged to Return the Thing Deposited
(1) When to do so would mean disobeying the judicial order of
attachment
(2) When there is a conflicting claim coming from a 3rd person, in
which case the thing should be consigned with the court
through an action of interpleader
Case Doctrines
Aboitiz v. Orquina
• Facts: X died. Y was his administrator. Y made a claim on X’s life
insurance & deposited the amount with Company W, which
issued a receipt, referring to the amount as a deposit. Later, Y
committed suicide, so Z replaced Y as X’s administrator. Z
demanded the amount from Company W, which refused to
release it, claiming that, since no time was given for the release
of the amount in the agreement between Y & W, Z must resort
to a judicial order to get the money out.
• Held: The amount is a deposit, & is therefore demandable at
any time the depositor makes such demand, whether or not
there is a stipulated period. W must give the deposited amount
to Z.
 • Note: This deposit had accruing interest, but SC still ruled it was
a deposit.
Art. 1989. Unless the deposit is for a valuable consideration, the
depositary who may have justifiable reasons for not keeping the thing
deposited may, even before the time designated, return it to the
depositor; and if the latter should refuse to receive it, the depositary may
secure its consignation from the court.
Depositary May Return the Thing Deposited Notwithstanding Period
Fixed for the Deposit When—
(1) The deposit is gratuitous &
(2) For justifiable reasons (e.g. depositary is going abroad)
Deposit for Valuable Consideration
If so, depositary has no right to return the thing deposited before the
expiration of the time designated.
1988 v. 1989
1988 governs the rules with respect to the depositor, whereas 1989
deals with the rules with respect to the depositary.
Art. 1990. If the depositary by force majeure or government order loses
the thing & receives money or another thing in its place, he shall deliver
the sum or other thing to the depositor.
Art. 1991. The depositor's10 heir who in good faith may have sold the
thing which he did not know was deposited, shall only be bound to
return the price he may have received or to assign his right of action
against the buyer in case the price has not been paid him.
Good Faith of Depositary’s Heir
Provision contemplates a situation where the depositary dies & the heir,
in good faith, sells the thing deposited.
• Heir must return the price received or assign the right to collect
the same to the depositor
• BUT if heir is in bad faith, depositor can sue heir for damages &
heir can be liable for estafa
10 Should be depositary’s
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
CLASS SCENARIO
Q: X dies. Y, his heir, sells X’s iPad for P2,000 which he finds in X’s
things. Later on he finds out it is actually owned by Z and Z gave it to X
by virtue of deposit.
A: Right to collect or the amount earned should be returned to Z.
SECTION 3. - Obligations of the Depositor
Art. 1992. If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have incurred for the
preservation of the thing deposited.
Obligation to Pay Expenses for Preservation
• Gratuitous – Depositor must pay all expenses for preservation,
whether ordinary or extraordinary so long as they are necessary
expenses
o Useful expenses or those for pure luxury or pleasure
are not covered
• Compensated – Expenses of preservation should be borne by
depositary absent contrary stipulation
o Stems from onerous nature of a deposit for valuable
consideration
CLASS SCENARIO
Q: A vehicle was deposited. The ashtray of the car broke. Who pays?
A: The depositor.
Art. 1993. The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the time of
the constitution of the deposit the former was not aware of, or was not
expected to know the dangerous character of the thing, or unless he
notified the depositary of the same, or the latter was aware of it without
advice from the depositor.
General Rule on Loss & Exceptions
Depositary must be reimbursed for any loss suffered because of the
character of the thing deposited, EXCEPT IF—
(1) At the time of the constitution of the deposit, the depositor was
not aware of the dangerous character of the thing
(2) At the time of the constitution of the deposit, the depositor was
not expected to know the dangerous character of the thing
 (3) The depositor notified the depositary of the same
(4) The depositary was aware of the fact without advice from the
depositor
CLASS SCENARIO
Q: If X deposits with Y 10 liters of kerosene, & Y’s house burns down, is
X liable to Y?
A: NO, because in this case, Y should have been aware that since it was
kerosene, it had a dangerous nature.
Q: Would it be the same if X gave Y an unlabeled bottle, but told Y it was
kerosene?
A: YES, X would still not be liable because X informed Y of the character
of the thing deposited.
Art. 1994. The depositary may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit.
Depositary’s Right of Retention
A pledge can be created by operation of law & the deposited thing will
serve as security for the payment of what is due to the depositary by
reason of the deposit, similar to the right granted to an agent.
• Distinguish from commodatum, where retention is only possible
if there are hidden defects that injure the bailee
CLASS SCENARIO
Q: X owes Y P1,000 2 weeks ago. Last week, Y deposited his iPad with X.
Today is the due date of the return of Y’s iPad. When Y made the
demand for P1,000, X refused to return the iPad of Y because Y still
owed X P1,000. If X & Y go to court, who would win?
A: Y would win, because the right of retention has to be by virtue of the
deposit (i.e., the retention should be because of expenses for the
preservation of the iPad), and has nothing to do with other obligations
due from the depositor to the depositary even if said obligation still
exists at the time the deposit is demanded by the depositor.
Art. 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary.
Causes of Extinguishment of Deposit
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
List is not exclusive & other causes can exist, such as novation, merger,
fulfillment of the resolutory condition, etc.
• The return of the thing also extinguishes the deposit
Effect of Death of Depositor
(1) Gratuitous – since a deposit that is gratuitous is personal in
nature, the depositary is not obliged to continue with the
contract of deposit
• Lerma: There is a certain trust committed and the heirs
have to hold it and keep it safely until it is claimed by
the depositary
(2) Compensated – An onerous deposit is not personal, so the
rights & obligations arising therefrom will be transmitted to the
respective heirs.
• BUT the heirs of either party have a right to terminate
the deposit even before the expiration of the term
CHAPTER 3. – NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar events.
Art. 1997. The deposit referred to in No. 1 of the preceding article shall
be governed by the provisions of the law establishing it, & in case of its
deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be
regulated by the provisions concerning voluntary deposit and by Art.
2168.
Four Kinds of Necessary Deposit (LOCTP)
As opposed to a voluntary deposit, a necessary deposit does not involve
freedom of choice.
(1) When it is made in compliance with a Legal Obligation
• Judicial deposit of a thing which is being disputed in a
litigation by 2 or more persons
• Deposit of a thing pledged when the creditor uses the
same without authority of the owner or misuses it in
any other way
 • Required in suits by the Rules of Court
• Deposit with a bank or public institution of bonds or
instruments of credit payable to order or bearer given
in usufruct when the usufructuary does not give proper
security for their conversion
• Those constituted to guarantee contracts with the
government
(2) When it takes place on occasion of any Calamity
(3) When made by Travelers in hotels or inns
(4) When made by Passengers with common carriers
Necessary Deposit on Occasion of Calamity
• Depositary gains the obligations of a bailee & the immediate
object would be to save the property rather than its
safekeeping.
o Ex. If X saves Y’s TV set in a fire, X is supposed to be
the depositary
• There must be a causal relation between the calamity & the
constitution of the deposit
o Such a deposit is a quasi-bailment, otherwise known as
involuntary bailment or involuntary deposit, or deposito
miserable
• Quasi-contract (Art. 2168) – The depositary must be paid by the
depositor a just compensation for saving the property from
destruction
Art. 1998. The deposit of effects made by the travellers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns shall
be responsible for them as depositaries, provided that notice was given
to them, or to their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions which said hotel-
keepers or their substitutes advised relative to the care and vigilance of
their effects.
Case Doctrines
Tan Khey v. De los Santos
• Facts: X stayed at a hotel owned by Y. X left his stuff with the
staff of Y in the afternoon, consisting of his bag & revolver, &
then came back in the evening & retired to his room. When X
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
woke up the next day, his pants, bag, the contents of the bag, &
his revolver were gone. X sought to make Y liable.
• Held: Y is liable for the pants, the bag & the revolver, because
for these 3, Y had notice that X had them with him, as X
deposited the revolver & bag with Y’s staff & X was walking
around in that pair of pants the whole day. However, Y is not
liable for the things he is not aware of—the contents of the bag,
which neither Y nor his staff ever saw. It is not necessary in
order to hold an innkeeper liable that the effects of the guest
are actually delivered to him; it is enough that they were in the
inn. Also, though the notices of the hotel said that valuables
such as revolvers, money, jewelry, etc. should be deposited with
staff, otherwise the management would not be liable for loss, Y
could not escape liability in the situation, because X had
exercised due diligence with his things & even locked the room,
whereas Y failed to provide adequate security for his guests.
Art. 1999. The hotel-keeper is liable for the vehicles, animals & articles
which have been introduced or placed in the annexes of the hotel.
Requisites for Keepers of Hotels or Inns to be Responsible
(1) The keepers have been previously informed or has notice about
the effects brought by the guests; &
(2) The guests have taken the precautions prescribed regarding
their safekeeping.
Extent of Liability of Keepers of Hotels & Inns
• Liability is not limited to baggage or articles of clothing, but
include those lost or damaged in hotel annexes, such as
vehicles in the hotel’s garage.
o Contract of deposit is perfected when the hotel guest
hands over his keys to his vehicle, & the latter received
the obligation to safely keep & return it
• Hotel-keepers cannot waive this because they are tasked with
taking extraordinary care with the safety & well-being of their
guests & their guests’ things
• Responsibility extends to all those who offer lodging for
compensation, whatever may be their character.
• Innkeepers are also subsidiarily liable for restitution of goods
taken by theft or robbery within their houses from guests
 lodging therein & for the payment of the values thereof (Revised
Penal Code)
Travellers or Guests Defined
• Transients who enter hotels or inns to seek temporary lodging
• Must be accepted without discrimination; accommodation may
be refused without liability only for justifiable reasons
• NOT the same as boarders in dorms who are there for an
extended or contracted period
CLASS SCENARIO
Q: X lives in a dorm. X took precautions told by the dorm-keeper, yet X’s
items were lost. Is the dorm-keeper liable?
A: NO. The provision refers to transients, or travelers who are only
temporarily in a certain lodging or hotel.
CLASS SCENARIO
Q: What if the loss occurred in the tennis court of a hotel. Is the hotel
liable?
A: YES, as the annexes of the hotel are included.
Art. 2000. The responsibility referred to in the two preceding articles
shall include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of hotels or inns as
well as strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on the vigilance
of the keeper of the hotels or inns shall be considered in determining
the degree of care required of him.
Art. 2001. The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or through
an irresistible force.
Art. 2002. The hotel-keeper is not liable for compensation if the loss is
due to the acts of the guest, his family, servants or visitors, or if the loss
arises from the character of the things brought into the hotel.
When Hotel-Keeper is Liable Regardless of Amount of Care
(1) The loss or injury to the personal property of the guest is caused
by his servants, employees or strangers
Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma
• Provided that notice has been given & proper
precautions taken by the guest
(2) The loss is caused by the act of a thief or robber done without
use of arms or irresistible force
When Hotel-Keeper Not Liable (FTAC)
(1) Loss or injury is via Force majeure
(2) Theft or robbery is by a stranger (not a hotel employee or
servant) & there is use of arms or irresistible force
• UNLESS the hotel-keeper is guilty of fault or negligence
in failing to provide against the loss or injury from his
cause (Art. 1170-74)
(3) Loss is due to the Acts of the guest, his family, servants or
visitors
(4) Loss arises from the Character of the things brought to the
hotel
Supervision or Control
For innkeepers or hotel-keepers to be liable for the effects of the guests,
it is not necessary that these are delivered to him or his employees; it is
enough that they are WITHIN the inn.
CLASS SCENARIO
Q1: X is a guest in Y’s hotel. Z is the culprit. X loses his things, including
his pants. If Z is a waiter, who is ultimately liable to X?
A: Y will be liable because it is the staff who did it.
Q2: Z is a pedestrian walking by the hotel. He looks up and sees through
the window X’s pants, & says “I like those pants and says he will steal
them. Is Y liable to the guest?
A: Y is liable because it was committed with theft without use of arms or
force.
Q3: What if the pants were hanging from the premises, would Y be
liable?
A: Yes because it was still hanging on the premises of the hotel and was
still within the vicinity of the hotel.
Q4: Z is a well-known thief, sneaks in, takes the pants & other valuables.
Is Y liable?
A: Y would still be liable. The only instance where thieves would be liable
is when they employ force.
Q5: What if Z is a guest of X? Is X liable?
A: It depends. Y must prove that the relative was a GUEST of X. Absent Notice of Lis Pendens
that, Y would be liable. Serves as notice to the whole world that a particular real property is in
Q6: What would happen if Z was not aware that the goods he was litigation & warns those who may acquire an interest over the property to
stealing belonged to his cousin? do so at his own risk.
A: Y would not be liable because the mere fact of the relationship
between X & Z exempts Z. Custodia Legis
Q7: What if what was damaged were plants brought in by the guest? Will A thing is in custodia legis when it is shown that it has been & is
Y be liable? subjected to the official custody of a judicial or executive officer
A: NO, because the damage is due to the character of the thing brought pursuant to the execution of a legal writ
in. • To effect proper custodia legis, property must be lawfully taken by
virtue of legal process.
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought Escrow Order
by the guest. Any stipulation between the hotel-keeper and the guest A written instrument which by its terms imports a legal obligation &
whereby the responsibility of the former as set forth in Art. 1998 to which is deposited by the grantor, promisor or obligor, or his agent with a
2001 is suppressed or diminished shall be void. stranger or third party, to be kept by the depositary UNTIL the
performance of a condition or the happening of a certain event, & then
Art. 2004. The hotel-keeper has a right to retain the things brought into to be delivered over to the grantee, promisee or obligee
the hotel by the guest, as a security for credits on account of lodging, & • Involves any written instrument with a third person (can involve
supplies usually furnished to hotel guests. land, money representing rentals or otherwise, etc.)
• May be issued by a court in the exercise of its intrinsic powers to
Not Paying for Food or Accommodation issue orders
The act of obtaining food or accommodation in a hotel or inn without
paying therefor constitutes estafa. Judicial Deposit or Sequestration
• Properties may be attached by the sheriff upon filing of a
CHAPTER 4. – SEQUESTRATION OR JUDICIAL DEPOSIT complaint
• Receiver (a disinterested party) may be appointed by the court to
Art. 2005. A judicial deposit or sequestration takes place when an administer & preserve the property in litigation
attachment or seizure of property in litigation is ordered.
• Personal property may be seized by the sheriff in suits of replevin
or manual delivery of personal property
Art. 2006. Movable as well as immovable property may be the object of
sequestration.
Description Judicial Extrajudicial
Cause or Origin By will of the court By will of the parties;
Art. 2007. The depositary of property or objects sequestrated cannot be
there is a contract
relieved of his responsibility until the controversy which gave rise thereto
has come to an end, unless the court so orders. Purpose Secures the right of a Custody & safekeeping
party to recover in case of of the thing
Art. 2008. The depositary of property sequestrated is bound to comply, a favorable judgment
with respect to the same, with all the obligations of a good father of a Subject Matter Movable or immovable, Only movable property
family. but generally immovable
Remuneration Remunerated (onerous) May be compensated or

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma

 not, but generally
gratuitous
In whose behalf Person who, by the Depositor or third person
it is held judgment, has a right designated

Art. 2009. As to matters not provided for in this Code, judicial

sequestration shall be governed by the Rules of Court.

Rules of Court Involved in Deposit

• Rule 57 – Preliminary Attachment
• Rule 59 – Receivership
• Rule 60 – Replevin
• Rule 127 of Criminal Rules of Court – Attachment in Criminal
Proceedings

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma