XII. CREDIT TRANSACTIONS Flashcards
XII. CREDIT TRANSACTIONS
A. Mutuum and Commodatum (Civil Code, arts. 1933-1961)
Key Points of Mutuum and Commodatum: A Comparison
These articles outline the key differences between two loan contracts in Philippine Civil Law: Mutuum and Commodatum.
Mutuum (Simple Loan):
- Ownership Transfer: The borrower becomes the owner of the borrowed item (money or other fungible goods).
- Repayment: The borrower must return the same amount of the same kind and quality as borrowed.
- Interest: Interest is only due if explicitly stipulated in writing. Usury laws apply to prevent excessive interest rates.
- Example: You borrow ₱10,000 from a friend. You become the owner of the money and must repay ₱10,000, potentially with interest if agreed upon.
Commodatum (Loan for Use):
- Ownership Retention: The lender retains ownership of the loaned item.
- Use: The borrower receives only the right to use the item for a specific purpose or period.
- Gratuitous: Commodatum is typically a free loan, though exceptions exist (e.g., borrower pays for maintenance).
- Liability: The borrower is generally liable for loss or damage unless caused by a fortuitous event (unforeseen accident) outside their control.
- Example: You borrow your neighbor’s lawnmower to cut your grass. You have the right to use it for that purpose, but you must return it undamaged (aside from normal wear and tear).
XII. CREDIT TRANSACTIONS
B. Deposit (Civil Code, arts. 1962-2009)
1. Voluntary Deposit (Ordinary Deposit):
* Most common type of deposit.
* Established when someone delivers an item (belonging to another) for safekeeping with the obligation to return it. (e.g., leaving your luggage at a hotel cloakroom)
* Can be gratuitous (no fee) or for a fee (storage locker).
* Only movable things can be deposited. (e.g., jewelry, cash)
* The depositary (person receiving the item) is generally liable for loss or damage unless caused by a fortuitous event (unforeseen accident) and they exercised due care.
* Depositor can demand the return of the item anytime, even if a period was initially specified, unless there’s a legal hold on the item.
Example: You lend your friend Michael your camera for a weekend trip. This is a voluntary deposit. Michael is responsible for taking care of the camera and returning it to you undamaged.
2. Necessary Deposit:
* Made by law or due to unforeseen circumstances.
* Examples:
* Depositing valuables with the court during a legal dispute.
* Leaving belongings at a hotel during a fire.
3. Hotel Deposits:
* Specific rules apply to guest belongings in hotels.
* Hotel keepers are liable for loss or damage to guest belongings, with some exceptions:
* Caused by the guest, their companions, or inherent nature of the item.
* Result of force majeure (uncontrollable event) like a natural disaster (unless proven caused by the hotel’s negligence).
* Guests are expected to take reasonable precautions with their belongings.
* Hotels cannot avoid responsibility through posted notices.
Example: You leave your laptop in your hotel room safe and it gets stolen. The hotel might be liable if they didn’t have proper security measures, but not if you left it out in the open.
4. Depositary’s Obligations:
* Keep the deposited item safe.
* Return it to the depositor upon request.
* Cannot use the deposited item without permission.
* May be liable for interest earned on deposited securities (bonds, certificates).
5. Depositor’s Obligations:
* Reimburse the depositary for reasonable expenses incurred in keeping the item safe (gratuitous deposits only).
* Inform the depositary if they know the deposited item is dangerous.
6. Termination of Deposit:
* The deposit ends when the item is lost, destroyed, or returned.
* In a gratuitous deposit, it also ends upon the death of either party.
XII. CREDIT TRANSACTIONS
C. Guaranty and Suretyship (Civil Code, arts. 2047-2081)
Key Points to Remember on Philippine Guaranty Law for the Bar Exam:
- Guaranty creates a secondary obligation where a guarantor (you) promises a creditor (lender) to pay a debtor’s debt if they fail to.
1) Guarantor’s Obligations and Rights:**
- Guaranty can be Gratuitous or Paid: You can guarantee a debt for free or for a fee (Article 2048).
- Prior Consent of Debtor Not Required: Your agreement with the creditor is enough (Article 2050).
- Limits of Guarantor’s Liability: You can’t be liable for more than the debtor (amount and conditions) (Article 2054).
- Guaranty Must be Clear and Specific: It cannot be broader than what’s agreed upon (Article 2055).
- Right to Object to Unqualified Guarantors: If you have to provide a guarantor, they must be solvent and reside in the Philippines (Article 2056).
- Benefit of Excussion (Unless Excepted): Generally, the creditor must try to collect from the debtor first before coming to you (Article 2058). You can point to the debtor’s assets to be seized first (Article 2060).
- Right to Sue Debtor for Reimbursement: If you pay the creditor, you can sue the debtor to get your money back (Article 2066).
2) Examples:**
* Mark guarantees a loan of ₱10,000 for his friend, Jessica. Mark can’t be forced to pay more than ₱10,000 if Jessica defaults (Article 2054).
* If Leo guarantees a loan for Sarah, but Leo lives in Canada, Sarah can object to him as a guarantor (Article 2056).
* If a bank requires a guarantor for a business loan, they can’t demand payment from the guarantor right away if the business has assets that can be sold first (Article 2058).
3) Relationship Between Guarantors:**
* Solidary Guarantors vs. Simple Guarantors: If multiple guarantors are solidary, the creditor can demand payment from any one of them for the entire debt. If they are simple guarantors, the debt is divided proportionally (Article 2065).
* Right to Contribution from Co-Guarantors: If you pay as a guarantor, you can seek contribution from other co-guarantors for their share (Article 2073).
4) Extinction of Guaranty:**
* Guaranty Ends When Debtor’s Obligation Ends: If the debt is paid or forgiven, your obligation as a guarantor ends too (Article 2076).
* Creditor’s Actions Affecting Guarantor’s Rights: If the creditor releases some collateral of the debt without your consent, you may be released from your obligation (Article 2080).
* Granting Extension to Debtor Without Guarantor’s Consent: This generally releases you from the guaranty (Article 2079).
Remember:
- Understanding the exceptions to the benefit of exhaustion is crucial (Article 2059).
XII. CREDIT TRANSACTIONS
D. Real Estate Mortgage (Civil Code, arts. 2124-2126 and 2128-2131)
ARTICLE 2124:
Key points:
1. Only immovables and alienable real rights imposed on immovables can be mortgaged.
2. Movables can be the object of a chattel mortgage.
Example: Juan can mortgage his house and lot (immovable property) to a bank as security for a loan. However, if Juan wants to use his car (movable property) as security, it would be through a chattel mortgage, not a regular mortgage.
ARTICLE 2125:
Key points:
1. For a mortgage to be validly constituted, it must be recorded in the Registry of Property.
2. An unrecorded mortgage is still binding between the parties.
3. Persons with a legal right to a mortgage can demand execution and recording of the mortgage document.
Example: Maria mortgages her farm to Pedro. Even if they don’t record it in the Registry of Property, the mortgage is still valid between Maria and Pedro. However, for the mortgage to be effective against third parties, it must be recorded.
ARTICLE 2126:
Key points:
1. A mortgage directly and immediately subjects the mortgaged property to the fulfillment of the secured obligation.
2. This is true regardless of who possesses the property.
Example: Carlos mortgages his apartment to a bank for a loan. Later, Carlos sells the apartment to Ana. Even though Ana now owns the apartment, the bank can still foreclose on the property if Carlos defaults on the loan, because the mortgage “follows” the property regardless of ownership changes.
These articles collectively define what can be mortgaged, how mortgages are formalized and recorded, and the effect of mortgages on the mortgaged property, providing a framework for using real property as security for obligations in the Philippines.
I’ll summarize the key points of each article and provide an example for each:
ARTICLE 2128:
Key point: A mortgage credit can be transferred or assigned to another person, in whole or in part, following legal formalities.
Example: Maria has a mortgage on her house with Bank A. Bank A decides to sell half of Maria’s mortgage to Bank B. As long as they follow the proper legal procedures, this transfer is valid.
ARTICLE 2129:
Key point: The creditor can demand payment from a third party who possesses the mortgaged property, for the portion of the credit secured by that property.
Example: Juan mortgages his farm to a bank. He then sells the farm to Pedro without informing the bank. The bank can demand payment from Pedro for the portion of the mortgage secured by the farm he now owns.
ARTICLE 2130:
Key point: Any provision in a mortgage contract that prohibits the owner from selling the mortgaged property is invalid.
Example: If Ana’s mortgage agreement with a bank includes a clause stating she cannot sell her mortgaged house, this clause would be considered void. Ana retains the right to sell her house despite the mortgage.
ARTICLE 2131:
Key point: The details of mortgages not covered in this chapter are governed by the Mortgage Law and Land Registration Law.
Example: If there’s a question about how to properly register a mortgage on a piece of land, one would need to refer to the Land Registration Law for the specific procedures, as it’s not detailed in this chapter of the Civil Code.
These articles collectively define important aspects of mortgage transferability, the rights of creditors against third-party possessors, the invalidity of alienation prohibitions, and the applicability of other laws to mortgage-related matters not covered in this chapter.
XII. CREDIT TRANSACTIONS
E. Personal Property Security Act (R.A. No. 11057)
The Personal Property Security Act (PPSA) is a law in the Philippines that governs how lenders and borrowers can use personal property as collateral for a loan.
It creates a system for registering security interests, which gives lenders a way to protect their rights to the collateral if the borrower defaults on the loan.
- Key Points**
1) Collateral:** This law applies to transactions involving MOVABLE collateral, such as equipment, inventory, and consumer goods. It does not apply to interests in aircrafts and ships, which are governed by separate laws.
2) Security Agreement:** A security interest is created by a written security agreement signed by both the borrower (grantor) and the lender (secured creditor). This agreement describes the collateral and the terms of the loan.
3) Perfection:** In order for the lender’s security interest to be enforceable against third parties, it must be perfected. This can be done by registering a notice with a central registry, taking possession of the collateral, or controlling investment property or a deposit account.
4) Priority:** If there are multiple lenders with security interests in the same collateral, the lender whose security interest is PERFECTED FIRST will have priority. This means that they will be first in line to recover their loan if the borrower defaults.
5) Repossession:** The secured creditor can take possession of the collateral without a court order if the security agreement allows it, as long as it can be done peacefully. If the collateral cannot be repossessed peacefully, the creditor can go to court to get an order for possession.
6) Debtor’s Rights:** The borrower has the right to redeem the collateral by paying off the loan in full, even after the lender has repossessed it. The borrower also has the right to dispute the lender’s claim to the collateral.
- Example**
Let’s say that Maria takes out a loan from a bank to buy a new refrigerator. The bank requires Maria to sign a security agreement that gives the bank a security interest in the refrigerator. The bank perfects its security interest by registering a notice with the central registry. If Maria defaults on the loan, the bank can repossess the refrigerator and sell it to pay off the debt. However, Maria has the right to redeem the refrigerator by paying off the loan in full before the bank sells it.
Challenging Multiple Choice Questions on Mutuum and Commodatum:
1. Maria lends her friend Daniel her car for a weekend trip. Daniel gets into an accident and the car is totaled. Who is liable for the car’s value?
a) Maria, because the car was damaged.
b) Daniel, because he was driving the car.
c) It depends on whether the accident was Daniel’s fault.
d) Maria, unless they had a written agreement about damage.
Answer: (b) Daniel, because he was driving the car.
Reasoning: This scenario describes a Commodatum (loan for use). In a Commodatum, the borrower (Daniel) is generally liable for loss or damage to the loaned item (the car) even in cases of fortuitous events (accidents) unless caused by the lender’s fault. While fault may play a role in some situations (e.g., drunk driving), the article suggests the borrower is liable for the car’s value regardless of fault in this instance.
2. Lisa loans her brother Mark ₱10,000 to help him pay rent. No interest was mentioned in their agreement. A year later, Lisa asks Mark to repay the loan. Can Lisa charge Mark interest?
a) Yes, Lisa can charge interest because it was a large sum of money.
b) Yes, Lisa can charge interest because she needs the money back.
c) No, Lisa cannot charge interest because it wasn’t stipulated in writing.
d) Mark can choose to pay back less than ₱10,000 since it was a loan to a family member.
Answer: (c) No, Lisa cannot charge interest because it wasn’t stipulated in writing.
Reasoning: This scenario describes a Mutuum (simple loan). In the Philippines, Mutuum contracts require written agreements for interest. Since their agreement was verbal and didn’t mention interest, Lisa cannot legally charge it under Article 1956.
3. Bianca lends her designer purse to her friend Carina for a special event. Carina lets her daughter use the purse, and the daughter accidentally spills juice on it, causing permanent damage. Who is liable for the damage?
a) Carina’s daughter, because she spilled the juice.
b) Bianca, because Carina loaned the purse to someone else.
c) Carina, because she was responsible for the borrowed item.
d) No one is liable; it was an accident.
Answer: (c) Carina, because she was responsible for the borrowed item.
Reasoning: This is another Commodatum situation. Commodatum contracts are personal in nature, meaning the borrower (Carina) cannot lend the item to someone else (Article 1939). By allowing her daughter to use the purse, Carina breached the agreement and may be liable for the damage, even if unintentional.
Challenging Multiple Choice Questions on Deposits in the Philippines:
1. Maria leaves her car at a valet parking service at a mall. While parked, the car is vandalized. Who is liable for the damage?
a) Maria, because she is the owner of the car.
b) The mall, because they have a responsibility for the safety of patrons’ vehicles.
c) The valet service, because they were entrusted with the car’s care.
d) It depends on whether the valet service had proper security measures in place.
Answer: (c) The valet service, because they were entrusted with the car’s care.
Reasoning: This scenario describes a voluntary deposit. Valet parking services act as depositaries, and under Article 1972, they are obligated to keep the deposited item (the car) safe and return it in the same condition. Vandalism suggests a lack of proper security, making the valet service liable for the damage.
2. Bianca lends her diamond necklace to her sister, Carina, for a wedding. Carina, without permission, lets her friend wear the necklace for the reception. The friend accidentally breaks the necklace. Who is liable for the damage?
a) Bianca, because she lent the necklace to Carina.
b) Carina’s friend, because she broke the necklace.
c) Carina, because she allowed someone else to use it without permission.
d) No one is liable; it was an accident.
Answer: (c) Carina, because she allowed someone else to use it without permission.
Reasoning: This is another voluntary deposit situation. Article 1977 prohibits the depositary (Carina) from using the deposited item (the necklace) without the depositor’s (Bianca’s) permission. By letting her friend wear the necklace, Carina breached the agreement and is liable for the damage, even if unintentional.
3. Daniel deposits a box of rare coins with a safety deposit box company. The company goes bankrupt, and Daniel loses his coins. Can Daniel recover the coins?
a) No, because the company’s bankruptcy is a fortuitous event.
b) Yes, because safety deposit boxes are a form of necessary deposit.
c) It depends on whether Daniel declared the value of the coins to the company.
d) No, safety deposit boxes are a form of gratuitous deposit.
Answer: (a) No, because the company’s bankruptcy is a fortuitous event.
Reasoning: Safety deposit boxes are a type of voluntary deposit, not necessary (Article 1996). While the company’s responsibility is to keep the box safe, Article 1979 protects them from liability for loss due to fortuitous events (like bankruptcy) if reasonable care was exercised.
4. Roberto finds a wallet containing cash and identification while walking down the street. He takes it to the nearest police station and deposits it with the officer on duty. What type of deposit is this?
a) Gratuitous deposit, because Roberto isn’t charging anything.
b) Necessary deposit, because Roberto has a legal obligation to turn it in.
c) Voluntary deposit, because Roberto chose to deposit it with the police.
d) There’s no deposit since Roberto doesn’t own the wallet.
Answer: (b) Necessary deposit, because Roberto has a legal obligation to turn it in.
Reasoning: This scenario describes a necessary deposit. Article 1996 (1) states that a deposit is necessary when it is made in compliance with a legal obligation. Finding lost property and turning it in to the authorities falls under this category.
Challenging Multiple Choice Questions on Guaranty in the Philippines:
1. Maya borrows ₱50,000 from a bank and asks her brother, Ethan, to guarantee the loan. Ethan agrees. The bank, without informing Ethan, grants Maya a one-year extension on the loan repayment. What is the effect of the extension on Ethan’s obligation as a guarantor?
a) Ethan remains liable for the loan as his guaranty is separate from the loan agreement.
b) Ethan is released from his obligation as the extension is a material change to the original agreement.
c) Ethan is still liable but only for the original loan amount of ₱50,000.
d) The answer depends on whether Ethan consented to the extension.
Answer: (b) Ethan is released from his obligation as the extension is a material change to the original agreement.
Reasoning: Article 2079 of the Civil Code states that an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. This is because the guarantor’s risk profile changes with an extension, and their consent ensures they are aware of the altered risk.
2. Daniel guarantees a loan for his friend, Carlos. Carlos defaults on the loan. Daniel pays the creditor the full amount and then sues Carlos for reimbursement. Can Daniel recover the entire amount he paid from Carlos?
a) No, Daniel can only recover the principal amount of the loan, not the interest.
b) Yes, Daniel can recover the entire amount, including interest and any legal fees incurred.
c) It depends on whether the guaranty agreement specified reimbursement for interest.
d) Daniel cannot recover anything as Carlos is the primary debtor.
Answer: (b) Yes, Daniel can recover the entire amount, including interest and any legal fees incurred.
Reasoning: Article 2066 of the Civil Code outlines the indemnity a guarantor who pays for the debtor is entitled to. This includes the total amount of the debt, legal interest from the time of payment, expenses incurred after notifying the debtor, and damages (if applicable).
3. A company requires a guaranty for a business loan. They present Robert as the guarantor. Robert, however, is facing financial difficulties and is about to declare bankruptcy. Can the company refuse Robert as a guarantor?
a) No, the company cannot refuse Robert as long as he agrees to be a guarantor.
b) Yes, the company can refuse Robert as they have the right to choose a solvent guarantor.
c) The company can only refuse Robert with a valid reason, such as a history of defaults.
d) It depends on whether Robert discloses his financial situation to the company.
Answer: (b) Yes, the company can refuse Robert as they have the right to choose a solvent guarantor.
Reasoning: Article 2056 of the Civil Code states that the person obliged to furnish a guarantor must present someone with integrity, the capacity to bind themselves, and sufficient property to answer for the obligation. This allows the creditor to choose a guarantor with a lower risk of default.
