Credit Transactions Loi Tips

LOAN .................................................................................................................................... 2
Commodatum .............................................................................................................. 2
Nature of a Commodatum ............................................................................... 2
Obligations of the Bailee .................................................................................. 2
Obligations of Bailor ......................................................................................... 3
Mutuum and Usury Law .............................................................................................. 3
DEPOSIT ............................................................................................................................... 8
Deposit In General And Its Different Kinds .................................................................. 8
Voluntary Deposit ....................................................................................................... 8
General Provisions ............................................................................................ 8
Obligations of a Depositary .............................................................................. 9
Obligations of the Depositor .......................................................................... 11
Necessary Deposit ..................................................................................................... 12
Sequestration or Judicial Deposit .............................................................................. 13
Act No. 2137 - WAREHOUSE RECEIPTS LAW ....................................................................... 13
PD 115 – TRUST RECEIPTS LAW .......................................................................................... 15
LETTERS OF CREDIT ............................................................................................................ 16
 Credit Transactions 1st Examination Nature of a Commodatum
Loi Tips
1. Bailee acquires use but not the fruits (1935); unless
LOAN there is a stipulation (1940)
2. Consumable goods may be the subject of a
Commodatum
commodatum (1936)
a. If purpose is not for consumption
Commodatum – when one party delivers to another
b. Exhibition
something which is not consumable so that the latter may use
3. Movable or immovable property (1937)
the same for a certain time and return it.
4. Bailor need not be the owner (1938)
a. As long as you have possessory interest as:
Mutuum/Simple Loan – when one party delivers to another
Usufructuary or Lessee
money or a consumable thing upon the condition that the
5. Commodautm is purely personal (1939)
same amount of the same kind and quality shall be paid.
a. Death of either bailor or bailee
b. Bailor can neither lend or lease
Bailor – one who lends
i. Except: household members
Bailee – one who received what is lent
1. Except: if nature forbids
such use
Commodatum versus Mutuum
As to: (OOCO – PPDLN)
Unique case of Producers Bank v CA the transaction where
money deposited in the account to make it appear that the
firm had sufficient capitalization to form a corporation was
deemed to be a commodatum. The SC held that it is the
intention of the parties which is accorded primordial
consideration in determining the actual character of the
contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such
determination. However, do take note: for the transaction
involving consumable goods, in this case money, to be a
commodatum what is expected to be returned should be the
exact money deposited with the same serial numbers.

In Mina v Pascual the contract entered into is not a

commodatum but a contract of lease. Contracts are not to be
interpreted in conformity with the name that the parties
thereto agree to give them but contract are defined and
denominated by law based from the intention of the parties.
Where the use of the immovable property was not for a fixed
and definite period and where it is found that present
possessor is obliged to pay rent. Contract is not a
commodatum which is for a certain period and is essentially
gratuitous.
Note: Commodatum/Mutuum is perfected by delivery
Obligations of the Bailee
1. Pay Ordinary expenses for use & preservation (1941)
Characteristics of a Commodatum: (RUN – PIG)
2. Must take good care of the thing with the diligence of
1. Real
a good father of a family
2. Unilateral
3. GR: Bailee is NOT liable for loss UNLESS: (1942)
3. Nominal
Bailee is Liable for loss (even fortuitous) IF (5)
4. Principal
a. Devotes to different purpose
5. Informal
b. Keeps it longer than period or after
6. Essentially Gratuitous
accomplishment of use
c. If thing loaned has been delivered with
In Pajuyo v CA the Kasunduan was not a commodatum appraisal of its value
because it was not essentially gratuitous by virtue of the d. Lends or leases to third person
obligation on the part of Guevarra to maintain the sproperty e. Chooses to save his own thing than that
in good condition. (this is despite absence of payment of rent) borrowed
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 4. Does not answer for deterioration of thing loaned
(1943)
a. Unless at fault
5. Bailee cannot retain thing loaned (1943)
a. Except for damages due to bailor knowing of
flaws over thing loaned does not advise
bailee (1951)
6. When there are 2 or more bailees = Solidary liability
In Republic v Balagtas there was no commodatum because
the contract was with payment of breeding fee. Assuming that
it was a commodatum the bailee is liable for the loss since he
kept it longer than the period stipulated and further he was
appraised of the book value of the bulls.
In Catholic Vicar v CA there was no adverse possession prior
to the repudiation of ownership via declaration of lot for
taxation purposes. Relationship of the parties before such
repudiation is considered as one of commodatum and failure
to return did not mean adverse possession.
a. Bailor has the right to retention until
damages is paid - REQUISITES: (4)
i. There is a flaw or defect
ii. It is hidden or latent
iii. Bailor is aware of defect
iv. Bailor does not advice bailee of
such flaw
v. Because of the defect bailee suffers
damage
8. Cannot be exempted from liability for expenses or
damages by abandoning thing to bailee (1952)
In Quintos v Beck where Quintos gratuitously granted Beck the
use of the furniture subject to the condition that Beck would
return them to her upon demand there was a contract of
commodatum specifically a precarium. Further where upon
demand Beck refused to return all the furniture, therefore
constituting a breach of the contract of commodatum, Quintos
had the right to refuse partial delivery and Beck should be
liable for the costs for the return.

Obligations of Bailor Mutuum and Usury Law

1. Primary obligation to allow bailee to use the thing
loaned for the duration of the period stipulated OR Notes:
for the accomplishment of the purpose for which it • Obligation is to pay to creditor an equal amount of the
was intended (1946) same kind and quality
2. May demand return • Characteristics of a Mutuum: (RUN – PIGO)
a. (or temporary use) When he should have 1. Real
urgent need of the thing 2. Unilateral
i. Then commodatum is suspended 3. Nominal
b. (1948) (immediate return) if bailee commits 4. Principal
act of ingratitude under Art. 765 5. Informal
i. Commits an offense to person, honor, 6. Gratuitous OR Onerous
property of bailor or wife or children under
• Distinguish Contract of Loan from Contract of Lease
PA
ii. Imputes to bailor a criminal offense or act o Contract of Lease – Lessor delivers to lessee
involving MT a non-consumable thing so that the lessee
1. Unless committed to bailee or may use it at a certain period and return it
wife or children under PA
for a consideration
iii. Unduly refuses support when legally or
morally bound o Lessor/Lessee (as opposed to
3. Precarium (1947) Creditor/Debtor)
a. If neither duration or use is stipulated o In Lease owner receives rent as
b. OR if use is merely tolerated by owner (bailor?) compensation or price
4. (1949) Refund extraordinary expenses • Distinguish Loan from Trust Receipt
a. Provided bailee informs him • Civil code refers to fungible things interchangeable
i. Except when expenses are so with consumable things
urgent that reply of bailor cannot • Note the modes of extinguishing an obligation:
be awaited payment, performance, condonation, confusion,
5. Extraordinary expenses arising out of the actual use compensation and novation;
of the thing by the bailee o Except: loss of the thing because here we
a. Borne equally by bailor and bailee have a generic thing and genus never
6. (1950) Expenses other than Ordinary expenses or perishes
Extraordinary expenses arising out of the actual use • Barter (1954)
of the thing shall NOT be reimbursed o What is delivered is a non-fungible thing
7. Bailor who does not advise the bailee of flaws of the o Equivalent thing is given in return for what
thing loaned is liable for damages which bailee may has been received
suffer by reason thereof (1951) o Always onerous
• Obligation of borrower/debtor (1249-1250)
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 o Payment of debt in money shall be in
currency stipulated OR if not possible the
legal tender in the Philippines
o Delivery of promissory notes, bills of
exchange or mercantile documents ahll
produce effect of payment only when
▪ They have been cashed
▪ Or impaired thru fault of creditor
o Action of original obligation is held in
abeyance
o In case of extraordinary inflation/deflation;
the value of the currency at the time of the
establishment of the obligation shall be
basis of payment; Requisites (3):
▪ Official BSP declaration of Inflation
or deflation
▪ Obligation is contractual in nature
▪ Parties expressly agreed to consider
effects of extraordinary
inflation/deflation
Terms to know:
• Principal – amount of the loan
• Maturity Date – date when loan must be fully paid
• Bullet payment or Balloon payment – when principal
is due and payable on maturity date
• Amortizations – refers to portions of the principal
which is payable over the life of the loan
• Fixed interest rate – interest rate does not change
over time
• Floating interest rate – interest rate changes based
on market rates
• Interest payment rates – dates when interest is due
and payable
• Covenant – obligation of borrower to do or not to do
something
• Option to pre-pay
• Mandatory pre-payment clause – stipulation which
gives the lender the right to require pre-payment of
loan upon occurrence of certain events
• Breakage costs – costs incurred by lender as a result
of borrower’s failure to pre-pay under the conditions
agreed upon
• Pre-Payment premium – fee collected by the lender
from borrower for prepaying the loan
• Cure Period or Grace Period – period of time given to
borrower to remedy a default under the loan
agreement
• Default – breach by borrower of loan agreement
• Acceleration Clause – gives the lender the right to
declare the loan immediately due and payable upon
the occurrence of an event of default.
In Yong Chan Kim v People there is a contract of Mutuum since
ownership of the money was transferred to Yong Chan and
there was no obligation to return the exact same cash
received. Further, because there is a mutuum there is no
fiduciary relationship between the parties and hence such
element is wanting to properly charge the crime of estafa.
Liquidation means settling of an indebtedness. Where an
employee who liquidates a cash advance is in fact paying back
his debt in the form of a loan of money advanced to him by his
employer as per diems and allowances. Hence, if the amount
of the cash advance received was less than that actually spent
the employee can demand reimbursement.
In BPI Investment Corporation v CA the Court held that a loan
contract is a real contract hence it is perfected only upon
delivery of the object of the contract. Therefore where
contract stipulates that payment of monthly amortizations is
on May 1, 1981 but the money loaned was only released on
September 13, 1982; the contract of loan was perfected on
September 13,1982.
Further, the contract of loan involved a reciprocal obligation.
Hence, delay occurred only when one of the parties performed
his/her obligation. In this case, it was only when BPI delivered
the money on September 13, 1982 that the obligation to pay
the monthly amortizations began to run.
Article 1956. No interest shall be due UNLESS it has been
expressly stipulated in writing. (MONETARY INTEREST)
2 General Kinds of Interest
1. MONETARY interest – interest paid as compensation
for the use of money
2. COMPENSATORY interest – interest imposed by law
or by courts as penalty or indemnity for damages.
Other kinds of interest
1. Simple Interest – paid for the principal at a rate fixed
by parties
2. Compound Interest – imposed upon interest due and
unpaid
3. Accrued interest – interest earned but not received
4. Legal interest – interest imposed by law
5. Lawful Interest
6. Unlawful or Usurious Interest
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 LATEST RULE ON INTEREST RATE:
BSP – MB Circular No. 799 Eastern Shipping Lines Rules - Summary
Decision or obligation Apply Eastern Shipping Lines When… Interest Rate Due… From
PRIOR to July 1,2013 the obligation is the interest due default, i.e., from
breached, and it should be that which judicial or extrajudicial
(June 30,2013) consists in the may have been demand
AFTER July 1,2013 6% interest rate regardless I payment of a sum of stipulated in writing.
forbearance of money, not money, i.e., a loan or OR
forbearance, or after finality forbearance of In the absence of
money, stipulation, the rate of
of judgement. interest shall be 12%
per annum
Rules in Eastern Shipping Lines v Court of Appeals When an obligation, an interest on the When demand can be
not constituting a amount of damages established with
loan or forbearance of awarded may be reasonable certainty;
I. When an obligation, regardless of its source, i.e., law, contracts, money, is breached, imposed at the from the time the
quasi-contracts, delicts or quasi-delicts is breached, the discretion of the court claim is made
contravenor can be held liable for damages. The provisions under at the rate of 6% per judicially or
Title XVIII(18) on "Damages" of the Civil Code govern in annum. extrajudicially
determining the measure of recoverable damages. OR
from the date the
II. With regard particularly to an award of interest in the concept judgment of the court
of ACTUAL AND COMPENSATORY DAMAGES, the rate of interest, is made
When the judgment shall be 12% per from such finality until
as well as the accrual thereof, is imposed, as follows:
of the court awarding annum its satisfaction
a sum of money
1. When the obligation is breached, and it consists in the becomes final and
payment of a sum of money, i.e., a loan or forbearance of executory
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
Latest Rule - Summary
demanded.
When… Interest Rate Due… From
In the absence of stipulation, the rate of interest shall be
the obligation is the interest due default, i.e., from
12% per annum to be computed from default, i.e., from breached, and it should be that which judicial or extrajudicial
judicial or extrajudicial demand under and subject to the consists in the may have been demand
provisions of Article 1169 of the Civil Code. payment of a sum of stipulated in writing.
money, i.e., a loan or OR
2. When an obligation, not constituting a loan or forbearance of In the absence of
forbearance of money, is breached, an interest on the money, stipulation, the rate of
amount of damages awarded may be imposed at interest shall be 6%
per annum
the discretion of the court at the rate of 6% per annum. No
When an obligation, an interest on the When demand can be
interest, however, shall be adjudged on unliquidated claims
not constituting a amount of damages established with
or damages except when or until the demand can be loan or forbearance of awarded may be reasonable certainty;
established with reasonable certainty. Accordingly, where money, is breached, imposed at the from the time the
the demand is established with reasonable certainty, the discretion of the court claim is made
interest shall begin to run from the time the claim is made at the rate of 6% per judicially or
judicially or extrajudicially (Art. 1169, Civil Code) but when annum. extrajudicially
such certainty cannot be so reasonably established at the time OR
the demand is made, the interest shall begin to run only from from the date the
judgment of the court
the date the judgment of the court is made (at which time
is made
the quantification of damages may be deemed to have been When the judgment shall be 6% per annum from such finality until
reasonably ascertained). The actual base for the computation of the court awarding its satisfaction
of legal interest shall, in any case, be on the amount finally a sum of money
adjudged. becomes final and
executory
3. 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.

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Forbearance
• obligation of creditor to refrain from requiring debtor
to repay amount lent during a period of time.
(Crismina Garments v CA)
• Arrangements other than loan agreements where a
person acquiesces to the temporary use of his money,
goods, or credits, pending happening of certain
events or fulfillment of certain conditions. (Estores v
Sps Supangan)
In Crismina Garments v CA the transaction was not a
loan/forebearance of money but a contract of sale for Crismina
to sell girls denim pants in exchange for 76,000 pesos. Hence
the applicable interest rate is 6% per annum. Since the amount
of the demand could be established with certainty upon filing
of complaint, the 6% interest rate accrues from time when
complaint was filed. However, once the judgement becomes
final and executory, the interim period upon finality of
judgement awarding monetary claim and until payment
thereof is deemed to be equivalent to a forbearance of credit,
hence interest is reckoned at 12% per annum from the time
judgement became final and executory.
This ruling is reiterated in PNB v Ibarrola involving a contract
of sale for medicines.
The same ruling was held in Pilipinas Bank v CA where there
was a contract of purchase or sale involving several parcels of
land. However in this case the court also held that as to the
excess amount paid and to be refunded shall earn an interest
rate of 12% per annum as it falls within the term forbearance.
In Estores v Sps. Supangan the parties entered into a
Conditional Deed of Sale but if the conditions are not fulfilled
seller must return payments made by the buyer. The
stipulation governing return of money paid can be considered
a Forbearance of money. Upon breach of such the conditions
by the seller, the buyer was entitled to compensatory damage
with an interest rate in accordance to that stipulated in writing
or in the absence of such stipulation interest rate shall be 12%
per annum.
Further here the Court held that it is proper to impose
COMPENSATORY interest even in the absence of a stipulation
in the contract.
In Advocates for Truth v Bangko Central Court held that The
CB-MB merely suspended the effectivity of the Usury Law
when it issued CB Circular No. 905. CB Circular No. 905 merely
upheld the parties’ freedom of contract to agree freely on the
rate of interest. It cited Article 1306 of the New Civil Code,
under which the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and
iniquitous interest. It is settled that nothing in CB Circular No.
905 grants lenders a carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets.
Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to morals,
if not against the law. Indeed, under Article 1409 of the Civil
Code, these contracts are deemed inexistent and void ab
initio, and therefore cannot be ratified, nor may the right to
set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest
does not affect the lender’s right to recover the principal of a
loan, nor affect the other terms thereof. Thus, in a usurious
loan with mortgage, the right to foreclose the mortgage
subsists, and this right can be exercised by the creditor upon
failure by the debtor to pay the debt due. The debt due is
considered as without the stipulated excessive interest, and
a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,following the guidelines
laid down in the landmark case of Eastern Shipping Lines, Inc.
v. Court of Appeals
In Medel v CA the interest rate of 5.5% per month or 66% per
annum is excessive, iniquitous, unconscionable, and
extorbitant. Therefore, it was held void and the court equitably
reduced the interest rate to 12% per annum. Here the Court
held that the interest rate is not deemed usurious because of
the suspension of the Usury law which is now legally
inexistent.
In Chua v Timan 7% or 5% interest rate per month is
iniquitous. Here the Court held that interest rates of 3% per
month and higher is iniquitous, and any such stipulation is
void.
In Pan Pacific v Equitable the written agreement entered into
between the parties which provide for an interest rate at the
current bank lending rate in case of delay in payment and the
promissory note charged; at 18% per annum is valid. Absent
any evidence of vice of consent the interest rate agreed upon
is binding upon them.
In Solidbank v Permenent Homes The promissory note
contained an escalation clause in the following stipulation:
5. We/I irrevocably authorize Solidbank to increase or decrease at
any time the interest rate agreed in this Note or Loan on the basis
of, among others, prevailing rates in the local or international
capital markets. …..
The Court held that such stipulation is valid because it was
mutually agreed upon, it takes effect only upon written
notice and there was this option to pre0pay the loan if they
do not agree with new interest rate.
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Requisites to Impose an Escalation clause (2)
1. There should be a de-escalation clause which appears
on the agreement (Increase or decrease)
2. It must be pegged to the prevailing market rates
3. There is an agreement between the parties.
In Toledo v Hyden the interest rate of 6% or 7% per month is
NOT iniquitous or unconscionable. Because first; there is no
urgency of the need for money on the part of the debtor;
second; the debtor used the money from the loans as advance
payment to her clients entitling her to increase production up
to 50% rebate on her sales; third a business transaction of this
nature continue between the parties for more than 5 years;
and fourth the debtor knew fully well loan she availed of
carried such interest rate per month and did not complain of
the same, hence she is estopped to assail the validity of the
interest rates.
In Prisma v Menchavez no rate of interest was stipulated but
rather a fixed sum equivalent to 4% rate of interest per month
which corresponds to the 6-month loan period agreed upon.
Thereafter, the court held that the interest on the loan should
be pegged at 12% per annum in accordance with the ruling in
Eastern Shipping Lines as this involves a forbearance of money.
In Dio v Sps. Japor the Court held that the 5% interest rate per
month was iniquitous but even if it was, the debtor is estopped
from assailing its validity as it is the debtor who proposed the
said interest rate for two months; however the succeeding
period after said 2 months, the interest rate shall be reduced
to 12% per annum
General Rule as to Interest Rates: There is no law which states
what is deemed as lawful interest. Further, there is no
controlling jurisprudence which pegs the standard as to
whether an interest rate is iniquitous hence whether the rate
is unconscionable or not is dependent upon the circumstances
of each case.
In Nacar v Gallery Frames and in Ece Realty v Hernandez the
Court applied the new rules set forth by BSP MB Circular No.
799 pegging a 6% interest rate per month regardless if the
transaction is a contract of loan or forbearance of money or
not; starting at July 1, 2013.
Notes:
• As to interest payable in kind; value is determined at
current price at the time and place of payment (1958)
• GR: Accrued interest or interest due and unpaid shall
not earn interest
• EXCEPTION:
o Express stipulation by parties
o Art 2212 – interest due shall earn legal
interest from the time it is judicially
demanded although obligation is silent on
this point
Rule: If there is a stipulation for payment of interest rate but
no exact stipulation as to the amount of interest rate, then the
legal interest rate shall apply.
Conventional Interest: that stipulated by the parties
In Sps. Abella v Abella the acknowledgement receipt failed to
state an exact interest but only stated “This is to acknowledge
receipt of x x payable within one year with interest” the Court
held that loan obtained is deemed subjected to a 12% per
annum interest even beyond July 1, 2013.
This is so because interest in this respect is used as a surrogate
for the parties' intent, as expressed as of the time of the
execution of their contract. In this sense, the legal rate of
interest is an affirmation of the contracting parties' intent; that
is, by their contract's silence on a specific rate, the then
prevailing legal rate of interest shall be the cost of borrowing
money. This rate, which by their contract the parties have
settled on, is deemed to persist regardless of shifts in the legal
rate of interest. Stated otherwise, the legal rate of
interest, when applied as conventional interest, shall always
be the legal rate at the time the agreement was executed and
shall not be susceptible to shifts in rate.
In Tan v CA the Court emphasized that the CC permits the
imposition of a monetary interest and a penalty charge which
are different and distinct from each other and may be
demanded separately. Further, the Court held that Article
1959 of the CC applies as there is a stipulation for the
compounding of interest. Finally, the court reduced the
penalty charge from 2% per month to 12% per annum in
consideration of the fact that petitioner has made partial
payments showing his good faith.
In Albos v Embisan the Court held that the compounding of
interest is erroneous as there was no stipulation in writing as
to the compounding of interest.
In Sigaan v Villanueva the Court held that reimbursement of
interest paid is proper pursuant to the principle of solutio in
debiti. In this case monetary interest was not stipulated in
writing, further it was not proven that Villanueva defaulted in
his obligation hence there is no basis for payment of
compensatory interest, Payment here is clearly a mistake, and
Sigaan’s obligation to reimburse arose from a quasi-contract of
solutio indebiti (not a loan or forbearance of money) hence an
interest of 6% per annum should be imposed.
Solutio in debiti
1. There is no binding relation between the payor the
payee
2. Payment was made through mistake
In Dela Paz v L&J Development the lack of a written stipulation
as to the monetary interest meant that no interest was due
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and the continued payment of such did not amount to an
estoppel to assail the validity of the act. Estoppel cannot give Deposit
validity to an act prohibited by law. Further here the court held 1. Judicial – when an attachment or seizure of property
that the 6% per month interest rate on an open-ended loan for is in litigation is in order.
an indefinite period was held to be iniquitous and 2. Extra-judicial
unconscionable. a. Voluntary – delivery is made by the will of
the depositor; can choose the depositary
DEPOSIT b. Necessary – delivery is made in compliance
Deposit In General And Its Different Kinds with a legal obligation, calamity, travelers in
hotels/inns, or travelers with common
Deposit – that which is constituted from the moment a person carriers; cannot choose the depositary.
receives a thing belonging to another. With the obligation of Judicial versus extrajudicial deposit
safely keeping it. (1962)
• Perfected only upon delivery of the thing
• Generally gratuitous; except (3)
o Unless there is an agreement to contrary
o Depositary is engaged in business of storing
goods.
o Property is saved from destruction without
knowledge of owner
• ONLY Movable things
• Depositary – one who receives
• Depositor – one who gives Voluntary Deposit
• Distinguish Deposit versus Mutuum General Provisions

Notes:
1. A voluntary deposit is that wherein delivery is made
by the will of the depositor (1968)
2. It may involve 2 parties or 3 parties wherein two
persons allege a right over the movable property.
3. Interpleader – action to compel depositors to settle
conflicting claims against themselves.
(1970, 1971)
DEPOSITOR is incapacitated 1. The depositary subject to
all the obligations of a
depositary;
• Distinguish Deposit versus Commodatum 2. The depositary may be
compelled to return the
thing by the
i. Guardian
ii. Administer
iii. Or the depositor if
he should acquire
capacity
DEPOSITARY is incapacitated 1. The depositor shall have
Characteristics RUBN PIGO an action to recover the
1. Reciprocal thing deposited while it is
2. Unilateral / Bilateral still in the possession of
3. Nominal the depositary.
4. (Informal??) 2. The depositor may compel
5. Gratuitous / Onerous the depositary to pay him
the amount by which he
may have enriched or
In BPI v IAC the document which embodied the contract states benefited himself with the
that the $3000 was received by the bank for safekeeping thing OR its price.
without selling them to the central bank. Hence, the court held 3. Depositor may bring an
that there was a contract of deposit and such contract was action for recovery if a
illegal and therefore void. Neither party can recover damages third person acts in bad
since they are in Pari Delicto. faith.

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Note: a. If seal is broken there is a presumption that
• If depositary is incapacitated and a third person in GF acquires the prop;
depositor only has action against depositary. he is at fault
• If incapacitated depositary and the thing is destroyed; he acquires no liability b. As regards value statement of the depositor
since under Obli&Con the incapacitated depositary acquires no liability in
case of loss or destruction of the thing.
shall be accepted by the court may pass
upon the credibility of the depositor.
Obligations of a Depositary 11. If seal or lock is broken depositor shall keep the secret
(1972-1991) of the deposit
1. To keep the thing and exercise the same diligence he 12. May have the authority to open a locked box or
would his own property; diligence of a good father of receptacle when:
the family; and to return it; a. It becomes necessary to do so depositary is
2. Liable if found guilty of fraud, negligence, delay, or presumed to have authority
contravention of the tenor of the agreement. b. When the instructions of the depositor as
3. Depositary cannot deposit to a third person; regards the deposit cannot be executed
Except: without opening the box or receptacle
if given authority. If the depositor designates a specific person 13. Return the thing deposited with all its products,
Depositary is liable: accessories and accessions
a. Transfers to 3rd person without authority a. If deposit consists of money the provisions
b. Deposits to a 3rd person who is manifestly on Agency shall govern
careless or unfit EVEN IF AUTHORIZED b. If the depositary uses the money deposited
c. Thing was lost due to negligence of the he may be liable to pay its interest without
employee the need of demand
4. May change the way of the deposit 14. Depositary cannot demand that depositor prove his
a. Under circumstances when he can ownership over thing deposited
reasonable presume that the depositor 15. Upon discovery that thing deposited is stolen and
would consent to the change depositary knows the true owner, depositary has
b. He must notify the depositor obligation to
i. Unless delay would cause danger a. Advise the true owner of the deposit
5. Collect the interest which certificates, bonds, b. Within one month allow the true owner to
securities, or instruments earn claim the thing deposited
a. Shall not apply to rent of safety deposit c. If owner fails to claim, depositary shall be
boxes relieved of responsibility by returning the
6. Preserve the value and rights of the certificates, thing to the depositor
bonds, securities and instruments which he may hold 16. May return the thing deposited to depositor IF he has
7. May comingle grain or other articles of the same kind reasonable grounds to believe that thing has not been
and quality lawfully acquired by the depositor
a. Various depositors own the entire mass in 17. Return the thing to the person designated according
common in proportionate shares. to the stipulation in the contract when there are two
8. (Irregular Deposit) Depositor cannot make use of the or more depositors
thing deposited except a. Note: If two or more depositors and not
a. With express permission of the depositor solidary; each cannot demand more than his
b. Use is required for the preservation of the share
thing b. Note: When there is solidarity and the thing
i. Failure to comply = damages does not admit division:
ii. When allowed to use contract i. Each depositor may do what is
becomes a loan or commodatum useful to the other but not that
1. Except when purpose is which is prejudicial (1212)
still safekeeping ii. The depositary may return to any
9. GR: Depositary is NOT liable for loss by virtue of a one of the solidary depositors but if
fortuitous event; HOWEVER he is liable for the loss of any demand judicial or extrajudicial
the thing through a fortuitous event if (SUDO) has been made by one of them,
a. It is so Stipulated return should be made to him
b. Uses the thing without the depositor’s (1214)
permission 18. Return the thing to the persons who may have
c. Delays its return administration over the property and rights IF the
d. Allows Others to use it even if he was depositor should lose the capacity to contract
authorized to use it himself 19. Must take the thing deposited to the place designated
10. Return it in the same condition if delivered closed and for the return of the thing
sealed
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 a. Expenses for transportation shall be borne by
depositor
b. If no place was designated; return shall be
where the thing deposited may be
20. Return the thing deposited to the depositor upon
demand even though there is a specified period or
time for return; except
a. When thing is judicially attached OR
b. The depositary was notified by a third
person not to return or remove the thing
deposited; remedy for depositary is to file
an action for Interpleader.
c. Problem: Depositary knows who the true owner of
thing is but before 30 days after informing true owner
Depositor demands the return;
Possible Answer: the depositary has the obligation to
return to the depositor and the true owner has other
legal remedies provided by the law against depositor.
d. If the deposit was with compensation; When the
Depositor demands return he must pay the full
compensation.
21. In case of opposition to return thing deposited,
Depositary has duty to inform depositor of
attachment or opposition
22. IF depositary has justifiable reason for not keeping
the thing deposited; AND deposit is NOT for valuable
consideration; May:
a. return the thing deposited OR
b. (if depositor refuses) may secure the
consignation of the thing in court;
23. Deliver the sum or thing received IF the depositary by
a. Force majeure
b. OR government order
Loses thing received AND receives money or another
thing
24. If DEPOSITARY’s (in provision it says depositor but was
corrected by Atty. Sarona-Lozare) heir sold the thing in good
faith; Depositary shall be bound to return:
a. Price he may have received
b. OR assign his right of action against the
buyer in case price has not been paid him
Note: Fixed, Savings, and Current deposits of money in banks
and similar institutions shall be governed by provisions on
simple loan (1980)
In Chan v Maceda Maceda failed to establish privity of contract
between Maceda and the depositary; When there is no privity
of contract there is likewise no obligation on the part of the
depositary to return the thing to Maceda. Maceda has the
burden to prove that there was any contract of deposit
between them, and it has failed to do so. It’s presentation of
unsigned delivery receipts was not upheld by the court as they
were not duly received nor authenticated by the depositor
Moreman.
Cases on Safety Deposit Boxes;
Safety deposit boxes are a special kind of deposit. They are
neither governed by the provisions under Deposit nor under
Lease. However the relationship between the bank and the
customer is one of Bailor-Bailee.
In CA AGRO-INDUSTRIAL v CA any stipulation exempting the
depositary from liability arising from the loss of the thing
deposited on account of fraud, negligence, or delay would be
VOID for being contrary to law and public policy. (principle
reiterated in Sia v CA)
However here the bank was exonerated because there was no
showing that it knew of the agreement between Pugaos and
CA-Agro. Further there was no showing that the loss of the
TCTS was due to the fraud and negligence of the bank.
In Sia v CA Regardless of any stipulation exempting the bank
from liability, the bank is still liable as it failed to exercise
reasonable care and prudence expected of a good father of a
family. The bank is liable for the loss by virtue of the fact that
it did not inform the depositor who had deposited his/her
stamp collected that there was a flood and the safety deposit
box was located at the lower portion of the premises.
In Baron v David (Applying Art. 1978) the parties entered into
a transaction with the understanding that the palay which is
delivered will be milled, it was not really for safekeeping.
Hence, there is no contract of deposit, for if there were one
the exact same thing should be returned. Therefore, the
depositary is bound to account for the value of the palay and
his liability was not extinguished by the occurrence of the fire
after it was milled.
In Javellana v Lim where Lim entered into a contract of deposit
with Javellana depositing P2686, and Lim asked for an
extension of time for payment thereof; the Court held that
there was no contract of deposit. Since the purpose is for Lim
to consume what was deposited the same is no longer a
contract of deposit but a contract of simple loan or mutuum.
This is corroborated by the fact that Lim asked for an extension
to return the same amount, showing that he no longer had
possession of the thing deposited. Further if such transaction
was a contract of deposit, what should have been returned is
the exact same money deposited with the exact same serial
numbers.
Loan versus Irregular Deposit
In Rogers v Smith there are three points of difference
between a loan and an irregular deposit: *MEMORIZE
Irregular Deposit Loan
The only benefit is that Essential cause for the
which accrues to depositor. transaction is the necessity
(Sole benefit) of the borrower; (benefit of
both parties)
The depositor has Not Present in Loan
preference over other
creditors in the distribution
of the debtor’s property
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 The depositor can demand The lender is bound by the
the return of the article at provisions of the contract
any time. and cannot seek restitution
until full payment has
arisen as provided in
contract.
In this case there is a contract of loan because first the
contract in question was for the benefit of both parties;
further the intention of the contract shows that the
relationship between the parties is that of a creditor-debtor;
finally, the lender here is bound by the provisions of the
contract and cannot seek restitution till payment.
In Compania Agricola v Nepomuceno Where Compania
Agricola deposited 10k to Mariano Velasco & Co and agreed
that it would earn a 6% interest; denominating the contract as
one of a contract of irregular deposit. The Court held that the
transaction was a contract of Loan. Applying the principles
under the case of Rogers v Smith the transaction here was not
for the sole benefit of Compania Agricola because there was a
payment of interest. Neither can it demand restitution till
expiration of term of 3 months.
In BPI v CA the Court mentioned that bank deposits are in the
nature of irregular deposits, they are essentially loans because
they earn interest the relationship involves that of a creditor-
debtor.
In this case, where it is proved that the account belonged to
Eastern even if the cash was deposited in the name of Lim and
Velasco; Only Eastern had the right to withdraw what was
deposited. BPI should not have allowed withdrawal by Lim and
Velasco and its act does not extinguish its obligation to the true
depositor, Eastern.
In Metrobank v BA Finance where Bitanga obtained a loan
from BA finance and mortgaged his car. This car was insured to
Malayan insurance. When the car was destroyed Malayan
Insurance issued a check to Bitanga. Bitanga deposited the
check to Metrobank without the indorsement of BA Finance.
The Court held that BA Finance is liable for its negligence.
Further the Court held that Art 1980 of CC does not apply; the
relationship here is not one of Loan or Deposit, but that of
Agency. Whereby Metrobank as collecting bank is to collect for
BA Finance for the proceeds of the check; Applying rules on
Eastern Shipping Lines since what is involved here is not a loan
or forbearance of money 6% interest per annum should be
applied.
In Reyes v CA and Far East Bank the banks are duty bound to
treat the de deposit accounts of their depositors with the
highest degree of care only when they are acting under their
fiduciary capacity as a depositary. The same degree of
diligence is not required to be exercised by the banks in their
commercial transactions which do not involve a fiduciary
capacity.
Hence in this case where far east bank drew a demand draft
with Westpac Bank Sydney to have itself be reimbursed by
Westpac Bank in New York in order to facilitate the transfer of
Australian Dollars to Reyes, the bank was not at fault when
there was an erroneous reading of its cable message to
Westpac Sydney by one of the latter’s employees.
In Guingona v City Fiscal When David deposited his money to
National Savings Loan and Association what was entered into
was not a Contract of Deposit but one of loan. It is however in
the nature of an irregular deposit. While the bank had the
obligation to return the amount deposited it had no obligation
to return the exact same money deposited. When Guingona
assumed the responsibility of the bank, novation occured
which converted the original trust relation into an ordinary
debtor-creditor relation. Hence, the failure of Guingona to pay
was not a breach of trust which is an element of Estafa.
In Province of Bataan v Villafuerte an Escrow is a written
instrument which imports a legal obligation. It is deposited by
the grantor, promisor, obligor or his agent with a stranger or
third party to be kept by the depositary until the performance
of a certain condition or the happening of an event and then
to be delivered to the grantee, promisee or obligee.
Money delivered may also be the subject of escrow, along with
bonds, deeds, covenants, contracts, mortgages etc.
In this case the lower court had the power to deposit the
rentals in escrow with the bank in its name, and this is only an
incident of the main proceeding in the lower court and is
included in its power to place properties in custodia legis for
the purpose of effectuating judgement or decree and
protecting the rights and interests of the claimants.
Obligations of the Depositor
1. (1992) Reimburse the depositary for the expenses
(Ordin/ExtraOrdin) he may have incurred for the
preservation of the thing deposited
a. If deposit is gratuitous
2. (1993) Reimburse the depositary for any loss arising
from the character of the thing deposited; unless: (4)
a. At the time of the constitution of the deposit
the depositor was not aware of the
dangerous character
b. At the time of the constitution of the deposit
was not expected to know the dangerous
character
c. Depositor notified the depositary of the
same
d. The depositary was aware of it without the
advice from the depositor
Note: Depositary may retain the thing in pledge until full
payment
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(2) Deposit is extinguished when: (LDR – NMEF)
1. Loss or Destruction
2. Death of EITHER depositary or depositor
3. Return of the thing
4. Novation
5. Merger
6. Expiration of the term
7. Fulfillment of Resolutory condition
Note: Compensation is not a ground or extinguishment of deposit (1995)
Necessary Deposit
What are necessary deposits
1. Deposit made in compliance with a legal obligation
2. Miserable Deposit
a. Deposit on the occasion of a calamity such
as: Fire, storm, flood, pillage, shipwreck,
others
3. Deposit of effects made by travelers in hotels or inns
4. (1754) Deposit of passenger’s baggage which is not in
his personal custody or that of his employee
Rules as to deposit in Hotels or Inns
1. The keepers of hotels or inns are responsible as
depositaries provided (2 requisites)
a. Notice was given to them or to their
employees of the effects brought by the
guests
b. The guests took precautions which said
hotel-keepers or their substitutes advised
relative to the care and vigilance of their
effects
2. Hotel keepers is liable for:
a. (1999) (VAA) vehicles, animals, and articles
introduced and placed in the annexes of the
hotel
b. (2000) Loss or injury to personal property of
guests caused by:
i. Servants or employees of the
keeper of the hotel or inn
ii. Strangers
c. (2001) Act of a thief or robber (is not
deemed a force majeure)
i. Unless done with the use of arms
OR through an irresistible force
3. Hotel Keepers is NOT liable for:
a. Loss of personal property which may
proceed from any force majeure (2000)
b. Loss due to the act of thief or robber with the
use of arms or irresistible force (2001)
c. Loss due to the acts of the guest, his family,
servants, or visitors (2002)
d. Loss which arises from the character of the
things brought into the hotel (2002)
4. The Hotel Keeper cannot free himself from
responsibility by posting notices to the effect that he
is not liable for the articles brought by the guest
a.Any stipulation to where responsibility of the
hotel keeper is suppressed or diminished is
void.
5. Hotel keepers exercise extraordinary diligence
6. Hotel Keeper has the right to remain the things
brought into the hotel as security for credit on
account of:
a. Lodging
b. AND supplies usually furnished to hotel
guests
(Civil aspect is right to retain; the criminal aspect is estafa.)
Instances of deposit in compliance with legal obligation
Governed by law, then by the provisions on voluntary deposit
1. Art 548 – Judicial deposit of a thing whose possession
is under dispute in a litigation by two or more persons
2. Art 586 – Deposit by the Usufructuary with a bank or
public institution public bonds or instruments of
credit payable to order or bearer
3. Art 2104 – When the creditor misuses the thing
pledged the owner may ask that it be deposited
judicially or extrajudicially
4. Suits required under the Rules of Court
5. Deposits to guarantee contracts with the government
which arises from an obligation of public or
administrative character
Miserable Deposit, Quasi-Bailment, Voluntary bailment or
involuntary bailment
• Governed by rules on voluntary deposit
• Art 2168 – the owner of a motor vehicle shall file with proper gov
office a bond
Cases on Deposit in Hotels or Inns
In Durban Apartments v Pioneer where See gave his car keys
to the valet of the City Garden Hotel who parked his car
unattended at the parking area of Equitable Bank; and said car
was carnapped; the Court held that there was a contract of
necessary deposit made by persons in hotels or inns. Aside
from the fact that Equitable Bank parking area became an
annex of the City Garden Hotel and is considered an extension
of the premises of the said hotel facts of the case show that
the hotel failed to exercise the required diligence as
manifested in its lack of security and the fact that this is the 2nd
time that an incident such as this happened.
In YHT Realty v CA the stipulation releasing Tropicana
Apartment Hotel from liability arising from the use of their
safety deposit box is null and void. The Hotel business is
imbued with public interest hence the law does not allow any
stipulation contrary to their duty which ordinarily appear in
prepared forms imposed by hotel keepers.
To hold the hotelkeeper liable for the loss it is not necessary
that the effects be actually delivered to the hotelkeepers and
their employees it is enough that such effects are within the
hotel or inn. With greater reason should therefore the hotel be
12|Palma Gil
liable if the effects were lost after it was deposited in their
safety deposit box.
Further since there is no showing that the act of the thief or
robber was done with the use of arms or through irresistible
force the same is not considered as force majeure which
exempts the hotel from liability. Further in this case the Court
took note of the fact that the hotel failed to exercise due
diligence when it allowed access of the safety deposit box by
someone who was not given authority by the depositor during
the early hours of the morning.
Anent their defense that the act was one of a “loss by reason
of a guest or visitor” under Art 2002 of the CC the Court held
that this provision presupposes that the hotel is NOT guilty of
negligence or has not contributed in any degree to the
occurrence of the loss. In this case the hotel was negligent.
In Makati Shangri-La v Harper the Court held that Makati
Shangri-La is liable for the death of their guest by virtue of their
negligence in providing adequate security to safeguard the
premises.
The premises liability rule provides that it is enough that
guests are injured while inside the hotel premises to make the
hotelkeeper liable. With great caution should the liability of
the hotelkeeper be enforced when a guest died inside the
hotel premises.
It also bears stressing that there were prior incidents that
occurred in the hotel which should have forewarned the hotel
management of the security lapses of the hotel. As testified to
by Col. De Guzman, "there were ‘minor’ incidents" (loss of
items) before the happening of the instant case. The murder
of Harper could have been avoided had the security guards of
the Shangri-La Hotel in Makati dutifully observed this standard
procedure.
Sequestration or Judicial Deposit
Judicial Deposit or Sequestration – when an attachment or
seizure of property in litigation is in order (2005)
Examples: Attachment by sheriff, receiver by the Court,
Replevin
Notes:
1. May involve movable or immovable (2006)
2. Obligation of depositary of property sequestrated
a. Cannot be relieved of responsibility until
controversy has come to an end
i. UNLESS Court so orders otherwise
b. Bound to comply with all the obligations of a
good father of the family
3. Governed suppletorily by Rules of Court
In the case of Los Banos v Africa the court made mention of
the concept of Notice of Lis Pendens - which serves as an
announcement to the whole world that a particular real
property is in litigation and as a warning that those who
acquire an interest over the property do so at their own risk.
Note that a notice of Lis Pendens is NOT A JUDICIAL DEPOSIT.
Act No. 2137 - WAREHOUSE RECEIPTS LAW
Review full text of the law in TSN
Note: This law applies to all receipts issued by a warehouseman; otherwise
provisions of CC under Documents of Title shall govern.
Definitions:
• Warehousemen – person engaged in the business of
storing goods for profit
• Warehouse receipt – a written acknowledgement by
a warehouseman that he has received and holds
certain goods therein described in store for the
person whom it is issued.
o 3-fold nature
▪ Contract of deposit or a contract of
carriage
▪ Evidence of receipt of goods
▪ Transferable document of title
Distinguish Negotiable Instruments Law versus Warehouse Receipt Law
Form of Receipts (Sec 2) (LDN – WRD – SSS)
1. Location of the warehouse where goods are stored
2. Date of the issuance of receipt
3. Consecutive Number of the receipt
4. Statement Where the goods will be delivered to
bearer, specified person or his order
5. Rate of storage charges
6. Description of goods and packages containing them
7. Signature of warehouseman or authorized agent
8. If goods are owned by warehouseman then a
Statement of the fact of such ownership
9. Statement of amount of advances made and liabilities
incurred to which warehouseman claims a lien
Omission of any which causes injury = damages
Non-negotiable receipt – delivered to the depositor or any
other specified person (can be assigned)
Negotiable receipt – delivered to bearer or to order of any
person
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Obligations and Rights of warehousemen upon their receipts
1. Deliver goods upon demand of: Holder of receipt of
goods or depositor; IF demand is accompanied with
a. Offer to satisfy lien
b. Offer to surrender receipt
c. Readiness and willingness to sign
acknowledgement that they have been
delivered
2. Deliver goods to
a. Person lawfully entitled to possession
b. Person with written authority from person
lawfully entitled to possession
c. A person in possession of negotiable receipt
3. Effect of Mis delivery
a. Warehouseman is liable for conversion to all
having right of possession
b. Liable even if authorized to deliver if:
i. He has been requested not to make
such delivery but he delivers
ii. Had information that delivery is
about to be made to one who is not
entitled to possession but delivers
anyway
4. When receipts are lost or destroyed
a. Court orders delivery of goods
i. upon satisfactory proof of such loss
or destruction
ii. upon giving of bond with sufficient
sureties to be approved by the
court to protect warehouseman
from liability or expense
5. warehouse man cannot set-up title or right of
possession to excuse him from liability of refusing to
deliver goods
6. warehouseman may file an Interpleader of adverse
claimants
7. warehouse man may refuse delivery until he had a
reasonable time to ascertain the validity of any
adverse claim or to bring legal proceedings in the
form of an Interpleader
8. non-existence of goods or mis-description of goods
a. warehouseman is liable
b. except if description is based on the kinds of
product on the marks or labels on the
packages
i. warehouse man is not liable if
different kind of goods were found
9. liable for the care of goods
10. warehouseman shall keep the goods subject to
separate receipts separate from each other
11. Fungible goods may be comingled IF
a. Authorized by agreement
b. OR by custom
12. If goods are comingled warehouseman is jointly and
severally liable
13. Goods delivered to a warehouseman cannot be
attached by garnishment or otherwise or levied upon
under an execution UNLESS the negotiable receipt is
surrendered
a. The remedy of the creditor is to avail such
aid from courts by injunction or otherwise
14. Warehouseman shall have a lien on the goods
deposited for expenses relative to storage,
preservation, notice, advertisement, sale and other
lawful claims
a. These charges shall be stated in the
negotiable receipt
15. Upon failure to satisfy warehouseman’s claim within
specified time a sale of goods by auction may be had
to satisfy his lien and he shall return the balance upon
demand to person entitled to it; he will not thereafter
be liable for failure to deliver goods
16. If goods are of
a. a perishable nature,
b. or by keeping will deteriorate greatly in
value,
c. or, by their order, leakage, inflammability, or
explosive nature, will be liable to injure
other property
warehouse man may:
1. give notice to owner to satisfy lien within a
specified period
2. failure of the owner the warehouseman
may:
a. sell the goods in public or private
sale without advertising OR
b. dispose of the goods
17. Warehouseman may avail of such other lawful
remedies to enforce his lien.
Who may negotiate a receipt?
1. Owner
2. Person to whom possession or custody of the receipt
has been entrusted by the owner
Warranties of Sale of Receipt
1. Receipt is Genuine
2. That he has Legal Right to negotiate or transfer it
3. That he has Knowledge of no fact which would impair
validity and worth of receipt
4. That he has the Right to transfer such goods and that
the goods are Merchantable or Fit for the purpose
Notes:
• Indorser is not liable for the failure of warehouseman
or previous endorsers to fulfill their respective
obligations
• Sellers lien shall not defeat the rights of a purchaser
for value in good faith
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 PD 115 – TRUST RECEIPTS LAW
Trust Receipt –
• a written or printed document
• signed by the trustee in favor of the entruster
• whereby the entruster releases the goods to the
possession of the trustee
• upon the trustee’s promise to
o Hold said goods in trust for the entruster,
o To sell or dispose of the goods AND
▪ Return the proceeds thereof to the
extent of the amount owing to the
entruster OR
▪ Return the goods if unsold or not
otherwise disposed.
Trust Receipt Transaction:
• transaction by and between the entruster and
entrustee;
• whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods,
documents or instruments,
• releases the same to the possession of the entrustee
• upon the latter's execution and delivery to the
entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold
the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments
• with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing
to the entruster or as appears in the trust receipt or
the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of to turn
over the same.
Trust Receipt must contain:
1. Description of:
a. The goods
b. Value of the goods
c. Undertaking or commitment of entrustee to
hold in trust for the entruster the goods
2. That the entrustee will dispose them in the manner
provided for in the trust receipt
3. That the entrustee will turn over the proceeds of the
sale or return the goods or instruments if not sold.
Note: Be able to distinguish a trust receipt transaction from
other transactions such as consignment, pledge,
3 Parties:
1. Seller
2. Entruster – person who holds title to the goods, but
he is not the owner of the goods rather a holder of
security interest
3. Entrustee – the borrower, buyer, importer, to whom
goods are delivered for sale or processing in trust with
the obligation to remit proceeds or turn over goods if
unsold.
Rights of Entruster
1. Entitled to proceeds
2. Entitled to return of goods if unsold
3. may cancel the trust and take possession of the goods
at any time upon default or failure of entrustee to
comply with terms and conditions
4. after notice, sell the goods in a public or private sale
5. As against innocent purchaser for value, entruster is
not preferred; As against creditors, entruster is
preferred
Obligations of Entruster
1. Give possession of goods
2. Give 5 day notice before he sells the goods
3. Have possession of goods as a condition for his
liability
Obligations of Entrustee
1. Hold the goods and dispose of the in accordance with
terms and conditions
2. Receive proceeds in trust for the entruster and turn
them over to the extend of the amount owing to
entruster
3. Insure value of goods against loss from fire, theft,
pilferage, or other casualties
4. Keep goods separate and identifiable
5. Return goods in event of non-sale
6. Observe other terms and conditions of trust receipt
7. The risk of loss shall be borne by the entrustee. Loss
of goods, documents or instruments which are the
subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault
or negligence of the entrustee, shall not extinguish his
obligation to the entruster for the value thereof.
In Rosario Textile v Home Bankers the transaction between
RTMC and the Bank is a contract of loan not a trust receipt
agreement. RTMC obtained a loan to purchase raw materials
and delivered the raw materials to the bank as collateral and
trust receipts were secured by the parties to evidence this
security agreement.
If under the trust receipt, the bank was made to appear as the
owner, it was but an artificial expedient, more of legal fiction
for if it were so it could dispose the goods in any manner that
it wants.
In this case the bank cannot be considered as the true owner
from the inception of the transaction for to do so would be to
disregard the loan feature thereof. The bank here is
considered as the holder of the title merely for purpose of
security.
In Landbank v Perez when both parties enter into an
agreement knowing that the return of the goods subject of the
15|Palma Gil
trust receipt is not possible even without fault on the part of
the entrustee then it is not a trust receipt transaction.
If the only obligation of the parties would be the return of the
proceeds of the sale than transaction becomes a mere loan
where borrower is obligated to pay the bank the amount spent
for the purchase of the goods. Note that in a Trust Receipt
transaction there are two obligations which refers to
obligation to turn over the proceeds and turn over unsold
goods.
In this case what was delivered were construction materials for
the building construction project; from this alone the parties
were aware that the entrustee could not possibly reconvey the
materials or the end product for which they were used.
Further in a trust receipt agreement the person who advanced
payment is considered the absolute owner of the merchandise
and continues to be such till full payment. Hence, in this case
where the materials were used for a government project the
property became that of public dominion; and such is contrary
to a trust receipt transaction.
There is no basis in the charge for estafa as the element of
dishonesty or abuse of confidence is wanting.
This is similar to the case of Colinares v CA and Hur Tin Yang v
People where the goods will be delivered to the entrustee the
inention should be to sell which is not present in these cases
where what was delivered were construction materials or
money to purchase construction materials. There was no
intention to resell the goods but only to use them in their
respective construction projects – hence they cannot be
considered as Trust Receipt transactions.
In Colinares v CA where the goods involved construction
materials for their construction project, the court held that the
transaction was a loan and not a trust receipt agreement. At
no time did titlte to the goods pass the bank but it went
directly to Colinares from the Seller.
The practice of banks of making borrowers sign trust receipts
to facilitate collection of loans and place them under the
threats of criminal prosecution should they be unable to pay it
may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have
no option but to sign lest their loan be disapproved. The resort
to this scheme leaves poor and hapless borrowers at the mercy
of banks, and is prone to misinterpretation, as had happened
in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance.
There is no basis in the charge for estafa as the element of
dishonesty or abuse of confidence is wanting.
LETTERS OF CREDIT
Governed by Arts 567-572 of the Code of Commerce
Notes:
• Letter of Credit – that issued by one merchant in
favor of another for the purpose of attending to a
commercial transaction (567)
• Bank deals with documents only
• A LOC is not a contract of guarantee or suretyship
because it entails primary liability on the part of the issuer-borrower in
default
• It is not a negotiable instrument; because it does not contain
an unconditional promise to pay a sum certain in money. The LC is
conditioned to the submission of certain documents. Moreover, the LC is
issued in favor of a definite person and not to order.
A Letter of Credit is a financial device designed to answer two
concerns: Seller’s refusal to part with his goods before being
paid coupled with the Buyer’s want of ownership or control
over the goods before paying.
Letter of Credit Transaction: How?
In Prudential Bank v IAC the Court explained the Letter of
Credit Transaction
1. the buyer may contract to a bank to issue a Letter of
Credit
2. The buyer and seller (in a contract of sale) agree to
what documents are to be presented for payment,
a. but ordinarily they are documents of title evidencing or
attesting to the shipments of the goods to the buyer
3. The issuing bank can authorize the seller to draw
drafts
4. The seller then ships the goods to the buyer
5. To get paid, the seller executes a draft and presents
it together with the required documents to the
issuing bank.
6. The issuing bank redeems the draft and pays cash to
the seller if it finds that the documents submitted by
the seller confirm with what the letter of credit
requires.
7. Bank obtains possession of the documents upon
paying the seller
8. The transaction is completed when the buyer
reimburses the issuing bank and acquires the
documents entitling him to ownership of the goods.
Note: The seller gets paid only if he delivers the documents of
title over the goods while the buyer acquires said documents
and control over the goods only after reimbursing the bank.
In Bank of America v CA the Court defined that a letter of
credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of
goods to satisfy the seeminlgly irreconcilable interests of the
seller who refuses to part with his goods and the buyer who
wishes to have control over the goods before paying.
Further here the Court emphasized the Independence
Principle; The bank in determining compliance with the terms
of the Letter of Credit is required only to examine the shipping
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document presented by the seller and is precluded from
determining whether the main contract of sale between the
buyer and seller is accomplished or not.
Further in this case the parties to the transaction and the
different types of correspondent banks were discussed. In this
case Bank of America was only an advising bank hence it did
not acquire any obligation more than just notifying Inter-Resin
of the letter of credit issued in its favor.
Further an advising bank is bound to check only the apparent
authenticity of the Letter of credit.
PARTIES TO THE TRANSACTION:
Basic parties to a letter of credit:
1. Applicant/buyer/importer –
• the one who procures the letter of credit and
obliges himself to reimburse the Issuing
Bank (IB) upon the receipt of the documents
of title.
• He is the party who initiates the operation
of the Letter of Credit transaction as the
buyer of the merchandise and also of the
credit instrument.
2. Issuing Bank –
• is usually the buyer’s bank;
• it issues the letter of credit and undertakes
to pay the seller upon receipt of the draft
and proper documents to the buyer upon
reimbursement.
3. Seller/beneficiary –
• is the one who in compliance w/ the contract
of sale ships the goods to the buyer
• and delivers the documents of title and
drafts to the issuing bank to recover
payment.
• He is the beneficiary of the instrument
because the instrument is addressed to him
and in his favor.
4. Correspondent Bank
4 TYPES OF CORRESPONDENT BANK: (ACPN)
1. Advising/Notifying Bank – does not have any contractual
relations w/ the buyer but merely serves as an agent of the
issuing bank. Its only responsibility is to transmit the
LC. Thus, it could validly refuse to negotiate or accept, even
if the seller tenders all the documents required under the
LC and it does not become liable as the beneficiary has no
cause of action against the bank.
2. Confirming Bank – lends credence to the LC issued by a
lesser known bank. It assumes direct obligation to the
seller/beneficiary and becomes principally liable.
A notifying bank, who also assumes the role of a negotiating
bank does not include assuming the role of a confirming
bank and is therefore not liable to the beneficiary.
To be liable, there must be an absolute assurance that it will
undertake the issuing bank’s obligation as its own. If it does
confirm, the beneficiary become entitled to proceed
against either or both banks in case of breach.
3. Paying Bank – the bank w/c pays the seller. It may either
be the opening/issuing bank or any other bank in the place
of the seller.
4. Negotiating Bank – any bank in the place of the seller w/c
buys or discounts the seller’s draft. Its liability depends on
the stage of negotiation. If BEFORE negotiation, such that
it suggests its willingness to negotiate, it has no liability w/
respect to the seller. But if AFTER negotiation, a contractual
relationship will then prevail between them.
Essential Conditions of LC: (2)
1. Issued in favor of determinate person not to order
2. Limited to
1. a fixed and specified amount
2. OR to one or more indeterminate amounts;
but all within a maximum sum the limit of
which must be exactly stated
Absent these = it is not a LC but a letter of recommendation
DOCTRINE OF STRICT COMPLIANCE-
The document tendered by the seller must strictly conform to
the terms of the LC. The correspondent bank which departs
from what has been stipulated under the LC, as when it accepts
a faulty tender, acts on his own risk and may not thereafter
recover from the buyer or issuing bank , the money paid to the
beneficiary.
In short, the documents presented must comply w/ those
stipulated on the LC. In a LC, the banks only deals w/
documents and not w/ goods.
Note: A loan transaction may give rise to Letter of Credit. A
Letter of Credit does not arise only because of sale or
importation. Example: Standby LC.
Standby Letter of Credit (SLC) – it is a bank issued option
on loan involving 3 parties:
1. the bank issuing the credit,
2. the party requesting for such issuance (otherwise
known as the account party)
3. and the beneficiary.
Under the terms of a SLC, the beneficiary has the right to
trigger the loan option (referred to as TAKING DOWN THE
LOAN) if the account party fails to meet its commitment, in
w/c case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan to its customer.
SLC’s may support non-financial obligations such as those of
bidders, or financial obligations such as those of
borrowers. In the latter case, the borrower purchases an
SLC and names the lender as beneficiary. Should the
borrower default, the beneficiary has the right to take down
the SLC and receive the principal balance from the issuing
bank. The borrower’s loan obligation is then passed to the
bank.
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Example: You will bid but you won’t release money just yet; 2. The issuing bank then holds on to these documents
then SLC are proof that you have available money. which the buyer needs in order to claim the goods
Note: SLC may be considered as security arrangement but shipped.
3. The buyer reimburses the issuing bank for its payment at
they are not considered or converted contracts of guarantee
which point the issuing bank releases the documents to
and bank does not act as a guarantor.
the buyer.
4. The buyer is then able to present these documents in
In HSBC v National Steel A letter of credit generally arises out order to claim the goods.
of a separate contract requiring the assurance of payment of a 5. At this point, all the transactions are completed. The
third party. In a transaction involving a letter of credit, there are seller received payment for his or her performance of his
usually three transactions and three parties. The first transaction, obligation to deliver the goods. The issuing bank is
which constitutes the underlying transaction in a letter of credit, is reimbursed for the payment it made to the seller. The
a contract of sale between the buyer and the seller. The contract buyer received the goods purchased.
may require that the buyer obtain a letter of credit from a third
Owing to the complexity of these contracts, there may be a
party acceptable to the seller. The obligations of the parties under
correspondent bank which facilitates the ease of completing the
this contract are governed by our law on sales.
transactions. A correspondent bank may be a notifying bank, a
The second transaction is the issuance of a letter of credit between negotiating bank or a confirming bank depending on the nature of
the buyer and the issuing bank. The buyer requests the issuing the obligations assumed. 77 A notifying bank undertakes to inform
bank to issue a letter of credit naming the seller as the beneficiary. the seller-beneficiary that a letter of credit exists. It may also have
In this transaction, the issuing bank undertakes to pay the seller the duty of transmitting the letter of credit. As its obligation is
upon presentation of the documents identified in the letter of limited to this duty, it assumes no liability to pay under the letter
credit. The buyer, on the other hand, obliges himself or herself to of credit. 78 A negotiating bank, on the other hand, purchases
reimburse the issuing bank for the payment made. In addition, this drafts at a discount from the seller-beneficiary and presents them
transaction may also include a fee for the issuing bank's to the issuing bank for payment. 79 Prior to negotiation, a
services. 68 This transaction constitutes an obligation on the part negotiating bank has no obligation. A contractual relationship
of the issuing bank to perform a service in consideration of the between the negotiating bank and the seller-beneficiary arises
buyer's payment. The obligations of the parties and their remedies only after the negotiating bank purchases or discounts the
in cases of breach are governed by the letter of credit itself and by drafts. 80 Meanwhile, a confirming bank may honor the letter of
our general law on obligations, as our civil law finds suppletory credit issued by another bank or confirms that the letter of credit
application in commercial documents. 69 will be honored by the issuing bank. 81 A confirming bank
The third transaction takes place between the seller and the essentially insures that the credit will be paid in accordance with
issuing bank. The issuing bank issues the letter of credit for the the terms of the letter of credit.82 It therefore assumes a direct
benefit of the seller. The seller may agree to ship the goods to the obligation to the seller-beneficiary. 83
buyer even before actual payment provided that the issuing bank
informs him or her that a letter of credit has been issued for his or Types of Letter Credit
her benefit. This means that the seller can draw drafts from the
issuing bank upon presentation of certain documents identified in
the letter of credit.
The relationship between the issuing bank and the seller is not
strictly contractual since there is no privity of contract nor meeting
of the minds between them. 70 It also does not constitute a
stipulation pour autrui in favor of the seller since the issuing bank
must honor the drafts drawn against the letter of credit regardless
of any defect in the underlying contract.71 Neither can it be
considered as an assignment by the buyer to the seller-beneficiary
as the buyer himself cannot draw on the letter. 72 From its
inception, only the seller can demand payment under the letter of
credit. It is also not a contract of suretyship or guaranty since it
involves primary liability in the event of default. 73
Nevertheless, while the relationship between the seller-
beneficiary and the issuing bank is not strictly contractual, strict
payment under the terms of a letter of credit is an enforceable
right.

In simpler terms, the various transactions that give rise to a letter

of credit proceed as follows:
1. Once the seller ships the goods, he or she obtains the
documents required under the letter of credit. He or she
shall then present these documents to the issuing bank
which must then pay the amount identified under the
letter of credit after it ascertains that the documents are
complete. End of First Examination Coverage.
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