Credit Transactions Case Doctrines: Simple Loan, Interest, Usury, Deposit, Warehouse Receipts

CREDIT TRANSACTIONS

Olive Cachapero

Case Doctrines Reviewer

(Loan to Warehouse Receipts)

Atty. Anthony Peralta

GARCIA vs. THIO

(Obligation to Deliver)

·         A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract.  

·         Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.  

·         Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount.

·         Delivery is the act by which the res or substance thereof is placed within the actual or constructive possession or control of another. Although respondent did not physically receive the proceeds of the checks, these instruments were placed in her control and possession under an arrangement whereby she actually re-lent the amounts to Santiago. 

BPI FAMILY BANK V. FRANCO

(Simple Loan)

·         Article 1980 of the Civil Code: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning loan.  

·         As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation to pay him an equal amount on demand. Although BPI-FB owns the deposits in Franco’s accounts, it cannot prevent him from demanding payment of BPI-FB’s obligation by drawing checks against his current account, or asking for the release of the funds in his savings account.  Thus, when Franco issued checks drawn against his current account, he had every right as creditor to expect that those checks would be honored by BPI-FB as debtor. 

PEOPLE V. PUIG AND PORRAS

(Simple Loan)

·         Depositors who place their money with the bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its clients, making the money taken by respondents as belonging to the bank.

·         The relationship between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by petitioner, provide as follows:

·         Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

·         Article 1980. (supra)

·         In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential elements constituting the crime of Qualified Theft.

CONCEPCION V. COURT OF APPEALS, ET. AL.

(Conventional Interest)

·         FACTS: Home Savings Bank and Trust Company granted to the Concepcions a loan.  The Concepcions, in turn, executed in favor of the bank a promissory note and a REM over their property.  The loan was payable in equal quarterly amortizations for a period of fifteen (15) years and carried an interest rate of sixteen percent (16%) per annum.  

·         Escalation Clause: The promissory note provided that the Concepcions had authorized - "x x x  the Bank to correspondingly increase the interest rate presently stipulated in this transaction without advance notice to me/us in the event the Central Bank of the Philippines raises its rediscount rate to member banks, and/or the interest rate on savings and time deposit, and/or the interest rate on such loans and/or advances."

·         In accordance with the above provision, the bank unilaterally increased the interest rate from 16% to 38%.

·         General Rule (GR): The validity of escalation clauses in contracts is upheld by the SC.

·         Reason for validity: (a) to maintain fiscal stability and (b) to retain the value of money in long term contracts.  

·         Principle of mutuality of contracts: ART. 1308.  The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

Ø  A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void.

Ø  An escalation clause that gives a creditor an unbridled right to unilaterally and upwardly adjust the interest on private respondentthe debtor’s loan would completely take away from the debtor the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.

·         Basis of the increase of interest rates in this case: on account of the revailing business and economic condition.

PD 1684 “Usury Law”: SEC. 7-a.  Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: xxx.'

RULING: Even if we were to consider that petitioners were bound by their agreement allowing an increase in the interest rate despite the lack of advance notice to them, the escalation should still be subject, as so contractually stipulated, to a corresponding increase by the Central Bank of its rediscount rate to member banks, or of the interest rate on savings and time deposit, or of the interest rate on such loans and advances.  There are no sufficient valid justifications aptly shown for the unilateral increases by private respondent bank of the interest rates on the loan.

FRIAS V. SAN DIEGO-SISON

(Conventional Interest )

*example of forbearance

·         Parties: Petitioner Frias as the property owner and Respondent Dra. Flora San Diego-Sison, entered into a Memorandum of Agreementover the subject property.

·         MOA: Petitioner received  P3M from respondent with the following agreement:

Ø  That respondent has a period 6 months from the date of the execution of this contract within which to notify petitioner of her intention to purchase the land at the price of P6.4M.  Upon notice to the petitioner of respondent’s intention to purchase the same, the latter has a period of another 6 months within which to pay the remaining balance of P3.4 million.

Ø  In the event that on the sixth month the respondent would decide NOT to purchase the property, the petitioner has a period of another 6 months within which to pay the sum of P3 million pesos provided that the said amount shall earn compounded bank interest for the last 6 months only.  Under this circumstance, the amount of P3 million given by the respondent shall be treated as a loan.

·         Respondent decided not to purchase the property and demanded the return of her money with 36% interest.

·         Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests, and per the certification issued by Prudential Bank, the interest rate for loans in 1991 ranged from 25% to 32% per annum.  The CA reduced the interest rate to 25% instead of the 32% awarded by the trial court which petitioner no longer assailed.

Monetary Interest: The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount.  It has been held that for a debtor to continue in possession of the principal of the loan and to continue to use the same after maturity of the loan without payment of the monetary interest, would constitute unjust enrichment on the part of the debtor at the expense of the creditor.

SC: Affirmed the ruling of the CA as to the 25% interest rate. Thus, the interest rate of 25% per annum awarded by the CA to a P2 million loan is fair and reasonable.

SPOUSES JUICO V. CHINA BANKING CORP.

(Conventional Interest; Escalation Clause)

(Include Concurring Opinion)

·         Bank: that the interest rate changes every month based on the prevailing market rate and notified petitioners of the prevailing rate by calling them thru a telephone monthly before their account becomes past due. When asked if there was any written authority from petitioners for respondent to increase the interest rate unilaterally, respondent answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate.

·         China Bank unilaterally increased the interest rates from 15% to as high as 24.50%.

RULES on Escalation Clauses:

a)      Escalation clauses are not void per se.

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. Hence, such stipulations are not void per se.

b)      Escalation clauses violating the principle of mutuality of contracts are void.

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts. Thus, this Court has previously nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in loan contracts.

Ø  Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board, because said circular is not a law although it has the force and effect of law and the escalation clause has no de-escalation clause.

Ø  De-escalation Clause: provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an important modification in their agreement and would also negate the element of mutuality in their contracts.³⁴ While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."

Ecalation clause in this case: I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.

RULING: At no time did petitioners protest the new rates imposed on their loan even when their property was foreclosed by respondent. This notwithstanding, we hold that the escalation clause is still VOID because it grants respondent the power to impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided by the respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality.

Effect: Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding effect. In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted rates cannot bind them. 

NOTE: The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds.

Concurring Opinion:

Points to consider in drafting a valid escalation clause: (DAP)

1)       Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation clause must be paired with a de-escalation clause. 

2)      Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to the prevailing market rates, and not merely make a generalized reference to "any increase or decrease in the interest rate" in the event a law or a Central Bank regulation is passed.

3)      Thirdly, consistent with the nature of contracts, the proposed modification must be the result of an agreement between the parties.

EASTERN SHIPPING LINES, INC. V. CA (1994)

(Compensatory, Penalty or Indemnity Interest)

Rules on Interest:

·         Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point.

·         But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty. Here, interest should be counted from the date of the decision (when the amount of damages are ascertained).

·         Art. 2209, CC. — If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.

Rules of thumb (on the award of interests):

^{*NOTE: The legal rate of 12% has been amended to 6%. See Circular No. 799 (amending Circular No. 905) effective July 1, 2013, and the case of NACAR V. GALLERY FRAMES AND/OR BORDEY (2013). Therefore, there is no need to distinguish now the obligations breached as the legal interest applicable is 6%.}

1)       When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages.  The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 

2)      With regard particularly to an award of interest in the concept of ACTUAL AND COMPENSATORY DAMAGES, the rate of interest, as well as the accrual thereof, is imposed, as follows:

a)      Obligation breached: consists in the payment of a sum of money, i.e., a loan or forbearance of money

Interest Due:

i)                    that which may have been stipulated in writing.  Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 

ii)                  In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169  of the Civil Code. (amended to 6%)

b)      Obligation breached: not constituting a loan or forbearance of money,

Interest due: may be imposed at the discretion of the court  at the rate of 6% per annum. 

Ø  No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 

o    Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)

o    When such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

c)       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. (amended to 6%)

LIGUTAN V. CA, (2002)

(Compensatory, Penalty or Indemnity Interest)

The essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty.  A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction of interest.  Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence.

·         Here, the stipulated interest of 15.189% on the forbearance of money was upheld by the court as reasonable.

GSIS v. CA

(Compensatory, Penalty or Indemnity Interest)

·         It has already been settled that the Usury Law applies only to interest by way of compensation for the use or forbearance of money. Interest by way of damages is governed by Article 2209 of the Civil Code of the Philippines which provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,...

In the Bachrach case the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of Equitable Banking Corp., where this Court held that the stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law.

SIGA-AN V. VILLANUEVA, (2009)

(Compensatory, Penalty or Indemnity Interest)

Interests:

a)     Monetary interest  is a compensation fixed by the parties for the use or forbearance of money.

b)     Compensatory interest - imposed by law or by courts as penalty or indemnity for damages.

The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.

Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing.

I. Hence, payment of monetary interest is allowed only if:

1) there was an express stipulation for the payment of interest; and

2) the agreement for the payment of interest was reduced in writing.

·         The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.

·         Monetary interest is due only when these requirements are present.

II. However, there are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% (now 6%) per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. (Compensatory interest)

·         This interest may be imposed only as a penalty or damages for breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. This applies only to compensatory interest and not to monetary interest.

Solutio Indebiti

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied.

Article 2154 provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. We have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.

HELD: It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to demand it, he has an obligation to return it.

ESTORES V. SPOUSES SUPANGAN, (2012)

(Compensatory, Penalty or Indemnity Interest)

*Forbearance of  money

ISSUE: Whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties.

HELD:

YES. Interest may be imposed even in the absence of stipulation in the contract.

Article 2210 of the Civil Code expressly provides that “[i]nterest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.”   In this case, there is no question that petitioner is legally obligated to return the P3.5 million because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand.  Petitioner enjoyed the use of the money from the time it was given to her until now.   Thus, she is already in default of her obligation from the date of demand.

Forbearance is defined as a “contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable.”  This definition describes a loan where a debtor is given a period within which to pay a loan or debt.  In such case, “forbearance of money, goods or credits” will have no distinct definition from a loan.  We believe however, that the phrase “forbearance of money, goods or credits” is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code.  

Forbearance of money, goods or credits should therefore refer to 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.  

In this case, the respondent-spouses parted with their money even before the conditions were fulfilled.  They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions.  They were deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money.  And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.

NACAR V. GALLERY FRAMES AND/OR BORDEY, (2013)

(Compensatory, Penalty or Indemnity Interest)

*Amending the Eastern Shipping Doctrine

*Important: because this case discusses the amendment of the legal interest in loan and forbearance of money, credits or goods from 12% to 6% effective July 1, 2013.

Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent portion of which reads:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be 12% per annum but will now be 6% per annum effective July 1, 2013.

Ø  It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the 12% per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of 6% per annum shall be the prevailing rate of interest when applicable.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I.                    When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II.                 With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

New guidelines in the award of interest:

1.)     When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2.)    When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

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 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Application in this case: The interest of 12% per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and 6% per annum from July 1, 2013 until their full satisfaction, is awarded.

UCPB V. SAMUEL AND BELUSO

(Finance Charges, R.A. No. 3765, Sec. 4. Sec. 6)

*better read the full text

Validity of the interest rates

·         The provision stating that the interest shall be at the “rate indicative of DBD retail rate or as determined by the Branch Head” is indeed dependent solely on the will of petitioner UCPB. Clearly, a rate “as determined by the Branch Head” gives the latter unfettered discretion on what the rate may be.  The Branch Head may choose any rate he or she desires.  As regards the rate “indicative of the DBD retail rate,” the same cannot be considered as valid for being akin to a “prevailing rate” or “prime rate” allowed by this Court in Polotan.  The interest rate in Polotan reads:

 The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company.  x x x.

·         In this provision in Polotan, there is a fixed margin over the reference rate: 3%.  Thus, the parties can easily determine the interest rate by applying simple arithmetic.  On the other hand, the provision in the case at bar does not specify any margin above or below the DBD retail rate.  UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest rate. 

  

Liability for Violation of Truth in Lending Act

RA 3765, otherwise known as the “Truth in Lending Act.”

Section 6(a) of the Truth in Lending Act which mandates the filing of an action to recover such penalty must be made under the following circumstances:

Section 6.  (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit transaction.  Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. 

Rationale: to protect the public from hidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender.  

Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4.  Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:

1)       the cash price or delivered price of the property or service to be acquired;

2)      the amounts, if any, to be credited as down payment and/or trade-in;

3)      the difference between the amounts set forth under clauses (1) and (2)

4)      the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit;

5)      the total amount to be financed;

6)      the finance charge expressed in terms of pesos and centavos; and

7)      the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

Rationale: to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.  The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions. 

The promissory notes, the copies of which were presented to the spouses Beluso after execution, are not sufficient notification from UCPB.  As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said promissory notes.

ADVOCATES FOR TRUTH IN LENDING, INC. AND OLAGUER V. BS-MB

(Usury)

Relevant Laws:

·         Act No. 2655, or the Usury Law of 1916.

·         R.A. No. 265 - created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the CB-MB to, among others, set the maximum interest rates which banks may charge for all types of loans and other credit operations, within limits prescribed by the Usury Law.

·         P.D. No. 1684 – Amended the Usury Law was amended on March 17, 1980, giving the CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are effected gradually and announced in advance.

·         CB Circular No. 905, Series of 1982 – issued by the CB-MB, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on interest rates on loans or forbearance of any money, goods or credits.

·         RA 7653 – established BSP to replace CB. Repealed RA 265.

CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity. By virtue of CB Circular No. 905, the Usury Law has been rendered ineffective and legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Effect of PD 1684 and CB 905 suspending the effectivity of the Usury Law

1)       Lifted interest ceiling.

2)      Upheld the parties’ freedom of contract to agree freely on the rate of interest.

The BSP-MB has authority to enforce CB Circular No. 905

Under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.

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 (void) contrary to morals, if not against the law.

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% (now 6%) per annum will be added in place of the excessive interest formerly imposed.

BPI V. IAC AND ZSHORNACK

(Voluntary Deposit)

Zshornack delivered to the bank US $3,000 for safekeeping. BPI argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. Zshornack demanded the return of the money on May 10, 1976, or over five months later.

Article 1962, New Civil Code:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law.

TRIPLE-V FOOD SERVICES, INC. V. FILIPINO MERCHANTS INSURANCE Co., Inc.,

(Voluntary Deposit)

In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and returning the same. A deposit may be constituted even without any consideration. It is not necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping and to return it later to the depositor.

THE ROMAN CATHOLIC BISHOP OF JARO V. DE LA PENA

(Obligation to Safekeep - Way of the Deposit)

By placing the money in the bank and mixing it with his personal funds, respondent did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. There was no law prohibiting him from depositing it as he did and there was no law which changed his responsibility by reason of the deposit.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP. V. CA AND SECURITY BANK

(Obligation to Safekeep - Way of the Deposit)

ISSEUE: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? BAILOR-BAILEE RELATIONSHIP.

In Tolentino vs. Gonzales, the Court  held that the owner of the property loses his control over the property leased during the period of the contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

Prevailing rule in the United States:

Where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bailor is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee (whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company.

HELD:

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is NOT an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit. The contract in the case at bar is a special kind of deposit.

·         Not lease: It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box.

·         Not deposit under 1975: the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present.

Prevailing view: Bailment

The prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit.  In our jurisdiction, the prevailing rule in the US has been adopted. Section 72 of the General Banking Act pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . . 

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function.

A contract of deposit may be entered into orally or in writing.  The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement.  In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed.  Hence, any stipulation exempting the depositary from any 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.

It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 

Thus, we reach the same conclusion which the CA arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the CA. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the CA, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present.

YHT REALTY CORPORATION V. CA

(Necessary Deposit  - Hotel or Inns, Art. 1998 to 2004)

Issue: Whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers. NO.

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void.

Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings.  The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

To hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest’s knowledge and consent from a safety deposit box provided by the hotel itself.

Rule: The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure. It is the loss through force majeure that may spare the hotel-keeper from liability.

PNB V. SE, ET. AL.

(Warehouse Receipts - General Bonded Warehouses, Act No. 3893, as amended)

Act No. 2137, the Warehouse Receipts Law

Sec. 27. What claims are included in the warehouseman’s lien. - Subject to the provisions of section thirty, a warehouseman shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing coopering and other charges and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and advertisement of sale, and for sale of the goods where default has been made in satisfying the warehouseman’s lien.

Sec. 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payment against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehouseman’s lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without paying the lien due private respondents as warehouseman.

Rule: While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman’s lien is possessory in nature.