Chapter II

SIMPLE LOAN or MUTUUM

(Articles 1953 1961)

Concept
It is a contract whereby one party delivers to another money or fungible thing, on the
condition of returning the same kind, amount and quality. If the object loaned is not fungible
but the borrower is to return another of the same kind and quality, it is barter.

Cases:
Mutuum vs. Commodatum

CHEE KIONG YAM vs. MALIK

FACTS:
This is a petition for certiorari, prohibition, and mandamus with preliminary
injunction. Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo,
Sulu, acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion
when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents
Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima
facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above determination;
and
(c) he undertook to conduct trial on the merits of the charges which were docketed in his
court as Criminal Cases No. M-111, M-183 and M-208.
In the three criminal cases the respondents charges the petitioner with estaffa
through misappropriation, however in the face of the documents it state that the amount
received was in the nature of a simple loan.

ISSUE:
Whether or not the petitioners in this case can be charged of estaffa when the
obligation is said to be that of simple loan.

SC Ruling:
We agree with the petitioners that the facts alleged in the three criminal complaints
do not constitute estafa through misappropriation.
In order that a person can be convicted of estaffa, it must be proven that he has the
obligation to deliver or return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which
they received from private respondents. This is so because as clearly stated in criminal
complaints, the related civil complaints and the supporting sworn statements, the sums of
money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing upon the condition that
the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while
in simple loam ownership passes to the borrower.
Art. 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.
It can be readily noted from the above-quoted provisions that in simple loan
(mutuum), as contrasted to commodatum, the borrower acquires ownership of the money,
goods or personal property borrowed. Being the owner, the borrower can dispose of the
thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person
to refuse to nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of
debtor and creditor, the debtor can not be held liable for the crime of estafa,
under said article, by merely refusing to pay or by denying the
indebtedness.
It appears that respondent judge failed to appreciate the distinction between the two
types of loan, mutuum and commodatum, when he performed the questioned acts, He
mistook the transaction between petitioners and respondents Rosalinda Amin, Tan Chu Kao
and Augusto Sajor to be commodatum wherein the borrower does not acquire ownership
over the thing borrowed and has the duty to return the same thing to the lender.
Thus the criminal complaints against petitioners are hereby declared null and void;
respondent judge is hereby ordered to dismiss said criminal cases and to recall the warrants
of arrest he had issued in connection therewith.

Mutuum vs. Lease

TOLENTINO vs. GONZALES SY CHIAM

FACTS:
Sometime prior to the 28th day of November, 1922, the appellants (Tolentino and
Manio) purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with the camarin
located thereon for the price of P25,000, promising to pay therefor in three installments. One
of the conditions of that contract of purchase was that on failure of the purchaser (plaintiffs
and appellants) to pay the balance of said purchase price or any of the installments on the
date agreed upon, the property bought would revert to the original owner. For the last
installment, upon receiving the letter of the vendor of said property, the purchasers, the
appellants herein, realizing that they would be unable to pay the balance due, began to
make an effort to borrow money with which to pay the balance due, began to make an effort
to borrow money with which to pay the balance of their indebtedness on the purchase price
of the property involved. Finally an application was made to the defendant for a loan for the
purpose of satisfying their indebtedness to the vendor of said property. After some
negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of
P17,500 upon condition that the plaintiffs execute and deliver to him a pacto de retro of said
property.

ISSUE:
May a tenant charge his landlord with a violation of the Usury Law upon the ground
that the amount of rent he pays, based upon the real value of the property, amounts to a
usurious rate of interest?

SC RULING:
No. The value of money, goods or credits is easily ascertained while the amount of
rent to be paid for the use and occupation of the property may depend upon a thousand
different conditions. It will thus be seen that the rent to be paid for the use and occupation of
property is not necessarily fixed upon the value of the property. The amount of rent is fixed,
based upon a thousand different conditions and may or may not have any direct reference
to the value of the property rented. To hold that "usury" can be based upon the comparative
actual rental value and the actual value of the property, is to subject every landlord to an
annoyance not contemplated by the law, and would create a very great disturbance in every
business or rural community. We cannot bring ourselves to believe that the Legislature
contemplated any such disturbance in the equilibrium of the business of the country.

Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect
of receiving or taking usurious rates." It will be noted that said statute imposes a penalty
upon a "loan" or forbearance of any money, goods, chattels or credits, etc. The central idea
of said statute is to prohibit a rate of interest on "loans." A contract of "loan," is very
different contract from that of "rent". A "loan," as that term is used in the statute, signifies
the giving of a sum of money, goods or credits to another, with a promise to repay, but not a
promise to return the same thing. To "loan," in general parlance, is to deliver to another for
temporary use, on condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a compensation
for its use. The word "loan," however, as used in the statute, has a technical meaning. It
never means the return of the same thing. It means the return of an equivalent only, but
never the same thing loaned. A "loan" has been properly defined as an advance payment of
money, goods or credits upon a contract or stipulation to repay, not to return, the thing
loaned at some future day in accordance with the terms of the contract. Under the contract
of "loan," as used in said statute, the moment the contract is completed the money, goods or
chattels given cease to be the property of the former owner and becomes the property of the
obligor to be used according to his own will, unless the contract itself expressly provides for
a special or specific use of the same. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the property of the former owner and
becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent"
the owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of "loan" the thing loaned
becomes the property of the obligor. In a contract of "rent" the thing still remains the
property of the lessor. He simply loses control of the same in a limited way during the period
of the contract of "rent" or lease. In a contract of "rent" the relation between the contractors
is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the
relation between the parties is that of obligor and obligee. "Rent" may be defined as the
compensation either in money, provisions, chattels, or labor, received by the owner of the
soil from the occupant thereof. It is defined as the return or compensation for the possession
of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for
their use. It is that, which is to paid for the use of land, whether in money, labor or other
thing agreed upon. A contract of "rent" is a contract by which one of the parties delivers to
the other some nonconsumable thing, in order that the latter may use it during a certain
period and return it to the former; whereas a contract of "loan", as that word is used in the
statute, signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases it is called
merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."

In the present case the property in question was sold. It was an absolute sale with
the right only to repurchase. During the period of redemption the purchaser was the
absolute owner of the property. During the period of redemption the vendor was not the
owner of the property. During the period of redemption the vendor was a tenant of the
purchaser. During the period of redemption the relation which existed between the vendor
and the vendee was that of landlord and tenant. That relation can only be terminated by a
repurchase of the property by the vendor in accordance with the terms of the said contract.
The contract was one of rent. The contract was not a loan, as that word is used in Act No.
2655.
 Mutuum vs. Estafa

LIWANAG vs. CA
When there is no transfer of ownership, it is not a simple loan but estafa.

FACTS:
Rosales constituted Liwanag and Tabligan as her agents in buying and selling cigarettes
business. Under their agreement, Rosales would give the money needed to buy cigarettes
while Liwanag and Tabligan would sell them, with corresponding 40% commission if the
goods are sold; otherwise, the money would be returned to Rosales. Thus Rosales gave
several cash advances to Liwanag and Tabligan amounting to P633,650.00. The two, after a
few visits to Rosales to report on the progress of the transactions, never showed up to remit
the proceeds of sale, nor returned the money advanced. Liwanag was charged with estafa,
which she was convicted of. This was affirmed by CA, hence the petition.

SC RULING: Liwanag alleged the contract between her and Rosales was simple loan,
hence there was no estafa. But the court held that the transaction cannot be considered
loan since in a contract of loan, once money is received, ownership over the same is
transferred. Being the owner, the borrower can dispose of it freely. Here, Liwanag could not
dispose of the property freely as it was delivered to her for the single purpose of buying
cigarettes, and if this was not possible then to return the money to Rosales. As there was no
transfer of ownership of the money delivered, Liwanag is liable for conversion under Art.315
par.1(b) of the RPC.

Kinds
1. Gratuitous
2. With interest

Requisites
1. Capacity of the parties
No special capacity is required to be a lender except ownership. But an
emancipated minor may not borrow money without the consent of his parent or
guardian.
2. Object
Consumable
Muttum involves money or any other fungible things. If not fungible, the contract
is barter.
3. Consideration
Gratuitous or onerous.
4. Form
No special form is needed; but there must be delivery, as the contract is real.
An accepted promise to deliver something by way of simple loan may be subject
to the Statute of Frauds if not to be performed within one year. This contract is
consensual as distinguished from loan proper which is real.

Case:
Accepted promise to deliver something by way of simple loan

SAURA IMPORT and EXPORT CO., INC., vs. DEVELOPMENT BANK OF THE
PHILIPPINES

FACTS:
Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its
conversion into DBP, for an industrial loan of P500,000.00, to be used as follows:
P250,000.00 for the construction of a factory building for the manufacture of jute sacks;
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and
equipment; and P9,100.00 as additional working capital.
After agreeing on the terms of the industrial loan, Mr. & Mrs. Ramon E. Saura,
Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall
sign the promissory notes jointly with the borrower-corporation. On January 7, 1954 RFC
passed Resolution No. 145 approving the loan application for P500,000.00, to be secured
by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Saura, Inc. was officially notified of the resolution
on January 9, 1954. The day before, however, evidently having otherwise been informed of
its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid
down by it, namely: that in lieu of having China Engineers, Ltd. which was willing to assume
liability only to the extent of its stock subscription with Saura, Inc. sign as co-maker on the
corresponding promissory notes.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was
present, it was decided to reduce the loan from P500,000.00 to P300,000.00. But after the
reexamination, there ensued several more circumstances that occurred that resulted to the
prolonged the discharged of the loan. Afterwhich, the loan was again restored to the original
amount of P500,000. Yet at one point, the negotiations between the two parties came to a
standstill, and so Saura Inc. did not anymore pursue the matter. Instead, it requested RFC
to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of
cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was
cancelled at the request of Saura, Inc., the latter commenced the present suit for damages,
alleging failure of RFC, as predecessor of the defendant DBP, to comply with its obligation
to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff
from completing or paying contractual commitments it had entered into, in connection with
its jute mill project.

ISSUE: Whether or not the defendant bank is guilty of breach of contract of loan.

SC RULING:
No. DBP is not guilty of breach of contract of loan. The Supreme Court held in this
case that although there was a perfected consensual contract between the parties, such that
there was offer and acceptance: the application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the corresponding mortgage was executed
and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw materials,
principally kenaf. It was in line with such assumption that when RFC approved and restored
the loan to the original amount of P500,000.00. There was nothing in said conditions that
contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954,
namely "that the proceeds of the loan shall be utilized exclusively for the following
purposes: for construction of factory building P250,000.00; for payment of the balance of
purchase price of machinery and equipment P240,900.00; for working capital
P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by
RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in
sufficient quantity this year or probably next year," and asking that out of the loan agreed
upon the sum of P67,586.09 be released "for raw materials and labor." Saura, Inc. obviously
was in no position to comply with RFC's conditions. So instead of doing so and insisting that
the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled,
which was done on June 15, 1955. The action thus taken by both parties was in the nature
of mutual desistance, what Manresa terms "mutuo disenso," which is a mode of
extinguishing obligations.
 Clearly, the subsequent conduct of Saura Inc. requesting for cancellation of the
mortgage carried no reservation of whatever rights it believed it might have against RFC for
the latter's non-compliance confirms their desistance. All these circumstances demonstrate
beyond doubt that the said agreement had been extinguished by mutual desistance and
that on the initiative of the plaintiff-appellee itself.

Effects (Obligation of the Borrower only)

Art. 1955. The obligation of a person who borrows money shall be governed by the
provisions of articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money the debtor owes another
thing of the same kind, quantity and quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time of the perfection of the loan shall be
paid.

a. To return the thing or amount borrowed at the period stipulated or fixed according to
general rules.
If the thing borrowed is money;
Art.1249. the payment of debts in money shall be made in the
currency stipulated and if it is not possible to deliver such
currency then in the currency which is the legal tender in the
Philippines.
The delivery of promissory notes payable to order or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed or when through the fault
of the creditor they have been impaired.
Art. 1250. In case of extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at
the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

If the thing borrowed is not money, to return the same amount in equal kind
and quality, even if the price has changed or else its value at the time the
contract was perfected.

b. To Pay Interest
When it is expressly agreed in writing (Art. 1956)
When the stipulation to pay is verbal, the volountary payment is valid as a
performance of a natural obligation. (But GR: Verbal void; EXCP: voluntary
payment)
Interest paid even if not stipulated, is not recoverable, it being proof of a tacit contract
or a natural obligation.
a. Except where it is proved that the interest was paid by error (solution indebiti)
b. Interest payable in kind, it is appraised at the current price at the time of
payment (Art. 1958)
c. Interest due shall not earn interest (no compounding) in the absence of
agreement and without prejudice to Art 2212 (interest after judicial demand)
(Art. 1595)
d. The following are not considered interest:
- Increase in the price when the sale is on installment
- Attorneys fees for cost of collection
- Penalty for breach
Bank deposits, whether fixed savings or current are governed by the provisions
concerning simple loan.
Cases:
Payment in Currency Stipulated
RONO vs. GOMEZ

FACTS:
Cristobal Roo received as a loan four thousand pesos in Japanese fiat money
from Jose L. Gomez. He informed the later that he would use the money to purchase a
jitney; and he agreed to pay that debt one year after date in the currency then prevailing.
After the liberation, Roo was sued for payment. His main defense was his liability should
not exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be
4,000 pesos Philippine currency, because the contract would be void as contrary to law,
public order and good morals.

ISSUE:
Whether or not the contract is contrary to the Usury law, because on the basis of
calculations by Government experts Roo only received the equivalent of one hundred
Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly
in excess of the lawful rates.

SC RULING:
No, he is not paying interest. The contract says that the money received "will not
earn any interest." Furthermore, he received four thousand pesos; and he is required to
pay four thousand pesos exactly. The increased intrinsic value and purchasing power of
the current money is consequence of an event (change of currency) which at the time of
the contract neither party knew would certainly happen within the period of one year. They
both elected to subject their rights and obligations to that contingency. If within one year
another kind of currency became legal tender, Gomez would probably get more for his
money. If the same Japanese currency continued, he would get less, the value of
Japanese money being then on the downgrade.

Stipulation not to pay while war is going on

NEPOMUCENO vs. NARCISO

FACTS:
In 1938, plaintiff executed a mortgage in favor of defendant on a parcel of land to secure
the payment of P24,000 in 7 years at 8% interest per year. By mutual agreement, the term
was modified in 1943 by reducing the interest to 6% per year from December 1941 until the
end of the war and by stipulating that the mortgagor shall not pay and release the
mortgage while the war went on. In 1944, the plaintiff offered to pay which the defendant
refused. Plaintiff filed this action to compel the defendant to accept his tender of payment.
The trial court sustained the defense that payment was premature. Plaintiff appealed
alleging that the provision for non-redemption during the war is against public policy and a
restraint on the freedom of commerce.

ISSUE: Whether or not said provision is against public policy as to render said contract
void.

SC RULING: There is nothing immoral or violative of public order in the questioned

stipulation. The morgagee apparently did not want to have their pre-war credit paid with
Japanese military notes, and the mortgagor voluntarily agreed not to do so in consideration
of the reduction of the rate of interest. It was a perfectly equitable and valid transaction.
Appellants were bound by said contract and appellees were not obliged to receive payment
before it was due. Hence, the latter had reason not to accept the tender of payment made
to them by the former. Judgment affirmed.

Liability for contractual interest after maturity of note

JARDENIL vs. SOLAS

FACTS:
Salas issued a promissory note where it was clearly agreed that he will pay interest only up
to the date of maturity, or until March 31, 1934, and that payment is extendable by one
year but without mention of interest.

ISSUE:
Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as
fixed in the promissory note, or up to the date payment is effected?

SC RULING:
As the contract is silent as to whether after that date, in the event of non-payment, the
debtor would continue to pay interest, we cannot in law, indulge in any presumption as to
such interest; otherwise, we would be imposing upon the debtor an obligation that the
parties have not chosen to agree upon. Article 1755 of the Civil Code provides that
"interest shall be due only when it has been expressly stipulated." There is nothing in the
mortgage deed to show that the terms employed by the parties thereto are at war with their
evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the
same date of execution of the deed of mortgage, an extension of one year from the date of
maturity within which to make payment, without making any mention of any interest which
the mortgagor should pay during the additional period, indicates that the true intention of
the parties was that no interest should be paid during the period of grace. Neither has
either of the parties shown that, by mutual mistake, the deed of mortgage fails to express
their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced
evidence to establish it and asked that the deed be reformed accordingly, under the parcel-
evidence rule.
As the contract is clear and unmistakable and the terms employed therein have not been
shown to belie or otherwise fail to express the true intention of the parties and that the
deed has not been assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be allowed to lay any
claim more than what its clear stipulations accord. His omission, to which the law attaches
a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by
what their own notions of justice or equity may dictate.

Increase in the prince when sale is on installment

MANILA TRADING vs. TAMARAW PLANTATION

FACTS:
On August 23, 1920, the plaintiff sold to the defendant the goods mentioned in
Exhibit A of the defendant for P5,300, if paid in cash, but as it was not so paid, there was
added to said amount the sum of P265, which is 5 per cent thereon, making a total of
P5,565. The defendant paid the first six monthly installments provided in Exhibit A, plus
P213.89 on account of the seventh installment, that is, a total of P2,996.39, and failed to
pay the rest, namely, P2,568.61; wherefore said goods were on August 15, 1922, sold by
the sheriff of Mindoro at public auction, as provided in Act No. 1508, the proceeds of the
sale having amounted to P2,000, which were paid to the plaintiff.
On December 24, 1920, the plaintiff sold to the defendant the goods mentioned in
Exhibit B for P2,550, if paid in cash. To said amount there was added the sum of P127.50,
which is 5 per cent thereon, making a total of P1,877.50. The defendant paid P800 upon
the delivery of the goods, but did not pay anything more afterwards; wherefore said goods
were sold at public auction by the sheriff of Mindoro on August 15, 1922, for P1,000, as
provided in Act No. 1508, said sum of P1,000 having been paid to the plaintiff.
The trial court, in view of said stipulation of facts, rendered judgment, sentencing
the defendant to pay to the plaintiff company

ISSUE:
Whether or not the increase of the price of an article sold on credit upon its cash sale value
constitutes interest within the meaning of the Usury Law.

SC RULING:
No. The instant case is of a chattel mortgage given to secure payment for the
agricultural implements sold by the plaintiff to the defendant. The transaction was carried
out between the parties in good faith, and there is no proof that the contract of sale of
agricultural effects, secured by a mortgage on the same goods, was executed as a loan of
money. This being so, the parties may freely agree upon the price of the goods sold, and it
cannot be said that the credit, greater than the cash, price, constitutes interest within the
meaning of the Usury Law. The increase of the price, when the sale is on credit, serves not
only to cover the expenses generally entailed by such transactions on credit, but also to
encourage cash sales, so useful to commerce. It is up to the purchaser to decide which
price he prefers in making the purchase. If he prefers to purchase for cash, he obtains a 5
per cent reduction of the price; if, on the contrary, he prefers to buy on credit, he cannot
complain of the increase of the price demanded by the vendor.
"On principle and authority, the owner of property, whether real or personal, has a
perfect right to name the price on which he is willing to sell, and to refuse to accede to any
other. He may offer to sell at a designated price for cash or at a much higher price on
credit, and a credit sale will not constitute usury however great the difference between the
two prices, unless the buying and selling was a mere pretense." It is also established that:
"A vendor mat well fix upon the property one price for cash and another for credit, and the
mere fact that the credit price exceeds the costs price by a greater percentage than is
permitted by the usury laws is a matter of concern to the parties but not to the courts,
barring evidence of bad faith. If the parties have acted in good faith such a transaction is
not a loan, and not usurious."

Attorneys fees

ANDREAS vs. GREEN

FACTS:
The defendant and appellant questions the clause in the promissory note sued on reading
"and a further sum equal to 10 per cent of the total amount due as and for expenses of
collection for attorney's fees whether actually incurred or not," as in contravention of the
Usury Law.

SC RULING: Stipulations in negotiable instruments for the payment of collection and

attorney's fees are not forbidden by lay in this jurisdiction. The lender may without violating
the Usury Law provide in a note for an attorney's fee to cover the cost of collection. This
has been definitely held in a long line of cases both here and elsewhere. The purpose of a
stipulation in a note for reasonable attorney's fees is not to give the lender a larger
compensation for the loan than the law allows, but is to safeguard the lender against
future loss or damage by being compelled to retain counsel to institute judicial
proceedings to collect his debt.
The only difference between the provision of the promissory note here complained of and
the provision of the promissory notes in any of the above-cited cases is that the note before
us contains these additional words: "whether actually incurred or not." But this clause is
merely descriptive in nature is in reality merely surplusage. The idea of the parties was
to provide for a penalty to cover expenses of collection. That such expenses were actually
incurred in this case is now before the appellate court for decision. Whether the creditor
could enforce the penalty where expenses of collection and attorney's fees were not
actually incurred, is questionable, but does not affect the result in this case.
Judgment affirmed.

Penalty for Breach

SENTINEL INSURANCE CO. vs. CA

FACTS:
Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship with
Nemesio Azcueta, Sr., who is doing business under the name and style of 'Malayan
Trading both of them bound themselves, 'jointly and severally, to fully and religiously
guarantee the compliance with the terms and stipulations of the credit line granted by
private respondent Rose Industries, Inc., in favor of Nemesio Azcueta, Azcueta made
various purchases of tires, batteries and tire tubes from the private respondent but failed to
pay therefor, prompting Rose Industries to demand payment but because Azcueta failed to
settle his accounts, the case was referred to the Insurance Commissioner who invited the
attention of the petitioner on the matter and the latter cancelled the Suretyship Agreement
with due notice to the private respondent.
Meanwhile, private respondent Rose Industries filed with the respondent court of
Makati a complaint for collection of sum of money against herein petitioner and
Azcueta.The decision having become final and executory, the prevailing party moved for its
execution which respondent judge granted and pursuant thereto, a notice of attachment
and levy was served upon the petitioner. On the same day.Contending that the order was
issued with grave abuse of discretion, petitioner went to respondent court on a petition for
certiorari and mandamus to compel the court below to clarify its decision to pay
interest at 14% per annum on the principal obligation and damage dues at the rate of 2%
every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid.

ISSUE:
Whether or not respondent court should not have made an award for "damage dues" at
such late stage of the proceeding since said dues were not the subject of the award made
by the trial court.

SC RULING:
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to
the pleadings filed by the parties, the findings of fact and the conclusions of law expressed
in the text or body of the decision. this was what respondent court did in resolving the
original petition.
The findings made by respondent court did not actually nullify the judgment of the
trial court. More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, 1975 on top of the 14% per annum (as would be the impression
from a superficial reading of the dispositive portion of the trial court's decision) would be
usurious is a sound observation. It should, however, be stressed that such observation
was on the theoretical assumption that the rate of 2% is being imposed as interest,
 not as damage dues which was the intendment of the trial court.
Damage dues in this case do not include and are not included in the computation
of interest as the two are of different categories and are distinct claims which may be
demanded separately, in the same manner that commissions, fines and penalties are
excluded in the computation of interest where the loan or forbearance is not secured in
whole or in part by real estate or an interest therein.
While interest forms part of the consideration of the contract itself, damage dues (penalties,
and so forth) are usually made payable only in case of default or non-performance of the
contract. 11 Also, although interest is subject to the provisions of the Usury Law, there is no
policy or provision in such law preventing the enforcement of damage dues although the
effect may be to increase the sum payable beyond the prescribed ceiling rates.
The lower court's decision explicitly ordered petitioner to pay private respondent
the amount of P198,602.41 as principal obligation including interest and damage dues,
which is a clear and unequivocal indication of the lower court's intent to award both interest
and damage dues.

Bank Deposits
Cases:
Nature of Bank Deposits

GOPOCO GROCERY vs. PACIFIC COAST BISCUIT

FACTS:
The Mercantile Bank of China was declared in liquidation. Creditors and all those who had
any claim against it were required to present the same before the Bank Commissioner
within 90 days. Gopoco presented its claim.

ISSUE:
What is the real nature of current account a savings deposit?

SC RULING:
The current account and savings deposit have lost their character as deposits and are
converted into simple commercial loans because in cases of such deposits, the bank has
made use thereof in the ordinary course of its transactions as an institution engaged in the
banking business, not because it so wishes but precisely because of the authority deemed
to have been granted to it by the depositors to enable him to collect the interest which they
had been and they are now collecting, and by virtue further of the authority granted to it by
Section 125 of the Corporation Law and the Banking Law. The deposits created a juridical
relation of creditor and debtor. The back acquired ownership of the money deposited.

CENTRAL BANK OF THE PHIL. vs. MORFE

FACTS:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its assets,
forbade it to do business and instructed the Central Bank Legal Counsel to take legal
actions. Central Bank of the Philippines, then filed the corresponding petition for assistance
and supervision in the Court of First Instance of Manila.
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of
First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of
P50, 584 as the balance of their time deposits. In the judgment rendered, the Fidelity
Savings Bank was ordered to pay the Elizes spouses the sum of P50, 584 plus
accumulated interest.
In another case, spouses Augusta A. Padilla and Adelaida Padilla secured on April
14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as the
balance of their time deposits, plus interests, P70,000 as moral and exemplary damages
and P9,600 as attorney's fees.
After the two judgments were rendered and upon motions of the Elizes and Padilla
spouses but over the opposition of the Central Bank, the court directed the latter as
liquidator, to pay their time deposits as preferred judgments, evidenced by final judgments.
From the said order, the Central Bank appealed to this Court by certiorari. It contends that
the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference
because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and
(b) under the charter of the Central Bank and the General Banking Law, no final judgment
can be validly obtained against an insolvent bank.

ISSUE: Whether or not a final judgment for the payment of a time deposit in a savings bank
which judgment was obtained after the bank was declared insolvent, is a preferred
claim against the bank.

SC RULING:
Section 29 of Republic Act No. 265 provides:
Whenever upon examination by the Superintendent or his examiners or
agents into the condition of any banking institution, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, it shall be the duty of the
Superintendent forthwith, in writing to inform the Monetary Board of the facts,
and the Board, upon finding the statements of the Superintendent to be true,
shall forthwith forbid the institution to do business in the Philippines and shall take
charge of its assets and proceeds according to law.
xxx xxx xxx
If the Monetary Board shall determine that the banking institution cannot
resume business with safety to its creditors, it shall, by the Office of the Solicitor
General, file a petition in the Court of First Instance reciting the proceedings which
have been taken and praying the assistance and supervision of the court in the
liquidation of the affairs of the same. The Superintendent shall thereafter, upon
order of the Monetary Board and under the supervision of the court and with all
convenient speed, convert the assets of the banking institution to money.

Section 30 of the same law also provides that:

In case of liquidation of a banking institution, after payment of the costs of
the proceedings, including reasonable expenses and fees of the Central Bank to
be allowed by the court, the Central Bank shall pay the debts of such institution,
under the order of the court, in accordance with their legal priority.

The trial court or, to be exact, the liquidation court noted that there is no provision
in the charter of the Central Bank in the General Banking Law (Republic Acts Nos. 265 and
337, respectively) which suspends or abates civil actions against an insolvent bank
pending in courts other than the liquidation court. It reasoned out that, because such
actions are not suspended, judgments against insolvent banks could be considered as
preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast
with the Central Act, section 18 of the Insolvency Law provides that upon the issuance by
the court of an order declaring a person insolvent "all civil proceedings against the said
insolvent shall be stayed."
On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the Board
becomes the trustee of its assets "for the equal benefit of all the creditors, including the
depositors". The Central Bank cites the ruling that "the assets of an insolvent banking
institution are held in trust for the equal benefit of all creditors, and after its insolvency, one
cannot obtain an advantage or a preference over another by an attachment, execution or
otherwise" it is also the stand of the Central Bank is that all depositors and creditors of the
insolvent bank should file their actions with the liquidation court.
It cites the ruling that "a creditor of an insolvent state bank in the hands of a
liquidator who recovered a judgment against it is not entitled to a preference for (by) the
mere fact that he is a judgment creditor." It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not true deposits. They are
considered simple loans and, as such, are not preferred credits
The aforequoted section 29 of the Central Bank's charter explicitly provides that
when a bank is found to be insolvent, the Monetary Board shall forbid it to do business and
shall take charge of its assets. Evidently, one purpose in prohibiting the insolvent bank
from doing business is to prevent some depositors from having an undue or fraudulent
preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would be rendered
for the payment of their deposits and then such judgments would be considered preferred
credits under article 2244 (14) (b) of the Civil Code.
ARTICLE 2244. With reference to other property, real and personal, of the debtor,
the following claims or credits shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the subject of litigation.
These credits shall have preference among themselves in the order of priority of
the dates of the instruments and of the judgments, respectively.
xxx xxx xxx

We are of the opinion that such judgments cannot be considered preferred and that
article 2244(14)(b) does not apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the declaration of insolvency. The Rohr
case supplies some illumination on the disposition of the instant case. The Supreme Court
of Montana said:
The general principle of equity that the assets of an insolvent are to be
distributed ratably among general creditors applies with full force to the distribution
of the assets of a bank. A general depositor of a bank is merely a general creditor, and,
as such, is not entitled to any preference or priority over other general creditors. xxx

The circumstance that the Fidelity Savings Bank, having stopped operations since
February 19, 1969, was forbidden to do business, and that ban would include the payment
of time deposits, implies that suits for the payment of such deposits were prohibited.
The trial court's order which contains the Bank Liquidation Rules and Regulations,
indicated that, in Step IV, the court directed the Central Bank, as liquidator, to submit a
Project of Distribution which should include "a list of the preferred credits to be paid in full in
the order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil
Code. It is important to note that Article 2244 was not mentioned. Therefore, there is no
cogent reason why the Elizes and Padilla spouses should not adhere to the procedure
outlined in the said rules and regulations.

Liability for failure to return savings deposit

GUINGONA vs. CITY FISCAL OF MANILA

FACTS:
The instant petition seeks to prohibit public respondents from proceeding with the
preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private
respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions principally, on the ground of
lack of jurisdiction in that the allegations of the charged, as well as the testimony of private
respondent's principal witness and the evidence through said witness, showed that
petitioners' obligation is civil in nature.
From March 20, 1979 to March, 1981, David invested with the Nation Savings and
Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits,
P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment
and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that
David was induced into making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and
petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed
under receivership by the Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David received a report from the
Central Bank that only P305,821.92 of those investments were entered in the records of
NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of
the investments, at the same time violating Central Bank Circular No. 364 and related
Central Bank regulations on foreign exchange transactions; that after demands, petitioner
Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."
At the inception of the preliminary investigation before respondent Lota, petitioners
moved to dismiss the charges against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied
the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the transactions
between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA
which were novated when Guingona, Jr. and Martin assumed them; and (b) David's
principal witness allegedly testified that the duplicate originals of the aforesaid instruments
of indebtedness were all on file with NSLA, contrary to David's claim that some of his
investments were not record

ISSUE:
Whether or not the petitioner in this case is properly charge of estaffa through
misappropriation of funds deposited in NSLA making them subject to the jurisdiction of the
respondents investigation.

SC Ruling:
There is merit in the contention of the petitioners that their liability is civil in nature
and therefore, public respondents have no jurisdiction over the charge of estaffa.
It must be pointed out that when private respondent David invested his money on
nine. and savings deposits with the aforesaid bank, the contract that was perfected was
a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980
of the New Civil Code provides that:
Article 1980. Fixed, savings, and current deposits of-money in banks and
similar institutions shall be governed by the provisions concerning simple
loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We
said:
It should be noted that fixed, savings, and current deposits of money in
 banks and similar institutions are hat true deposits. are considered simple
loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re
Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association 65 Phil. 375; Fletcher American National Bank vs.
Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit
CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines
(96 SCRA 102 [1980]) that:
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank because it can use
the same. The petitioner here in making time deposits that earn interests
will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time
deposit is failure to pay its obligation as a debtor and not a breach of trust
arising from a depositary's failure to return the subject matter of the deposit
(Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings
and Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract and it
can make use of the amount deposited for its banking operations, such as to pay interests
on deposits and to pay withdrawals. While the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or deliver the same money that was
deposited. And, the failure of the Bank to return the amount deposited will not constitute
estafa through misappropriation punishable under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil liability over which the public respondents have
no- jurisdiction.

CHAPTER 2

SIMPLE LOAN OR MUTUUM

Arts. 1953-1961

I. Simple Loan (Mutuum, Loan of Consumption)

A. Concept: It is a contract whereby one party delivers to money or a fungible thing, on

the condition of returning the same kind, amount and quality.

a. If the object loaned is not fungible (should be non-consumable), but the borrower
is to return another of the same kind and quality, it is barter (1954)

b. VS lease: a loan signifies the giving of a sum of money, goods or credit to another,
with a promise to repay, but not a promise to return the same thing; a contract of lease of property
is not a loan, and hence, the Usury Law is not applicable

B. Kinds
 a. Gratuitous, and

b. With interest (Planiol considers the latter a variety of lease, being a lease of
money)

C. Requisites

a. Capacity of the parties: No special capacity is required to be a lender except

ownership

b. Object: money or fungible things; if not money, the contract is barter (1954)

c. Consideration: gratuitous (liberality) or onerous (interest)

d. Form: No special form is needed; but there must be delivery, as the contract is
real

1) An accepted promise to deliver something by say of simple loan may be

subject to the Statute of Frauds if not to be performed within one year. This
contract is consensual as distinguished from loan which is real.

D. Effects: Obligation of the borrower (only)

a. To return the thing or amount borrowed at the period stipulated or fixed according
to general rules:

1) If the thing borrowed is money, he must return the numerical value (1) in the
currency stipulated or (2) in legal tender (1249) except in case of
extraordinary inflation (1250)

2) If the thing borrowed is not money, to return the same amount (in equal kind
and quality) even if the price has changed (1955) or else its value at the time
the contract was perfected.

b. To pay interest where it is expressly agreed in writing (1956), subject to the

provisions of the Usury Law (1957, 1961)

1) Where the stipulation to pay interest is verbal, the voluntary payment is valid
as a performance of a natural obligation

c. Interest paid even if not stipulated, is not recoverable, it being proof of a tacit
contract or a natural obligation

1) Except where it is proved that the interest was paid by error (solutioindebiti)
(1960)
Proof if error is difficult, because the absence of
stipulation is not sufficient evidence that payment was due to mistake.

2) Interest payable in kind is appraised at the current price

at the time of payment (1958)

3) Interest due does not earn interest in the absence of

agreement, and without prejudice to Art. 2212 (1958)

E. Bank deposits, whether fixed, savings or current are governed by the provisions
concerning simple loan (1980)