CREDIT TRANSACTIONS AND SECURITY ARRANGEMENTS (In a Nutshell)

PART ONE CREDIT TRANSACTIONS

V.

I.

Credit Transactions DefinedCredit in this context refers to the belief or trust of person in anothers ability to comply with obligations; and credit transactions refer to the contract of agreement based on said trust or credit. Scope of Credit Transactions: a) The PRINCIPAL contracts of simple loan or mutuum, bailment or commodatum and deposit. b) The ACCESSORY contracts of : 1.) Personal guaranty to include guaranty proper and suretyship 2.) Real guaranty include contracts of real estate mortgage and antichresis; if personal property, the contracts of pledge and chattel mortgages. 3.) Trust receipt 4.) Assignment of Receivables Applicable Statutes: 1. Civil Code- (Articles 1935 to 1961: Loan, Bailment and Deposit); 1962-2002;2047 to 2081 ( Guaranty)l 2085to 2140 (Pledge, Mortgage and Antichresis: 2236 to 2251(Concurrent and Preference of Credits) 2. Warehouse Receipt Laws 3. Act No. 3135 as amended by Act No. 4118 (Extra-judicial Foreclosure of Real Estate Mortgage. 4. Rule 68, Rules of Court Judicial Foreclosure of Real Estate Mortgage. 5. Act No. 1508 Chattel Mortgage Law 6. Presidential Decree No. 1521 (The Ship Mortgage Decree of 1975) 7. Presidential Decree No. 1529 (Property Registration Decree) 8. General Banking Act 9. Presidential Decree No. 115 (Trust Receipts Law) Bailment or Commodatum DefinedA personal contract where one of the parties (called the bailor or lender) delivers to another (called the bailee or borrower) a non-consumable object, so that the latter may USE the same for a certain period and later return it. (Arts. 1933 and 1935 of New Civil Code) The presumption in this transaction is that the owner or person entitled to its possession has no need for his property in the meantime. The essence is use, otherwise if possession only, it can be deposit. It is essentially gratuitous hence the contract ceases to be commodatum if any compensation is to be paid by the borrower. It could be either lease contract or inominate contract (Mina v. Pascual 25 Phil 540) Important feature of this contract is its being personal in character (Article 1939) and the lender considers the character, credit and conduct of the borrower. As a corollary, the bailee can neither lend nor lease the property to a third person and its use is limited to members of the bailees household unless there is a stipulation to the contrary or is forbidden by the nature of the property. Death of either bailor or bailles extinguishes the contract.

Mutuum or Simple Loan DefinedA contract whereby one of the parties delivers to another money or other consumable thing in the condition that the same amount of the same kind and quality shall be returned. Distinctions Between Mutuum or Simple Loan and Commodatum or Bailment. MUTUUM OR SIMPLE LOAN
a.) equivalent amount to be returned (subject matter is fungible) b.) may be gratuitous or onerous (with interest)

VI.

II.

COMMODATUM OR BAILMENT
a.) same thing to be returned (subject matter is non-fungible) b.) essentially gratuitous, if there is compensation it ceases to be commodatum. c.) ownership retained by lender or bailor. d.) may involve real and personal property. e.) referred to as loan for use temporary possession. f.) lender, because of his ownership, bears risk of loss. g.) while generally obliged to return object at the end of the period, still in some cases the return can be demanded even before the end of the period h.) personal in character

c.) ownership goes to borrower d.) refers to personal property only e.) referred to as loan for consumption f.) borrower, because of his ownership bears risks of loss. g.) can be generally obliged to pay only at end of period.

III.

h.) not personal in character

VII.

IV.

Interest A. When payable 1. if so stipulated in writing 2. in case of delay in payment

B.

Interest Rate Declaration Clause- stipulations normally found in loan agreements which authorize the creditor to increase the interest rate. 1.Not basically wrong or legally objectionable. (Almeda v. Court Appeals 256 SCRA 292 1996) 2.Should not be solely potestative and must observe the principle of mutuality between the parties based on their essential equality. (Garcia v. Rit. Legarda Inc. 21 SCRA 555 1967) 3. Must be based on reasonable and valid grounds. 4.Valid only if there is provision that the rate of interest agreed upon shall be reduced in the event the applicable maximum rate of interest reduced by the law or Monetary Board ( PD 1684) 5.Adjustment in rate shall take effect only after effectivity of the increase or decrease in the maximum rate of interest (Id)

VIII.

A.

Deposit Characteristics of the Contract of Deposit:

Credit Transactions and Security Arrangements in a Nutshell

a.It is a real contract perfected by delivery. ( Art

1316, Civil code) Nonetheless, there can be consensual contract to make or to constitute a deposit. (Art 1963 Civil Code) b.The principal purpose is the safekeeping of the thing delivered. ( Art. 1962) Thus, if the safekeeping is merely secondary, the contract is like one of a lease or commodatum ( Ibid) c. The depositor cannot use the thing deposited except: with the express permission of the depositor or I. when the preservation of the thing deposited requires its use ( but then it must be used only for the purpose (Art. 1977, Civil Code) d.Only movable things can be the object of a deposit ( Art. 1966, Civil Code) e. It is a gratuitous contract, except when there is an agreement to the contrary or unless the depositary is engaged in the business of storing goods. ( Art. 1965, Civil Code) f. The contract is either unilateral or bilateral, according to whether it is gratuitous or compensated (onerous) Kinds of Deposit

d.Necessary

deposit- occurs when made in compliance with a legal obligation when it takes place on the occasion of a calamity. The deposit of effects made by travelers in hotels or shall also be regarded as necessary. or

e. Judicial Deposit- occurs when an attachment

seizure of property is litigated or ordered. PART TWO SECURITY ARRANGEMENTS

1.

2.

Security Arrangements Defined These are contracts entered into to insure compliance with an obligation under another contract. Classifications of Guaranty

A.

Personal Guaranty- which may be in the form of: 1. Guaranty 2. Suretyship Real Guaranty- here the guaranty is property. 1. if real property, it may be in the form of: i.) real estate mortgage ii.) antichresis 2. if personal property it may be in the form of: i.) pledge ii.) chattel mortgage

B.

B.

a.Judicial

Sequestration- when an attachment or seizure of property in litigation is ordered (Art. 2005, civil Code) II.

b. Extrajudicial 1.voluntary made by the will of the depositor ( Art. 1968, Civil Code) 2. necessary a. made in compliance with a legal obligation (Art 1966, Civil Code) b.on the occasion of a calamity (Art. 1966, Civil Code) c. made by travelers in hotels or inns ( Art. 1998, Civil Code) d.made by travelers with common carrier ( Art. 1736, Civil Code)

Guaranty DefinedBy guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (Art 2047, Civil Code). By its nature, it is an accessory contract because it is dependent for its existence upon the principal obligation. It is subsidiary and conditional because it takes effect only when the principal debtor fails in his obligation and unilateral because it give rise to a duty on the part of the guarantor in relation to the creditor and not vice-verse and can be done without intervention of the principal debtor. 1.) Concept of Continuing Guaranty If the terms of the contract of guaranty are general and indefinite and do not specify in clear and express manner the extent in the liability of the guarantor the guaranty will extend to the accessories e.g. interests and costs (Republic v Pal Fax Lumber Co, 43 SCRA 365).

c. Voluntary

Deposit- a voluntary deposit is that wherein the delivery of the object is made by the will of the depositor. 1. Obligations of the Depositor a. to reimburse the depository for expenses for preservation. b.to reimburse the depositary for any loss arising from the character of the thing deposited. 2. Obligation of the Depositary a. to keep the thing safely and return to the depositor when required. b.if the thing deposited is income producing, to collect. c. to use the thing if it is necessary for the preservation. d.to be liable for the loss if it is so stipulated or when he uses the thing without the depositors permission or in case of delay or if he allows others to use it. e. to return the thing deposited upon demand, even though a specified period may have been fixed.

2.)

Benefit of Excussion- ( Exhaustion of properties of debtor) Not applicable in: a. cases covered by Article 2059, Civil Code; b. guarantor fails to indicate to the creditor available property of the debtor within Philippine territory sufficient to cover the indebtedness; c. where pledge or mortgage was given as a special security; and d. failure to interpose before judgment. Protective Measure Available to a Guarantor In case of insolvency of the debtor or imminence thereof, or where the debt becomes due or after the lapse of ten (10) years when no period is provided or where debtor intends to abscond, guarantor may proceed against the debtor to obtain release of guaranty or demand

Credit Transactions and Security Arrangements in a Nutshell

security. (Manila Surety v. Almeda Trading 345 SCRA 137)

Cruz 61 SCRA 137). To exclude them it is necessary that there be an express stipulation to that effect.

4.)

Extension of period to comply as made of extinguishment of guaranty. An extension of time to perform the obligation granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty and it is immaterial whether extension was actually proved prejudicial or not. Where the guaranty involves installments for rents or upon series of promissory notes, an extension of time as to one or more will not affect the other unless there is an automatic acceleration clause.

6.

Where the amount stated as consideration in a contract of mortgage do not have limit and it is evident that the intent to secure future and other indebtedness can be gathered the foreclosure maybe for the larger amount. A mortgage to secure future advancement is valid. Writ of possession under Sec. 7 Act 3135 can be issued before expiration of the redemption period more so, after the time for redemption has expired. The Creditor cannot appropriate the things given by way of pledge or mortgage or dispose of them. Any stipulation to the contrary is null and void.

7.

8.

IV.

Surety DefinedA contract whereby a person binds himself to fulfill a principal obligation in case the debtor does not comply. Distinction between Guarantor and Surety GUARANTOR SURETY
a. primary liability b. pays if debtor DOES NOT c. insurer of the debt

V.

a. subsidiary liability b. pays if debtor CAN NOT c. insurer of the debtors solvency

VII. Antichresis A contract whereby a creditor acquires the right to receive the fruits of an immovable property of his debtor with the obligation to apply them to the payment of the interest if owing and thereafter to the principal of his credit. It requires delivery by the debtor of the property given as security to the creditor to enable him to receive the fruits. The agreement constituting antichresis should be in writing and the amount of principal and of interest shall be so provided. VIII. Chattel Mortgage Formal Requirements Section 7 of the Chattel Mortgage Law requires that the property be described in such a manner as to enable the parties to the mortgage or any other person, after reasonable inquiry and investigation, to identify them. Coverage Only those described but parties may validly stipulate to cover after acquired properties so long as they are substitution, renewal or purchases with proceeds of sale of some goods.

VI.

Real Estate Mortgage DefinedA contract in which the debtor guarantees to the creditor the fulfillment of a principal obligation, subjecting for the faithful compliance therewith a real property in case of non-fulfillment of said obligation at the time stipulated.

A.
Mortgage: 1.

Salient Features of Real Estate A mortgage is indivisible even if the obligation is joint and not solidary. Where the real estate mortgage and chattel mortgage are embodied in the instrument, both remain distinct agreements and does not have the effect of fusing both securities into one indivisible whole (De la Rama v Sajo 45 Phil 703) As a general rule, mortgage on future properties pursuant to a stipulation that it shall cover any other property he then might have and those he might acquire in the future does not constitute a valid mortgage (Dilag v Heirs of Resurrection 70 Phils 650) but a stipulation subjecting to the mortgage properties which the mortgagor may subsequently acquire or use in connection with the real property already mortgaged belonging to the mortgagor is valid. (Peoples Bank v Dahican Lumber Co. 20 SCRA 84) Where the deed of mortgage was held invalid either because it was executed by a person who is not the owner or the consideration for the contract is simulated or false the principal obligation is not rendered null and void. The mortgage can be treated as evidence or proof of the personal obligation of a debtor and the amount delivered by the creditor maybe enforced by personal action. Mortgage to the material accessions, improvements, growing fruits and rents or income not yet received as well as proceeds of insurance should the property be destroyed or the expropriated value of the property should it be expropriated ( Manahan v

IX.

2.

Pledge DefinedA contract similar to a chattel mortgage with the additional requirement that the personal property subject of the contract of pledge should be placed in the possession of the creditor or of a third person by common agreement. To be valid against third persons, description of the thing pledged and date of pledge should appear in a public instrument. Stand-by Letter of CreditA written instrument issued by a bank and directed to a person or entity, which contain an undertaking that upon failure of the obligor to perform his obligation under the contract specified, the bank engages to pay the pledge by exchange, normally upon drawing of draft, or to give him such satisfaction as he shall require either for himself or the bearer of the letter. Trust ReceiptA transaction by and between a person (entruster) and another (entrustee), whereby the entruster, who owns absolute title or security interests, over certain specified goods, documents or entrustee upon the latter execution and delivery to the entruster of a signed document called a trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt of the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. Assignment of Receivables

3.

X.

XI.

4.

5.

XII.

Credit Transactions and Security Arrangements in a Nutshell

Ordinarily employed to describe the transfer or nonnegotiable choses in action and of rights in or connected with property as distinguished from the particular item of property.

Credit Transactions and Security Arrangements in a Nutshell