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Credit Transactions Midterm - Hypothetical Questions and Suggested Answers

(1) X owns a house in Baguio. Y, a close friend, went to vacation there, borrowing Xs house for one month, to which X agrees. Z, son
of X and a married lawyer, was not informed of the borrowing. During the second day of stay of Y, Z with his barkada, found the Y
there. In the heat of the argument, Y punches Z in the face. Z calls X and tells X what happened. X rushes to Baguio, and in the midst
of hurry, bumps his car to Ys, causing damages. Y blotters the bumping to the police. If you are the Xs lawyer, what would be your
advice?
ANS: The problem involves a contract of commodatum. As Xs lawyer, I would advise him to simply wait-out the lapse of the
agreed period of the commodatum, allowing Y to occupy the house, without prejudice to the filing of a criminal action against Y for
punching his son. There appears to be no ground by which to deprive him of the use of the house, as the period thereof still subsists
(Art 1946).
Article 1948 allows the bailor to demand the immediate return of the thing loaned, if the bailee commits any act of
ingratitude, specified in Article 765, which by itself applicable to law on donations but nonetheless made applicable to law on
commodatum by cross-reference. Of interest for the present problem, pertinent portions thereof are: (1) commission of the donee
(bailee) of some offense against the person of the bailor (donor) or of his wife or children under his parental authority; and (2) an
imputation by the donee (bailee) to the donor (bailor) of any criminal offense, or act involving moral turpitude.
Insofar as (1) above is concerned, it must be stressed that the Ys punching of Z does not constitute an act of ingratitude since
Z is no longer under the parental authority of X for two reasons: (a) Zs membership in the bar necessarily implies that he is already
emancipated from parental authority because a requirement in the admission of the bar is that he must at least be twenty-one (21) years
old pursuant to Section 2, Rule 138, Revised Rules of Court; and (b) Z is already married, necessarily implying that he is of legal age
and no longer under parental authority because a requirement for marriage is that he must be at least eighteen (18) years old pursuant
to Article 5 of the Family Code. Clearly, Z is no longer among one of the members of Xs family, an offense against whom would
constitute an act of ingratitude, as to serve as a ground for the termination of commodatum.
Insofar as (2) above is concerned, the bailee must impute to the bailor any criminal offense or act involving moral turpitude.
Moral turpitude, as held in Teves vs COMELEC, is inherent baseness, vileness, or depravity. In the situation given, the bumping of
Ys car constitutes reckless imprudence, which under Article 365 of the Revised Penal Code, is one which involves criminal lack of
care and caution on Xs part; hence, the act blottered of would not involve any moral depravity, as to constitute an ungrateful
imputation, as required in Article 765.
(2) N, unemployed and with 4 children, has a close friend, M, a merchant engaged in selling rice, whom the former borrowed 10 sacks
of wag-wag rice, promising to return the same number of the same kind in 1 year. M delivered the sacks of rice. Next day, O, Ns
brother, who is as poor as N, goes to the latter and borrows 5 sacks of rice. M learns of generosity and asked his lawyer what action he
can take against N. If you are Ms lawyer, what would you advise?
ANS: The problem involves a contract of simple loan or mutuum. As Ms lawyer, M has no cause of action about the generosity of N
to his brother O, but he has to simply wait for lapse of the one-year period from when he can demand the return of the same number of
the same kind of sacks of wag-wag rice.
Article 1933(4) provides that in mutuum, ownership passes to the borrower; while Article 1934 states that contract of
mutuum shall not be perfected until the delivery of the object of the contract. When M delivered the sacks of rice, the contract of
mutuum is perfected, and ownership of the sacks of rice passed to N. An owner, under the laws on ownership, particularly Article 428
in relation to Article 429, provides that the owner has the right to enjoy and dispose of a thing, and to exclude any person from the
enjoyment and disposal thereof. When M delivered the sacks of rice, thereby losing ownership thereon, he lost any whatever interest
he may have over it. Furthermore, when N disposed of the sacks of rice in favor of his brother, under whatever contract, N is
exercising his legitimate right as an owner.
(3) Y, a friend of X, borrowed a TV from the latter for one month. The TV was placed in the sala of Ys house in the morning. That
afternoon, Z, Ys married son who happens to be a lawyer, and his family arrived and used the TV. Thirty minutes later, X came,
seeing the TV being watched by Z. That moment, lightning struck the antenna and the TV was destroyed. X sues Y for damages.
Would the suit prosper?
ANS: It depends whether Z is a member of household of Y. The problem involves a contract of commodatum. Ordinarily, the bailee is
not liable for the loss of thing if such loss is occasioned by a fortuitous event, such as a lightning in the present problem. Article 1942,
however, lays down the exceptions to the foregoing general rule. Of interest for the present problem is Article 1942(4) which provides
that the bailee is liable for the loss of thing, even if it should be through a fortuitous event, if he lends or leases the thing to a third
person, who is not a member of his household. Hence, whether the suit would prosper or not would depend on whether the Z is a
member of the household. If Z is a member of household of Y, Y is not liable and the suit would not prosper. If Z is not a member of
household, Y is liable and the suit would prosper.

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A dictionary definition of a household is a number of persons dwelling as a unit under one roof. In the present case,
while Z is married, with his own family, such situation would not preclude his residency in his fathers house, especially with the
Philippine setting where such arrangement is common. Thus, if Ys and Zs families live in a single household, so as to constitute a
single family unit, Y is not liable and the suit would not prosper. If Ys and Zs families, however, do not live in a single household,
then Y, as the bailee, is liable for the loss of the TV, even if it should be through a fortuitous event, such as lightning, if Y lends the
thing to Z, who is not a member of his household, hence the suit would prosper.
(4) B, a close friend of A, borrowed 10M from the latter. A agrees on the condition that B issues a post-dated check dated five years
later. The interest was set at the legal rate. After five years, B encashed the check, which bounced. Despite demand B refused to pay. A
filed a case for BP 22. B was convicted. Court sentenced B to pay A 10M as principal and pay A interest from date of demand to date
of judgment. B filed an MR, disputing that the interest, according to the law, cannot be due unless expressly stipulated. If you are the
judge, decide.
ANS: If I am the judge, I shall deny the motion for reconsideration on the ground that interest, in a compensatory nature, is awarded as
an indemnity for damages for delay of payment of sum of money, whether or not there is stipulation, as provided under Article 2209.
Said compensatory interest is to be distinguished from monetary interest provided under Article 1956, the former being submitted as
an exception to the latter. The purpose of compensatory interest is to serve as an indemnity for damages for default or delay and is
awarded whether or not there is stipulation. The debtor incurs delay from the time of judicial or extrajudicial demand of the fulfillment
of the obligation (Article 1169). On the other hand, the purpose of monetary interest is to serve as payment for the use of money and is
enforced only if such is expressly stipulated in writing.
In the present problem, B would have been correct if the interest awarded is a monetary one. This is, however, not the case, as
the interest awarded is from the date of demand to the date of judgment, which clearly indicates that such interest is a compensatory
one. Hence, the motion for reconsideration is hereby denied.
(5) A owned a car which B borrowed for one month. B had the car filled up with gasoline on credit, in the gasoline station owned by
C, a mutual friend of A and B. On the second week, A needed to go to Baguio to attend to his arraignment in a criminal case. A
borrowed the car from B for three days. A had the car filled with gasoline on credit, in the gasoline station owned by C. A returned the
car to B, who used said car for the rest of the month. C went to B and demanded payment for the total credits of gasoline A and B
used. B paid C, but demanded reimbursement on A who refused, saying that it is the bailee who should be responsible for that. Decide.
ANS: The problem involves a contract of commodatum. Article 1946(1) provides that the bailor cannot demand the return of the thing
loaned until after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In the
given problem, the demand of A, the bailor, to have the car returned for his temporary use going to Baguio is of a nature of urgent
need. His liberty is at stake, such that failure to appear in the arraignment would warrant a warrant of arrest to be issued against him.
His demand, therefore, is proper.
Ordinarily, the bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned (Article
1941). Gasoline is considered as an ordinary expense for the use of the car. B, the bailee, however is not liable for the gasoline credits
consumed by A, on the ground that, as provided under Article 1946(2), in case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of the bailor. The suspension of the contract of commodatum carries
with it the suspension of obligations of the bailee. Hence, when the car is in the temporary use of A, the bailor, the contract of
commodatum being suspended, the obligation of B, the bailee, to pay for the gasoline, an ordinary expense for the use of the car, is
likewise suspended. Thus, A is liable for the gasoline credits he consumed during the time he was in possession of the car in going to
and from Baguio, and he must reimburse B for what he has advanced to C.
(6) A owned a house in Baguio, which B borrowed for 30 days. During Bs stay, an earthquake occurred and the walls cracked. The
day thereafter, B had the cracks repaired. One week after, B went to A seeking reimbursement. Is Bs demand tenable?
ANS: No, Bs demand is untenable. The problem involves a contract of commodatum. Article 1949(1) provides that the bailor shall
refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to
the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited
without danger. In the present problem, the repair of cracked walls constitutes an extraordinary expense for the preservation of the
house. However, in the absence of proof that the cracks of the walls pose such danger so as to make the repair so urgent that the reply
to the notification cannot be awaited, B should have brought to the knowledge of A the need for repair before incurring them. For Bs
failure to do so, he is not entitled to any reimbursement.
(7) M borrowed cash from N. Interest was never discussed. Upon maturity, M paid with interest. M told O, a lawyer, about the
transaction. O advised M to get back the interest paid, saying that interest is due only when expressed and in writing. N refused to give
back the interest paid. If you are the judge, decide.

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ANS: If I am the judge, I would decide in favor of M for him to recover the interest paid. Article 1960 states that if a borrower pays
interest, when there has been no stipulation therefore, the provisions of the Civil Code regarding either solutio indebiti, or natural
obligations would apply, as the case may be. The essence of natural obligation in relation to a contract of mutuum would be the
payees right to retain what has been voluntarily paid to him, despite absence of any obligation on the part of the payor to do so
(Article 1423). In contrast, a solution indebiti arises whenever the payor, through mistake, unduly delivers to the payee, something
which he is not legally obligated to do so, (Article 2154) in which case, the errant payor would have a right to the return of the
payment. Simply stated, in solutio indebiti, payment is committed through mistaken assumption that there exists a legal obligation to
do so, while in natural obligation, payment was voluntary and with implied knowledge of the lack of any legal obligation to do so.
As payment of interest is not allowed in Article 1956, unless the same be expressly stipulated in writing, M cannot plead
ignorance of Article 1956 as his defense, for ignorance of the law excuses no one from compliance therewith (Article 3). That would
have been the case, if Article 1956 is a simple law, but it is not. While Article 1956 requires interest to be expressly stipulated in
writing, Article 2209 provides for interest, even in the absence of stipulation thereon. Only after expert interpretation does it appear
that the two provisions deal with two different kinds of interest, the former a monetary interest and the latter, a compensatory interest.
It may be reasonably argued that the two provisions of law involve a difficult question which may give rise to mistake, as conceived in
Article 2154. Under Article 2155, payment by reason of a mistake in the construction and application of a doubtful or difficult
question of law may be considered an error within the scope of Article 2154. This in turn, is an acceptable exception to Article 3.
Thus, M may cite arguably his inability as a non-lawyer to distinguish between the two species of interest. In such a case, his
mistaken payment arising from such excusable ignorance may be considered one of solutio indebiti, rather than a natural obligation.
He would, thus, be entitled to a return of the interest he erroneously paid.
(8) B borrowed As civil law reviewer in April. In August, an Ondoy-type storm inundated Bs house. B was able to save his set of
remedial law reviewer, but not the civil law reviewer. For such loss, A demanded compensation from B. Is A entitled thereto?
ANS: Yes, he is entitled to compensation. The problem involves a commodatum. Under Article 1942(5), the bailee is liable for the loss
of the thing, even if it should be through a fortuitous event if, being able to save either the thing borrowed or his own thing, he chose
to save the latter. In the given case, it is clear that instead of saving As civil law reviewer, B saved his own set of remedial law
reviewer, in the midst of an Ondoy-type storm, which is a fortuitous event. Hence, B is liable for As loss and A is entitled to
compensation.
(9) If in the same scenario in (8) except that the house caught on fire due to a faulty wiring of Bs neighbor and B was not able to save
both, is A entitled to compensation?
ANS: No, he is not entitled. Article 1942(5) would apply only if B saved his own thing and not that which has been borrowed, but not
when both were lost. Apart from Article 1942(5), the other circumstances enumerated in Article 1942 do not apply to the present case,
hence the general rule applies that B, the bailee, is not liable for the loss of the thing due to fortuitous event.
(10) M is an owner of a car. N borrowed it for a date. During the date, the car figured in an accident with a jeepney, where N was
driving with due care and the jeepney driver driving negligently. N had the car repaired expending P100,000. At repair shop, he meets
L, a lawyer. If you are L, what will be your advice?
ANS: If I am L, I would advise N to ask M for reimbursement of 50% of the extraordinary expenses or 50% of P100,000, which is
P50,000. This finds basis under Article 1949(2) which provides: If the extraordinary expenses arise on the occasion of the actual use
of the thing by the bailee, even though he acted without fault, they shall borne equally by both the bailor and bailee, unless there is a
stipulation to the contrary. Hence, for both the bailor and bailee to bear 50-50 the expenses under Article 1949(2), the following must
concur: (1) the expense must be an extraordinary expense; (2) it must arise on the occasion of the actual use of the thing; (3) there is
no stipulation to the contrary.
An extraordinary expense is an expense which is not ordinarily incurred in the normal maintenance of the thing and does not
always occur, but when such expense arises under certain exigencies, it is necessary for the preservation and use of the thing. Thus, in
the given case, the repair of the car which was damaged because of the accident constitutes an extraordinary expense. The first
requisite is present.
The expense arose from N driving the car and figuring in an accident. Hence, it is said that the extraordinary expenses arose
on the occasion of the actual use of the thing, the actual use being Ns driving the car. The second requisite is present.
Finally, there is nothing in the facts which state the presence of any stipulation as to liability of extraordinary expenses.
Hence, the third requisite is present.
Thus, considering the foregoing, Article 1949(2) is applicable. N may ask M for reimbursement of P50,000. This is without
prejudice for N filing an action for damages based on quasi-delict against the negligent jeepney driver.

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(11) If in the same scenario (10), N does not want to shoulder 50% of the expenses but want to ask M for 100% reimbursement
claiming that he drove with due care. Is his claim tenable?
ANS: No, Ns claim in untenable. The clause even though he acted without fault in Article 1949(2) indicates that due diligence by
the bailee in the use of the thing loaned is irrelevant and immaterial.
(12) Suppose M lacks cash and does not want to reimburse N, and he instead give the car to N. Is this tenable?
ANS: No, under Article 1952, the bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to
the bailee. Hence M cannot abandon the car to N to exempt himself from payment of extraordinary expenses.
(13) X, owner of a white car. His friend Y borrows it for the wedding of his son. He picks it up 5 days before the wedding. On the way
back to the house, Y decided to drop by the mall to watch movie and eat dinner. An earthquake destroyed the multi-storey parking
space, including Xs car. X sues Y for damages. Will the suit prosper?
ANS: Yes, the suit will prosper. The problem involves a commodatum. Under Article 1942(1), the bailee is liable for the loss of the
thing, even if it should be a fortuitous event if he devotes the thing to any purpose different from that for which it has been loaned. No
doubt, an earthquake is a fortuitous event. Since Y used the car going to the mall for eating dinner and watching movie, when the
agreement was that its purpose is to be used as a wedding car, then Y is liable for the loss of the car even if the reason was the
earthquake, which is a fortuitous event. Hence, Y is liable for damages and the suit will prosper.
(14) Supposing in (13), instead of going to the mall, Y goes to gas station to fill up the car with gas, and the car was destroyed by a
post which fell on the car, will your answer in number (13) be the same?
ANS: No, my answer would be different. The suit will not prosper. Article 1942(1) will not apply. The filling up of gas is a purpose
which is not different from that for which it has been loaned, but it is an activity incidental to the use of the car, more so for its use as a
bridal car. Hence, it cannot be said that the car was devoted to different purpose for which it has been loaned.
(15) *Under Section 186 of Negotiable Instruments Law, a check must be presented within a reasonable time from its issue.* A loaned
money from B, a businessman. As security, A issued a post-dated check. Under rules on banking of the bank, the check must be
presented within six months. B was busy with his business that he only encashed the check with the bank after eight months. The bank
dishonors the check. B goes to A and asked for payment. If you are As lawyer, what would you advise A?
ANS: If I am the lawyer of A, I would advise A not to pay B. Under Article 1955, the obligation of a person who borrows money shall
be governed by the provisions of Articles 1249 and 1250 of this Code. By cross-reference, Article 1249(2), which is of interest to the
given problem, is made applicable and provides: 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.
A check is a special form of a bill of exchange. Its delivery by A to B shall only operate as payment only when it has been
cashed, or when through the fault of the creditor it has been impaired. Because of Bs failure to cash the check within six months as
prescribed by the rules on banking, but only after eight months, he impaired its validity. When the check was impaired through the
fault of B, the creditor, it has produced the effect of payment, which extinguished any liability or obligation on the part of A for the
money loaned. This finds support in the case of Quiros vs Guinlay (5 Phil 675), which provides that the delivery of the mercantile
document by the debtor to the creditor operates as a valid payment when the latter impaired it through his fault, and he must suffer for
such loss. Hence, As obligation to pay B the amount he loaned has been extinguished.
(16) A lends his car to B. The brakes of the car are defective, and A does not tell B. B suffered injury because of the defective brakes,
and sues A. Will the suit prosper?
ANS: Yes, the suit will prosper. The problem involves commodatum. Under Article 1951, the bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof.
Since A, the bailor, knows that the brakes of his car is defective and still does not advised B, the bailee, he shall be made answerable
to the injuries suffered by B.
(17) Suppose in the above scenario, B goes to C, As mechanic who told him that he had fixed brakes and it was defective. B still used
it, and he suffered injury. Is A liable?
ANS: No, A is no longer liable. Although Article 1951 states that where the bailor fails to advise the bailee for any defect of the thing
loaned, he shall be liable for damages, it does not, in a literal reading, provide for a circumstance where a third party informs the

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bailee of such flaw. Nonetheless, the essence of Article 1951 is that the risk is taken by the bailee once he is informed of the defect or
flaw. In the present case, the use of the car by B despite his knowledge of the defects constitutes supervening factor so as to attribute
the injuries he suffered to his own negligence. In other words, his negligence is the proximate cause of his own injury. He may not
hold A liable for the injuries he suffered. If at all, he may ask A for such damages for his contributory negligence of neglecting to
inform him of such defect, to some extent.