Credit Transction - Cases

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs.VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant. Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10, 1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in the amount of P300,000. This special authorization was essential in view of the memorandum order of President Concepcion dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only security required consisting of six demand notes. The notes, together with the interest, were taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

|1 | P a g eCREDIT TRANSACTION

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five years, or by both such fine and imprisonment." These two sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors they have argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the proposition of appellant one by one.

The question presented are reduced to their simplest elements in the opinion which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to make a loan was given, but only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not prohibit what is commonly known as a "discount."


In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said section referred to loans alone, and placed no restriction upon discount transactions. It becomes material, therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if the instant transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with, however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially different from the facts in the Binalbagan Estate case. Just as there it was declared that the operations constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of section 35 of Act No. 2747?

Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan." In this connection, it should be recalled that the wife of the defendant held one-half of the capital of this partnership.

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against temptation for a director of the bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters — that where personal interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband is financially interested in the success or failure of his wife's business venture, a loan to


partnership of which the wife of a director is a member, falls within the prohibition.

Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the acknowledged fact that in this instance the defendant was tempted to mingle his personal and family affairs with his official duties, and to permit the loan P300,000 to a partnership of no established reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or indirectly violating this section he shall be punished by fine and imprisonment?" We say to protect the stockholders, depositors and creditors of the bank, against the temptation to which the directors and officers might be exposed, and the power which as such they must necessarily possess in the control and management of the bank, and the legislature unwilling to rely upon the implied understanding that in assuming this relation they would not acquire any interest hostile or adverse to the most exact and faithful discharge of duty, declared in express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly. The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act No. 2747 were repealed by Act No. 2938, prior to the finding of the information and the rendition of the judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section 35 of the same Act, provides a punishment for any person who shall violate any of the provisions of the Act. It is contended,


however, by the appellant, that the repeal of these sections of Act No. 2747 by Act No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an answer adverse to such contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the holding, that where an Act of the Legislature which penalizes an offense, such repeals a former Act which penalized the same offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No. 2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and since section 49 of said Act provides a punishment not on the bank when it violates any provisions of the law, but on a person violating any provisions of the same, and imposing imprisonment as a part of the penalty, the prohibition contained in said section 35 is without penal sanction.

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on account of public policy and public interest, constitutes the crime. And, in this instance, as previously demonstrated, the acts of the President of the Philippine National Bank do


not fall within the purview of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the other stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors assigned by the appellant, and with reference to previous decisions of this court on the same subject, we are irresistibly led to the conclusion that no reversible error was committed in the trial of this case, and that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

DIGEST

FACTS: Defendant authorized an extension of credit in favor of Concepcion, a co-partnership. Defendant’s wife was a director of this co-partnership. Defendant was found guilty of violating Sec. 35 of Act No. 2747 which says that “The National Bank shall not, directly or indirectly, grant loans to any of the members of the Board of Directors of the bank nor to agents of the branch banks.” This Section was in effect in 1919 but was repealed in Act No. 2938 approved on January 30, 1921.

ISSUE: W/N Defendant can be convicted of violating Sections of Act No. 2747, which were repealed by Act No. 2938.

HELD: In the interpretation and construction, the primary rule is to ascertain and give effect to the intention of the Legislature. Section 49 in relation to Sec. 25 of Act No. 2747 provides a punishment for any person who shall violate any provisions of the Act. Defendant contends that the repeal of these Sections by Act No. 2938 has served to take away basis for criminal prosecution. The Court holds that where an act of


the Legislature which penalizes an offense repeals a former act which penalized the same offense, such repeal does not have the effect of thereafter depriving the Courts of jurisdiction to try, convict and sentence offenders charged with violations of the old law.


Manila

EN BANC

G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs.PHILIPPINE NATIONAL BANK, ET AL., defendants, THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of Act No. 3936 against several banks, among them the First National City Bank of New York. It is alleged that pursuant to Section 2 of said Act, defendant banks forwarded to the Treasurer of the Philippines a statement under oath of their respective managing officials of all the credits and deposits held by them in favor of persons known to be dead or who have not made further deposits or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and deposits be escheated to the Republic of the Philippines


by ordering defendant banks to deposit them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which remained dormant for 10 years or more, are subject to escheat however, it has inadvertently included in said report certain items amounting to P18,589.89 which, properly speaking, are not credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not included in the claim of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and demand drafts as those which defendant wants excluded from the complaint come within the purview of Act No. 3936, but not the telegraphic transfer payment which orders are of different category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to reconsider was filed by defendant, the court a quo changed its view and held that even said demand drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff has appealed.

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or deposits of money, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a period of ten years or more. Such unclaimed balances, together with the increase and proceeds thereof, shall be deposited with the Insular Treasure to the credit of the Government of the Philippine Islands to be as the Philippine Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to escheat include credits or deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term "credit" in its usual meaning is a sum credited on the books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the correlative to debt or indebtedness, and that which is due to any person, a distinguished from that which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,


101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits" in banks where the relationship created between the depositor and the bank is that of creditor and debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., et al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning of the term "credits" or "deposits" employed in the law? Can their import be considered as a sum credited on the books of the bank to a person who appears to be entitled to it? Do they create a creditor-debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an open letter of request from, and an order by, one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future time therein specified (13 Words and Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common term, for all bills of exchange. And the words "draft" and "bill of exchange" are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No. 2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the drawee is not liable on the bill unless and until he accepts the same." In other words, in order that a drawee may be liable on the draft and then become obligated to the payee it is necessary that he first accepts the same. In fact, our law requires that with regard to drafts or bills of exchange there is need that they be presented either for acceptance or for payment within a reasonable time after their issuance or after their last negotiation thereof as the case may be (Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presented either for acceptance or for payment, the inevitable consequence


is that the appellee bank never had any chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's pretense, for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable demand. It is an order upon a third party purporting to drawn upon a deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W. 734)....lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified check and the deposit represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in advance by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the transaction is for the establishment of a telegraphic or


cable transfer the agreement to remit creates a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned the contract is executory until the credit is established (Ibid.) We agree with the following comment the Solicitor General: "This is so because the drawer bank was already paid the value of the telegraphic transfer payment order. In the particular cases under consideration it appears in the books of the defendant bank that the amounts represented by the telegraphic payment orders appear in the names of the respective payees. If the latter choose to demand payment of their telegraphic transfers at the time the same was (were) received by the defendant bank, there could be no question that this bank would have to pay them. Now, the question is, if the payees decide to have their money remain for sometime in the defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now with the drawer bank? The latter was already paid the value of the telegraphic payment orders otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the items specifically referred to and listed under paragraph 3 of appellee bank's answer representing telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines. No costs.


Manila

EN BANC

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs.DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.


Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as 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.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.

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. Among the other terms spelled out in the resolution were the following:

1. 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 240,900.00

For working capital 9,100.00

T O T A L P500,000.00


4. That 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;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"

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, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17.


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. Resolution No. 3989 was approved as follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso:


That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenafmill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill machineries with the Prudential Bank &

Trust Company P250,000.00


(For immediate release)

b) For the purchase of materials and equip-ment per attached list to enable the jutemill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-ing of the letter of credit for raw jutefor $25,000.00.

2) P25,000.00 to be released upon arrivalof raw jute.

3) P17,586.09 to be released as soon as themill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan.

With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of


your factory, would not be in line with our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. 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.

It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 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.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: 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. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. 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 utilizedexclusively 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." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. 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 cf mutual desistance — what Manresa terms "mutuo disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was


disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.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.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.

DIGEST

FACTS:

In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now DBP, for an industrial loan of P500,000 to be used for the construction of a factory building, to pay the balance of the jute mill machinery and equipment and as additional working capital. In Resolution No.145, the loan application was approved to be secured first by mortgage on the factory buildings, the land site, and machinery and equipment to be installed.

The mortgage was registered and documents for the promissory note were executed. But then, later on, was cancelled to make way for the registration of a mortgage contract over the same property in favor of Prudential Bank and Trust Co., the latter having issued Saura letter of credit for the release of the jute machinery. As security, Saura execute a trust receipt in favor of the Prudential. For failure of Saura to pay said obligation, Prudential sued Saura.

After almost 9 years, Saura Inc, commenced an action against RFC, alleging failure on the latter to comply with its obligations to release 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.

The trial court ruled in favor of Saura, ruling that there was a perfected contract between the parties and that the RFC was guilty of breach thereof.

ISSUE: Whether or not there was a perfected contract between the parties. YES. There was indeed a perfected consensual contract.

HELD:


·Article 1934 provides: An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until delivery of the object of the contract.· There was undoubtedly offer and acceptance in the case. 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. The defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.· When an application for a loan of money was approved by resolution of the respondent corporation and the responding mortgage was executed and registered, there arises a perfected consensual contract.· However, it should be noted that RFC imposed two conditions (availability of raw materials and increased production) when it restored the loan to the original amount of P500,000.00.· 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.The action thus taken by both parties was in the nature of mutual desistance which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.·WHEREFORE, the judgment appealed from is reversed and the complaint dismissed.2ND DIGEST

Facts: Saura Inc. applied to the Rehabilitation Finance Corp (before its conversion to DBP) for a loan of 500k secured by a first mortgage of the factory building to finance for the construction of a jute mill factory and purchase of factory implements. RFC accepted and approved the loan application subject to some conditions which Saura admitted it could not comply with. Without having received the amount being loaned, and sensing that it could not at anyway obtain the full amount of loan, Saura Inc. then asked for cancellation of the mortgage which RFC also approved. Nine years after the cancellation of the mortgage, Saura sued RFC for damages for its non-fulfillment of obligations arguing that there was indeed a perfected consensual contract between them.

Issue: Was there a perfected consensual contract? Was there a real contract of loan which would warrant recovery of damages arising out of breach of such contract?


Held: On the first issue, yes, there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code. There was undoubtedly offer and acceptance in this case: 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 second issue and the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. The action thus taken by both parties—Saura's request for cancellation and RFC's subsequent approval of such cancellation—was in the nature of mutual desistance — what Manresa terms "mutuo disenso"— which is a mode of extinguishing obligations. It is a concept derived from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. In view of such extinguishment, said perfected consensual contract to deliver did not constitute a real contract of loan.



Manila

SECOND DIVISION

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners, vs.THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals, now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion for reconsideration.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by one who was not the owner of the mortgaged property. It further alleged that the property in question was foreclosed pursuant to Act No. 3135 as


amended, without, however, complying with the condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the property under the principle of equity said justice.

On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied most of the allegations in the complaint and raised the following affirmative defenses: (a) that the defendant has not given its consent, much less the requisite written consent, to the sale of the mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on contracts requires defendant's consent before Jose Lozano can be released from his bilateral agreement with the former and doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two renewals remain unpaid despite countless reminders and demands; of that the property in question remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking practice that payments against accounts need not be personally made by the debtor himself; and (h) that it is not true that the mortgage, at the time of its execution and registration, was without consideration as alleged because the execution and registration of the securing mortgage, the signing and delivery of the promissory note and the disbursement of the proceeds of the loan are mere implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion for intervention. The intervention was premised on the Deed of Assignment executed by petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of petitioner Honesto Bonnevie over the subject property. The intervention was ultimately granted in order that all issues be resolved in one proceeding to avoid multiplicity of suits.

On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered dismissing the complaint with costs against the plaintiff and the intervenor.


After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to respondent Court of Appeals assigning the following errors:

1. The lower court erred in not finding that the real estate mortgage executed by Jose Lozano was null and void;

2. The lower court erred in not finding that the auction sale decide on August 19, 1968 was null and void;

3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the property;

4. The lower court erred in not finding that the defendant acted in bad faith; and

5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of the lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present petition for review.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt the facts found the trial court and found by the Court of Appeals to be consistent with the evidence adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property which they mortgaged on December 6, 1966, to secure the payment of the loan in the principal amount of P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in consideration of the sum of P100,000.00, P25,000.00 of which amount being payable to the Lozano spouses upon the execution of the document, and the balance of P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when the mortgage was executed by the Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet received them, as it was on December 12, 1966 when they and their co-maker Alfonso Lim signed the promissory note for that amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments to defendant-appellee on the mortgage in the total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with Assumption of Mortgage to his brother,


intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction sale was conducted on August 19, 1968, and the property was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the property failed, and on October 9, 1969, he caused an adverse claim to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5).

Presented for resolution in this review are the following issues:

I

Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was validly and legally executed.

II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.

III

Whether petitioners had a right to redeem the foreclosed property.

IV

Granting that petitioners had such a right, whether respondent was justified in refusing their offers to repurchase the property.

As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and equity. In attacking the validity of the deed of mortgage, they contended that when it was executed on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses "So much so that in the absence of a principal obligation, there is want of consideration in the accessory contract, which consequently impairs its validity and fatally affects its very existence." (Petitioners' Brief, par. 1, p. 7).


This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the original loan, using as security the same property which the Lozano spouses had already sold to petitioners, rendered the mortgage null and void,

This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is constituted. These provisions are expressly made part and parcel of the Deed of Sale with Assumption of Mortgage.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the obligation for whose security it was constituted. Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:

a) petitioners were never notified of the foreclosure sale.


b) The notice of auction sale was not posted for the period required by law.

c) publication of the notice of auction sale in the Luzon Weekly Courier was not in accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor. The requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public places in the Municipality where the property is located. Petitioners were thus placed on constructive notice.

The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered making the mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction sale was not in accordance with law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a week for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks.


The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier, stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was published in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).

To be a newspaper of general circulation, it is enough that "it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; that it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said newspaper is not a newspaper of general circulation in the province of Rizal.

Whether or not the notice of auction sale was posted for the period required by law is a question of fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the records show that copies of said notice were posted in three conspicuous places in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal Hall. In the same manner, copies of said notice were also posted in the place where the property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of respondent bank, namely:

Q How many days were the notices posted in these two places, if you know?

A We posted them only once in one day. (TSN, p. 45, July 25, 1973)

is not a sufficient countervailing evidence to prove that there was no compliance with the posting requirement in the absence of proof or even of allegation that the notices were removed before the expiration of the twenty- day period. A single act of posting (which may even extend beyond the period required by law) satisfies the requirement of law. The burden of proving that the posting requirement was not complied with is now shifted to the one who alleges non-compliance.

On the question of whether or not the petitioners had a right to redeem the property, We hold that the Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured from respondent


Bank to the sale with assumption of mortgage by petitioners, the latter were not validly substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise said right within the period granted by law. Thru certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September 29, 1969, Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie.

On the question of whether or not respondent Court of Appeals erred in holding that respondent Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized to make payments for the amount secured by the mortgage on the subject property, to receive acknowledgment of payments, obtain the Release of the Mortgage after full payment of the obligation and to take delivery of the title of said property. On the assumption that the letter was received by respondent Bank, a careful reading of the same shows that the plaintiff was merely authorized to do acts mentioned therein and does not mention that petitioner is the new owner of the property nor request that all correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968, when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners' payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the payment of interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank may not be, therefore, charged of bad faith.

WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.


DIGEST

Facts: Spouses Lozano mortgaged their property to secure the payment of a loan amounting to 75K with private respondent Philippine Bank of Communication (PBCom). The deed of mortgage was executed on 12-6-66, but the loan proceeeds were received only on 12-12-66. Two days after the execution of the deed of mortgage, the spouses sold the property to the petitioner Bonnevie for and in consideration of 100k—25K of which payable to the spouses and 75K as payment to PBCom. Afterwhich, Bonnevie defaulted payments to PBCom prompting the latter to auction the property after Bonnivie failed to settle despite subsequent demands, in order to recover the amount loaned. The latter now assails the validity of the mortgage between Lozano and Pbcom arguing that on the day the deed was executed there was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses, so that in the absence of a principal obligation, there is want of consideration in the accessory contract, which consequently impairs its validity and fatally affects its very existence.

Issue: Was there a perfected contract of loan?

Held: Yes. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

2ND DIGEST

Facts:

December 6, 1966: Spouses Jose M. Lozano and Josefa P. Lozano secured their loan of P75K from Philippine Bank of Commerce (PBC) by mortgaging their property


December 8, 1966: Executed Deed of Sale with Mortgage to Honesto Bonnevie where P75K is payable to PBC and P25K is payable to Spouses Lanzano.

April 28, 1967 to July 12, 1968: Honesto Bonnevie paid a total of P18,944.22 to PBC

May 4, 1968: Honesto Bonnevie assigned all his rights under the Deed of Sale with Assumption ofMortgage to his brother, intervenor Raoul Bonnevie

June 10, 1968: PBC applied for the foreclosure of the mortgage, and notice of sale was published

January 26, 1971: Honesto Bonnevie filed in the CFI of Rizal against Philippine Bank of Commerce for the annulment of the Deed of Mortgage dated December 6, 1966 as well as the extrajudicial foreclosure made on September 4, 1968.

CFI: Dismissed the complaint with costs against the Bonnevies CA: AffirmedISSUE: W/N the forclosure on the mortgage is validly executed.

HELD: YES. CA affirmed A contract of loan being a consensual contract is perfected at the same

time the contract of mortgagewas executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

Respondent Bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value.

Thru certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not until September 29, 1969 that Honesto Bonnevie first wrote respondent and offered to redeem the property.

loan matured on December 26, 1967 so when respondent Bank applied for foreclosure, the loan was already six months overdue. Payment of interest on July 12, 1968 does not make the earlier act of PBC inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the payment of interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed


does not solely depend on the debtor but more so on the discretion of the bank.


Manila


SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners, vs.THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and


treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).


On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the


P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of


this responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.


Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25


hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

DIGETS


The bank’s asking for advance interest for the loan is improper

considering that the total loan hasn’t been released. A person can’t

be charged interest for nonexisting debt. The alleged discovery by

the bank of overvaluation of the loan collateral is not an issue. Since

Island Savings Bank failed to furnish the P63,000.00 balance of the

P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino

became unenforceable to such extent.

Facts: Island Savings Bank, upon favorable recommendation of its legal

department, approved the loan application for P80,000.00 of Sulpicio M.

Tolentino, who, as a security for the loan, executed on the same day a real

estate mortgage over his 100-hectare land located in Cubo, Las Nieves,

Agusan. The loan called for a lump sum of P80,000, repayable in semi-annual

installments for 3 yrs, with 12% annual interest. After the agreement, a mere

P17K partial release of the loan was made by the bank and Tolentino and his

wife signed a promissory note for the P17,000 at 12% annual interest

payable w/in 3 yrs. An advance interest was deducted fr the partial release

but this prededucted interest was refunded to Tolentino after being informed

that there was no fund yet for the release of the P63K balance.

Monetary Board of Central Bank, after finding that bank was suffering

liquidity problems, prohibited the bank fr making new loans and investments.

And after the bank failed to restore its solvency, the Central Bank prohibited

Island Savings Bank from doing business in the Philippines. Island Savings

Bank in view of the non-payment of the P17K filed an application for

foreclosure of the real estate mortgage. Tolentino filed petition for specific

performance or rescission and damages with preliminary injunction, alleging

that since the bank failed to deliver P63K, he is entitled to specific

performance and if not, to rescind the real estate mortgage.

Issues: 1) Whether or not Tolentino’s can collect from the bank for damages

2) Whether or not the mortgagor is liable to pay the amount covered

by the promissory note


3) Whether or not the real estate mortgage can be foreclosed

Held:

1) Whether or not Tolentino’s can collect from the bank for damages

The loan agreement implied reciprocal obligations. When one party is willing

and ready to perform, the other party not ready nor willing incurs in delay.

When Tolentino executed real estate mortgage, he signified willingness to

pay. That time, the bank’s obligation to furnish the P80K loan accrued. Now,

the Central Bank resolution made it impossible for the bank to furnish the

P63K balance. The prohibition on the bank to make new loans is irrelevant

bec it did not prohibit the bank fr releasing the balance of loans previously

contracted. Insolvency of debtor is not an excuse for non-fulfillment of

obligation but is a breach of contract.

The bank’s asking for advance interest for the loan is improper considering

that the total loan hasn’t been released. A person can’t be charged interest

for nonexisting debt. The alleged discovery by the bank of overvaluation of

the loan collateral is not an issue. The bank officials should have been more

responsible and the bank bears risk in case the collateral turned out to be

overvalued. Furthermore, this was not raised in the pleadings so this issue

can’t be raised. The bank was in default and Tolentino may choose bet

specific performance or rescission w/ damages in either case. But

considering that the bank is now prohibited fr doing business, specific

performance cannot be granted. Rescission is the only remedy left, but the

rescission shld only be for the P63K balance.

2) Whether or not the mortgagor is liable to pay the amount covered by the

promissory note

The promissory note gave rise to Sulpicio M. Tolentino’s reciprocal obligation

to pay the P17,000.00 loan when it falls due. His failure to pay the overdue

amortizations under the promissory note made him a party in default, hence

not entitled to rescission (Article 1191 of the Civil Code). If there is a right to

rescind the promissory note, it shall belong to the aggrieved party, that is,


Island Savings Bank. If Tolentino had not signed a promissory note setting

the date for payment of P17,000.00 within 3 years, he would be entitled to

ask for rescission of the entire loan because he cannot possibly be in default

as there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective

reciprocal obligations, that is, Island Savings Bank failed to comply with its

obligation to furnish the entire loan and Sulpicio M. Tolentino failed to

comply with his obligation to pay his P17,000.00 debt within 3 years as

stipulated, they are both liable for damages.

3) Whether or not the real estate mortgage can be foreclosed

Since Island Savings Bank failed to furnish the P63,000.00 balance of the

P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became

unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence

the real estate mortgage covering 100 hectares is unenforceable to the

extent of 78.75 hectares. The mortgage covering the remainder of 21.25

hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is

more than sufficient to secure a P17,000.00 debt.


Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:


The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2


December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract ofcommodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum —


. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for


monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

DIGEST

Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry for one year for breeding purposes subject to payment of breeding fee of 10% of book value of the bull. Upon expiration, Bagtas asked for renewal. The renewal was granted only to one bull. Bagtas offered to buy the bulls at its book value less depreciation but the Bureau refused. The Bureau said that Bagtas should either return or buy it at book value. Bagtas proved that he already returned two of the bulls, and the other bull died during a Huk raid, hence, obligation already extinguished. He claims that the contract is a commodatum hence, loss through fortuitous event should be borne by the


owner.

Issue: WON Bagtas is liable for the death of the bull.

Held: Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10% charge. If this is considered compensation, then the case at bar is a lease. Lessee is liable as possessor in bad faith because the period already lapsed.

Even if this is a commodatum, Bagtas is still liable because the fortuitous event happened when he held the bull and the period stipulated already expired and he is liable because the thing loaned was delivered with appraisal of value and there was no contrary stipulation regarding his liability in case there is a fortuitous event.

2ND DIGEST

FACTS:

May 8, 1948: Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of 1 year for breeding purposes subject to a breeding fee of 10% of the book value of the bulls

May 7, 1949: Jose requested for a renewal for another year for the three bulls but only one bull was approved while the others are to be returned

March 25, 1950: He wrote to the Director of Animal Industry that he would pay the value of the 3 bulls

October 17, 1950: he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General.

October 19, 1950: Director of Animal Industry advised him that either the 3 bulls are to be returned or their book value without deductions should be paid not later than October 31, 1950 which he was not able to do

December 20, 1950: An action at the CFI was commenced against Jose praying that he be ordered to return the 3 bulls or to pay their book


value of P3,241.45 and the unpaid breeding fee of P199.62, both with interests, and costs

July 5, 1951: Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.

RTC: granted the action December 1958: granted an ex-parte motion for the appointment of a

special sheriff to serve the writ outside Manila December 6, 1958: Felicidad M. Bagtas, the surviving spouse of Jose who

died on October 23, 1951 and administratrix of his estate, was notified January 7, 1959: she file a motion that the 2 bulls where returned by his

son on June 26, 1952 evidenced by recipt and the 3rd bull died from gunshot wound inflicted during a Huk raid and prayed that the writ of execution be quashed and that a writ of preliminary injunction be issued.

ISSUE: W/N the contract is commodatum and NOT a lease and the estate should be liable for the loss due to force majeure due to delay.

HELD: YES. writ of execution appealed from is set aside, without pronouncement as to costs If contract was commodatum then Bureau of Animal Industry retained

ownership or title to the bull it should suffer its loss due to force majeure. A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Underarticle 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable if he keeps it longer than the period stipulated

the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned because it was killed while in the custody of the administratrix of his estate

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the CFI, the money judgment rendered in favor of the appellee cannot be enforced by means


of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.



Manila

FIRST DIVISION

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs.COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or


damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.


The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.


On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. B—B-4 ) to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and peacefully and has constructed permanent structures thereon.


In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;


6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago.


To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.


The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner.

SO ORDERED.

DIGEST

Facts:

The whole controversy started when the herein petitioner filed an application for registration of lands 1, 2, 3 and 4 in La Trinidad, Benguet on September 5, 1962. The heirs of Juan Valdez and the heirs of Egmidio Octaviano filed an opposition on lots 2 and 3, respectively. On November 17, 1965, the land registration court confirmed the registrable title of the petitioner. On May 9, 1977, the Court of Appeals reversed the decision and dismissed the Vicar’s application. The heirs filed a motion for reconsideration, praying that the lots be ordered registered under their names. The Court of Appeals denied the motion for lack of sufficient merit. Both parties then came before the Supreme Court. The Supreme Court, in a minute resolution, denied both petitions. The heirs filed the instant cases for the recovery and possession of the lots.

Respondents argue that the petitioner is barred from setting up the defense of ownership or long and continuous possession by the prior judgment of the


Court of Appeals under the principle of res judicata. Petitioner contends that the principle is not applicable because the dispositive portion of the judgment merely dismissed the application for registration.

Issues:

(1) Whether the decision of the Court of Appeals constitute res judicata and therefore bars the petitioner from alleging ownership over the lots

(2) Whether the petitioner has acquired the lots through acquisitive prescription

Held:

(1) The Court of Appeals did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. On the above findings of facts supported by evidence and evaluated by the Court of Appeals, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end.

(2) Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for


taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.

Motion for Reconsideration

Issue:

Who is entitled to the possession and ownership of the land?

Held:

Pursuant to the said decision in CA-G.R. No. 38830-R, the two lots in question remained part of the public lands. This is the only logical conclusion when the appellate court found that neither the petitioner nor private respondents are entitled to confirmation of imperfect title over said lots. Hence, the Court finds the contention of petitioner to be well taken in that the trial court and the appellate court have no lawful basis in ordering petitioner to return and surrender possession of said lots to private respondents. Said property being a public land its disposition is subject to the provision of the Public Land Act, as amended.

Article 555 of the Civil Code provides as follows:

Art. 555. A possessor may lose his possession:

(4) By the possession of another, subject to the provisions of Article 537, if the new possession has lasted longer than one year.But the real right of possession is not lost till after the lapse of ten years.

It is clear that the real right of possession of private respondents over the property was lost or no longer exists after the lapse of 10 years that petitioner had been in adverse possession thereof. Thus, the action for recover of possession of said property filed by private respondents against petitioner must fail. The Court, therefore, finds that the trial court and the Court of Appeals erred in declaring the private respondents to be entitled to the possession thereof. Much less can they pretend to be owners thereof. Said lots are part of the public domain.

2ND DIGEST


Facts:- 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner, filed with the court an application for the registration of title over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said lots being used as sites of the Catholic Church, building, convents, high school building, school gymnasium, dormitories, social hall and stonewalls.- 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that they have ownership over lots 1, 2 and 3. (2 separate civil cases)- 1965: The land registration court confirmed the registrable title of Vicar to lots 1 , 2, 3 and 4. Upon appeal by the private respondents (heirs), the decision of the lower court was reversed. Title for lots 2 and 3 were cancelled.- VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his application for registration of Lots 2 and 3.- During trial, the Heirs of Octaviano presented one (1) witness, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano; his written demand to Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000 per month. On the other hand, Vicar presented the Register of Deeds for the Province of Benguet, Atty. Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the testimony of Mons. Brasseur when the heirs admitted that the witness if called to the witness stand, would testify that Vicar has been in possession of Lot 3, for 75 years continuously and peacefully and has constructed permanent structures thereon.

Issue: WON Vicar had been in possession of lots 2 and 3 merely as bailee borrower in commodatum, a gratuitous loan for use.

Held: YES.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee.

The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee


held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.

The Court of Appeals found that petitioner Vicar did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration.


Manila

EN BANC

G.R. No. L-46240 November 3, 1939


MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants, vs.BECK, defendant-appellee.

Mauricio Carlos for appellants.Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three has heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for them in the house where they were found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of all of them. On November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not


calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net

The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter determined by the trial Court through evidence which the parties may desire to present.


The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both instances. So ordered.

DIGEST

Facts: Quintos and Beck entered into a contract of lease, whereby the latter occupied the former’s house. On Jan 14, 1936, the contract of lease was novated, wherein the QUintos gratuitously granted to Beck the use of the furniture, subject to the condition that Beck should return the furnitures to Quintos upon demand. Thereafter, Quintos sold the property to Maria and Rosario Lopez. Beck was notified of the conveyance and given him 60 days to vacate the premises. IN addition, Quintos required Beck to return all the furniture. Beck refused to return 3 gas heaters and 4 electric lamps since he would use them until the lease was due to expire. Quintos refused to get the furniture since Beck had declined to return all of them. Beck deposited all the furniture belonging to QUintos to the sheriff.

ISSUE: WON Beck complied with his obligation of returning the furnitures to Quintos when it deposited the furnitures to the sheriff.

RULING: The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps.


As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was nt entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps.



Manila

EN BANC

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due dates, but because the loans were due one year after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets, including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government of the United States under Transfer Agreement dated July 20, 1954. These assets were among the properties that were placed under the administration of the Board of Liquidators created under Executive Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the account in


question. The record shows that the appellant had actually received the written demand for payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values as of the time that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959 was P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the complaint until full payment was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines, could not legally bring action against the appellant for the enforcement of the obligation involved in said transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States Government and the Republic of the Philippines, the assets of


the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines. The successive transfer of the rights over the loans in question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interest in said loans, thereby creating a privity of contract between the appellee and the appellant. In defining the word "privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of one of those who contracted the judicial relation and executed the private document and appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by international law, the United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the property rights of the United States of America over the loans in question, the Republic of the Philippines had thereby become a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the appellant under the five promissory notes was not to deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money representing the total sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the parties delivers to another ... money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans in questions is to pay the value


thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.

In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The appellant points out that the loans became due on June 1, 1944; and when the complaint was filed on January 17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten years when an action based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against the State. This Court has held that the statute of limitations does not run against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period of prescription of the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No. 25, which became effective on November 18, 1944, providing for the suspension of payments of debts incurred after December 31, 1941. The period of prescription was, therefore, suspended beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that the moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when Executive Orders Nos. 25 and 32 were declared


unconstitutional by this Court. Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the cause of action on the five promissory notes in question arose on June 1, 1944. The complaint in the present case was filed on January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action arose. If the prescriptive period was not interrupted by the moratorium laws, the action would have prescribed already; but, as We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8 years and 6 months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time the cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained a period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred, because what should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of the appellant is also without merit.

The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine Philippine currency which was considered the aggregate amount due as principal of the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing the interest on the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision of the lower court is supported by the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after the liberation to the extent of the just obligation of the contracting parties and, as said notes have


become worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed otherwise. ... . (italics supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of the judgment in the present case.


Manila

EN BANC

G.R. No. L-38745 August 6, 1975

LUCIA TAN, plaintiff-appellee, vs.ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, defendants-appellants.

Alaric P. Acosta for plaintiff-appellee.

Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:

This appeal was certified to this Court by the Court of Appeals as involving questions purely of law.

The decision a quo was rendered by the Court of First Instance of Misamis Occidental (Branch I) in an action instituted by the plaintiff-appellee Lucia Tan against the defendants-appellants Arador Valdehueza and Rediculo Valdehueza (docketed as civil case 2574) for (a) declaration of ownership and recovery of possession of the parcel of land described in the first cause of action of the complaint, and (b) consolidation of ownership of two portions of another parcel of (unregistered) land described in the second cause of


action of the complaint, purportedly sold to the plaintiff in two separate deeds of pacto de retro.

After the issues were joined, the parties submitted the following stipulation of facts:

1. That parties admit the legal capacity of plaintiff to sue; that defendants herein, Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed Valdehueza, are brothers and sisters; that the answer filed by Arador and Rediculo stand as the answer of Pacita, Concepcion and Rosario.

2. That the parties admit the identity of the land in the first cause of action.

3. That the parcel of land described in the first cause of action was the subject matter of the public auction sale held on May 6, 1955 at the Capitol Building in Oroquieta, Misamis Occidental, wherein the plaintiff was the highest bidder and as such a Certificate of Sale was executed by MR. VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff in favor of LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza to redeem the said land within the period of one year as being provided by law, MR. VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.

A copy of the NOTICE OF SHERIFFS SALE is hereby marked as 'Annex A', the CERTIFICATE OF SALE is marked as 'Annex B' and the ABSOLUTE DEED OF SALE is hereby marked as Annex C and all of which are made as integral parts of this stipulation of facts.

4. That the party-plaintiff is the same plaintiff in Civil Case No. 2002; that the parties defendants Arador, Rediculo and Pacita, all Valdehueza were the same parties-defendants in the same said Civil Case No. 2002; the complaint in Civil Case No. 2002 to be marked as Exhibit 1; the answer as Exhibit 2 and the order dated May 22, 1963 as Exhibit 3, and said exhibits are made integral part of this stipulation.

5. That defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have executed two documents of DEED OF PACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions of a parcel of land which is described in the second cause of action with the total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00), Philippine Currency, copies of said


documents are marked as 'Annex D' and Annex E', respectively and made as integral parts of this stipulation of facts.

6. That from the execution of the Deed of Sale with right to repurchase mentioned in the second cause of action, defendants Arador Valdehueza and Rediculo Valdehueza remained in the possession of the land; that land taxes to the said land were paid by the same said defendants.

Civil case 2002 referred to in stipulation of fact no. 4 was a complaint for injunction filed by Tan on July 24, 1957 against the Valdehuezas, to enjoin them "from entering the above-described parcel of land and gathering the nuts therein ...." This complaint and the counterclaim were subsequently dismissed for failure of the parties "to seek for the immediate trial thereof, thus evincing lack of interest on their part to proceed with the case. 1

The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex D" (dated August 5, 1955) was not registered in the Registry of Deeds, while the Deed of Pacto de Retro referred to as "Annex E" (dated March 15, 1955) was registered.

On the basis of the stipulation of facts and the annexes, the trial court rendered judgment, as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff:

1. Declaring Lucia Tan the absolute owner of the property described in the first cause of action of the amended complaint; and ordering the herein defendants not to encroach and molest her in the exercise of her proprietary rights; and, from which property they must be dispossessed;

2. Ordering the defendants, Arador Valdehueza and Rediculo Valdehueza jointly and severally to pay to the plaintiff, Lucia Tan, on Annex 'E' the amount of P1,200, with legal interest of 6% as of August 15, 1966, within 90 days to be deposited with the Office of the Court within 90 days from the date of service of this decision, and that in default of such payment the property shall be sold in accordance with the Rules of Court for the release of the mortgage debt, plus costs;

3. And as regards the land covered by deed of pacto de retro annex 'D', the herein defendants Arador Valdehueza and Rediculo Valdehueza are hereby ordered to pay the plaintiff the


amount of P300 with legal interest of 6% from August 15, 1966, the said land serving as guaranty of the said amount of payment;

4. Sentencing the defendants Arador Valdehueza and Rediculo Valdehueza to pay jointly and severally to the herein plaintiff Lucia Tan the amount of 1,000.00 as attorney's fees; and .

5. To pay the costs of the proceedings.

The Valdehuezas appealed, assigning the following errors:

That the lower court erred in failing to adjudge on the first cause of action that there exists res judicata; and

That the lower court erred in making a finding on the second cause of action that the transactions between the parties were simple loan, instead, it should be declared as equitable mortgage.

We affirm in part and modify in part.

1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently provides that a dismissal for failure to prosecute "shall have the effect of an adjudication upon the merits," the Valdehuezas submit that the dismissal of civil case 2002 operated, upon the principle of res judicata, as a bar to the first cause of action in civil case 2574. We rule that this contention is untenable as the causes of action in the two cases are not identical. Case 2002 was for injunction against the entry into and the gathering of nuts from the land, while case 2574 seeks to "remove any doubt or cloud of the plaintiff's ownership ..." (Amended complaint, Rec. on App., p. 27), with a prayer for declaration of ownership and recovery of possession.

Applying the test of absence of inconsistency between prior and subsequent judgments, 2 we hold that the failure of Tan, in case 2002, to secure an injunction against the Valdehuezas to prevent them from entering the land and gathering nuts is not inconsistent with her being adjudged, in case 2574, as owner of the land with right to recover possession thereof. Case 2002 involved only the possession of the land and the fruits thereof, while case 2574 involves ownership of the land, with possession as a mere attribute of ownership. The judgment in the first case could not and did not encompass the judgment in the second, although the second judgment would encompass the first. Moreover, the new Civil Code provides that suitors in actions to quiet title "need not be in possession of said property. 3

2. The trial court treated the registered deed of pacto de retro as an equitable mortgage but considered the unregistered deed of pacto de


retro "as a mere case of simple loan, secured by the property thus sold underpacto de retro," on the ground that no suit lies to foreclose an unregistered mortgage. It would appear that the trial judge had not updated himself on law and jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this Court circa 1910 and 1912.

Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since August 30,1950), this is no longer so. 4

If the instrument is not recorded, the mortgage is nonetheless binding between the parties. (Article 2125, 2nd sentence).

The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, 5 whether registered or not, there being no third parties involved.

3. The Valdehuezas claim that their answer to the complaint of the plaintiff affirmed that they remained in possession of the land and gave the proceeds of the harvest to the plaintiff; it is thus argued that they would suffer double prejudice if they are to pay legal interest on the amounts stated in the pacto de retro contracts, as the lower court has directed, and that therefore the court should have ordered evidence to be adduced on the harvest.

The record does not support this claim. Nowhere in the original and the amended complaints is an allegation of delivery to the plaintiff of the harvest from the land involved in the second cause of action. Hence, the defendants' answer had none to affirm.

In submitting their stipulation of facts, the parties prayed "for its approval and maybe made the basis of the decision of this Honorable Court. " (emphasis supplied) This, the court did. It cannot therefore be faulted for not receiving evidence on who profited from the harvest.

4. The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300, respectively, is without legal basis, for, "No interest shall be due unless it has been expressly stipulated in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts being equitable mortgages.

With the definitive resolution of the rights of the parties as discussed above, we find it needless to pass upon the plaintiffs petition for receivership.


Should the circumstances so warrant, she may address the said petition to the court a quo.

ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the amounts of P1,200 and P300 mentioned in Annexes E and D shall bear interest at six percent per annum from the finality of this decision; and (b) the parcel of land covered by Annex D shall be treated in the same manner as that covered by Annex E, should the defendants fail to pay to the plaintiff the sum of P300 within 90 days from the finality of this decision. In all other respects the judgment is affirmed. No costs.

DIGEST

Facts:Defendants herein, Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed Valdehueza, are brothers and sisters; the parcel of land described in the first cause of action was the subject matter of the public auction sale wherein the plaintiff was the highest bidder and as such a Certificate of Sale was executed in favor of LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza to redeem the said land within the period of one year as being provided by law, an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA; that defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have executed two documents of DEED OFPACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions of a parcel of land which is described in the second cause of action with the total amount of P1,500; that from the execution of the Deed of Sale with right to repurchase mentioned in the second cause of action, defendants Arador Valdehueza and Rediculo Valdehueza remained in the possession of the land. A complaint for injunction filed by Tan to enjoin the Valdehuezas "fromentering the parcel of land and gathering the nuts therein ...." This complaint and the counterclaim were subsequently dismissed for failure of the parties"to seek for the immediate trial thereof, thus evincing lack of interest on their part to proceed with the case. The Deed of Pacto de Retro referred to was not registered in the Registry of Deeds, while the 2nd Deed of Pacto de Retro was registered.Issue:Whether the transactions between the parties were simple loan?Held:NO. Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since August 30,1950),this is no longer so. The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto deretro transactions are presumed to be equitable mortgages, 5 whether registered or not, there being no third parties involved.



Manila

THIRD DIVISION

G.R. No. 138739 July 6, 2000

RADIOWEALTH FINANCE COMPANY, petitioner, vs.Spouses VICENTE and MA. SUMILANG DEL ROSARIO, respondents.

D E C I S I O N

PANGANIBAN, J.:

When a demurrer to evidence granted by a trial court is reversed on appeal, the reviewing court cannot remand the case for further proceedings. Rather, it should render judgment on the basis of the evidence proffered by the


plaintiff. Inasmuch as defendants in the present case admitted the due execution of the Promissory Note both in their Answer and during the pretrial, the appellate court should have rendered judgment on the bases of that Note and on the other pieces of evidence adduced during the trial.

The Case

Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision1 and the May 3, 1999 Resolution2 of the Court of Appeals in CA-GR CV No. 47737. The assailed Decision disposed as follows:

"WHEREFORE, premises considered, the appealed order (dated November 4, 1994) of the Regional Trial Court (Branch XIV) in the City of Manila in Civil Case No. 93-66507 is hereby REVERSED and SET ASIDE. Let the records of this case be remanded to the court a quo for further proceedings. No pronouncement as to costs."3

The assailed Resolution denied the petitioner’s Partial Motion for Reconsideration.4

The Facts

The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria Sumilang del Rosario (herein respondents), jointly and severally executed, signed and delivered in favor of Radiowealth Finance Company (herein petitioner), a Promissory Note5 for P138,948. Pertinent provisions of the Promissory Note read:

"FOR VALUE RECEIVED, on or before the date listed below, I/We promise to pay jointly and severally Radiowealth Finance Co. or order the sum of ONE HUNDRED THIRTY EIGHT THOUSAND NINE HUNDRED FORTY EIGHTPesos (P138,948.00) without need of notice or demand, in installments as follows:

P11,579.00 payable for 12 consecutive months starting on ________ 19__ until the amount of P11,579.00 is fully paid. Each installment shall be due every ____ day of each month. A late payment penalty charge of two and a half (2.5%) percent per month shall be added to each unpaid installment from due date thereof until fully paid.

x x x x x x x x x

It is hereby agreed that if default be made in the payment of any of the installments or late payment charges thereon as and when the same becomes due and payable as specified above, the total principal sum then remaining unpaid, together with the agreed late payment charges thereon, shall at once become due and payable without need of notice or demand.


x x x x x x x x x

If any amount due on this Note is not paid at its maturity and this Note is placed in the hands of an attorney or collection agency for collection, I/We jointly and severally agree to pay, in addition to the aggregate of the principal amount and interest due, a sum equivalent to ten (10%) per cent thereof as attorney’s and/or collection fees, in case no legal action is filed, otherwise, the sum will be equivalent to twenty-five (25%) percent of the amount due which shall not in any case be less than FIVE HUNDRED PESOS (P500.00) plus the cost of suit and other litigation expenses and, in addition, a further sum of ten per cent (10%) of said amount which in no case shall be less than FIVE HUNDRED PESOS (P500.00), as and for liquidated damages."6

Thereafter, respondents defaulted on the monthly installments. Despite repeated demands, they failed to pay their obligations under their Promissory Note.

On June 7, 1993, petitioner filed a Complaint7 for the collection of a sum of money before the Regional Trial Court of Manila, Branch 14.8 During the trial, Jasmer Famatico, the credit and collection officer of petitioner, presented in evidence the respondents’ check payments, the demand letter dated July 12, 1991, the customer’s ledger card for the respondents, another demand letter and Metropolitan Bank dishonor slips. Famatico admitted that he did not have personal knowledge of the transaction or the execution of any of these pieces of documentary evidence, which had merely been endorsed to him.

On July 4, 1994, the trial court issued an Order terminating the presentation of evidence for the petitioner.9 Thus, the latter formally offered its evidence and exhibits and rested its case on July 5, 1994.

Respondents filed on July 29, 1994 a Demurrer to Evidence10 for alleged lack of cause of action. On November 4, 1994, the trial court dismissed11 the complaint for failure of petitioner to substantiate its claims, the evidence it had presented being merely hearsay.

On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for further proceedings.

Hence, this recourse.12

Ruling of the Court of Appeals

According to the appellate court, the judicial admissions of respondents established their indebtedness to the petitioner, on the grounds that they admitted the due execution of the Promissory Note, and that their only defense was the absence of an agreement on when the installment


payments were to begin. Indeed, during the pretrial, they admitted the genuineness not only of the Promissory Note, but also of the demand letter dated July 12, 1991. Even if the petitioner’s witness had no personal knowledge of these documents, they would still be admissible "if the purpose for which [they are] produced is merely to establish the fact that the statement or document was in fact made or to show its tenor[,] and such fact or tenor is of independent relevance."

Besides, Articles 19 and 22 of the Civil Code require that every person must -- in the exercise of rights and in the performance of duties -- act with justice, give all else their due, and observe honesty and good faith. Further, the rules on evidence are to be liberally construed in order to promote their objective and to assist the parties in obtaining just, speedy and inexpensive determination of an action.

Issue

The petitioner raises this lone issue:

"The Honorable Court of Appeals patently erred in ordering the remand of this case to the trial court instead of rendering judgment on the basis of petitioner’s evidence."13

For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of the Demurrer to Evidence, and (b) the date when the obligation became due and demandable.

The Court’s Ruling

The Petition has merit. While the CA correctly reversed the trial court, it erred in remanding the case "for further proceedings."

Consequences of a Reversal, on Appeal, of a Demurrer to Evidence

Petitioner contends that if a demurrer to evidence is reversed on appeal, the defendant should be deemed to have waived the right to present evidence, and the appellate court should render judgment on the basis of the evidence submitted by the plaintiff. A remand to the trial court "for further proceedings" would be an outright defiance of Rule 33, Section 1 of the 1997 Rules of Court.

On the other hand, respondents argue that the petitioner was not necessarily entitled to its claim, simply on the ground that they lost their right to present evidence in support of their defense when the Demurrer to Evidence was reversed on appeal. They stress that the CA merely found them indebted to


petitioner, but was silent on when their obligation became due and demandable.

The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules, but the consequence on appeal of a demurrer to evidence was not changed. As amended, the pertinent provision of Rule 33 reads as follows:

"SECTION 1. Demurrer to evidence.—After the plaintiff has completed the presentation of his evidence, the defendant may move for dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief. If his motion is denied, he shall have the right to present evidence. If the motion is granted but on appeal the order of dismissal is reversed he shall be deemed to have waived the right to present evidence."14

Explaining the consequence of a demurrer to evidence, the Court in Villanueva Transit v. Javellana15 pronounced:

"The rationale behind the rule and doctrine is simple and logical. The defendant is permitted, without waiving his right to offer evidence in the event that his motion is not granted, to move for a dismissal (i.e., demur to the plaintiff’s evidence) on the ground that upon the facts as thus established and the applicable law, the plaintiff has shown no right to relief. If the trial court denies the dismissal motion, i.e., finds that plaintiff’s evidence is sufficient for an award of judgment in the absence of contrary evidence, the case still remains before the trial court which should then proceed to hear and receive the defendant’s evidence so that all the facts and evidence of the contending parties may be properly placed before it for adjudication as well as before the appellate courts, in case of appeal. Nothing is lost. The doctrine is but in line with the established procedural precepts in the conduct of trials that the trial court liberally receive all proffered evidence at the trial to enable it to render its decision with all possibly relevant proofs in the record, thus assuring that the appellate courts upon appeal have all the material before them necessary to make a correct judgment, and avoiding the need of remanding the case for retrial or reception of improperly excluded evidence, with the possibility thereafter of still another appeal, with all the concomitant delays. The rule, however, imposes the condition by the same token that if his demurrer is granted by the trial court, and the order of dismissal is reversed on appeal , the movant losses his right to present evidence in his behalf and he shall have been deemed to have elected to stand on the insufficiency of plaintiff’s case and evidence. In such event, the appellate court which reverses the order of dismissal shall proceed to render judgment on the merits on the basis of plaintiff’s evidence." (Underscoring supplied)


In other words, defendants who present a demurrer to the plaintiff’s evidence retain the right to present their own evidence, if the trial court disagrees with them; if the trial court agrees with them, but on appeal, the appellate court disagrees with both of them and reverses the dismissal order, the defendants lose the right to present their own evidence.16 The appellate court shall, in addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims to discourage prolonged litigations.17

In the case at bar, the trial court, acting on respondents’ demurrer to evidence, dismissed the Complaint on the ground that the plaintiff had adduced mere hearsay evidence. However, on appeal, the appellate court reversed the trial court because the genuineness and the due execution of the disputed pieces of evidence had in fact been admitted by defendants.

Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered judgment on the basis of the evidence submitted by the petitioner. While the appellate court correctly ruled that "the documentary evidence submitted by the [petitioner] should have been allowed and appreciated xxx," and that "the petitioner presented quite a number of documentary exhibits xxx enumerated in the appealed order,"18 we agree with petitioner that the CA had sufficient evidence on record to decide the collection suit. A remand is not only frowned upon by the Rules, it is also logically unnecessary on the basis of the facts on record.

Due and Demandable Obligation

Petitioner claims that respondents are liable for the whole amount of their debt and the interest thereon, after they defaulted on the monthly installments.

Respondents, on the other hand, counter that the installments were not yet due and demandable. Petitioner had allegedly allowed them to apply their promotion services for its financing business as payment of the Promissory Note. This was supposedly evidenced by the blank space left for the date on which the installments should have commenced.19 In other words, respondents theorize that the action for immediate enforcement of their obligation is premature because its fulfillment is dependent on the sole will of the debtor. Hence, they consider that the proper court should first fix a period for payment, pursuant to Articles 1180 and 1197 of the Civil Code.

This contention is untenable. The act of leaving blank the due date of the first installment did not necessarily mean that the debtors were allowed to pay as and when they could. If this was the intention of the parties, they should have so indicated in the Promissory Note. However, it did not reflect any such intention.


On the contrary, the Note expressly stipulated that the debt should be amortized monthly in installments ofP11,579 for twelve consecutive months. While the specific date on which each installment would be due was left blank, the Note clearly provided that each installment should be payable each month.

Furthermore, it also provided for an acceleration clause and a late payment penalty, both of which showed the intention of the parties that the installments should be paid at a definite date. Had they intended that the debtors could pay as and when they could, there would have been no need for these two clauses.

Verily, the contemporaneous and subsequent acts of the parties manifest their intention and knowledge that the monthly installments would be due and demandable each month.20 In this case, the conclusion that the installments had already became due and demandable is bolstered by the fact that respondents started paying installments on the Promissory Note, even if the checks were dishonored by their drawee bank. We are convinced neither by their avowals that the obligation had not yet matured nor by their claim that a period for payment should be fixed by a court.

Convincingly, petitioner has established not only a cause of action against the respondents, but also a due and demandable obligation. The obligation of the respondents had matured and they clearly defaulted when their checks bounced. Per the acceleration clause, the whole debt became due one month (April 2, 1991) after the date of the Note because the check representing their first installment bounced.

As for the disputed documents submitted by the petitioner, the CA ruling in favor of their admissibility, which was not challenged by the respondents, stands. A party who did not appeal cannot obtain affirmative relief other than that granted in the appealed decision.21

It should be stressed that respondents do not contest the amount of the principal obligation.1âwphi1 Their liability as expressly stated in the Promissory Note and found by the CA is "P13[8],948.0022 which is payable in twelve (12) installments at P11,579.00 a month for twelve (12) consecutive months." As correctly found by the CA, the "ambiguity" in the Promissory Note is clearly attributable to human error.23

Petitioner, in its Complaint, prayed for "14% interest per annum from May 6, 1993 until fully paid." We disagree.1âwphi1The Note already stipulated a late payment penalty of 2.5 percent monthly to be added to each unpaid installment until fully paid. Payment of interest was not expressly stipulated in the Note. Thus, it should be deemed included in such penalty.


In addition, the Note also provided that the debtors would be liable for attorney’s fees equivalent to 25 percent of the amount due in case a legal action was instituted and 10 percent of the same amount as liquidated damages. Liquidated damages, however, should no longer be imposed for being unconscionable.24 Such damages should also be deemed included in the 2.5 percent monthly penalty. Furthermore, we hold that petitioner is entitled to attorney’s fees, but only in a sum equal to 10 percent of the amount due which we deem reasonable under the proven facts.25

The Court deems it improper to discuss respondents' claim for moral and other damages. Not having appealed the CA Decision, they are not entitled to affirmative relief, as already explained earlier.26

WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in that the remand is SET ASIDE and respondents are ordered TO PAY P138,948, plus 2.5 percent penalty charge per month beginning April 2, 1991 until fully paid, and 10 percent of the amount due as attorney’s fees. No costs.

SO ORDERED.

Digest

FACTS:

Spouses Vicente & Maria Del Rosario jointly & severally executed, signed and delivered in favor of Radiowealth Finance Company a promissory note for P138,948.

Thereafter, respondents defaulted on the monthly installments. Despite repeated demands, they failed to pay their obligation.

Petitioner filed a complaint for the collection of sum of money before the RTC.

Trial court dismissed the complaint for the evidence presented were merely hearsay.

CA reversed & remanded the case for further proceedings.

Petitioner claims that respondents are liable for the whole amount of their debt and the interest thereon, after they defaulted on the monthly installments. Respondents counter that the installments were not yet due


and demandable. They theorize that the action for immediate enforcement of their obligation is premature because its fulfillment is dependent on the sole will of the debtor. Hence, they consider that the proper court should first fix a period for payment, pursuant to Articles 1180 and 1197 of the Civil Code.

ISSUE:

WON the installments had already became due and demandable? YES

HELD:

The act of leaving blank space the due date of the first installment did not necessary mean that the debtors were allowed to pay as & when they could. If this was the intention of the parties, they should have so indicated in the promissory note. However, it did not reflect any such intention.

While the specific date on which each installment would be due was left blank, the note clearly provided that each installment should be payable each month.

Furthermore, it also provided for an acceleration clause and a late payment penalty, both of which showed the intention of the parties that the installment should be paid at a definite date. Had they intended that the debtors could pay as & when they could, there would have been no need for these 2 clauses.

The installments had already became due & demandable is bolstered by the fact that respondents started paying installments on the promissory note. The obligation of the respondents had matured & they clearly defaulted when their checks bounced. Per the acceleration clause, the whole debt became due one month after the date of the note because the check representing their first installment bounced.


FIRST DIVISION

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and AMBROSIO PADILLA, Respondents.

The Chief Legal Counsel for Petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF INTEREST RATE; NOT TO BE MADE OFTENER THAN ONCE A YEAR. — PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null and void. Although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made oftener than once every twelve months. "If the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS AND RESOLUTION ARE NEITHER LAWS NOR RESOLUTIONS OF MONETARY BOARD. — While the private respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exhs. 2,


3, and 4), no laws was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board.

3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT AUTHORIZE BANKS TO UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST RATES. — CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury law ceiling on interest rates — but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to "once every twelve months."cralaw virtua1aw library

4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION OF ARTICLE 1308 OF CIVIL CODE. — Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s loan, violated the mutuality of contracts ordained in Article 1308 of the civil Code: "ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."cralaw virtua1aw library

5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF ARTICLE 1956 OF CIVIL CODE. — PNB’s successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

D E C I S I O N

GRIÑO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision of


the trial court which had dismissed the private respondent’s complaint "to annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered judgment:

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest collected from July, 1984 in excess of twenty-four percent (24%) per annum. Costs against the defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of 321.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules, regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)

The Real Estate Mortgage Contract likewise provided that:

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; Emphasis supplied.)


Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net proceeds of which were released to the private respondent by crediting or transferring the amount to his current account with the bank.

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will expire on July 4, 1984," (2)" [i]f renewal of the line for another year is intended, please submit soonest possible your request," and (3) the "present policy of the Bank requires at least 30% reduction of principal before your line can be renewed." (pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under the same arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to 21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give due course to your request for preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loan of more than one year; our present cost of funds has substantially increased." (pp. 8788, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue making further payments, and instead of a ‘loan of more than one year,’ I shall pay the said loan before the lapse of one year or before July 4, 1985. . . . I reiterate my request that the increase of my rate of interest from 18% ‘be fixed at 21% or 24%.’" (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that "the interest rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and further explained "why we can not grant your


request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00.

Like rubbing salt on the private respondent’s wound, the petitioner informed private respondent on October 29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that judgment be rendered:

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is reasonable, fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date and not from July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be refunded to plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of preliminary injunction be issued (1) to restrain and or enjoin defendant bank for [sic] collecting from plaintiff and/or debiting his current account with illegal and excessive increases of interest rates; and (2) to prevent defendant bank from declaring plaintiff in default for non-payment and from instituting any foreclosure proceeding, extrajudicial or judicial, of the valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral excessive and arbitrary and recited the reasons justifying said increases.


On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest were properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed the trial court, hence, NB’s recourse to this Court by a petition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNB’s petition for review can be resolved into a single legal issue of whether the bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made oftener than once every twelve months."cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board.

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Ex’s. 2, 3, and 4), no law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The Court of Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the following instruments, to wit: (1) Exhibit ‘1’ — Credit


Agreement dated July 1, 1982; (2) Exhibit ‘2’ — Promissory Note dated July 5, 1982; (3) Exhibit ‘(3)’ — Promissory Note dated January 3, 1983; (4) Exhibit ‘4’ — Promissory Note, dated December 13, 1983; and (5) Exhibit ‘5’ — Real Estate Mortgage contract dated July 1, 1982.

"Exhibit ‘1’ states in its portion marked Exhibit ‘1-g-1’:

‘9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules, regulations and policies.’

"Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively marked Exhibits ‘2-B,’ ‘3-B,’ and ‘4-B’ uniformly authorize the defendant bank to increase the stipulated interest rate of 18% per annum ‘within the limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board.’

"Exhibit ‘5’ in its portion marked Exhibit ‘5-e-1’ stipulates:

‘(k) INCREASE OF INTEREST RATE

‘The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.’

"Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest rate beyond the original rate of 18% per annum but ‘within the limits allowed by law’ or ‘within the rate allowed by law,’ it being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents and instruments to effectuate the increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court disauthorized the bank from raising the interest rate on the borrowers’ loan from 12% to 17% despite an escalation clause in the


loan agreement signed by the debtors authorizing Banco Filipino "to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." (Emphasis supplied.)

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of interest, including commissions premiums, fees and other charges on loans with a maturity of more than 730 days by banking institution . . . shall be 19%."cralaw virtua1aw library

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the effect of law is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this Court held:

"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest ‘in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.’" p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

". . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law."cralaw virtua1aw library

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of PD. 116 which limits such changes to "once every twelve months."cralaw virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

"ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."cralaw virtua1aw library


In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

PNB’S successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."cralaw virtua1aw library

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791, the Court resolved to deny the petition for review for lack of merit, with costs against the petitioner.

SO ORDERED.



Manila

EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner, vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.


VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).


Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief,


Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-


Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court a quo.


In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,thus:


The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:


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

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the


appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads —

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


The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:


There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:


WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint


judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.


The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.


WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Digest

FACTS Two fiber drums were shipped owned by Eastern Shipping from Japan. The shipment as insured with a marine policy. Upon arrival in Manila unto the custody of metro Port Service, which excepted to one drum, said to be in bad order and which damage was unknown the Mercantile Insurance Company. Allied Brokerage Corporation received the shipment from Metro, one drum opened and without seal. Allied delivered the shipment to the consignee’s warehouse. The latter excepted to one drum which contained spillages while the rest of the contents was adulterated/fake. As consequence of the loss, the insurance company paid the consignee, so that it became subrogated to all the rights of action of consignee against the defendants Eastern Shipping, Metro Port and Allied Brokerage. The insurance company filed before the trial court. The trial court ruled in favor of plaintiff an ordered defendants to pay the former with present legal interest of 12% per annum from the date of the filing of the complaint. On appeal by defendants, the appellate court denied the same and affirmed in toto the decision of the trial court.

ISSUE(1) Whether the applicable rate of legal interest is 12% or 6%.

(2) Whether the payment of legal interest on the award for loss or damage is to be computed from the time the complaint is filed from the date the decision appealed from is rendered.

HELD(1) The Court held that the legal interest is 6% computed from

the decision of the court a quo. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damaes awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.


When the judgment of the court awarding a sum of money becomes final and executor, the rate of legal interest shall be 12% per annum from such finality until satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of money.

The interest due shall be 12% PA to be computed fro default, J or EJD.

(2) From the date the judgment is made. Where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or EJ but when such certainty cannot be so reasonably established at the time the demand is made, the interest shll begin to run only from the date of judgment of the court is made.

(3) The Court held that it should be computed from the decision rendered by the court a quo.


Manila

THIRD DIVISION

G.R. No. 128721 March 9, 1999

CRISMINA GARMENTS, INC., petitioner, vs.COURT OF APPEALS and NORMA SIAPNO, respondent.


PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties. In the absence of such agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari 1 assailing the December 28, 1995 Decision 2 and March 17, 1997 Resolution 3 of the Court of Appeals in CA-GR CV No. 28973. On September 24, 1997, this Court issued a minute Resolution 4 denying the petition "for its failure to show any reversible error on the part of the Court of Appeals."

Petitioner then filed a Motion for Reconsideration, 5 arguing that the interest rate should be computed at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent per annum as prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on the Motion, the Court reinstated 6 the Petition, but only with respect to the issue of which interest rate should be applied. 7

The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the appellate court:

During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in the export of girls' denim pants, contracted the services of the [respondent], the sole proprietress of the D'Wilmar Garments, for the sewing of 20,762 pieces of assorted girls['] denims supplied by the [petitioner] under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1, 1979, 1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her services, in the total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered the same to the [petitioner] which acknowledged the same per Delivery Receipt Nos. 0030 dated February 9, 1979; 0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034, dated February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated March 24, 1979; 0040 dated March 27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18, 1979[;] 0037, dated March 10, 1979 and 0042 dated March 10, 1979, in good order condition. At first, the [respondent] was told


that the sewing of some of the pants w[as] defective. She offered to take delivery of the defective pants. However, she was later told by [petitioner]'s representative that the goods were already good. She was told to just return for her check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the [petitioner] demanding payment of the aforesaid amount within ten (10) days from receipt thereof. On February 7, 1990, the [petitioner]'s [v]ice-[p]resident-[c]omptroller, wrote a letter to [respondent]'s counsel, averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and that she was liable to the [petitioner] for the amount of P49,925.51 which was the value of the damaged pairs of denim pants and demanded refund of the aforesaid amount.

On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with the [trial court] for the collection of the principal amount of P76,410.00. . . .

xxx xxx xxx

After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in favor of the [respondent] against the [petitioner], the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of this complaint on January 8, 1981, until fully paid;

(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed. 8

The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of attorney's fees which was deleted. 9 Subsequently, the CA denied the Motion for Reconsideration. 10

Hence, this recourse to this Court 11


Sole Issue

In light of the Court's Resolution dated April 27, 1998, petitioner submits for our consideration this sole issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties. 12

This Court's Ruling

We sustain petitioner's contention that the interest rate should be computed at six percent (6%) per annum.

Sole Issue: Interest Rate

The controversy revolves around petitioner's payment of the price beyond the period prescribed in a contract for a piece of work. Article 1589 on the Civil Code provides that "[t]he vendee [herein petitioner] shall owe interest for the period between the delivery of the thing and the payment of the price . . . should he be in default from the time of judicial or extrajudicial demand for the payment of the price." The only issue now is the applicable rate of interest for the late payment.

Because the case before us is "an action for the enforcement of an obligation for payment of money arising from a contract for a piece of work," 13 petitioner submits that the interest rate should be six percent (6%), pursuant to Article 2209 of the Civil Code, which states:

If the obligation consists in the payment of money and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." (Emphasis supplied.)

On the other hand, private respondent maintains that the interest rate should be twelve percent (12 %) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the "Usury Law", the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate


of interest, shall be twelve per cent (12%) per annum." (Emphasis supplied.)

She argues that the circular applies, since "the money sought to be recovered by her is in the form of forbearance." 14

We agree with the petitioner. In Reformina v. Tomol Jr., 15 this Court stressed that the interest rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the said circular are governed by Article 2209 of the Civil Code, 16which considers interest a form of indemnity for the delay in the performance of an obligation. 17

In Eastern Shipping Lines, Inc. v. Court of Appeals, 18 the Court gave the following guidelines for the application of the proper interest rates:

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


1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but


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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to forbearance of credit. 19

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award shall earn interest at twelve percent (12%) per annum from the date of finality of the judgment until its satisfaction, regardless of whether or not the case involves a loan of forbearance of money. The interim period is deemed to be equivalent to a forbearance of a credit. 21

Because the amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of six percent (6%) per annum should be applied. Furthermore, since the amount of the demand could be established with certainty when the Complaint was filed, the six percent (6%) interest should be computed from the filing of the said Complaint. But after the judgment becomes final and exuecutory until the obligation is satisfied, the interest should be reckoned at twelve percent (%12) per year.

Private respondent maintains that the twelve percent (12%) interest should be imposed, because the obligation arose from a forbearance of money. 22 This is erroneous. In Eastern Shipping, 23 the Court observed that a "forbearance" in the context of the usury law is a "contractual obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable." Using this standard, the obligation in this case was obviously not a forbearance of money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%) per annum, computed from the time of the filing of the Complaint in the trial court until the finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes final and executory until it is fully satisfied. No pronouncement as to costs.


SO ORDERED.

Digest

FACTS:

Petitioner contracted the services of the respondent, to sew for the petitioner of 20,762 pieces of assorted girls denims to the amount of P76,410.00.

At first, the respondent was told that the sewing of some of the pants was defective. She offered to take delivery of the defective pants. However, she was later told by [petitioner]'s representative that the goods were already good. She was told to just return for her check of P76,410.00. However, the petitioner failed to pay her the aforesaid amount. This prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the petitioner demanding payment of the aforesaid amount within ten days from receipt thereof. On February 7, 1990, the petitioner's vice-president-comptroller, wrote a letter to respondent's counsel, averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were defective and that she was liable to the petitioner for the amount of P49,925.51 which was the value of the damaged pairs of denim pants and demanded refund of the aforesaid amount.

ISSUE:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties.

HELD:

Because the amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of six percent (6%) per annum should be applied. Furthermore, since the amount of the demand could be established with certainty when the Complaint was filed, the six percent (6%) interest should be computed from the filing of the said Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the interest should be reckoned at twelve percent (12%) per year.



Manila

SECOND DIVISION

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., petitioner-appellant, vs.THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-appellees.

ABAD SANTOS, J.:ñé+.£ªwph!1

Petition to review the Order of the respondent judge dated August 24, 1977. The facts are simple.

Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No. 2414 of the Court of First Instance of La Union. On January 22, 1973, the respondent judge rendered judgment in said case, the dispositive portion of which reads: têñ.£îhqwâ£

IN VIEW OF THE FOREGOING, the Court hereby renders judgment and sentences the defendant to pay Concordia Garcia Navalta the amount of P75,000.00 with legal interest from October, 1968, Pl,000.00, as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No. 52675-R but was affirmed on February 7, 1977. On February 24, 1977, the petitioner paid the following amounts to the private respondent: têñ.£îhqwâ£

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00


Total P114,250.00

(*Art. 2209 of the Civil Code provides: "If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." This appears to be the basis for awarding interest at the legal rate from October, 1968, although the debt was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the payment was not in fun satisfaction of the judgment because the former had to pay compound interest or an additional sum of P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent secure a writ of execution for the same which the former sought to quash over the opposition of the latter. In resolving the question the respondent judge issued an Order on August 24, 1977 as follows: têñ.£îhqwâ£

After hearing and consideration of the motion of the plaintiff for the issuance of an alias writ of execution, and the written manifestation and opposition filed by the defendant and finding as it appears that the written schedule of interest computation, which was submitted, is correct and in order, because compound interest has been computed from July 6, 1970 when the claim was judicially demanded, let an alias writ of execution issue to satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the question as to whether or not the petitioner is obligated to pay compound interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought to be executed ordered the payment of simple "legal interest" only. It said nothing about the payment of compound interest. Accordingly, when the respondent judge ordered the payment of compound interest he went beyond the confines of his own judgment which had been affirmed by the Court of Appeals and which had become final. Fundamental is the rule that execution must conform to that ordained or decreed in the dispositive part of the decision. Likewise, a court can not, except for clerical errors or omissions, amend a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960]; Ablaza vs. Sycip, et al., 110 Phil., 4 [1960].)


Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: "In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or, in default thereof, whenever the debt is judicially claimed in which last case it shall draw six per centum per annum interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." Both legal provisions are in applicable for they contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913]; Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil. 539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest had been stipulated by the parties. In other words, there was no accrued conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is hereby set aside. No special pronouncement as to costs.

SO ORDERED.

Digest



Manila

EN BANC

G.R. No. L-23559 October 4, 1971

AURELIO G. BRIONES, plaintiff-appellee, vs.PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants.

Carlos J. Antiporda for plaintiff-appellee.

Manuel A. Cammayo for defendants-appellants.

DIZON, J.:

On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally, the amount of P1,500.00, plus damages, attorney's fees and costs of suit. The defendants answered the complaint with specific denials and the following special defenses and compulsory counterclaim:

...;

By way of —

SPECIAL DEFENSES

Defendants allege:

4. Defendants executed the real estate mortgage, Annex "A" of the complaint, as security for the loan of P1,200.00 given to defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year;


5. That although the mortgage contract, Annex "A" was executed for securing the payment of P1,500.00 for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year;

6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but as in interest of the said loan for an extension of another term of one year;

7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs, public order or public policy and is, therefore, in existent and void from the beginning (Art. 1407 Civil Code);

And as —

COMPULSORY COUNTERCLAIM

Defendants replead all their allegations in the preceding paragraphs;

8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to violate the law, at the expense of the defendants, committed a flagrant violation of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorney's fees, the amount of which will be proven at the trial;

9. That this is the second time this same case is filed before this court, the first having been previously filed and docketed in this court as Civil Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance of Manila on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing this case to the court, harassing and persecuting defendants in that manner, defendants have suffered mental anguish and anxiety for which they should be compensated for moral damages.

On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim. Thereupon the defendants moved


for the rendition of a summary judgment on the ground that, upon the record, there was no genuine issue of fact between the parties. The Municipal Court granted the motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at the legal rate from February 22, 1962, plus the sum of P150.00 as attorney's fees. From this judgment, the defendants appealed to the Court of First Instance of Manila where, according to the appealed decision, "defendant has asked for summary judgment and plaintiff has agreed to the same." (Record on Appeal p. 21). Having found the motion for summary judgment to be in order, the court then, proceeded to render judgment as follows:

Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully paid. This judgment represents Defendant's debt of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorney's fees or a total deduction of P320.00. Plaintiff shall pay the costs.

In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the loan notwithstanding its finding that the same was tainted with usury, and erred likewise in not dismissing the case.

It is not now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved, therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at what rate.

The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum or value than is allowed by law, and provides further that, in such case, the debtor may recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered, with costs and attorney's fees, in an appropriate action against his creditor, within two (2) years after such payment or delivery (Section 6, Act 2655, as amended by Acts 3291 and 3998).

Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that even if the contract of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal interest due thereon.

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the


creditor the amount which he justly owes him citing in support of this ruling its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.

In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor had no right of action to recover the interest in excess of the lawful rate; but that this did not mean that the debtor may keep the principal received by him as loan — thus unjustly enriching himself to the damage of the creditor.

Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing jurisprudence of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with usury "the only right of the respondent (creditor) ... was merely to collect the amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Code — a subsequent law — provides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases "the power may recover in accordance with the laws on usury." From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover — not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following:

... .


The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50, leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35. Accordingly, it stated in the dispositive portion of the decision, thus:

WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (½) of the unsatisfied portion of this judgment.

With costs against the defendants.

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?

Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:

ART. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring


action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (Emphasis ours.) .

We do not agree with such reasoning, Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest.

True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or object of said contract.

However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.

And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,


being separable, the latter only should be deemed void, since it is the only one that is illegal.

Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of 20% per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The whole stipulation as to interest is void, since payment of said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered "with interest thereon from the date of payment."

The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.

The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint.


In answer to the contention that the forfeiture of the principal of the usurious loan is necessary to punish the usurer, We say this: Under the Usury Law there is already provision for adequate punishment for the usurer namely, criminal prosecution where, if convicted, he may be sentence to pay a fine of not less than P50 nor more than P500, or imprisonment of not less than 30 days nor more than one year, or both, in the discretion of the court. He may further be sentenced to return the entire sum received as interest, with subsidiary imprisonment in case of non-payment thereof. lt is, of course, to be assumed that this last penalty may be imposed only if the return of the entire sum received as interest had not yet been the subject of judgment in a civil action involving the usurious contract of load.

In arriving at the above conclusion We also considered our decision in Mulet vs. The People of the Philippines (73 Phil. p. 60), but found that the same does not apply to the present case. The facts therein involved were as follows:

On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of mortgage executed by the Rubillos as a security; the sum of P1,375 was made to appear as the capital of the loan. This amount obviously represented the actual loan of P550 and the total interest of P825 computed at 30 per cent per annum for 5 years. Within four years of following the execution of the mortgage, the debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors paid the whole capital of P550, due to petitioner's promise to condone the unpaid interest upon payment of such capital. But to their surprise, petitioner informed them that they were still indebted in the sum of P546.73 which represented the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the debtors to execute in October, 1933, in his favor, a deed of sale with pacto de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date of the execution of the new deed up to 1936, petitioner received, as his share of the products of the land, the total sum of P480. Prosecuted on November 18, 1936, for the violation of the Usury Law, petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of Appeals. The instant petition for certiorari is directed at that portion of the decision of the appellate court ordering petitioner to return to the offended parties the sum of P373.27, representing interests received by him in excess of that allowed by law.


It was Mulet's claim that, as the amount of P373.27 had been paid more than two years prior to the filing of the complaint for usury against him, its return could no longer be ordered in accordance with the prescriptive period provided therefor in Section 6 of the Usury Law. Said amount was made up of the usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law — amounting to P385.85 — was deducted. Our decision was that Mulet should return the amount of P480.00 which represented the value of the produce of the land sold to him under pacto de retrowhich, with the unpaid balance of the usurious interest, was the consideration of the transaction — meaning thepacto de retro sale. This Court then said:

... . This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro with the unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit, and the contract which results therefrom, null and void. (Art. 1275, Civil Code). And, under the provisions of article 1305, in connection with article 1303, of the Civil Code, when the nullity of a contract arises from the illegality of the consideration which in itself constitutes a felony, the guilty party shall be subject to criminal proceeding while the innocent party may recover whatever he has given, including the fruits thereof. (emphasis supplied).

It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to pay it back to the former, and that what this Court declared recoverable by the debtor were only the usurious interest paid as well as the fruits of the property sold underpacto de retro.

IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the sense that appellee may recover from appellant the principal of the loan (P1,180.00) only, with interest thereon at the legal rate of 6% per annum from the date of the filing of the complaint. With costs.

Digest

FACTS:

Aurelio G. Briones filed an action in the MunicipalCourt of Manila against Primitivo, Nicasio, Pedro, Hilarioand Artemio, all surnamed Cammayo, to recover fromthem, jointly and severally, the amount of P1,500.00, plus


damages, attorney's fees and costs of suit.Defendants executed the real estate mortgage assecurity for the loan of P1,200.00 given to Primitivo P.Cammayo upon the usurious agreement that defendantpays to the plaintiff, out of the alleged loan of P1,500.00(which includes as interest the sum of P300.00) for oneyear.Although the mortgage contract was executed forsecuring the payment of P1,500.00 for a period of oneyear, without interest, the truth and the real fact is thatplaintiff delivered to the defendant Primitivo P. Cammayoonly the sum of P1,200.00 and withheld the sum ofP300.00 which was intended as advance interest for oneyear.

On account of said loan of P1,200.00, defendantPrimitivo P. Cammayo paid to the plaintiff during theperiod from October 1955 to July 1956 the total sum ofP330.00 which plaintiff, illegally and unlawfully refused toacknowledge as part payment of the account but as ininterest of the said loan for an extension of another term ofone year.

ISSUE:Can Briones recover the amount of P1,500.00?

RULING:Loan is valid but usurious interest is void. Creditorhas the right to recover his capital by judicial action. Todiscourage stipulations on usurious interest, saidstipulations are treated as wholly void, so that the loanbecomes one without stipulation as to payment of interest.It should not, however, be interpreted to mean forfeitureeven of the principal, for this would unjustly enrich theborrower at the expense of the lender. Furthermore, penalsanctions are available against a usurious lender, as afurther deterrence to usury.In simple loan with stipulation of usuriousinterest, the prestation of the debtor to pay the principaldebt, which is the cause of the contract (Article 1350, Civil


Code), is not illegal. The illegality lies only as to theprestation to pay the stipulated interest; hence, beingseparable, the latter only should be deemed void, since it isthe only one that is illegal.


Manila

EN BANC

G.R. No. L-32644 October 4, 1930

CU UNJIENG E HIJOS, plaintiff-appelle, vs.THE MABALACAT SUGAR CO., ET AL., defendants. THE MABALACAT SUGAR CO., appellant.

Romeo Mercado for appellant. Araneta and Zaragoza for plaintiff-appellee. Duran and Lim for defendant-appellee Siuliong and Co.


STREET, J.:

This action was instituted in the Court of First Instance of Pampanga by Cu Unjieng e Hijos, for the purpose of recovering from the Mabalacat Sugar Company an indebtedness amounting to more than P163,00, with interest, and to foreclose a mortgage given by the debtor to secure the same, as well as to recover stipulated attorney's fee and the sum of P1,206, paid by the plaintiff for insurance upon the mortgaged property, with incidental relief. In the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the Mabalacat Sugar Company, and as having a third mortgage on the mortgaged property. The Philippine National Bank was also joined by reason of its interest as second mortgagee of the land covered by the mortgage to the plaintiff. After the cause had been brought to issue by the answers of the several defendants, the cause was heard and judgment rendered, the dispositive portion of the decision being as follows:

Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a pagar a la demandante la suma de P163,534.73, con sus intereses de 12 por ciento al ano, compuestos mensualmente desde el 1. de mayo de 1929. Tambien se le condena a pagar a dicha demandante la suma de P2,412 por las primas de seguros abonadas por esta, con sus intereses de 12 por ciento al ano, compuestos tambien mensualmente desde el 15 de mayo de 1928, mas la de P7,500 por honorarios de abogados y las costas del juicio. Y si esta deuda no se pagare dentro del plazo de tres meses, se ejecutaran los bienes hipotecados de acuerdo con la ley.

Si del producto de la venta hubiese algun remanente, este se destinara al pago del credito del Banco Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al ano desde el 7 de junio de 1929, sin perjuicio de la orden de ejecucion que pudiera expedirse en el asundo No. 26435 del Juzgado de Primera Instancia de Manila.

Se condena ademas a The Mabalacat Sugar Company al pago de la suma de P3,205.78 reclamada por Siuliong & Co., con sus intereses de 9 por ciento al ano desde el 29 de julio de 1926 hasta su completo pago, ordenandola que rinda cuentas del azucar por ella producido y pague la comision correspondiente bajo la base de 5 por ciento de su valor, descontandose, desde luego, las cantidades ya pagadas.

Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc.1awph!l.net

From this judgment the defendant, the Mabalacat Sugar Company, appealed.


The first point assigned as error has relation to the question whether the action was prematurely stated. In this connection we note that the mortgage executed by the Mabalacat Sugar Company contains, in paragraph 5, a provision to the effect that non-compliance on the part of the mortgage debtor with any of the obligations assumed in virtue of this contract will cause the entire debt to become due and give occasion for the foreclosure of the mortgage. The debtor party failed to comply with the obligation, imposed upon it in the mortgage, to pay the mortgage debt in the stipulated installments at the time specified in the contract. It results that the creditor was justified in treating the entire mortgage debt as having been accelerated by such failure of the debtor in paying the installments.

It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e Hijos, agreed to extend the time for payment of the mortgage indebtedness until June 30, 1929, with certain interim payments to be made upon specified dates prior to the contemplated final liquidation of the whole indebtedness. But the debtor party failed to make the interim payments due on February 25, 1929, March 25, 1929, and April 25, 1929, and failed altogether to pay the balance due, according to the terms of this extension, on June 30, 1929. Notwithstanding the failure of the debtor to comply with the terms of this extension, it is insisted for the appellant that this agreement for the extension of the time of payment had the effect of abrogating the stipulation of the original contract with respect to the acceleration of the maturity of the debt by non-compliance with the terms of the mortgage. As the trial court pointed out, this contention is untenable. The agreement to extend the time of payment was voluntary and without consideration so far as the creditor is concerned; and the failure of the debtor to comply with the terms of the extension justified the creditor in treating it as of no effect. The first error is therefore without merit.

The second error is directed to the propriety of the interest charges made by the plaintiff in estimating the amount of the indebtedness. In this connection we note that, under the second clause of the mortgage, interest should be calculated upon the indebtedness at the rate of 12 per cent per annum. In the same clause, but in a separate paragraph, there is another provision with respect to the payment of interest expressed in Spanish in the following words:

Los intereses seran pagados mensualmente a fin de cada mes, computados teniendo en cuenta el capital del prestamo aun no pagado.

Translated into English this provision reads substantially as follows: "Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly, at the end of each month."


It is well settled that, under article 1109 of the Civil Code, as well as under section 5 of the Usury Law (Act No. 2655), the parties may stipulate that interest shall be compounded; and rests for the computation of compound interest can certainly be made monthly, as well as quarterly, semiannually, or annually. But in the absence of express stipulation for the accumulation of compound interest, no interest can be collected upon interest until the debt is judicially claimed, and then the rate at which interest upon accrued interest must be computed is fixed at 6 per cent per annum.

In the present case, however, the language which we have quoted above does not justify the charging of interest upon interest, so far as interest on the capital is concerned. The provision quoted merely requires the debtor to pay interest monthly at the end of each month, such interest to be computed upon the capital of the loan not already paid. Clearly this provision does not justify the charging of compound interest upon the interest accruing upon the capital monthly. It is true that in subsections (a), (b) and (c) of article IV of the mortgage, it is stipulated that the interest can be thus computed upon sums which the creditor would have to pay out (a) to maintain insurance upon the mortgaged property, (b) to pay the land tax upon the same property, and (c) upon disbursements that might be made by the mortgagee to maintain the property in good condition. But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing upon the capital of the debt.

The trial court was of the opinion that interest could be so charged, because of the Exhibit 1 of the Mabalacat Sugar Company, which the court considered as an interpretation by the parties to the contract and a recognition by the debtor of the propriety of compounding the interest earned by the capital. But the exhibit referred to is merely a receipt showing that the sum of P256.28 was, on March 19, 1928, paid by the debtor to the plaintiff as interest upon interest. But where interest is improperly charged, at an unlawful rate, the mere voluntary payment of it to the creditor by the debtor is not binding. Such payment, in the case before us, was usurious, being in excess of 12 per cent which is allowed to be charged, under section 2 of the Usury Law, when a debt is secured by mortgage upon real property. The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon interest can be accumulated in the manner adopter by the creditor in this case. The point here ruled is in exact conformity with the decision of this court in Bachrach Garage and Taxicab Co. vs. Golingco (39 Phil., 192), where this court held that interest cannot be allowed in the absence of stipulation, or in default thereof, except when the debt is judicially claimed; and when the debt is judicially claimed, the interest upon the interest can only be computed at the rate of 6 per cent per annum.

It results that the appellant's second assignment of error is well taken, and the compound interest must be eliminated from the judgment. With respect


to the amount improperly charged, we accept the estimate submitted by the president and manager of the Mabalacat Sugar Company, who says that the amount improperly included in the computation made by the plaintiff's bookkeeper is P879.84, in addition to the amount of P256.28 covered by Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff creditor had the right to charge interest, in the manner adopted by it, upon insurance premiums which it had paid out; and if any discrepancy of importance is discoverable by the plaintiff in the result here reached, it will be at liberty to submit a revised computation in this court, upon motion for reconsideration, wherein interest shall be computed in accordance with this opinion, that is to say, that no accumulation of interest will be permitted at monthly intervals, as regards the capital of the debt, but such unpaid interest shall draw interest at the rate of 6 per cent from the date of the institution of the action.

In the third assignment of error the appellant complains, as excessive, of the attorney's fees allowed by the court in accordance with stipulation in the mortgage. The allowance made on the principal debt was around 4 per cent, and about the same upon the fee allowed to the bank. Under the circumstances we think the debtor has no just cause for complaint upon this score.

The fourth assignment of error complains of the failure of the trial court to permit an amendment to be filed by the debtor to its answer, the application therefore having been made on the day when the cause had been set for trial, with notice that the period was non-extendible. The point was a matter in the discretion of the court, and no abuse of discretion is shown.

From what has been stated, it follows that the appealed judgment must be modified by deducting the sum of P1,136.12 from the principal debt, so that the amount of said indebtedness shall be P162,398.61, with interest at 12 per cent per annum, from May 1, 1929. In other respects the judgment will be affirmed, and it is so ordered, with cost against the appellant.


Manila

FIRST DIVISION

G.R. No. 135046 August 17, 1999


SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners, vs.PILAR DEVELOPMENT CORPORATION, respondent.

PUNO, J.:

This petition for review seeks to reverse and set aside the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 513631 which reversed the Decision of the Regional Trial Court, Makati, Branch 138 in Civil Case No. 17702.2

The following facts are uncontroverted.

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex) a loan in the amount of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves, jointly and severally, to pay the "principal sum of P100,180.00 with interest rate of 12% and service charge of 3%" for a period of 240 months, or twenty years, from date, in monthly installments of P1,378.83.3 Late payments were to be charged a penalty of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note, petitioners authorized Apex to "increase the rate of interest and/or service charges" without notice to them in the event that a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest and service charges on the loan.4 Payment of the promissory note was secured by a second mortgage on the house and lot purchased by petitioners.5

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent (21%) per annum with no provision for service charge but with penalty charge of 1 1/2% for late payments. Payment was to be made for a period of 196 months or 16.33 years in monthly installments of P2,526.68, inclusive of principal and interest. Petitioner spouses also authorized Apex to "increase/decrease the rate of interest and/or service charges" on the note in the event any law or Central Bank regulation shall be passed increasing or decreasing the same.6

In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984, Apex assigned the second promissory note to respondent Pilar Development Corporation without notice to petitioners.1âwphi1.nêt

On August 31, 1987, respondent corporation, as successor-in-interest of Apex, instituted against petitioner spouses Civil Case No. 17702 before the


Regional Trial Court, Makati, Branch 138. Respondent corporation sought to collect from petitioners the amount of P140,515.11 representing the unpaid balance of the principal debt from November 23, 1983, including interest at the rate of twenty-one per cent (21%) under the second promissory note, and 25% and 36% per annum in accordance with Central Bank Circular No. 905, series of 1982. Respondent also sought payment of ten per cent (10%) of the amount due as attorney's fees.7

In their answer, petitioner spouses mainly contended that the terms of the second promissory note increasing the interest rate to 21% and the escalation clauses authorizing Apex to increase interest rates pursuant to any law or Central Bank regulation are null and void in the absence of a de-escalation clause in the same note.8

After pre-trial, both parties submitted the case for decision on the sole issue of the interest rate.

The trial court rendered judgment on September 22, 1995. It ordered petitioner spouses to pay respondent corporation the sum of P140,515.11, with interest at the rate of 12% per annum, plus service charge, viz:

WHEREFORE, judgment is hereby rendered as follows:

(a) Plaintiff is entitled to collect from the defendants the amount of P140,515.11 with interest at the rate of 12% per annum from November 23, 1983 until the amount is fully paid plus the stipulated service charge;

(b) Ordering defendants as joint and several obligors to pay plaintiff the amount stated in paragraph (a) hereof;

(c) Counterclaim is hereby dismissed.

No pronouncement as to costs.

SO ORDERED.9

Both parties appealed to the Court of Appeals. In a Decision dated May 14, 1998, the appellate court reversed the trial court by applying the interest rate of 21% per annum, and adding attorney's fees of 10%. Thus:

IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby REVERSED and SET ASIDE and a new one entered ordering the defendants to pay the plaintiffs the amount of P142,326.43, as principal with interest at the rate of 21% from November 23, 1983 until


the amount is fully paid; the sum equivalent to 10% of the amount due as attorney's fees and the costs of this suit.

SO ORDERED.10

Petitioner spouses moved for reconsideration. In a Resolution dated August 18, 1998, the Court of Appeals denied the motion but reduced the principal amount of the obligation from P142,326.42 to P140,515.11.11

Hence this recourse.

Petitioner spouses claim that the Court of Appeals erred:

I

IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE PARTIES ARE INDEPENDENT OF EACH OTHER.

CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES CONSTITUTE A SINGLE-LOAN TRANSACTION.

II

IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER ANNUM AS STIPULATED IN THE SECOND PROMISSORY NOTE.

CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST RATE FROM 12% PER ANNUM (1ST PROMISSORY NOTE) TO 21% PER ANNUM (2ND PROMISSORY NOTE) IS UNLAWFUL.

III

IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS ATTORNEY'S FEES.

CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY'S FEES IS NOT PROPER UNDER THE CIRCUMSTANCES.

IV

IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS AND UNSUSTAINABLE ."

CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS REQUIRED WHEN CREDIT IS ASSIGNED.


V

IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE ENTITLED TO MORAL AND EXEMPLARY DAMAGES.12

The controversy in this petition involves the rate of interest respondent creditor is entitled to collect on petitioners' loan: whether it be 12% under the promissory note of December 22, 1978, or 21% under the promissory note of September 20, 1982.

Petitioners claim that the interest rate of 12% per annum should be adjudged inasmuch as the two promissory notes constitute one transaction. Allegedly, the first note defined the terms and conditions of the loan while the second note is merely an extension of and derives its existence from the former. Hence, the second note is governed by the stipulations in the first note.13

The two promissory notes are identically entitled "Promissory Note with Authority to Assign Credit." The notes were prepared by Apex in standard form and consist of two (2) pages each. Except for one or two stipulations, they contain the same provisions and the same blanks for the amount of the loan and other pertinent data subject of each note. However, on the upper right portion of the second note, there appears a typewritten entry which reads:

This cancels PN # A-387-78 dated December 22, 1978.14

Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated December 22, 1978, the word "Cancelled" is boldly stamped twice with the date "September 16, 1982" and a signature written in a space inside the letters of the word.15

The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike out, to revoke, rescind or abandon, to terminate.16 In fine, the first note was revoked and terminated. Simply put, it was novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first is a novation.17 Novation is made either by changing the object or principal conditions, referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, which is known as subjective or personal novation.18 In both objective and subjective novation, a dual purpose is achieved — an obligation is extinguished and a new one is created in lieu thereof.19 Novation may either be express, when the new obligation declares in unequivocal terms that the old obligation is extinguished; or implied, when the new obligation is on every point incompatible with the old one.20 Express novation takes place when the contracting parties expressly disclose that their object


in making the new contract is to extinguish the old contract, otherwise the old contract remains in force and the new contract is merely added to it, and each gives rise to an obligation still in force.21

Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one.22 In the instant case, all four requisites have been complied with. The first promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid principal and interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are substantial and constitute the principal conditions of the obligation.23 Both parties voluntarily accepted the terms of the second note; and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to novate.24 The first promissory note was cancelled and replaced by the second note. This second note became the new contract governing the parties' obligations.

In their second assigned error, petitioners contend that in the second promissory note, the escalation of the interest rate from 12% to 21% per annum is unlawful and cannot be imposed for failure of the escalation provisions to include valid de-escalation clauses. In the absence of de-escalation clauses, the Court of Appeals allegedly erred in applying Central Bank Circulars Nos. 705, 712 and 905 issued by the Monetary Board of the Central Bank of the Philippines.25

At the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed by the Usury Law for loans secured by a mortgage upon registered real estate.26 On December 1, 1979, the Monetary Board of the Central Bank of the Philippines27 issued Circular No. 705 which fixed the effective rate of interest on loan transactions with maturities of more than 730 days to twenty-one per cent (21%) per annum for both secured and unsecured loans.28 On January 28, 1980, The Monetary Board issued Circular No. 712 reiterating the effective interest rate of 21% on said loan transactions.29 On January 1, 1983, CB Circular No. 905, series of 1982, took effect. This Circular declared that the rate of interest on any loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.30 In short, Circular No. 905 removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity.31


When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos. 705 and 712 were already in effect. These Circulars fixed the effective interest rate for secured loan transactions with maturities of more than 730 days, i.e., two (2) years, at 21% per annum. The interest rate of 21% provided in the second promissory note was therefore authorized under these Circulars.

The question of whether the escalation clauses in the second promissory note are valid is irrelevant. Respondent corporation has signified that it is collecting petitioners' debt only at the fixed interest rate of 21% per annum, as expressly agreed upon in the second promissory note, not at the escalated rates authorized under the escalation clauses.32 The Court of Appeals therefore did not err in applying the interest rate of 21% to petitioner's loan under the second promissory note.

Neither did the Court of Appeals err in imposing attorney's fees of ten per cent (10%) on the amount, due. The award of attorney's fees is expressly stipulated in the fourth paragraph of the promissory note itself, viz:

In case of non-payment of the amount of this note or any portion of it on demand when given due, or any other amount/s due on account of this note, the entire obligation shall become due and demandable, and if for the enforcement of the payment thereof, APEX MORTGAGE AND LOANS CORP. is constrained to entrust the case to its attorneys, I/We, jointly and severally, bind myself/ourselves to pay TEN (10%) per cent on the amount due on the note as attorney's fees, such amount in no case to be less than FIVE HUNDRED (P500.00) PESOS in addition to the legal fees and other incidental expenses.33

Petitioners' lack of bad faith in resisting imposition of the increased interest rate cannot serve to mitigate their liability for liquidated damages. Petitioner Florante Bautista is a lawyer and he should have been aware of the effects of the stipulations in the second promissory note and the pertinent CB Circulars on his obligation. At the same time, there is no showing that the amount of liquidated damages is iniquitous and unconscionable for this court to equitably reduce the same.34

Finally, the fact that petitioners were not notified of the assignment of their credit by Apex to herein respondent corporation is not material. In the eighth paragraph of the second promissory note, petitioners expressly waived notice to any assignment of credit, viz:

It is understood that APEX MORTGAGE AND LOANS CORPORATION has the right to assign this promissory note, or make use of it as collateral in favor of any third person whomsoever and this will constitute as an authority therefore waiver of notice of such action taken [sic].35


The purpose of the notice is only to inform the debtor that from the date of the assignment, payment should be made to the assignee and not to the original creditor.36

IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51363 are affirmed.1âwphi1.nêt

SO ORDERED.

Digest

Fact:In 1978, Petitioner spouses Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage and Loan Corp a loan in the amout of 100,180.00php. They executed a promissory note obligating themselves, jointly and severally to pay the principal sum with interest rate of 12% for 240 months or 2years. In the same promissory note, petitioners authorized Apex to "increase the rate of interest and/or service charge" without notice to them in the event a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest.

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in favor of Apex. This time there was an increased interest rate of 21% per annum with penalty of 11/2 for late payment payable for 196 months. Petitioners retained the authorization to increase/decrease the rate of interest.

In November 1983, petitioners again failed to pay installments. On June 06, 1984, Apex assigned the second promissory note to respondent Pilar Development Corporation, a successor-in-interest. The latter then instituted against petitioner spouses before the RTC collection for the unpaid balance as of November 23, 1983 including the internal rate of 21%. RTC rendered judgment ordering petitioners to pay balance with interest of 12%. CA reversed the trial court by applying 21% per annum amounting to 142,346.42php. However, it was reversed to 140,515.11, initial decision of RTC, after the denial for motion to reconsider.

Issue:Whether it be 12% under the promissory note of December 22, 1978 or 21% under the promissory note of September 20, 1982.

Ruling:The court ruled that at the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed by the Usury Law for loans secured by a mortgage upon registered estate.


On December 1, 1979, the Monetary Board of the Central Bank of the Philippines issued Circular No 705 which fixed the effective rate of interest on loan transactions with maturities of more than 730 days to 21% per annum for both secured and unsecured loans. On January 28, 1980, the Monetary Board issued Circular No 712 reiterating the effective rate of 21% on said transactions. On January 1, 1983, CB Circular No 905 series of 1982, took effect. The circular declared that the rate of interest on any loan or forbearance of any money, goods or credit, regardless of maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." In short, Circular No 905 removed the ceiling on interest rate for secured and unsecured loans, regardless of majority.

When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos 705 and 712 were already in effect. These circulars fixed the effective interest rate for secured loans transactions with maturities of more than 730 days, i.e., 2years at 21% per annum. The interest rate of 21% provided in the second promissory note was therefore authorized under these Circulars.2nd digest

In 1978, Bautista, a lawyer, acquired a loan (abt. P100k) from Apex Corp. The terms ofthe loan are: that interest rate is at 12% per yr; that interest rate may be increased/decreased by Apex if authorized by law; that there is a 10% penalty of the amount due in case of litigation; that no notice is needed in case Apex will assign the credit to another. These were all put into a promissory note.

In 1982, Bautista is already behind in payment so he executed another promissory note in favor of Apex. The balance then was at P140k. Apex increased the interest rate to 21% pursuant to CB Circular 705 which allowed the maximum 21%. There is de-escalation clause this time around. The 2nd PN expressly cancelled the 1st PN. In 1983, CB Circular 905 was issued. In same year, Bautista failed to make payments.

In 1984, Apex assigned the credit to Pilar Dev’t w/o notice to Bautista. Pilar sued Bautista. Bautista now claims that the 2nd PN is one and the same as the 1st; that interest rate should be at 12%; that CB Circ. 905 does not allow escalation of rate in the absence of a de-escalation clause.

ISSUE: Whether or not to follow the 1st promissory note.

HELD: No. The 2nd promissory note novated the 1st PN. This was expressly agreed upon by both parties. Hence, the 2nd PN is distinct and separate from


the 1st. Therefore, the imposition of the 21% rate is valid as it was agreed upon. This regardless of the absence of a de-escalation clause. The operative law was CB Circ. 705 which was in effect when 2nd PN was signed in ’82. Also, the assignment of credit is valid even if it was w/o notice to Bautista because the same was agreed upon.


Manila

FIRST DIVISION

G.R. No. L-30771 May 28, 1984

LIAM LAW, plaintiff-appellee, vs.OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants.

Felizardo S.M. de Guzman for plaintiff-appellee.

Mariano M. de Joya for defendants-appellants.

MELENCIO-HERRERA, J.:

This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved was one of law.

It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30, 1960.

On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows:


That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement.

Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest.

Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment.

On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed theirs on February 2, 196l. 2

On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that defendants have appealed.

We have decided to affirm.

Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of interest income, attorney's fees and incidentals.

The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under oath". 3

Section 9 of the Usury Law (Act 2655) provided:


SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter.

The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury.

Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect.

Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural laws are retrospective in that sense and to that extent. 5

... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December 1953, and may be retroactively applied to the case at bar because it is procedural in nature. ... 6

WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.

SO ORDERED.



Manila

SECOND DIVISION

G.R. No. 116285 October 19, 2001

ANTONIO TAN, petitioner, vs.COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the Court of Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.

The facts are as follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One


Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs.


Defendant’s counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4

The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from denying his liability or loan obligation to the private respondent.

The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorney’s fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of which reads:

WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.5

In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:

We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged partial or irregular performance, there being none. Appellant’s offer or tender of payment cannot be deemed as a partial or irregular performance of the contract, not a single centavo appears to have been paid by the defendant.

However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing the amount of awarded attorney’s fees to five percent (5%), by ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the award of 25% as


attorney’s fees and P500,000.00 as exemplary damages is out of proportion to the actual damage caused by the non-performance of the contract and is excessive, unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of the said decision.

Hence, this petition anchored on the following assigned errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES AND IN REDUCING PENALTIES.

Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit "A". The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees.

The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit "A". The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.


We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that:

For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable. (Underscoring supplied)

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty


charge which is separate and distinct from the monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. QuotingEquitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code which provides that:

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

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code, which provides that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth paragraph of the said


promissory note provides that: "Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law."10 Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,11 in the absence of express stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.

The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of interest on the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the said case lasted for twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.

The private respondent’s Statement of Account (marked Exhibits "C" to "C-2")13 shows the following breakdown of the petitioner’s indebtedness as of August 28, 1986:

Principal

P2,838,454.68

Interest P 576,167.89

Surcharge

P4,581,692.10

P7,996,314.67


The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were made during the period from May 13, 1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to the said partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable." Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.15

There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of its money collectible from the petitioner.


The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the interest during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In this connection, the petitioner referred to the private respondent’s letter16 dated September 28, 1988 addressed to petitioner which partially reads:

Dear Mr. Tan:

xxx xxx xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist you in applying for relief of liability through the Commission on Audit and Office of the President xxx.

While your application is being processed and awaiting approval, the center will be accepting your proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.

xxx xxx xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation to pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event which consists of whether the petitioner’s request for condonation of interest and surcharge would be recommended by the Commission on Audit and the Office of the President to the House of Representatives for approval as required under Section 36 of Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private respondent’s reneging on its promise, his liability to pay the interest and surcharge on the loan has not arisen. This is the petitioner’s contention.

It is our view, however, that the running of the interest and surcharge was not suspended by the private respondent’s promise to assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant to Rule 132, Section 34 of the Rules of Court which provides that: "The court shall consider no evidence which has not been formally offered xxx." Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that the payment of


the interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the Commission on Audit and the Office of the President of his application for condonation of interest and surcharge. It was incumbent upon the petitioner to bring his administrative appeal for condonation of interest and penalty charges to the attention of the said government offices.

On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount due.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.

SO ORDERED.

Digest

FACTS:1. Petition for review.2. TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.1. Executed a promissory note in amount of P3,411,421.32; payable in 5

installments. 2. TAN failed to pay any installment on the said restructured loa.3. In a letter, TAN requested and proposed to respondent CCP a mode of paying

the restructured loan i. 20% of the principal amount of the loan upon the respondent

giving its conformity to his proposal ii. Balance on the principal obligation payable 36 monthly

installments until fully paid. 4. TAN requested for a moratorium on his loan obligation until the following

year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation.

i. No favorable response was made to said letters. ii. CCP demanded full payment, within ten (10) days from

receipt of said letter P6,088,735.03.3. CCP FILED COMPLAINT collection of a sum of money1. TAN interposed the defense that he accommodated a friend who asked for

help to obtain a loan from CCP.


i. Claimed that cannot find the friend.2. TAN filed a Manifestation wherein he proposed to settle his indebtedness to

CCP by down payment of P140,000.00 and to issue1 2 checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid.

i. CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

4. TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing defendant’s outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs.

1. REASONS: i. Reason of loan for accommodation of friend was not credible. ii. Assuming, arguendo, that the TAN did not personally benefit

from loan, he should have filed a 3rd-party complaint against Wilson Lucmen iii. 3 times the petitioner offered to settle his loan obligation with

CCP. iv. TAN may not avoid his liability to pay his obligation under the

promissory note which he must comply with in good faith. v. TAN is estopped from denying his liability or loan obligation to

the private respondent.5. TAN APPEALED TO CA, asked for the reduction of the penalties and charges

on his loan obligation.1. Judgment appealed from is hereby AFFIRMED.1. No alleged partial or irregular performance.2. However, the appellate court modified the decision of the trial court by

deleting exemplary damages because not proportionate to actual damage caused by the non-performance of the contract

ISSUES:WON there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees.TAN imputes error on CA in not fully eliminating attorney fees and in not reducing the penalties considering that he made partial payments on the loan. And if penalty is to be awarded, TAN asking for non-imposition of interest on the surcharges because compounding of these are not included in promissory note.No basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.


WON interest may accrue on the penalty or compensatory interest without violating ART 1959: “Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.”TAN- No legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. Penalties should not earn interest.

WON TAN can file reduction of penalty due to made partial payments.Petitioner contends that reduction of the penalty is justifiable under ART 1229: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”

HELDCA DECISION AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.

1. WON there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees. –YES. WITH LEGAL BASES.

1. ART 1226: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

i. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

2. CASE AT BAR: promissory note expressed the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan.

3. PENALTY IN MANY FORMS: i. If the parties stipulate penalty apart monetary interest, two

are different and distinct from each other and may be demanded separately. ii. If stipulation about payment of an additional interest rate

partakes of the nature of a penalty clause which is sanctioned by law:1. ART 2209: If the obligation consists in the payment of a sum of money, and

the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,


and in the absence of stipulation, the legal interest, which is six per cent per annum.

4. CASE AT BAR: Penalty charge of 2% per month began to accrue from the time of default by the petitioner.

i. No doubt petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge.

1. PENALTY CHARGE = penalty or compensatory interest.

2. WON interest may accrue on the penalty or compensatory interest without violating ART 1959.

1. Penalty clauses can be in the form of penalty or compensatory interest. i. Thus, the compounding of the penalty or compensatory

interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:

1. There is an express stipulation in the promissory note (Exhibit “A”) permitting the compounding of interest.

a. 5th paragraph of the said promissory note provides that: “Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.”.

2. Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, in the absence of express stipulation on the specific rate of interest, as in the case at bar.

2. ART 2212: “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.”

3. CASE AT BAR: interest began to run on the penalty interest upon the filing of the complaint in court by CCP.

i. Hence, the courts did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.

3. WON TAN can file reduction of penalty due to made partial payments. –YES. BUT NOT 10% REDUCTION AS SUGGESTED BY PETITIONER.

1. REDUCED TO 2% REDUCTION: i. PARTIAL PAYMENTS showed his good faith despite difficulty in

complying with his loan obligation due to his financial problems. 1. However, we are not unmindful of the respondent’s long overdue

deprivation of the use of its money collectible.4. The petitioner also imputes error on the part of the appellate court for not

declaring the suspension of the running of the interest during period when the CCP allegedly failed to assist the petitioner in applying for relief from liability


1. Alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation to pay such interest and surcharge has become conditional

i. Dependent on a future and uncertain event which consists of whether the petitioner’s request for condonation of interest and surcharge would be recommended by the Commission on Audit.

1. Since the condition has not happened due to the private respondent’s reneging on its promise, his liability to pay the interest and surcharge on the loan has not arisen.

2. COURT ANSWER: i. Running of the interest and surcharge was not suspended. ii. CCP correctly asserted that it was the primary responsibility

of petitioner to inform the Commission on Audit of his application for condonation of interest and surcharge.



Manila

FIRST DIVISION

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, petitioner, vs.REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA,respondents.

HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in this case: Should the rate of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans, in the absence of evidence justifying the imposition of a higher rate?

This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by the court a quo from 23% per annum as agreed upon the parties to 12% per annum.


The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos (P100,000.00) payable in six monthly installments with a stipulated interest of 23% per annum up to the fifth installment. 1

On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos (P100,000.00) in six (6) monthly installments plus 23% interest per annum. 2

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly installments plus interest at the rate of 23% per annum. 3

On all the abovementioned promissory notes, private respondent Leila Ventura had signed as co-maker. 4

Upon maturity which fell on the different dates below, the principal balance remaining on the notes stood at:

1) PN No. TL/74/748/83 — P16,665.00 as of September 1983.2) PN No. TL/74/1296/83 — P83,333.00 as of August 1983.3) PN No. TL/74/1991/83 — P65,000.00 as of August 1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered a judgment in favor of petitioner SBTC, the dispositive portion which reads:

WHEREFORE, premises above-considered, and plaintiff's claim having been duly proven, judgment is hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to:

1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September 1983, until fully paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully paid;


3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of attorney's fees; and to

5. Pay the costs of this suit.

SO ORDERED. 6

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:

(1) the interest rate agreed upon by the parties during the signing of the promissory notes was 23%per annum;

(2) the interests awarded should be compounded quarterly from due date as provided in the three (3) promissory notes;

(3) defendants Leila Ventura should likewise be held liable to pay the balance on the promissory notes since she has signed as co-maker and as such, is liable jointly and severally with defendant Eusebio without a need for demand upon her. 7

Consequently, an Order was issued by the court a quo denying the motion to grant the rates of interest beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with co-defendants Eusebio.

Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3) promissory notes is 23% per annum. 8 The applicable provision of law is the Central Bank Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which state: 9

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person,


whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684 empowering them to prescribe the maximum rates of interest for loans and certain forbearances, to wit:

Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That changes in such rate or rates may be effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribed different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. 10

The court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to the claim of respondent court,


this circular did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left with no alternative but to apply the same according to its clear language. As we have held in the case of Quijano v.Development Bank of the Philippines: 12

. . . We cannot see any room for interpretation or construction in the clear and unambiguous language of the above-quoted provision of law. This Court had steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms, interpretation being called for only when such literal application is impossible. No process of interpretation or construction need be resorted to where a provision of law peremptorily calls for application. Where a requirement or condition is made in explicit and unambiguous terms, no discretion is left to the judiciary. It must see to it that is mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum. 13 Hence, only in the absence of a stipulation can the court impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between them. Respondent Eusebio, likewise, did not question any of the stipulations therein. In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question the decision and instead expressed his desire to negotiate with the petitioner bank for "terms within which to settle his obligation." 14

IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be 23% per annum.

SO ORDERED.


Digets

In 1983, Eusebio acquired 3 separate loans from Security Bank amounting to P265k. The agreed interest rate was 23% per annum. The promissory note was freely and voluntarily signed by both parties. Leia Ventura was the co-maker. Eusebio defaulted from paying. Security Bank sued for collection. Judge Gorospe of the Makati RTC ordered Eusebio to pay but he lowered the interest rate to 12% per annum.

ISSUE: Whether or not the courts have liberality to reduce stipulated interest rates to the legal rate of 12% per annum.

HELD: No. From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3) promissory notes is 23% per annum. The applicable provision of law is the Central Bank Circular No. 905 which took effect on December 22, 1982:

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

Only in the absence of stipulations will the 12% rate be applied or if the stipulated rate is grossly excessive.

Further, Eusebio never questioned the rate. He merely expressed to negotiate theterms and conditions. The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between them.

2nd digest

FACTS:

In 1983, Eusebio acquired 3 separate loans from Security Bank amounting to P265k. The agreed interest rate was 23% per annum. The promissory note was freely and voluntarily signed by both parties. Leia Ventura was the co-maker. Eusebio defaulted from paying. Security Bank sued for collection.

DECISION OF LOWER COURTS: * RTC: Judge Gorospe of the Makati RTC ordered Eusebio to pay but he lowered the interest rate to 12% per annum. * directly to SC in petition for certiorari.


ISSUES & RULING: 1. Should the rate of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? or whether or not the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law?

Yes, the rate per contract prevails.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3) promissory notes is 23% per annum. The applicable provision of law is the Central Bank Circular No. 905 which took effect on December 22, 1982:


Only in the absence of stipulations will the 12% rate be applied or if the stipulated rate is grossly excessive.

Further, Eusebio never questioned the rate. He merely expressed to negotiate the terms and conditions. The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between them.

2. Do the Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans, in the absence of evidence justifying the imposition of a higher rate?

NO. The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due should be that stipulated in writing,


and in the absence thereof, the rate shall be 12% per annum. Hence, only in the absence of a stipulation can the court impose the 12% rate of interest.

APPLICABLE PROVISION OF LAW: Central Bank Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which state:


Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%) per annum.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity.


Manila

THIRD DIVISION

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs.COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.

PARDO, J.:


The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, 1 and its resolution denying reconsideration, 2 the dispositive portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23, 1986, until the entire amount is fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants.

SO ORDERED. 3

The Court required the respondents to comment on the petition, 4 which was filed on April 3, 1998, 5 and the petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.


On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275.000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until fully paid according to the amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable,


exclusive of costs and judicial or extra judicial expenses. (Emphasis supplied).

I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice although the original interest have already been collected wholly or partially unless the contrary is required by law.

It is also a special condition of this contract that the parties herein agree that the amount of peso-obligation under this agreement is based on the present value of the peso, and if there be any change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or extension of payments, reserving rights against each and all indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.


In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum." 7

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19, 1985 until the whole amount is fully paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants. 8


In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest that may be charged on the loan". 9 The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid' was allowed bylaw". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants.

SO ORDERED. 11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that


plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that the Usury Law is now "legally inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." 17 In the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." 19

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. 20 The stipulation is void. 21 The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.


Digest

FACTS:

Four loans were involved in this case. The first loan was secured by the spouses Medel from Gonzales in the amount of P50,000 wherein P3,000 was withheld by the latter as advance interest. This was secured by a promissory note. The second loan obtained was for P90,000. The spouses only received P84,000. The third loan was for P300,000 and this was secured by a real estate mortgage. The spouses failed to pay for the aforementioned three loans. This was consolidated into one loan in the amount of P500,000. An additional P60,000 was loaned to make the payable P500,000. This was covered with a promissory note containing an acceleration clause. Again the spouses failed to pay. The appellate court modified the interest to be paid by saying that that the interest should be 5.5% per month.

HELD:

The interest was exorbitant, iniquitous, and unconscionable and hence, it contrary to morals, if not the law.

2nd digest

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance interest for 1 month at 6% per month.Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2 months, at 6% interest per month. They executed a promissory note to evidence the loan and received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00, maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.


Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on the loans was unconscionable and “revolting to the conscience” and ordered the payment of the amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and the borrower could agree on any interest that may be charged on the loan, and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2& service charge per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is usurious.Held: No.A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous, unconscionable and exorbitant, but it cannot be considered “usurious” because Central Bank Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now “legally inexistent.”

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but simply suspended the latter’s effectivity (Security Bank and Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.


Law: Article 2227, Civil CodeThe courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a haemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]).


Manila

FIRST DIVISION

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant, vs.PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased to the latter a portion of his property for a period of twenty (20) years from said date, subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within the 1st twenty days of each year;


provided, a financial aid in the sum of P15,000 to clear the leased premises of existing improvements thereon is paid in this manner; P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear of improvements thereon within 30 days from the date of execution of this agreement. The portion on the side of the leased premises with an area of 365 sqrm. more or less, will be occupied by LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per annum or a total net amount of P130,288.47 before registration of lease. Leased premises shall be delivered within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as constituting the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also prayed for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the factual allegations of the complaint but argued that the amount deducted was not usurious interest but a given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was rendered for the defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the computation of the interest collected out of the rentals paid for the first eight years; that such interest was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the defendant-appellant's computation of the total amount to be deducted for the eight years advance rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first year rental because at the time the


amount of P281, 199.20 was paid it was already due under the lease contract hence no interest should be collected from the rental for the first year, the amount of P29,536.42 only as the total interest should have been deducted by defendant from the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because there was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it was for this advance payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties may establish such stipulations, clauses, terms and condition as they may want to include; and as long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they were being made in advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as money; it must be repayable absolutely and in all events; and something must be exacted for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the parties that the money lent shall or may be returned; that for such loan a greater rate or interest that is


allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six (6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4) years, those due on the fourth year by three (3) years, those due on the third year by two (2) years, and those due on the second year by one (1) year, so much so that the total number of years by which the annual rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual rental discount by 28 years. It computed the total discount with the principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why the total discount amount to only P 8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous. Also after making its own computations and after examining closely defendant's Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the first year so much so that the computation conforms with the provision of the Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the 1st 20 days of each year. '


We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not have been the intention of the parties to the transaction. Had it been so, then it should have been clearly stipulated in the contract. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance payment there would be a deduction of 12% and this amount would be the same for each of the eight years. There is no showing that the intricate computation applied by the trial court was explained to him by the defendant-appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent modification that the interest should be limited to only seven years because the first year rental was not being paid in advance. The agreement was for auniform deduction for the advance rentals for each of the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a whole rather on the single stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee.

SO ORDERED.


Digest

Facts:

On December 5, 1969, Herrera and ESSO Standard, (later substituted by Petrophil Corp.,) entered into a lease agreement, whereby the former leased to the latter a portion of his property for a period of 20yrs.subject to the condition that monthly rentals should be paid and there should be an advance payment of rentals for the first eight years of the contract, to which ESSO paid on December 31, 1969. However, ESSO deducted the amount of 101, 010.73 as interest or discount for the eight years advance rental. On August 20, 1970, ESSO informed Herrera that there had been a mistake in the computation of the interest and paid an additional sum of 2,182.70; thus, it was reduced to 98, 828.03. As such, Herrera sued ESSO for the sum of 98, 828.03, with interest, claiming that this had been illegally deducted to him in violation of the Usury Law. ESSO argued that amount deducted was not usurious interest but rather a discount given to it for paying the rentals in advance. Judgment on the pleadings was rendered in favor of ESSO. Thus, the matter was elevated to the SC for only question of law was involved.

ISSUE:

W/N the contract between the parties is one of loan or lease.

RULING:

Contract between the parties is one of lease and not of loan. It is clearly denominated a "LEASEAGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed as are payment of a loan because there was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it was for this advance payment that it was getting a rebate or discount.

---

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor did it allow him to use its money already in his possession. There was neither loan nor forbearance


but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they were being made in advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law

The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury.

To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as money; it must be repayable absolutely and in all events; and something must be exacted for the use of the money in excess of and in addition to interest allowed by law."

It has been held that the elements of usury are

(1) a loan, express or implied; (2) an understanding between the parties that the money lent shall or may be returned; that for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned.

Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be declared.



Manila

EN BANC

G.R. No. L-18208 February 14, 1922THE UNITED STATES, plaintiff-appellee, vs.VICENTE DIAZ CONDE and APOLINARIA R. DE CONDE, defendants-appellants.

JOHNSON, J.:

It appears from the record that on the 6th day of May, 1921, a complaint was presented in the Court of First Instance of the city of Manila, charging the defendants with a violation of the Usury Law (Act No. 2655). Upon said complaint they were each arrested, arraigned, and pleaded not guilty. The cause was finally brought on for trial on the 1st day of September, 1921. At the close of the trial, and after a consideration of the evidence adduced, the Honorable M. V. del Rosario, judge, found that the defendants were guilty of


the crime charged in the complaint and sentenced each of them to pay a fine of P120 and, in case of insolvency, to suffer subsidiary imprisonment in accordance with the provisions of the law. From that sentence each of the defendants appealed to this court.

The appellants now contend: (a) That the contract upon which the alleged usurious interest was collected was executed before Act No. 2655 was adopted; (b) that at the time said contract was made (December 30, 1915), there was no usury law in force in the Philippine Islands; (c) that said Act No. 2655 did not become effective until the 1st day of May, 1916, or four months and a half after the contract in question was executed; (d) that said law could have no retroactive effect or operation, and (e) that said law impairs the obligation of a contract, and that for all of said reasons the judgment imposed by the lower court should be revoked; that the complaint should be dismissed, and that they should each be discharged from the custody of the law.

The essential facts constituting the basis of the criminal action are not in dispute, and may be stated as follows: (1) That on the 30th day of December, 1915, the alleged offended persons Bartolome Oliveros and Engracia Lianco executed and delivered to the defendants a contract (Exhibit B) evidencing the fact that the former had borrowed from the latter the sum of P300, and (2) that, by virtue of the terms of said contract, the said Bartolome Oliveros and Engracia Lianco obligated themselves to pay to the defendants interest at the rate of five per cent (5%) per month, payable within the first ten days of each and every month, the first payment to be made on the 10th day of January, 1916. There were other terms in the contract which, however, are not important for the decision in the present case.

The lower court, in the course of its opinion, stated that at the time of the execution and delivery of said contract (Exhibit B), there was no law in force in the Philippine Islands punishing usury; but, inasmuch as the defendants had collected a usurious rate of interest after the adoption of the Usury Law in the Philippine Islands (Act No. 2655), they were guilty of a violation of that law and should be punished in accordance with its provisions.

The law, we think, is well established that when a contract contains an obligation to pay interest upon the principal, the interest thereby becomes part of the principal and is included within the promise to pay. In other words, the obligation to pay interest on money due under a contract, be it express or implied, is a part of the obligation of the contract. Laws adopted after the execution of a contract, changing or altering the rate of interest, cannot be made to apply to such contract without violating the provisions of the constitution which prohibit the adoption of a law "impairing the obligation of contract." (8 Cyc., 996; 12 Corpus Juris, 1058-1059.)


The obligation of the contract is the law which binds the parties to perform their agreement if it is not contrary to the law of the land, morals or public order. That law must govern and control the contract in every aspect in which it is intended to bear upon it, whether it affect its validity, construction, or discharge. Any law which enlarges, abridges, or in any manner changes the intention of the parties, necessarily impairs the contract itself. If a law impairs the obligation of a contract, it is prohibited by the Jones Law, and is null and void. The laws in force in the Philippine Islands prior to any legislation by the American sovereignty, prohibited the Legislature from giving to any penal law a retroactive effect unless such law was favorable to the person accused. (Articles 21 and 22, Penal Code.)

A law imposing a new penalty, or a new liability or disability, or giving a new right of action, must not be construed as having a retroactive effect. It is an elementary rule of contract that the laws in force at the time the contract was made must govern its interpretation and application. Laws must be construed prospectively and not retrospectively. If a contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation. If that were permitted then the obligations of a contract might be impaired, which is prohibited by the organic law of the Philippine Islands. (U.S. vs. Constantino Tan Quingco Chua, 39 Phil., 552; Aguilar vs. Rubiato and Gonzales Vila, 40 Phil., 570.)

Ex post facto laws, unless they are favorable to the defendant, are prohibited in this jurisdiction. Every law that makes an action, done before the passage of the law, and which was innocent when done, criminal, and punishes such action, is an ex post facto law. In the present case Act No. 2655 made an act which had been done before the law was adopted, a criminal act, and to make said Act applicable to the act complained of would be to give it an ex post facto operation. The Legislature is prohibited from adopting a law which will make an act done before its adoption a crime. A law may be given a retroactive effect in civil action, providing it is curative in character, but ex post facto laws are absolutely prohibited unless its retroactive effect is favorable to the defendant.

For the reason, therefore, that the acts complained of in the present case were legal at the time of their occurrence, they cannot be made criminal by any subsequent or ex post facto legislation. What the courts may say, considering the provisions of article 1255 of the Civil Code, when a civil action is brought upon said contract, cannot now be determined. A contract may be annulled by the courts when it is shown that it is against morals or public order.

For all of the foregoing reasons, we are of the opinion, and so decide, that the acts complained of by the defendants did not constitute a crime at the time they were committed, and therefore the sentence of the lower court


should be, and is hereby, revoked; and it is hereby ordered and decreed that the complaint be dismissed, and that the defendants be discharged from the custody of the law, with costs de oficio. So ordered.

Digest

Facts:On December 30, 1915, complainants Bartolome Oliveros and Engracia Lianco entered into a contract with the defendants concerning a debt of P300. Oliveros and co. were obligated to pay five percent interest per month within the first ten days of every month. On May 6, 1921, Vicente Diaz Conde and Apolinaria R. De Conde were charged with violating the Usury Law in the Court of First Instance of the city of Manila. They were found guilty, sentenced to pay a fine of P120 and in case of insolvency, to suffer subsidiary imprisonment in accordance with the provisions of law. They took it to SC to plead.Issues:WoN the Usury Law has a retroactive effect in this caseWoN the law impaired the contract

Held and Ratio:No. The Usury Law, a penal law, cannot become retroactive unless it is favorable to the person accused. (Art. 21 and 22 Penal Code)Yes. If a contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation.

Decision: Judgment reversed, defendants acquitted.


Manila

EN BANC

G.R. No. L-1927 May 31, 1949

CRISTOBAL ROÑO, petitioner, vs.JOSE L. GOMEZ, ET AL., respondents.


Alfonso Farcon for petitioner.Capistrano & Azores for respondents.

BENGZON, J.:

This petition to review a decision of the Court of Appeals was admitted mainly because it involves one phase of the vital contemporary question: the repayment of loans given in Japanese fiat currency during the last war of the Pacific.

On October 5, 1944, Cristobal Roño 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. He signed a promissory note of the following tenor:

For value received, I promise to pay one year after date the sum of four thousand pesos (4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment It is agreed that this will not earn any interest and the payment prevailing by the end of the stipulated period of one year.

In consideration of this generous loan, I renounce any right that may come to me by reason of any postwar arrangement, of privilege that may come to me by legislation wherein this sum may be devalued. I renounce flatly and absolutely any condition, term right or privilege which in any way will prejudice the right engendered by this agreement wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I affirm the legal tender, currency or any medium of exchange, or money in this sum of P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.

On October 15, 1945, i.e., after the liberation, Roño was sued for payment in the Laguna Court of First Instance. 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.

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the defendant Roño to pay four thousand pesos in Philippine currency with legal interest from the presentation of the complaint plus costs.

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with costs. It declared being a mechanic who knew English was not deceived into signing the promissory note, and that the


contents of the same had not been misrepresented to him. It pronounced the contract valid and enforceable according to its terms and conditions.

One basic principle of the law on contracts of the Civil Code is that "the contracting parties may establish any pacts, clauses and conditions they may deem advisable, provided they are not contrary to law, morals or public order." (Article 1255.) Another principle is that "obligations arising from contracts shall have the force of law between the contracting parties and must be performed in accordance with their stipulations" (Article 1091).

Invoking the above proviso, Roño asserts this contract is contrary to the Usury law, because on the basis of calculations by Government experts he 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.

But he is not paying interest. Precisely 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.

Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see art. 1790 and Manresa's comment thereon) on a par with insurance policies and life annuities.

The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest is some additional money to be paid in any event, which is not the case herein, because Gomez might have gotten less if the Japanese occupation had extended to the end of 1945 or if the liberation forces had chosen to permit the circulation of the Japanese notes.

Moreover, Roño argues, the deal was immoral because taking advantage of his superior knowledge of war developments Gomez imposed on him this onerous obligation. In the first place, the Court of Appeals found that he voluntary agreed to sign and signed the document without having been misled as to its contents and "in so far as knowledge of war events was concerned" both parties were on "equal footing". In the second place although on October 5, 1944 it was possible to surmise the impending American invasion, the date of victory or liberation was anybody's guess. In


the third place there was the possibility that upon-re-occupation the Philippine Government would not invalidate the Japanese currency, which after all had been forced upon the people in exchange for valuable goods and property. The odds were about even when Roño and Gomez played their bargaining game. There was no overreaching, nor unfair advantage.

Again Roño alleges it is immoral and against public order for a man to obtain four thousand pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money he borrowed). According to his line of reasoning it would be immoral for the homeowner to recover ten thousand pesos (P10,000, when his house is burned, because he invested only about one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the whole business is immoral or against public order.

In this connection we should explain that this decision does not cover situations where borrowers of Japanese fiat currency promised to repay "the same amount" or promised to return the same number of pesos "in Philippines currency" or "in the currency prevailing after the war." There may be room for argument when those litigations come up for adjudication. All we say here and now is that the contract in question is legal and obligatory.

A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the Court of Appeals that the matter involve a defect in procedure which does not amount to prejudicial error.

Wherefore, the appealed judgment will be affirmed with costs. So ordered.

Digest

STATEMENT OF FACTS:

On October 5, 1944, Cristobal Roño received as a loan fromJose L. Gomez P4,000.00 in Japanese fiat money (mickey mouse money). The contract of loan is under the condition that said loan will not earn interest and that it will be paid in the currency then prevailing one year after the execution of the contract. After a year, a collection suit was filed by respondent Gomez against petitioner Rono to collect the latter’s debt. Subsequently, the trial court ruled in favor of Gomez. The court ordered Rono to pay the respondent an amount of P4,000.00 in Philippine currency which was then the prevailing currency at the time of payment. Contending such decision, Rono insists that the contract taken in favor of respondent is contrary to law, public order and good morals since his loan then of P4,000.00 “mickey mouse” money is


equivalent only to P100.00 of the Philippine currency which is the prevailing currency at the time of payment.

CONTENTION OF THE PETITIONER:

Roño asserts that the decision of the trial court ruling in favor of respondent is contrary to the Usury law, because on the basis of calculations by Government experts he only received the equivalent of P100 Philippine pesos and now he is required to give four thousand pesos or interest greatly in excess of the lawful rates.

CONTENTION OF THE RESPONDENT:

That both parties agreed that the loaned amount of

P4,000.00 mickey mouse money be paid in “the currency prevailing by the end of one year.” The civil cod

e supports such agreement when it says "obligations arising from contracts shall have the force of law between the contracting parties and must be performed in accordance with their stipulations" (Article 1091).

RESOLUTION OF SC:

The SC ruled that that the contract between the parties is an aleatory contract. The eventual gain of Gomez is not “interest” within the meaning of the Usury law. In the first place, Rono is not paying an interest. Such is evidenced by the fact that in his promissory note, he indicated that the money loaned “will not earn any interest.”

Furthermore, both parties clearly agreed at the time of the execution of thecontract that the loaned money ( P4,000.00 “mickey mouse ) will be paid in “the currency prevailing by the end of the stipulated period of one year.” The devaluation of the Mickey mouse money is due to an event unforeseeable by any man; that 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. However, both parties subjected their rights and obligations to that contingency. Thus, the contract in question is legal and obligatory and is not subject to the operation of the Usury law.



Manila


FIRST DIVISION

G.R. No. L-35697-99 April 15, 1988

ELADlA DE LIMA, POTENCIANO REQUIJO, NEMESIO FLORES, REYNALDO REQUIJO, DOMINADOR REQUIJO and MARIO REQUIJO, petitioners, vs.LAGUNA TAYABAS CO., CLARO SAMONTE, SANTIAGO SYJUCO, INC., (SEVEN-UP BOTTLING CO., OF THE PHILIPPINES) and PORVENIR ABAJAR BARRETO, respondents.

Leon O. Ty, Gesmundo and Gesmundo and Renato B. Vasquez for petitioners.

Domingo E. de Lara and Associates for respondents.

GANCAYCO, J.:

Before Us is a petition for review on certiorari of the decision De Lima vs. Laguna Tayabas Co. of the Court of Appeals 1 affirming the decision of the court a quo with modification to include an award of legal interest on the amounts adjudged in favor of the petitioners from the date of the decision of the Court of Appeals to the time of actual payment.

This present action arose from a collision between a passenger bus of the Laguna Tayabas Bus Co. (LTB) and a delivery truck of the Seven-up Bottling Co. of the Philippines which took place on June 3, 1958 resulting in the death of Petra de la Cruz and serious physical injuries of Eladia de Lima and Nemesio Flores, all passengers of the LTB bus. Three civil suits were filed against herein respondents which were consolidated for trial before the Court of First Instance of Laguna (San Pablo City).

On December 27, 1963, the court a quo rendered its decision, the dispositive part of which reads as follows:

WHEREFORE, in view of all the foregoing considerations, judgment is hereby rendered against the defendants LTB Co. Inc. and Claro Samonte, who are hereby ordered to pay jointly and severally, the resolve plaintiffs.

In Civil Case No. SP-239; Plaintiff Eladia de Lima:

1 For P960


. loss of money and medical expenses.

.00

2.

For loss of earnings from June 3, 1958 to

November 3, 1958

. 924.00

3.

For expenses of litigation and attorney's

fees . .1,000.00

TOTAL

P 2,884.00

In Civil Case No. SP-240; Plaintiffs Requijos:

1 For P


the death of Petra de la Cruz

3,883.82

including funeral expenses

2 For the money lost during the trip

800.00

3 Moral damages for mental angui


sh

(of Mercado vs. Lira, et al.)

3,000.00

4 For the loss of earning capacity for

5 years

8,000.00

5 For expenses of litigation and

attorney's

2,500.00


fees

TOTAL

P18,183.82

In Civil Case No. SP-268: To Plaintiff Nemesio Flores:

1

.For loss of earning capacity for

5 year from June 3, 1958 at the

rate of P228.00 a month

P 3,680.00

2.

For expenses of litigation and

attorney's fees.

1,000.00

TOTAL P14,680.00

Plaintiffs in Civil Cases Nos. SP-239 and SP-240 filed a motion for reconsideration of the decision seeking an award of legal interest on the amounts adjudged in their favor from the date of the said decision but their motion was not acted upon by the court a quo.


All of the plaintiffs voluntarily desisted from appealing the decision by reason of financial necessity and in the hope that the defendants LTB Co. and its driver Claro Samonte will be persuaded to make immediate payment to them as adjudged by the court a quo. Only the said defendants appealed the decision to the Court of Appeals.

In the motion of petitioners dated December 29, 1971 filed with the Court of Appeals, 2 they sought for an immediate decision of the case with a prayer for the granting of legal interest from the date of the decision of the court a quo and for the increase to P12,000.00 of the civil indemnity of P3,000.00 awarded for the death of Petra de la Cruz.

On January 31, 1972, the now disputed decision of the Court of Appeals was promulgated. 3

Petitioners moved for a reconsideration of this decision 4 seeking its modification so that the legal interest awarded by the Appellate, Court will start to run from the date of the decision of the trial court on December 27, 1963 instead of January 31, 1972, the date of the decision of the Court of Appeals. Petitioner potenciano Requijo as heir of the deceased Petra de la Cruz further sought an increase in the civil indemnity of P3,000.00 to P 12,000.00.

The Appellate Court denied the motion for reconsideration holding that since the plaintiffs did not appeal from the failure of the court a quo to award interest on the damages and that the court on its own discretion awarded such interest in view of Art. 2210 of the Civil Code, the effectivity of the interest should not be rolled back to the time the decision of the court a quo was rendered. 5

Hence this petition.

The assignment of errors raised the following issues, to wit:

1) Whether or not the Court of Appeal; erred in granting legal interest on damages to start only from the date of its decision instead of from the date of the trial court's decision;

2) Whether or not the Court of Appeals erred in not increasing the indemnity for the death of Petra de La Cruz (in Civil Case No. SP-240) from P3,000 to P12,000.00.

We find merit in the petition.

Under the first issue, petitioners contend that the ruling of she Appellate Court departs from the consistent rulings of this court that the award of the


legal rate of interest should be computed from the promulgation of the decision of the tonal court.

Respondents counter that petitioners having failed to appeal from the lower court's decision they. are now precluded from questioning the ruling of the Court of Appeals.

It is true that the rule is well-settled that a party cannot impugn the correctness of a judgment not appealed from by him, and while he may make counter assignment of errors, he can do so only to sustain the judgment on other grounds but not to seek modification or reversal thereof, 6 for in such case he must appeal. 7 A party who does not appeal from the decision may not obtain any affirmative relief from the appellate court other than what he has obtained from the lower court, if any, whose decision is brought up on appeal. 8

However, respondents failed to note that the legal interest was awarded by the Appellate Court in its discretion based on equitable grounds which is duly sanctioned by Art. 2210 of the Civil Code which provides —

Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.

Thus, the Appellate Court pointed out —

A further examination of the record will also show that the plaintiffs in Civil Cases Nos. SP-239 and SP-240 moved for the reconsideration of the decision appealed from to include the award of legal interest on the amounts adjudicated from the date of the decision, but said motion was not acted upon by the court a quo. Although said plaintiffs failed to appeal on this issue, and did not file their brief to reiterate their claim for interest thereon, the plaintiff in Civil Case No. SP-268, Nemesio Flores, filed his brief and prayed for the imposition of interest from the date of the decision. We are not left without discretion to resolve this issue, considering the provision of Article 2210, New Civil Code, stating that "Interest may, in the petition of the court, be allowed upon damages awarded for breach of contract." There is no doubt that the damages awarded in these civil cases arise from the breach of a contractual obligation on the part of the defendants- appellants. But to grant the imposition of interest on the amounts awarded to and as prayed for by one of the plaintiffs and deny the same to the others considering that the cases arose from one single incident would be, to Our mind, unfair and inequitous. In the light, therefore, not only of the provision of the Civil Code above referred to, but also the facts


and circumstances obtaining in these cases. We believe that on equitable grounds legal interest, should be allowed on the amounts adjudged in favor of the plaintiffs from the date of this decision up to the time of actual payment thereof.

Also noteworthy is the case of Fores v. Miranda 9 where this Court upheld the granting by the Court of Appeals of attorney's fees even if the respondent, a jeepney passenger injured in a vehicular accident, did not appeal from the decision of the trial court. The Appellate Court found the award to be justified because the respondent asked for damages in his answer and the said court considered the attorney's fees as included in the concept of damages which can be awarded whenever the court deems it just and equitable (Art. 2208, Civil Code of the Philippines).

At any rate, this Court is inclined to adopt a liberal stance in this case as We have done in previous decisions where We have held that litigations should, as much as possible be decided on their merits and not on technicality.10

We take note of the fact that petitioners are litigating as paupers. Although they may not have appealed, they had filed their motion for reconsideration with the court a quo which unfortunately did not act on it. By reason of their indigence, they failed to appeal but petitioners De Lima and Requijo had filed their manifestation making reference to the law and jurisprudence upon which they base their prayer for relief while petitioner Flores filed his brief.

Pleadings as well as remedial laws should be construed liberally in order that the litigants may have ample opportunity to pursue their respective claims and that a possible denial of substantial justice due to legal technicalities may be avoided. 11

Moreover, under the circumstances of this case where the heirs of the victim in the traffic accident chose not to appeal in the hope that the transportation company will pay the damages awarded by the lower court but unfortunately said company still appealed to the Court of Appeals, which step was obviously dilatory and oppressive of the rights of the said claimants: that the case had been pending in court for about 30 years from the date of the accident in 1958 so that as an exception to the general rule aforestated, the said heirs who did not appeal the judgment, should be afforded equitable relief by the courts as it must be vigilant for their protection. 12The claim for legal interest and increase in the indemnity should be entertained in spite of the failure of the claimants to appeal the judgment.

We take exception to the ruling of the Appellate Court as to the date when the legal interest should commence to ran. In view of the consistent rulings of this Court, We hold that the legal interest of six percent (6) 13 on the amounts adjudged in favor of petitioners should start from the time of the


rendition of the trial court's decision on December 27, 1963 instead of January 31, 1972, the promulgation of the decision of the Court of Appeals. 14

As to the second issue, civil indemnity for the death of Petra de la Cruz was properly awarded by virtue of Art. 1764 in relation to Art. 2206 of the Civil Code of the Philippines which allows a minimum indemnity of P3,000.00 for the death of a passenger caused by the breach of contract by a common carrier. In accordance with prevailing jurisprudence the indemnity of P3,000.00 should be increased to P30,000.00 and not P12,000.00 as prayed for by petitioner.

If the transportation company had only accepted the judgment of the trial court and paid its just awards instead of appealing the same to the Court of Appeals, no further delay would have been occasioned on the simple issue of interest and indemnity. To mitigate the impact of such a great delay in this case the Court finds ample justification in the aforesaid award for interest and indemnity. We hope this relief is not too late.

WHEREFORE, the petition is hereby GRANTED, the subject decision is modified in that the legal interest on the damages awarded to petitioners commences from the date of the decision of the court a quo until actual payment while the civil indemnity for the death of Petra de la Cruz is increased to P 30,000.00. This judgment is immediately executory and no motion for extension of time to file motion for reconsideration shall be entertained.

SO ORDERED.

FACTS:

On June 3, 1958, an accident between a Laguna Tayabas Co. (LTB)bus and Seven-up Bottlers Co. delivery truck resulted to the death of an LTB passenger named Petra dela Cruz. Two other LTB passengers namely Eladia de Lima and Nemesio Flores also incurred physical injuries. De Lima, Flores and the heir of dela Cruz filed suits to the buscompany.In December 29, 1971, the petitioners requested to expedite thedecision of the case with the hope that the legal interest is to be given immediately from the date of the decision. By January 31, 1972, the decision was given. Again, the petitioners reiterated their request forthe modification of the decision in such a way that the effectivity is tobe rolled back to December 27, 1963. Furthermore, the heir of dela Cruz filed a reconsideration for the increase of indemnity from P3,000to P12,000. With this pending motion for reconsideration, LTB filed an appeal for the case. The appellate court turned down the motion for reconsideration of the plaintiffs


indicating that an appeal should have been filed for the awarding of the legal interest. The petition was reviewed in 1988, thirty years after the actual incident.

ISSUES:

a. Whether the effectivity of the decision is to be rolled back as requested by the plaintiffs.

b. Whether the lower court was erroneous in the delay of the decision for the increase in the claim of the heir of Petra dela Cruz.

HELD:

The court granted the petition noting that the plaintiffs were unable to make an appeal in the lower court due to the fact that the petitionersare seeking judicial remedy as impoverished individuals. They were hopeful that the adjudged amount will be provided to them by the transportation company. With the case pending for thirty years, the court aptly found this as a sufficient justification to grant the legal interest as well as the increase in indemnity. It was found that the rolling back of the effectivity date was necessary to compensate for the monetary loss the plaintiffs incurred from the accident, death and court proceedings. Moreover, the claim for Petradela Cruz was increased from P3,000.00 to P30,000.00. The decision was immediately executory in response to the identified urgent need of the plaintiffs.


Manila


SECOND DIVISION

G.R. No. 120262 July 17, 1997

PHILIPPINE AIRLINES, INC., petitioner, vs.COURT OF APPEALS and LEOVIGILDO A. PANTEJO, respondents.

REGALADO, J.:

In this appeal by certiorari, petitioner Philippine Airlines, Inc. (PAL) seeks to set aside the decision of respondent Court of Appeals, 1 promulgated on December 29, 1994, which affirmed the award for damages made by the trial court in favor of herein private respondent Leovegildo A. Pantejo.

On October 23, 1988, private respondent Pantejo, then City Fiscal of Surigao City, boarded a PAL plane in Manila and disembarked in Cebu City where he was supposed to take his connecting flight to Surigao City However, due to typhoon Osang, the connecting flight to Surigao City was cancelled.

To accommodate the needs of its stranded passengers, PAL initially gave out cash assistance of P100.00 and, the next day, P200.00, for their expected stay of two days in Cebu. Respondent Pantejo requested instead that he be billeted in a hotel at PAL's expense because he did not have cash with him at that time, but PAL refused. Thus, respondent Pantejo was forced to seek and accept the generosity of a co-passenger, an engineer named Andoni Dumlao, and he shared a room with the latter at Sky View Hotel with the promise to pay his share of the expenses upon reaching Surigao.

On October 25, 1988 when the flight for Surigao was resumed, respondent Pantejo came to know that the hotel expenses of his co-passengers, one Superintendent Ernesto Gonzales and a certain Mrs. Gloria Rocha, an auditor of the Philippine National Bank, were reimbursed by PAL. At this point, respondent Pantejo informed Oscar Jereza, PAL's Manager for Departure Services at Mactan Airport and who was in charge of cancelled flights, that he was going to sue the airline for discriminating against him. It was only then that Jereza offered to pay respondent Pantejo P300.00 which, due to the ordeal and anguish he had undergone, the latter decline.

On March 18, 1991, the Regional Trial Court of Surigao City, Branch 30, rendered judgment in the action for damages filed by respondent Pantejo against herein petitioner, Philippine Airlines, Inc., ordering the latter to pay


Pantejo P300.00 for actual damages, P150,000.00 as moral damages, P100,000.00 as exemplary damages, P15,000.00 as attorney's fees, and 6% interest from the time of the filing of the complaint until said amounts shall have been fully paid, plus costs of suit. 2 On appeal, respondent court affirmed the decision of the court a quo, but with the exclusion of the award of attorney's fees and litigation expenses.

The main issue posed for resolution is whether petitioner airlines acted in bad faith when it failed and refused to provide hotel accommodations for respondent Pantejo or to reimburse him for hotel expenses incurred by reason of the cancellation of its connecting flight to Surigao City due to force majeure.

To begin with, it must be emphasized that a contract to transport passengers is quite different in kind and degree from any other contractual relation, and this is because of the relation which an air carrier sustain with the public. Its business is mainly with the travelling public. It invites people to avail of the comforts and advantages it offers. The contract of air carriage, therefore, generates a relation attended with a public duty. Neglect or malfeasance of the carrier's employees naturally could give ground for an action for damages. 3

In ruling for respondent Pantejo, both the trial court and the Court of Appeals found that herein petitioner acted in bad faith in refusing to provide hotel accommodations for respondent Pantejo or to reimburse him for hotel expenses incurred despite and in contrast to the fact that other passengers were so favored.

In declaring that bad faith existed, respondent court took into consideration the following factual circumstances:

1. Contrary to petitioner's claim that cash assistance was given instead because of non-availability of rooms in hotels where petitioner had existing tie-ups, the evidence shows that Sky View Hotel, where respondent Pantejo was billeted, had plenty of rooms available.

2. It is not true that the P300.00 Paid to Ernesto Gonzales, a co-passenger of respondent, was a refund for his plane ticket, the truth being that it was a reimbursement for hotel and meal expenses.

3. It is likewise not denied that said Gonzales and herein respondent came to know about the reimbursements only because another passenger, Mrs. Rocha, informed them that she was able to obtain the refund for her own hotel expenses.


4. Petitioner offered to pay P300.00 to private respondent only after he had confronted the airline's manager about the discrimination committed against him, which the latter realized was an actionable wrong.

5. Service Voucher No. 199351, presented by petitioner to prove that it gave cash assistance to its passengers, was based merely on the list of passengers already given cash assistance and was purportedly prepared at around 10:00 A.M. of October 23, 1988. This was two hours before respondent came to know of the cancellation of his flight to Surigao, hence private respondent could not have possibly refused the same. 4

It must be stressed that these factual findings, which are supported by substantial evidence, are binding, final and conclusive upon this Court absent any reason, and we find none, why this settled evidential rule should not apply.

Petitioner theorizes that the hotel accommodations or cash assistance given in case a flight is cancelled is in the nature of an amenity and is merely a privilege that may be extended at its own discretion, but never a right that may be demanded by its passengers. Thus, when respondent Pantejo was offered cash assistance and he refused it, petitioner cannot be held liable for whatever befell respondent Pantejo on that fateful day, because it was merely exercising its discretion when it opted to just give cash assistance to its passengers.

Assuming arguendo that the airline passengers have no vested right to these amenities in case a flight is cancelled due to force majeure, what makes petitioner liable for damages in this particular case and under the facts obtaining herein is its blatant refusal to accord the so-called amenities equally to all its stranded passengers who were bound for Surigao City. No compelling or justifying reason was advanced for such discriminatory and prejudicial conduct.

More importantly, it has been sufficiently established that it is petitioner's standard company policy, whenever a flight has been cancelled, to extend to its hapless passengers cash assistance or to provide them accommodations in hotels with which it has existing tie-ups. In fact, petitioner's Mactan Airport Manager for departure services, Oscar Jereza, admitted that PAL has an existing arrangement with hotels to accommodate stranded passengers, 5 and that the hotel bills of Ernesto Gonzales were reimbursed 6 obviously pursuant to that policy.

Also, two witnesses presented by respondent, Teresita Azarcon and Nerie Bol, testified that sometime in November, 1988, when their flight from Cebu


to Surigao was cancelled, they were billeted at Rajah Hotel for two nights and three days at the expense of PAL. 7 This was never denied by PAL.

Further, Ernesto Gonzales, the aforementioned co-passenger of respondent on that fateful flight, testified that based on his previous experience hotel accommodations were extended by PAL to its stranded passengers either in Magellan or Rajah Hotels, or even in Cebu Plaza. Thus, we view as impressed with dubiety PAL's present attempt to represent such emergency assistance as being merely ex gratia and not ex debito.

While petitioner now insists that the passengers were duly informed that they would be reimbursed for their hotel expenses, it miserably and significantly failed to explain why the other passengers were given reimbursement while private respondent was not. Although Gonzales was subsequently given a refund, this was only so because he came to know about it by accident through Mrs. Rocha, as earlier explained.

Petitioner could only offer the strained and flimsy pretext that possibly the passengers were not listening when the announcement was made. This is absurd because when respondent Pantejo came to know that his flight had been cancelled, he immediately proceeded to petitioner's office and requested for hotel accommodations. He was not only refused accommodations, but he was not even informed that he may later on be reimbursed for his hotel expenses. This explains why his co-passenger, Andoni Dumlao, offered to answer for respondent's hotel bill and the latter promised to pay him when they arrive in Surigao. Had both know that they would be reimbursed by the airline, such arrangement would not have been necessary.

Respondent Court of Appeals thus correctly concluded that the refund of hotel expenses was surreptitiously and discriminatorily made by herein petitioner since the same was not made known to everyone, except through word of mouth to a handful of passengers. This is a sad commentary on the quality of service and professionalism of an airline company, which is the country's flag carrier at that.

On the bases of all the foregoing, the inescapable conclusion is that petitioner acted in bad faith in disregarding its duties as a common carrier to its passengers and in discriminating against herein respondent Pantejo. It was even oblivious to the fact that this respondent was exposed to humiliation and embarrassment especially because of his government position and social prominence, which altogether necessarily subjected him to ridicule, shame and anguish. It remains uncontroverted that at the time of the incident, herein respondent was then the City Prosecutor of Surigao City, and that he is a member of the Philippine Jaycee Senate, past Lt. Governor of the Kiwanis Club of Surigao, a past Master of the Mount Diwata Lodge of Free


Masons of the Philippines, member of the Philippine National Red Cross, Surigao Chapter,and past Chairman of the Boy Scouts of the Philippines, Surigao del Norte Chapter. 8

It is likewise claimed that the moral and exemplary damages awarded to respondent Pantejo are excessive and unwarranted on the ground that respondent is not totally blameless because of his refusal to accept the P100.00 cash assistance which was inceptively offered to him. It bears emphasis that respondent Pantejo had every right to make such refusal since it evidently could not meet his needs and that was all that PAL claimed it could offer.

His refusal to accept the P300.00 proffered as an afterthought when he threatened suit was justified by his resentment when he belatedly found out that his co-passengers were reimbursed for hotel expenses and he was not. Worse, he would not even have known about it were it not for a co-passenger who verbally told him that she was reimbursed by the airline for hotel and meal expenses. It may even be said that the amounts, the time and the circumstances under which those amounts were offered could not salve the moral wounds inflicted by PAL on private respondent but even approximated insult added to injury.

The discriminatory act of petitioner against respondent ineludibly makes the former liable for moral damages under Article 21 in relation to Article 2219 (10) of the Civil Code. 9 As held in Alitalia Airways vs. CA, et al., 10 such inattention to and lack of care by petitioner airline for the interest of its passengers who are entitled to its utmost consideration, particularly as to their convenience, amount to bad faith which entitles the passenger to the award of moral damages.

Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. They are awarded only to allow the former to obtain means, diversion, or amusements that will serve to alleviate the moral suffering he has undergone due to the defendant's culpable action and must, perforce, be proportional to the suffering inflicted. 11 However, substantial damages do not translate into excessive damages. 12 Except for attorney's fees and costs of suit, it will be noted that the Court of Appeals affirmed point by point the factual findings of the lower court upon which the award of damages had been based. 13 We, therefore, see no reason to modify the award of damages made by the trial court.

Under the peculiar circumstances of this case, we are convinced that the awards for actual, moral and exemplary damages granted in the judgment of respondent court, for the reasons meticulously analyzed and thoroughly explained in its decision, are just and equitable. It is high time that the


travelling public is afforded protection and that the duties of common carriers, long detailed in our previous laws and jurisprudence and thereafter collated and specifically catalogued in our Civil Code in 1950, be enforced through appropriate sanctions.

We agree, however, with the contention that the interest of 6% imposed by respondent court should be computed from the date of rendition of judgment and not from the filing of the complaint. The rule has been laid down inEastern Shipping Lines, Inc. vs. Court of Appeals, et al. 14 that:

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

This is because at the time of the filing of the complaint, the amount of damages to which plaintiff may be entitled remains unliquidated and not known, until it is definitely ascertained, assessed and determined by the court, and only after the presentation of proof thereon. 15

WHEREFORE, the challenged judgment of respondent Court of Appeals is hereby AFFIRMED, subject to the MODIFICATION regarding the computation of the 6% legal rate of interest on the monetary awards granted therein to private respondent

SO ORDERED.

Digest

FACTS:

On October 23, 1988, Leovegildo Pantejo, then City Fiscal of Surigao City, boarded a PAL plane in Manila and disembarked in Cebu City where he was supposed to take his connecting flight to Surigao City. However, due to typhoon Osang, the connecting flight to Surigao City was cancelled. PAL


initially gave out cash assistance of P100 and, the next day, P200 for their expected stay of two days in Cebu. Pantejo requested instead that he be accommodated in a hotel at the expense of PAL as he did not have cash with him at that time but PAL refused. Fortunately, Pantejo was accommodated by Andoni Dumlao and he shared a room with the latter at Sky View Hotel with the promise to pay his share of the expenses upon reaching Surigao. When the flight for Surigao was resumed, Pantejo was informed that the hotel expenses of his co-passengers were reimbursed by PAL. At this point, Pantejo informed the Manager for Departure Services of PAL at Mactan Airport that he was going to sue the airline for discriminating against him. The manager offered to pay Pantejo P300 which the latter declined. Pantejo filed a suit for damages against PAL in the Regional Trial Court of Surigao City. Said court rendered judgment in favor of Pantejo, ordering PAL to pay Pantejo P300 for actual damages, P150,000 as moral damages, P100,000 as exemplary damages, P15,000 as attorney's fees, and 6% interest from the time of the filing of the complaint until said amounts shall have been fully paid, plus costs of suit. On appeal, CA affirmed the decision, but with the exclusion of the award of attorney's fees and litigation expenses. Hence, this petition.

ISSUE:

Whether or not PAL was liable for damages.

HELD:

Yes. A contract to transport passengers is quite different in kind and degree from any other contractual relation because of the relation which an air carrier sustains with the public. Its business is mainly with the travelling public. It invites people to avail of the comforts and advantages it offers. The contract of air carriage, therefore, generates a relation attended with a public duty. Neglect or malfeasance of the carrier's employees naturally could give ground for an action for damages.

In this case, there was bad faith on the part of PAL. Contrary to the claim of PAL that cash assistance was given instead because of non-availability of rooms in hotels, the evidence showed that Sky View Hotel, where respondent Pantejo was billeted, had plenty of rooms available. Pantejo only came to know about the reimbursements when other passengers informed him that they were able to obtain the refund for their own hotel expenses. PAL offered to pay P300.00 to Pantejo only after the latter had confronted the manager of PAL about the discrimination


committed against Pantejo, which the manager realized was an actionable wrong. The hotel accommodation was not a mere amenity or privilege. It was a company policy whenever a flight is cancelled as testified by several witnesses. And even if it was a mere privilege, PAL was still liable for damages for its blatant refusal to accord the so-called amenities equally to all its stranded passengers. No compelling or justifying reason was advanced for such discriminatory and prejudicial conduct. It was not also true that Pantejo was not listening to the announcements. In fact, Pantejo immediately proceeded to the office of PAL and requested for hotel accommodations. He was not only refused accommodations, but he was not even informed that he may later on be reimbursed for his hotel expenses. The refund of hotel expenses was surreptitiously and discriminatorily made by PAL as only handful of passengers knew about it. Pantejo was exposed to humiliation and embarrassment especially because of his government position and social prominence. The discriminatory act of PAL against Pantejo made PAL liable for moral damages under Article 21 in relation to Article 2219 (10) of the Civil Code. As held in Alitalia Airways vs. CA, such inattention to and lack of care by petitioner airline for the interest of its passengers who were entitled to its utmost consideration, particularly as to their convenience, amounted to bad faith which entitled the passenger to the award of moral damages. Under the peculiar circumstances of this case, the awards for actual, moral and exemplary damages granted in the judgment of CA were just and equitable. But the interest of 6% imposed should be computed from the date of rendition of judgment and not from the filing of the complaint. The judgment of Court of Appeals was AFFIRMED, subject to the MODIFICATION regarding the computation of the 6% legal rate of interest on the monetary awards granted therein to private respondent.



Manila

THIRD DIVISION

G.R. No. 120097 September 23, 1996

FOOD TERMINAL, INC., petitioner, vs.COURT OF APPEALS and TAO DEVELOPMENT, INC., respondents.

R E S O L U T I O N

FRANCISCO, J.:

Petitioner Food Terminal, Inc. (FTI) is a government owned and controlled corporation engaged in the business of providing storage services and bonded warehousing to the public for a fee. Sometime in the first quarter of


1984, petitioner FTI and herein private respondent entered into a contract of storage whereby private respondent deposited in petitioner's cold storage 22,716 bags (approximately 567,900 kilos) of yellow granex onions and 2,853 bags (approximately 71,300 kilos) of red creole onions. These onions were intended for export to Japan. During the first week of May, an ammonia leak penetrated through petitioner's storage facilities and caused damage on private respondent's goods, as a consequence of which, the onions were rendered unfit for export.

Private respondent filed a complaint for damages demanding payment of the actual value of the goods, unrealized profits, exemplary damages and attorney's fees. Finding petitioner negligent in the performance of its duties, the lower court rendered judgment in favor of private respondent as follows:

ACCORDINGLY, judgment is hereby rendered:

1. Ordering defendant Food Terminal, Inc. to pay plaintiff TAO Development, Inc. the amount of P2,429,055.00 as actual damages representing the loss sustained by plaintiff;

2. Ordering said defendant to pay said plaintiff the amount of P800,000.00 as damages it sustained in paying interest on the cash advance of US$100,000.00 from plaintiff's Japanese buyer;

3. Ordering said defendant to pay said plaintiff the amount of P1,534,005.00 as unearned profits; and

4. Ordering said defendant to pay said plaintiff the amount of P100,000.00 as attorney's fees.

The above amounts shall earn interest at the rate of 12 percent per annum from May 15, 1984 until fully satisfied.

In addition, defendant is, likewise, ordered to pay the costs of the suit.

SO ORDERED. 1

On appeal, public respondent Court of Appeals (CA) affirmed the decision of the lower court with modification, to wit:

WHEREFORE, in view of the foregoing, the decision appealed from is hereby AFFIRMED with MODIFICATIONS. Accordingly, judgment is hereby rendered as follows:


a) Ordering the defendant Food Terminal, Inc. to pay appellee TAO Development, Inc. the amount of P2,400,168.00 as actual damages representing the loss sustained by the appellee;

b) Ordering said appellant to pay said appellee the amount of P1,534,005.00 as unearned profits; and

c) Ordering said appellant to pay said appellee the amount of P100,000.00 as attorney's fees.

The above amounts shall earn interest at the rate of 12% per annum from May 15, 1984 until fully satisfied.

No costs.

IT IS SO ORDERED. 2

Hence, this petition on both questions of fact and law.

It is contended that the lower court and public respondent CA erred in finding petitioner negligent. Petitioner alleges that the damage to the onions was due to their poor quality, their propensity to deteriorate rapidly, and private respondent's delay in their disposal.

The contention, we note, is premised on a review of the factual findings of the CA and the lower court, matters not ordinarily reviewable in a petition for review on certiorari. Well-established is the rule that factual findings of the trial court and the CA are entitled to great weight and respect 3 and will not be disturbed on appeal save in exceptional circumstances, 4 none of which obtains in the case at bench. On the contrary, the finding of the trial court and the CA that the damage caused to private respondent's goods is due to petitioner's negligence is sufficiently supported by the evidence on record. Hence, on this ground, the petitioner's contention must fail.

Petitioner likewise argues that the CA erred in affirming the rate of interest imposed by the lower court in its decision. This contention is well-taken. The CA incorrectly applied the provisions of Central Bank Circular No. 416 which provides:

By virtue of the authority granted to it under Section 1 of Act 2655, as amended known as the "Usury Law", the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest,


shall be twelve (12%) per cent per annum. This circular shall take effect immediately.

The above circular refers to legal interest in a loan or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. 5Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. 6 When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum 7 in accordance with Art. 2209 8 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent. However, as declared in the case ofEastern Shipping Lines, Inc. vs. CA 9 , the interim period from the finality of the judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit. Thus, from the time the judgment becomes final until its full satisfaction, the applicable rate of legal interest shall be twelve percent (12%).

ACCORDINGLY, the appealed decision is hereby AFFIRMED with the following modification:

a) Ordering petitioner Food Terminal, Inc. to pay private respondent TAO Development, Inc. the amount of P2,400,168.00 as actual damages representing the loss sustained by the private respondent;

b) Ordering petitioner to pay private respondent the amount of P1,534,005.00 as unearned profits; and

c) Ordering petitioner to pay private respondent the amount of P100,000.00 as attorney's fees.

These amounts shall earn interest at the rate of SIX PER CENT (6%) per annum from May 15, 1984 until fully satisfied, but before judgment becomes final. From the date of finality of the judgment until the obligation is totally paid, A TWELVE PER CENT (12%) interest, in lieu of the SIX PER CENT (6%) interest, shall be imposed.

SO ORDERED.



Manila

SECOND DIVISION

G.R. No. 119974 June 30, 1999

RUPERTO L. VILORIA, petitioner, vs.COURT OF APPEALS, LIDA C. AQUINO, assisted by her husband Gregorio Aquino, MANUEL V. CACANANDO, as heirs of the late Felicitacion V. Cacanando, RODOLFO V. ANCHETA, ESTRELLA V. ANCHETA and CARMEN A. NICOLASURA, assisted by her husband


Ramon Nicolasura, as heirs of the late Josefina V. Ancheta and ANASTACIO L. VILORIA, respondents.

BELLOSILLO, J.:

ASSAILED in this petition for review on certiorari is the decision of the Court of Appeals 1 which affirmed with modification that of the Regional Trial Court, Branch 34, Balaoan, La Union, 2 declaring petitioner and private respondents as co-owners of the 2/3 portion of the commercial lot located in Cabua-an Oeste, Balaoan, La Union, under TCT No. T-29060 in the name of Ruperto L. Viloria as trustee, and 1/3 portion of the orchard located in Nalasin, Balaoan, La Union, under OCT No. 0-1952 in the name of Ruperto, Nicolasa and Rosaida, all surnamed Viloria.

Sometime in December 1980 Nicolasa Viloria passed away, followed by her sister Rosaida in June 1989. Both died single and without issue, survived by their brothers Ruperto L. Viloria, Anastacio L. Viloria, the heirs of their sister Felicitacion V. Cacanando, who predeceased them, namely, Lida C. Aquino and Manuel V. Cacanando, and the heirs of their other sister Josefina V. Ancheta, who likewise predeceased them, namely, Rodolfo V. Ancheta, Estrella V. Ancheta and Carmen A. Nicolasura.

On 18 February 1991 the heirs of Rosaida and Nicolasa Viloria filed an action for partition with the Regional Trial Court of Balaoan, La Union, against their co-heir Ruperto L. Viloria. The heirs alleged that during the lifetime of Nicolasa and Rosaida they were co-owners in equal shares and pro-indiviso with Ruperto L. Viloria of a commercial lot and an orchard. After Nicolasa and Rosaida died, their heirs demanded from Ruperto L. Viloria, who was in possession of the properties, to partition the same among them but he refused claiming that during their lifetime Nicolasa and Rosaida sold and conveyed to him all their shares, interests and participation over the properties in question. Ruperto alleged that Nicolasa and Rosaida sold the commercial lot to him by virtue of a deed of sale executed on 10 August 1965 and duly registered in the Office of the Register of Deeds of La Union, while the heirs of Josefina V. Ancheta sold and relinguished to him all their claims and ownership over the commercial lot. As regards the orchard, Ruperto further alleged that it came to his possession when Nicolasa sold to him her share of the land and the ancestral house standing thereon by virtue of a private agreement written in Ilocano, referred to as "Catulagan," dated 10 June 1978, while Rosaida sold to him her share of the property by virtue of a deed of sale dated 10 September 1987.

Refuting Ruperto's allegations, the heirs of Nicolasa and Rosaida maintained that the transfer of title of the commercial lot in the name of Ruperto Viloria


was only for loan purposes and not to convey and relinquish ownership over the property, and that Ruperto assured Nicolasa and Rosaida that they would remain as co-owners and the deed of sale returned to them. As proof of this arrangement, the heirs asserted that Nicolasa and Rosaida exercised acts of administration and dominion over the property and collected rentals from the buildings standing thereon for 25 years or until they died.

Through their co-heirs Lida C. Aquino and Atty. Gerardo Viloria, private respondents also asserted that while Rosaida Viloria executed a deed of sale conveying her share of the orchard to Ruperto Viloria, it was without any consideration. However, upon realization of the iniquitous nature of the document, Rosaida Viloria immediately executed a deed of revocation of the sale.

On 6 April 1992 the trial court ruled that title over the commercial lot was not in reality transferred in the name of Ruperto L. Viloria for the reason that the parties to the deed of sale merely intended to create an express trust. 3By admitting the trust and assuring his sisters Nicolasa and Rosaida as well as private respondents that they would remain as co-owners, an express trust had been created. 4 Petitioner Ruperto Viloria thus became only a trustee to an express trust which incapacitated him from acquiring for his own benefit the property committed to his custody although titled in his name. 5 Nicolasa and Rosaida remained as co-owners of the commercial lot, which upon their demise passed on to their heirs.

The trial court likewise declared that there was no effective conveyance of the 1/3 share of Rosaida over the orchard in Nalasin since the document of conveyance was in effect nullified when Rosaida executed the deed of revocation. 6 Neither did the "Catulagan" allegedly executed by Nicolasa convey her share of the orchard to Ruperto since she had already disposed of the property in favor of Rodolfo Ancheta by virtue of a deed of donation. 7 Consequently, the trial court declared Ruperto L. Viloria and the other heirs as co-owners of the entire portion of the commercial lot (except the northern portion titled in the name of Rodolfo, Aurora and Estrella Ancheta) and the entire orchard, and ordered a partition of the properties such that the commercial lot and the orchard would be divided into four (4) equal parts each, 1/4 for Ruperto Viloria and 3/4 for the other heirs. 8

Apparently dissatisfied with the adjudication by the lower court, Ruperto L. Viloria elevated the matter to the Court of Appeals which affirmed the findings of the court a quo with the modification that petitioner and private respondents should be declared co-owners of the commercial lot only to the extent of 2/3 of the property and co-owners of 1/3 of the orchard. 9 Indeed, the trial court erred in ordering that the entire commercial lot be divided into four (4) equal parts since petitioner Ruperto Viloria already owned 1/3 as co-owner thereof. Therefore, with regard to the commercial lot, what should be


divided into four (4) equal parts should only be the 2/3 share of Nicolasa and Rosaida Viloria. The appellate court further held that the deed of revocation executed by Rosaida did not rescind the 1987 deed of sale over the orchard since it was duly notarized and hence enjoyed the presumption of validity which could only be annulled through proper judicial action. In the absence thereof, the 1987 deed of sale remained valid. Hence, only the 1/3 share of Rosaida Viloria in the orchard should be divided among petitioner and private respondents.

Petitioner now impugns the decision of the Court of Appeals as he contends that the appellate court committed serious errors when it affirmed the findings of the lower court that (a) the 1965 deed of sale of the commercial lot was an express trust and not a true conveyance of real property, and (b) that prescription did not run against private respondents.

Petitioner argues that the existence of an express trust cannot be deduced from the collection of rentals by Nicolasa and Rosaida since what they collected were merely rentals for the use of the buildings and improvements on the property as differentiated from rentals for the use of the land itself. 10 Neither can the existence of an express trust be inferred from the consent and conformity to the waiver of rights issued by Nicolasa and Rosaida since they were not signatories to the actual document, petitioner being the sole signatory thereto. 11

These issues would call for the examination of the probative value of the evidence presented by the parties before the trial court. As we have ruled in a litany of cases, resort to judicial review of the decisions of the Court of Appeals under Rule 45 is confined only to errors of law. The findings of fact by the lower court are conclusive absent any palpable error or arbitrariness. After carefully examining the records, we find no reason to depart from this principle. The lower courts are in a much better position to properly evaluate the evidence and hence we find no other recourse but to leave it untouched and proceed with the determination of the other issues raised.

Petitioner further contends that the appellate court committed a grave error in law when it assumed jurisdiction over the validity of the 1965 deed of sale since it was never raised as an issue in Civil Case No. 417 where plaintiffs, private respondents herein, merely asked for partition without praying for the annulment of the document, 12 hence, according to petitioner, public respondent overstepped the boundaries of its jurisdiction when it classified the 1965 sale as merely one of express trust and not a true conveyance.

The contention is without merit. In the action for partition private respondents claimed that they were co-owners of the property subject thereof hence entitled to their share, while petitioner denied their claim by asserting that their rights were supplanted by his by virtue of the deed of


absolute sale. As a result, the issue of co-ownership and the legality of the 1965 sale have to be resolved in the partition case. As enunciated in Catapusan v. CA, 13 until and unless the issue of ownership is definitely resolved, it would be premature to effect a partition of the properties. Thus, the appellate court did not exceed the limits of its jurisdiction when it ruled on the validity of the 1965 sale.

Petitioner still further asserts that the 1965 deed of sale should not have been declared as an express trust in the absence of a court declaration annulling and declaring it as such, pursuant to Art. 1390 of New Civil Code. 14Likewise, petitioner points out that the 1965 deed of sale should have enjoyed the presumption of validity since it was duly notarized. 15

Art. 1390 of the New Civil Code has no bearing in the instant case. The provision alludes to contracts which could be voided by reason of absence or infirmity of consent and not to simulated contracts. The parties in the instant case freely gave their consent to the 1965 deed of sale but intended it to be merely a trust agreement and not a relinquishment of rights. It is therefore the nature of the contract that is in issue and not the character of the consent given. Moreover, a separate declaration of nullity is no longer necessary since the trial court already assumed jurisdiction over the validity of the 1965 deed of sale in determining whether co-ownership in fact existed and whether partition was proper.

The fact that a deed of sale is notarized does not necessarily justify the conclusion that the sale is a true conveyance to which the parties thereto are irrevocably and undeniably bound. 16 Although the notarization of the deed of sale vests in its favor the presumption of regularity, it does not validate nor make binding an instrument never intended, in the first place, to have any binding legal effect upon the parties thereto. 17

Petitioner argues that the determination of the preceding issue is contrary to the principle laid down in Dino v. CA18 where it was held that under the Torrens system registration is the operative act that gives validity to the transfer or creates a lien upon the land. The deed of sale being duly registered in the Office of the Register of Deeds of La Union in 1965 and a certificate of title issued in his name, thereby conferring upon him valid and legal title to the property, cannot thereafter be declared as merely an express trust. 19

Petitioner cannot rely on the registration of the land subject of the 1965 sale and the corresponding issuance of a certificate of title in his name as vesting ownership on him because the trial court found the deed of sale to be in fact an express trust. It has been held that a trustee who obtains a Torrens title over property held in trust by him for another cannot repudiate the trust by relying on the registration. 20


Finally, petitioner claims that the ruling that the heirs are entitled to the property in question is contrary to the law on succession. 21 Citing Locsin v. CA, 22 petitioner postulates that property transferred or conveyed by one person to another during the lifetime of the former no longer forms part of his estate at the time of his death to which his heirs may lay claim. Since the shares of Nicolasa and Rosaida in the commercial lot were already sold to Ruperto Viloria by virtue of the 1965 deed of sale the heirs had nothing more to inherit.

The contention is without merit. The claim that the ruling of the appellate court is contrary to the law on succession and jurisprudence proceeds from the assumption that the deed of sale was a true conveyance. However, the Court finds that the 1965 deed of sale was in fact an express trust and hence no actual conveyance took place. The owners Nicolasa and Rosaida did not relinquish their claim of ownership over the commercial lot but continued to exercise acts of administration and dominion over it, hence, it continued to form part of their estate and devolved upon their demise on their heirs.

As regards prescription invoked by petitioner, it is contended that prescription has already run against co-owners Nicolasa and Rosaida Viloria since Ruperto Viloria openly, publicly and continuously owned and possessed the properties for a period of more than 25 years, or from 1965 up to the filing of the case in 1991, with good and just title 23 pursuant to Arts. 1117, 24 1127 25 and 1134 26 of the New Civil Code.

We disagree. Prescriptive period for an action of reconveyance of real property based on implied or constructive trust which is counted from the date of registration of property applies when the plaintiff is not in possession of the contested property. 27 Moreover, an action to compel the trustee to convey property registered in his name for the benefit of the cestui que trust does not prescribe unless the trustee repudiates the trust. 28 Nicolasa and Rosaida were in possession of the land and were exercising acts of ownership and administration over the property consistent with their responsibility as co-owners. At no time did Ruperto openly repudiate the claims of his co-owners but continued to assure them of their rights regarding the property. Hence, prescriptive period did not commence to run against private respondents.

WHEREFORE, the decision of the Court of Appeals declaring petitioner and private respondents as co-owners of the 2/3 portion of the commercial lot located in Cabua-an Oeste (Poblacion), Balaoan, La Union, under TCT No. T-29060 in the name of Ruperto Viloria as trustee, and 1/3 portion of the orchard located in Nalasin, Balaoan, La Union, under OCT No. 0-1952 in the name of Ruperto, Nicolasa and Rosaida, all surnamed Viloria, is AFFIRMED. The properties in Cabua-an Oeste and Nalasin, Balaoan, La Union, shall be divided into 4 equal parts: 1/4 for petitioner, and 3/4 for private respondents


Anastacio L. Viloria; Lida C. Aquino, assisted by her husband Gregorio Aquino, and Manuel V. Cacanando, as heirs of the late Felicitacion V. Cacanando; and Rodolfo V. Ancheta, Estrella V. Ancheta and Carmen A. Nicolasura, assisted by her husband Ramon Nicolasura, as heirs of the late Josefina V. Ancheta.1âwphi1.nêt

SO ORDERED.

Digest

FACTS: In December 1980 Nicolasa Viloria passed away, followed by her sister Rosaida in June 1989. Both died single, survived by their brothers Ruperto Viloria, Anastacio Viloria, the heirs of their sister Felicitacion Cacanando, who predeceased them, Lida Aquino and Manuel Cacanando, and the heirs of their other sister Josefina Ancheta, who likewise predeceased them, Rodolfo Ancheta, Estrella Ancheta and Carmen Nicolasura.In February 1991 the heirs of Rosaida and Nicolasa Viloria filed an action for partition with the Regional Trial Court of La Union, against their co-heir Rupero. The heirs claims that during the lifetime of Nicolasa and Rosaida they were co-owners in equal shares and pro-indiviso with Ruperto of a commercial lot and an orchard. After Nicolasa and Rosaida died, their heirs demanded from Ruperto, who was in possession of the properties, to partition the same among them but he refused claiming that during their lifetime Nicolasa and Rosaida sold and conveyed to him all their shares, interests and participation over the properties in question. Ruperto alleged that Nicolasa and Rosaida sold the commercial lot to him by virtue of a deed of sale executed in August 1965 and duly registered in the Office of the Register of Deeds, while the heirs of Josefina sold and relinquished to him all their claims and ownership over the commercial lot. Ruperto further alleged that the orchard came to his possession when Nicolasa sold to him her share of the land and the ancestral house standing thereon by virtue of a private agreement written in Ilocano, referred to as “Catulagan,” in June 1978.The heirs of Nicolasa and Rosaida maintained that the transfer of title of the commercial lot in the name of Ruperto was only for loan purposes and not to convey and relinquish ownership over the property, and that Ruperto assured Nicolasa and Rosaida that they would remain as co-owners and the deed of sale returned to them.Through their co-heirs Lida and Atty. Gerardo Viloria, private respondents also asserted that while Rosaida executed a deed of sale conveying her share of the orchard to Ruperto, it was without any consideration. Thereafter upon realization of the iniquitous nature of the document, Rosaida Viloria immediately executed a deed of revocation of the sale.


Trial Court held that title over the commercial lot was not transferred in the name of Ruperto for the parties to the deed of sale merely intended to create an express trust. By admitting the trust and assuring his sisters Nicolasa and Rosaida as well as private respondents that they would remain as co-owners, an express trust had been created. Petitioner Ruperto Viloria thus became only a trustee to an express trust which incapacitated him from acquiring for his own benefit the property committed to his custody although titled in his name. Nicolasa and Rosaida remained as co-owners of the commercial lot, which upon their demise passed on to their heirs.The trial court likewise declared that there was no effective conveyance of the one thitd share of Rosaida over the orchard in Nalasin since the document of conveyance was in effect nullified when Rosaida executed the deed of revocation. Neither did the “Catulagan” allegedly executed by Nicolasa convey her share of the orchard to Ruperto since she had already disposed of the property in favor of Rodolfo Ancheta by virtue of a deed of donation. Consequently, the trial court declared Ruperto portion titled in the name of Rodolfo, Aurora and Estrella Ancheta) and the entire orchard, and ordered a partition of the properties such that the commercial lot and the orchard would be divided into four (4) equal parts each, one fourth for Ruperto Viloria and three-fourths for the other heirs.Ruperto filed a case to the Court of Appeals. The court affirmed the findings of the trial court with the modification that petitioner and private respondents should be declared co-owners of the commercial lot only to the extent of two-thirds of the property and co-owners of one third of the orchard. Therefore, with regard to the commercial lot, what should be divided into four (4) equal parts should only be the two-thirds share of Nicolasa and Rosaida Viloria. The court further held that the deed of revocation executed by Rosaida did not rescind the 1987 deed of sale over the orchard since it was duly notarized and hence enjoyed the presumption of validity which could only be annulled through proper judicial action. In the absence thereof, the 1987 deed of sale remained valid. Therefore only the one third share of Rosaida in the orchard should be divided among petitioner and private respondents.

ISSUE: Whether or not the 1965 deed of sale of the commercial lot was an express trust and not a true conveyance of the real property.Whether or not the prescription did not run against the private respondents.

HELD: The Court held that the 1965 deed of sale was in fact an express trust and hence no actual conveyance took place. The parties in the case freely gave their consent to the deed of sale but intended the same to be merely a trust agreement between them and not alienation of the property in litigation. In the present case, by admitting the trust and assuring his sisters


Nicolasa and Rosaida as well as private respondents that they would remain as co-owners, an express trust had been created. Deceased owners, Nicolasa and Rosaida, did not relinquish their claim of ownership over the commercial lot but continued to exercise acts of administration and dominion over it. The property continued to form part of their estate and devolved upon their demise on their heirs.The allegation that the sale was notarized does not affect the nature of the contract which both parties are bound. Notarization creates a presumption that there is a consummated sale, however if the intention of the parties states otherwise, the instrument is binding according to the intent of the parties.On the allegation that Ruperto owns the property and there is no trust since the property was already registered in the name of Ruperto, the court held that under the Torrens system registration is the operative act that gives validity to the transfer or creates a lien upon the land. However petitioner cannot rely on the registration of the land subject of the 1965 sale and the corresponding issuance of a certificate of title in his name as vesting ownership on him because the trial court found the deed of sale is in fact an express trust. It has been held that a trustee who obtains a Torrens title over property held in trust by him for another cannot repudiate the trust by relying on the registration.

With respect to the second issue, the court held that the prescriptive period for an action of reconveyance of real property based on implied or constructive trust which is counted from the date of registration of property which applies when the plaintiff is not in possession of the contested property. Likewise, an action to compel the trustee to convey property registered in his name for the benefit of the cestui que trust does not prescribe unless the trustee repudiates the trust. In the present case, Nicolasa and Rosaida were in possession of the land and were exercising acts of ownership and administration over the property consistent with their responsibility as co-owners. Ruperto did not openly repudiate the claims of his co-owners but continued to assure them of their rights regarding the property. Hence, prescriptive period did not commence to run against private respondents.

Therefore, the decision of the Court of Appeals declaring petitioner and private respondents as co-owners of the two-thirds portion of the commercial lot in the name of Ruperto, Nicolasa and Rosaida, is AFFIRMED.



Manila

SECOND DIVISION

G.R. No. 127135 January 18, 1999

EASTERN ASSURANCE AND SURETY CORPORATION (EASCO), petitioner, vs.HON. COURT OF APPEALS, HON. TEOFISTO L. CALUMPANG, in his capacity as Presiding Judge of the Regional Trial Court of Dumaguete City, Branch 40, and VICENTE TAN, respondents.

MENDOZA, J.:

This is a petition for review of the decision of the Court of Appeals,1 the dispositive portion of which reads:2

WHEREFORE, the petition is hereby GIVEN DUE COURSE and is GRANTED. The legal interest rate to be paid by petitioner EASCO to the private respondent is 6% per annum on the amount due corresponding to the period from June 26, 1981 to August 24, 1993; and 12% per annum beginning August 25, 1993 until the money judgment shall have been fully paid. No pronouncement as to costs.1âwphi1.nêt

SO ORDERED.

The facts of the case are as follows:

On April 9, 1981, private respondent Vicente Tan insured his building in Dumaguete City against fire with petitioner Eastern Assurance and Surety Corporation (EASCO) for P250,000.00. On June 26, 1981, the


building was destroyed by fire. As his claim for indemnity was refused, private respondent filed a complaint for breach of contract with damages against petitioner. The Regional Trial Court, Branch 40, Dumaguete City, to which the case was assigned rendered judgment as follows:3

WHEREFORE, judgment is rendered in favor of plaintiff [private respondent Vicente Tan] and ordering defendant [petitioner EASCO].

1. To pay plaintiff the sum of Two Hundred Fifty Thousand (P250,000.00) Pesos representing the fire insurance claim of plaintiff plus legal rate of interest from June 26, 1981 until fully paid;

2. To pay plaintiff the sum of Twenty Thousand (P20,000.00) Pesos as attorney's fees;

3. To pay plaintiff all expenses incurred when he went to Manila with his lawyer regarding his insurance claim;

4. To pay plaintiff Twenty Thousand Pesos (P20,000.00) Pesos as moral damages and Twenty Thousand (P20,000.00) Pesos as exemplary damages.

SO ORDERED.

Petitioner appealed to the Court of Appeals, which, on July 30, 1993, affirmed the decision of the trial court with modification by disallowing the award of moral and exemplary damages, attorney's fees and litigation expenses. As no further appeal was taken from the decision of the Court of Appeals, the same became final and executory on August 25, 1993. Thereupon, petitioner tendered payment of the money judgment in the amount of P250,000.00 plus interest of 6% per annum from June 26, 1981 to July 30, 1993. However, private respondent refused to accept payment on the ground that the applicable legal rate of interest was 12% per annum. Subsequently, private respondent brought the matter to the Insurance Commission. On February 27, 1995, the parties agreed before the hearing officer of the commission that the interest should be computed from June 26, 1981 to September 30, 1994. Petitioner would file with the trial court a motion to fix the legal rate of interest attaching thereto a check in the amount of P250,000.00 with 6% interest per annum.

Accordingly, on March 17, 1995, petitioner filed the necessary motion in court, attaching thereto a manager's check for P448,750.00 representing the principal sum plus 6% interest per annum for the period June 26, 1981 to September 30, 1994. On May 10, 1995, the trial court issued the assailed


resolution fixing the rate of interest at 12% per annum, the dispositive portion of which reads:4

WHEREFORE, premises considered, this Court hereby resolve[s] that:

1. The legal rate of interest imposable on the principal sum of P250,000.00 should be twelve (12%)per annum from June 26, 1981 to September 30, 1994, which is the cut-off date agreed upon by the parties;

2. That the manager's check issued by the defendant in the amount of P448,750.00 in favor of the plaintiff is considered as partial satisfaction of the writ of execution; and

3. Defendant to pay immediately to plaintiff the unpaid balance of interest of the principal amount of P250,000.00 equivalent to 6% per annum from June 26, 1981 to September 30,1994.

Petitioner filed a motion for reconsideration which was, however, denied by the trial court. Thus, on August 30, 1995, petitioner went to the Court of Appeals on certiorari, and on November 14, 1996, the appellate court rendered a decision. Noting that the case was for breach of contract for the payment of damages for the loss or destruction of property and not for collection of a loan or forbearance of money, the Court of Appeals ruled, on the authority of Eastern Shipping Lines, Inc. v. Court of Appeals,5 that the interest rate on the amount due should be 6% per annum from June 26, 1981 to August 24, 1993, and 12% per annumbeginning August 25, 1993 (the date the decision of the trial court became final and executory) until the money judgment is paid.

Hence, this petition. Petitioner contends that6 —

I. The Appellate Court glaringly committed an error of law in its assailed decision when it wrongfully applied the aforecited paragraph 3 of the suggested rules of thumb for future guidance [as formulated in Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994)] and unlawfully ignored or disregarded the agreed cut-off date for the payment of the legal rate of manifestations/admissions of the parties as well as the stand of the respondent Judge in resolving the issue of applicable legal rare of interest thereon.

II. The application of the abovequoted paragraph 3 of the suggested rules of thumb in the computation of the applicable legal rate of interest embodied in the dispositive part of the


assailed decision is tantamount to a "modification of a judgment that is at its execution stage." It is also an "addition" amounting to a material alteration of the same judgment which had been satisfied only at 6% percent interest per annum from June 26, 1981 up to September 30, 1994 (the agreed cut-off date). Hence, it cannot be allowed and is null and void.

Petitioner's contentions are without merit.

First. In Eastern Shipping Lines, Inc. v. Court of Appeals,7 it was held:

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


1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

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


legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rare of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Unquestionably, this case falls under the rule stated in paragraph 3. The question is whether this rule can be applied to this case. Petitioner contends that paragraph 3 cannot be applied to this case considering that the decision of July 30, 1993 of the Court of Appeals, affirming the decision of the trial court, became final and executory on August 25, 1993, whereas the decision in Eastern Shipping Lines, Inc. was rendered only on July 22, 1994. Petitioner argues that the rules stated in that case were in fact made for "future guidance" of courts and, thus, to apply paragraph 3 to the case at bar is to sanction the modification of a judgment which is already final and executory.

Contrary to petitioner's contention, Eastern Shipping Lines, Inc. did not lay down any new rules; all that was made was to state a comprehensive summary of existing rules on the computation of legal interest. In fact, earlier in the case of Nakpil and Sons v. Court of Appeals,8 the Court allowed the imposition of 12% legal interest per annum on money judgment from the date of its finality until fully paid. Strictly speaking, therefore, there was no retroactive application of the rules in this case.

Nor was there modification of judgment in fixing the legal rate of interest at 12% precisely because the subject case arose when the trial court failed to specify in its decision the rate of the legal interest to be imposed on the money judgment.1âwphi1.nêt

Second. Petitioner argues that the parties agreed on the "cut-off date" for the payment of legal interest, and that is from June 26, 1981 to September 30, 1984, which the Court of Appeals should have respected. Private respondent disputes the existence of the alleged agreement of the parties. He claims that he merely agreed to refer the issue of the applicable rate of legal interest to the trial court for resolution.9

We are inclined to believe the claim of petitioner. The resolution of May 10, 1995 of the trial court referred to such an agreement, and private respondent never questioned this resolution. The trial court's finding on this point is binding. Hence, the payment of 12% legal interest per annum should commence from August 25, 1993, the date the decision of the trial court


became final, up to September 30, 1994, the agreed "cut-off-date" for the payment of legal interest.

WHEREFORE, the questioned decision is AFFIRMED with the only MODIFICATION that petitioner is ordered to pay interest on the amount due at the rate of 12% legal interest per annum from August 25, 1993 to September 30, 1994.

SO ORDERED.

Digest

Eastern Assurance v. CA

Recit ready digest

Tan insured his building in Dumaguete against fire with Eastern Assurance in the amount of Php250,000. The building was later destroyed in a fire, for which Tan sought payment from the insurance company. His claim was refused, prompting him to file in the RTC a complaint against Eastern Assurance. The RTC ordered the insurance company to pay Php250,000 + interest. This was affirmed by the CA. Petitioner tendered the Php 250,000, but it was refused, with Tan insisting on the payment of 12% pa interest. The matter was brought before the insurance commission, which provided a cut-off date for the payment in Sept. 1994. The insurance company filed with the trial court a petition to fix the interest rate to be applied, for which the rate of 12% pa was provided. This was affirmed by the CA

The Eastern Shipping case did not lay down new rules, as it only stated a comprehensive summary of existing rules on the computation of legal interest. The cut-off date previously provided must still be respected, such that the rate of 12% will be imposed from the finality of the judgment until Sept. 30, 1994.

Petition:

• review the decision of CA which ordered the petitioner to pay interest rate on the amount due should be 6% per annum from June 26, 1981 to August 24, 1993, and 12% per annum beginning August 25, 1993 until the money judgment is paid.

Factual Antecedents:


On April 9, 1981, private respondent Vicente Tan insured his building in Dumaguete City against fire with petitioner Eastern Assurance and Surety Corporation (EASCO) for P250,000.00.

On June 26, 1981, the building was destroyed by fire. As his claim for indemnity was refused, private respondent filed a complaint for breach of contract with damages against petitioner. The RTC Court, decided in favour of Vicente Tan. In its ruling, the RTC court imposed the rate of interest at 12% per annum, and decided that EASCO to pay immediately to Vicente Tan the unpaid balance of interest of the principal amount of P250,000.00 equivalent to 6% per annum from June 26, 1981 to September 30,1994.

Petitioner EASCO appealed to the Court of Appeals, which, on July 30, 1993, affirmed the decision of the trial court. The CA, on the authority of prior case, Eastern Shipping Lines, Inc. v. Court of Appeals, that the interest rate on the amount due should be 6% per annum from June 26, 1981 to August 24, 1993, and 12% per annum beginning August 25, 1993 until the money judgment is paid.

Thereafter, petitioner EASCO tendered payment of the money judgment in the amount of P250,000.00 plus interest of 6% per annum from June 26, 1981 to July 30, 1993.

However, private respondent refused to accept payment on the ground that the applicable legal rate of interest was 12% per annum. Subsequently, private respondent brought the matter to the Insurance Commission.

Then in, 1995, the parties agreed before the hearing officer of the commission that the interest should be computed from June 26, 1981 to September 30, 1994. Petitioner would file with the trial court a motion to fix the legal rate of interest attaching thereto a check in the amount of P250,000.00 with 6% interest per annum.

Ruling of the lower court/s:

The trial court fixed the rate of interest at 12% per annum from June 26, 1981 to September 30, 1994.

The CA ruled that the interest rate on the amount due should be 6% per annum from June 26, 1981 to August 24, 1993, and 12% per annum beginning August 25, 1993 until the money judgment is paid.

Position of Petitioner:

It contended that the CA wrongfully applied the paragraph 3 of the suggested rules of thumb for future guidance as formulated in Eastern Shipping Lines, Inc. v. Court of Appeals, and unlawfully ignored or disregarded the agreed cut-off date for the payment of the legal rate.

ISSUE:


When the judgment of the court awarding a sum of money becomes final and executory what is the rate to be imposed?

HELD/RATIO:

In Eastern Shipping Lines, Inc. v. Court of Appeals, was held:I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts, is breached, the contravener can be held liable for damages. The provisions under "Damages" of the Civil Code govern in determining the measure of recoverable damages.


III. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Unquestionably, this case falls under the rule stated in paragraph 3. The question is whether this rule can be applied to this case.

The prior Eastern Shipping Lines, case. did not lay down any new rules because it was just a a comprehensive summary of existing rules on the computation of legal interest.

As to the "cut-off date" for the payment of legal interest :o The payment of 12% legal interest per annum should commence

from August 25, 1993, the date the decision of the trial court became final, up to September 30, 1994, the agreed "cut-off-date" for the payment of legal interest.

2nd digest

Facts: On June 26, 1981 , a building owned by private respondent Vicente Tan and insured with the petitioner East Assurance and Surety Corporation (EASCO) was destroyed by fire. Due to EASCO’s refusal to indemnify private respondent, the latter filed a complaint against the former for breach of contract with damages with RTC by which a judgment was rendered in favor of private respondent and ordered EASCO to pay as sum of money representing the fire insurance claim plus legal rate of interest from June 26,


1981 until fully paid , attorney’s fees, moral and exemplary damages and all expenses incurred from Manila.

On Appeal by the petitioner , to The CA , the decision was affirmed with some modification , and thereafter , became final and executory on August 25, 1993. Upon Payment by the petitioner , private respondent refused to accept it on ground that the applicable legal rate was 12% per annum. Subsequently, private respondent brought the matter to the Insurance Commission . On February 27, 1995, the parties agreed before the hearing office of the commission that the interest should be computed from June 26, 1981 to September 30, 1994. Petitioner would file with the trial court a motion to fix a legal rate of interest attaching thereto a check with 6% interest per annum. Upon Doing so , the trial court issued the assailed resolution fixing the rate of interest to 12% per annum.

Petitioner filed a motion for reconsideration, but was denied and on certiorari to the Court of Appeals , the latter rendered a decision. Noting that the case was for breach of contract for payment of damages for the loss or destruction of property and not for collection of a loan or forbearance , it ruled that the interest rate should be 6% per annum from June 26, 1981 to August 24, 1993 and 12% per annum beginning August 25, 1993( the date the decision of the trial court become final and executory until the money judgment is paid), Hence this petition

Issue: Whether or not the legal interest rate should be 12 % per annum from such finality until its satisfaction , this interim period being deemed to be by then an equivalent to a forbearance of credit.

Held: Contrary to the petitioner contention , Eastern Shipping Lines, Inc., did not lay down any new rules ; all that was made was to state a comprehensive summary of existing rules on the computation of interest . In fact , earlier in the case of Nakpil An Sons vs. Court of Appeals , the court allowed the imposition of 12 % legal interest per annum on money judgment from the date of it finality until fully paid. Strictly speaking, therefore, there was no retroactive application of the rules in this case. Nor there


modification of judgment in fixing the legal rate of interest at 12 % precisely because the subject case arose when the trial court failed to specify in its decision the rate of the legal interest to be imposed on the money judgment.


Manila

EN BANC

G.R. No. L-28497 November 6, 1928


THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs.FAUSTINO ESPIRITU, defendant-appellant.

------------------------------

G.R. No. L-28498 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs.FAUSTINO ESPIRITU, defendant-appellant, and ROSARIO ESPIRITU, intervenor-appellant.

Ernesto Zaragoza and Simeon Ramos for defendant-appellant. Benito Soliven and Jose Varela Calderon for intervenor-appellant. B. Francisco for appellee.

AVANCEÑA, C. J.:

These two cases, Nos. 28497 and 28948, were tried together.

It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu purchased of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to apply on account of this price, and obligating himself to pay the remaining P10,983.50 within the periods agreed upon. To secure the payment of this sum, the defendants mortgaged the said truck purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively, and all of the White make (Exhibit A). These two trucks had been purchased from the same plaintiff and were fully paid for by the defendant and his brother Rosario Espiritu. The defendant failed to pay P10,477.82 of the price secured by this mortgage.

In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the P500 cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to make payment of this sum within the periods agreed upon. To secure this payment the defendant mortgaged to the plaintiff corporation the said truck purchased and two others, numbered 77197 and 92744, respectively, the same that were mortgaged in the purchase of the other truck referred to in the other case. The defendant failed to pay P4,208.28 of this sum.

In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the executon of the contracts, and in case of


non-payment of the total debt upon its maturity, 25 per cent thereon, as penalty.

In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the defendant at the same time also signed a promissory note solidarily with his brother Rosario Espiritu for the several sums secured by the two mortgages (Exhibits B and D).

Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the two White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to the plaintiff. lawphi1.net

While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58.

The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.

The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. But there is positive proof that they were included at the time the defendant signed these documents. Besides, there were presented two of defendant's letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I).

Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But the evidence shows that while the intervenor Rosario Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together with the defendants Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by these two mortgages. All these instruments were executed at the same time, and when the trucks 77197 and 92744 were included in the mortgages, the intervenor Rosario Espiritu was aware of it and consented to such inclusion. These facts are supported


by the testimony of Bachrach, manager of the plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents, and of Angel Hidalgo, who witnessed the execution of Exhibits B and D.

We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in Batac, Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not necessarily prove that the latter could not have been in Manila on the 25th of that month.

In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and 92744 and consented to the mortgage of the same, it is immaterial whether he was or was not the exclusive owner thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be demamded separetely. According to this, the penalty is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt.

With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects without special pronouncement as to costs. So ordered.

Digest

Facts:1. This is a consolidated case(Cases no. 28497 and 28948) involving two separate sale transactions. One made in Feb. 18, 1925 (case 28498), when the defendant earlier bought a truck on instalment from the petitioner and said truck was mortgaged together with the two others (no. 77197 & 92744


in the the subsequent sale transaction dated July 28, 1925. The said two of the other trucks were also purchased (but already paid previously) from the plaintiff. The defendant failed to pay the balance. In July 1925, defendant again purchased another truck from Bachrach. The said truck, together with the 3 other vehicles were mortgaged to the plaintiff to secure the remaining balance. The defendant failed to pay the balance for the latest truck obtained.

2. It was agreed in both sales that 12% interest will be paid on the unpaid price, and in case of the non-payment of the total debt at maturity, 25% shall be the penalty. The defendant also signed a promissory note solidarily with his brother Rosario (acting as intervenor), the sums secured by the mortgages. Rosario is alleged to be the owner of the two white trucks no. 77197 & 92744 mortgaged.

3. While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58.

4. The lower court ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.

5. The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged.

6. But there is positive proof that they were included at the time the defendant signed these documents. Besides, there were presented two of defendant's letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I).

Issue: W/N the 25% penalty upon the debt in addition to the 25% p.a. is usurious


Ruling: No, Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be demanded separately. The penalty is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt. The penalty is however reduced from 25 % upon the sum owed, the defendants need pay only 10 % thereon as penalty. (Judgment appealed from is affirmed in all other respects).- See more at: http://lawsandfound.blogspot.com/2013/07/the-bachrach-motor-co-v-espiritu-digest.html#sthash.5jALV3GV.dpuf



Manila

THIRD DIVISION

G.R. No. 82082 March 25, 1988

INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant, vs.SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The appeal was originally brought to the Court of Appeals but was certified to us by that tribunal because it raises only a question of law.

The facts are not disputed.

On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo Salazar obtained a loan from the plaintiff-appellant in the amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before December 12, 1980. This loan transaction was evidenced by a promissory note where the defendants-appellees bound themselves jointly and severally to pay the amount with interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an attorney for collection, the defendants-appellees were also bound to pay 25% of any amount due as attorney's fees plus expenses of litigation and costs.


In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant to Central Bank Circular No. 705 dated December 1, 1979.

The promissory note matured but the defendants-appellees failed to pay their account. It was only after several demands that the defendants-appellees were able to make partial payment. As of November 25, 1983, they were able to pay a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges.

On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging that the defendants-appellees were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984. including interest at 21% per annum penalty charges, and attorney's fees.

At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses admitted the execution of the promissory note in consideration of P48,050.00. The trial court then rendered a summary judgment the dispositive portion of which reads:

WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses Ricardo Salazar and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of Eleven Thousand Two Hundred Fifty Three Pesos and Twenty Five Centavos ( P11,253.25 ), with interest thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiff-attorney's fees in the amount of one Thousand Pesos ( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff- Appellant's Brief).

Plaintiff-appellant now raises the following assigned errors:

I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;

II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21 % PER ANNUM.

III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT


III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE AMOUNT DUE AND EXPENSES OF LITIGATION; and

IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief)

The Escalation Clause provided in the promissory note reads:

The interest herein charged shall be subject to in , without notice, depending on whatever policy IBAA may in the future adopt conformable to law, especially to compensate for any in Central Bank interests or rediscounting rates.

Finding strength in the argument that the promissory note is the contract between the parties and, under the law, obligations arising from contracts have the force of law between the parties, the plaintiff-appellant increased the interest rate to 21% per annum effective December 1, 1979 pursuant to Central Bank Circular No. 705.

In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28,1987), the interest rate may not be increased by the plaintiff-appellant in the instant case. It is the nile that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. However, the enforceability of such stipulations are subject to certain conditions.

In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of P41,300.00 she obtained when the interest rates were increased from 12% to 17% per Central Bank Circular No. 494, issued on January 2, 1976. In a letter written by the Central Bank to the borrower, some clarifications were made. Pertinent portions of the letter read:

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976 adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi- banking functions on loans already existing as of January 3, 1976, in the light of Central Rank Circulars Nos. 492-498:

1 Only banks and non-bank financial intermediaries performing quasi-banking functions may interest rates on I already existing as of January 2,1976, provided that:


a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976, and

2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. (Emphasis supplied)

Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the Central Bank took the position that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that- 41) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. (Emphasis supplied)

In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, the plaintiff-appellant's second assignment of error is without merit.

With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As the Court stated in the case of Government Service Insurance System v. Court of appeals (145 SCRA 311, 321):

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


of such additional rate partakes of the nature of a penalty clause, winch is sanctioned by law.

In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained:

xxx xxx xxx

... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law, (Art. 1226, Civil Code of the Philippines), although, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Art 1229, Civil Code of the Philippines). ...

Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid. The plaintiff-appellant, on the other hand, merely applied this amount to satisfy the penalty and interest charges which it additionally imposed. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to make good their promise. We note the trial court's observation that the plaintiff-appellant did not even state in the complaint that the defendants-appellees had made partial payments, making it appear that the spouses Salazars refused to pay the loan. In their answer with counterclaim, the defendants-appellees alleged that the bank neglected to credit said payments in the defendant's account folio and subjected it as it did to the additional charges. Furthermore, we agree with the trial court that the bank has already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous

With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand ( P1,000.00 ) pesos by the trial court appears to be enough.

The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear interest at the rate of 19% per annum. This


would yield interest of P7,989.50 per annum or a total of P 46,339.10 from November 22, 1978 to September 12, 1984, the date of filing the complaint. Penalty interest of 1% a month or 12% per annum is reasonable so that from December 12, 1980 up to September 12, 1984, penalty charges should be P19,202.83. Considering that the defendants-appellees have paid the amount of P68,676.75, they, therefore, owed the bank the amount of P38,915.18 when the complaint was filed. There is no indication in the records as to the fluctuation of actual interest rates from 1984 and, therefore, we order interest at the legal rate of 12% per annum on the unpaid amount.

WHEREFORE, the decision of the lower court is MODIFIED. The defendants-appellants Ricardo Salazar and Epifania Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per annum from the filing of the complaint until fully paid.

SO ORDERED.

No digest available


Manila

EN BANC

G.R. No. L-9262 July 10, 1959

MARINO S. UMALI, petitioner, vs.EFRAIN Y. MICLAT, respondent.

Zavalla, Bautista and Nuevas for petitioner.Domingo F. de Guzman for respondent.



This is an action to recover certain sums of money, plus damages and attorney's fees, for some work done by plaintiff for defendant Marino S. Umali. Defendant Antonio M. Tiongco was included in his capacity as guarantor of Umali but he was never served with summons. With leave of Court, defendant Umali filed a third party complaint against Maharlika Pictures, Inc., a corporation duly organized under the laws of the Philippines, but because the latter failed to file its answer, it was declared in default.

Defendant Umali set up the defense that the work done by the plaintiff was not complete or satisfactorily; that the contract upon which the action is based was executed by the Maharlika Pictures, Inc., of which he is the President and General Manager, and so plaintiff's action should be directed against said corporation.

After trial, the lower court rendered judgment ordering defendant Umali to pay plaintiff the sum of P675.00, plus 10% surcharge thereon as stipulated, and the sum of P200.00 as attorney's fees; and with respect to the second claim, to pay the sum of P344.50. The Court ordered that the sums of P675.00 and P344.50 shall bear 6% interest per annum for the date of the filing of the complaint until paid. The complaint with respect to defendant Tiongco and the third party complaint against the corporation were dismissed. Costs were taxed against defendant Umali.

Umali took the case on appeal to the Court of Appeals, and the decision of the lower court was affirmed in toto, with costs against appellant. Hence the present petition for review.

It appears that in accordance with the contract Exhibit "A" and the Job Order Exhibit "D", appellee prepared posters, a theater show board display, a theater display standee, a float, and other forms of advertisement for the showing of the film "LAGRIMAS"; that for the work specified in Exhibit "A", Umali agreed to pay the sum of P900, of which appellee was paid P225 in advance; that for work called for in Exhibit "D", Umali agreed to pay the sum of P344.50; that the work covered by the contract and job order above mentioned were completely done and the articles called for therein delivered to Umali; and that notwithstanding several demands made upon Umali, he refused to pay without justification.

The first defense set up by appellant is that the contracts which appellee's action is based were executed by and between the appellee and the Maharlika Pictures, Inc., of which appellant is the President and General Manager, and so the action should have been directed against the corporation and not against him in his personal capacity. Appellant does not dispute the correctness of the amounts claimed in the complaint.


The Court of Appeals, in meeting this contention, made the following observation:

We have gone carefully over the evidence of record, and we have arrived at the conclusion that the decision appealed from should be affirmed. As the contract (Exhibit A) would show, Umali signed the same in his personal capacity. While it is mentioned therein that he is the President and General Manager of Maharlika Pictures, Inc., it is not stated that, as such, he was duly authorized to enter into the contract for and on behalf of the corporation. If it were true that it was the intention of the contracting parties to hold Maharlika Pictures, Inc., solely and exclusively liable, it was not explained why Umali allowed Maharlika Pictures, Inc., of which he was still an Officer at the time of trial of this case, to be declared in default by not filing its answer to the third-party complaint filed by him. Neither did Umali present in evidence any resolution or minutes of meeting of Maharlika Pictures, Inc., which Umali admits is a corporation duly organized and existing under and by virtue of the laws of the Philippines, or of its Board of Directors, ratifying the action of Umali and confirming the contract (Exhibit A) as an act of the corporation. As President and General Manager of the corporation and the party appearing to be solely and personally liable under the contract (Exhibit A), Umali should have taken steps to enable the Board of Directors of the corporation to adopt a resolution confirming the execution by him of Exhibit A as an act of the corporation because this was for his own protection.

We find the above observation supported by evidence. Indeed it appears in the contract Exhibit "A" that the one who contracted for the work to be done is appellant in his personal capacity, although he described himself therein as President and General Manager of the Maharlika Pictures, Inc. Umali signed the contract as "party of the second part" without stating that he was acting in behalf of the corporation. And from what may be gathered from the decision both of the lower court and the Court of Appeals, Umali never explained that when he entered into such a contract he acted in behalf of the corporation or was authorized to do so by its Board of Directors. It is strange that, after bringing the corporation into this case as party-defendant, Umali allowed it to be declared in default being its president and general manager as he claims to be, which gives rise to the suspicion that his claim is merely an attempt to shift to the corporation the responsibility for the transaction. The same consideration may be made with regard to the job order Exhibit "D". It is true that on its face it appears that the articles mentioned therein were delivered to the corporation, but apparently the requisition of said articles was made by appellant himself for which reason he was made personally responsible by the trial court and the Court of Appeals. This is a question of fact which we cannot now look into.


The next question refers to the surcharge of 10% which was agreed upon in the contract Exhibit "A". It appears therein that if appellant should fail to pay the balance of P675 after the lapse of 30 days from the date exhibition of the film "LAGRIMAS" has started, he should pay a surcharge of 10% every 30 days thereafter until the amount has been fully paid. It is claimed that this surcharged is unconscionable and unreasonable, because it is tantamount to imposing an interest of 10% a month, or 120% a year on the balance of the obligation until the same is paid in full.

There is merit in this contention. While this surcharge partakes of the nature of a penal clause which the parties may stipulate under the law,1 however, one cannot deny that the same is unreasonable, for if that is to be maintained, we would have that on the basis of P675 which is the balance that remains outstanding, appellant would pay P67.50 a month, or P810 a year, which considering the time that has already elapsed since appellant defaulted, would amount to P3,420. This is indeed a case where equity demands that the penalty be reduced in fairness to the debtor. And so, making use of the discretion that the law grants us on the matter, we are of the opinion that a surcharge of 20% per annum would be reasonable. We therefore hold that the penalty should be reduced accordingly.2

The last claim of appellant refers to the portion of the decision which orders the payment of 6% interest per annum from the date of the filing of the complaint until full payment of the obligation due, which is also considered unreasonable considering that appellant was already ordered to pay the penalty agreed upon.

This claim is untenable in the light of the law and the contract of the parties. Thus, Article 1226 of the new Civil Code provides that "in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty. . . .". In other words, the penalty takes the place of the interests only if there is no stipulation to the contrary, and even then, damages may still be collected if the obligor refuses to pay the penalty. In this case not only is there an express stipulation to pay damages in addition to the penalty, but appellant has failed to pay his obligation as well as the penalty. This appears in paragraph (f) of the contract Exhibit "A". The imposition of 6% interest per annum is, therefore, justified.

Modified with regard to the amount of the surcharge to be imposed on appellant as above indicated, we hereby affirm the decision appealed from in all other respects, without pronouncement as to costs.



Manila

EN BANC

G.R. No. L-29292 March 13, 1929


TOMASA C. VIUDA DE PAMINTUAN, plaintiff-appellant, vs.JUAN TIGLAO, defendant-appellant

Jose Ma. Cavanna for plaintiff-appellant.Alfonso Ponce Enrile for defendant-appellant.

OSTRAND, J.:

This action was instituted in the court of the justice of the peace of Mabalacat, Pampanga, by Tomasa C. Vda. de Pamintuan, as guardian of her five minor children, bearing ther surname of Pamintuan y Centeno, for the purpose of recovering from Juan Tiglao the possession of 2 parcels of land described in the complaint, as well as quantity of palay and sugar, as rent, together with damages and an attorney's fee, and costs. In the said court the cause was decided favorably to the plaintiff, whereupon the defendant appealed to the Court of First Instance. In the latter court the defendant challenged the jurisdiction of the court and set up various counterclaims not necessary to be here specified.

Upon the trial of the cause in the Court of First instance justice was again rendered in favor of the plaintiff for the possession of the land in question and requiring the defendant to pay for the plaintiff, as rent for the agricultural year 1925-1926, three hundred cavans of palay (Pinilingbeltu), or in the default thereof, its equivalent in the money at the rate of P3.75 per caravan, as well as four hundred piculs of sugar; and as rent for agricultural year 1926-1927, another three hundred cavans of palay, or in default thereof, its equivalent value in money at the same rate per cavan, with interest on all of said sums from April 10, 1926. From this judgment both the plaintiff and appellant appealed: the plaintiff appealing with respect to so much of the judgement as failed to award the stipulated attorney's fee of P1000 and stipulated interest at the rate of 15 percent per annum upon the unpaid rents; the defendant appealing from the court's refusal to dismiss the cause of lack of jurisdiction, as well as from the failure of the court to allow the defendant his own attorney's fee.

It appears that on March 18, 1925, one Jose v. Ramirez, as attorney-in-fact of Florentino Pamintuan, entered into a written contract with the defendant herein, Juan Tiglao, whereby the former leased to the latter 2 parcels of land described in the plaintiff's complaint, located in the barrio of Dolores, municipality of Mabalacat, Province of Pampanga. The term of the lease was fixed at two agricultural years, beginning with the month of April, 1925, and continuing to March, 1927.

In the fourth paragraph of this contract the annual rent due upon the lease was fixed at three hundred cavans of palay and four hundred piculs of sugar,


of defined quality, and deliverable on or before the last day of March, marking the end of two respective years covered by the lease. The rent for the first year not having been paid on or before March 31, 1926, nor thereafter, this action was instituted on September 10, 1926, after proper demand made, for the purposes indicated in the first paragraph of this opinion.

Logically speaking, the first question that presents itself upon this record is whether the court of justice of the peace has jurisdiction to entertain an action of the detainer, at the instance of the landlord, upon failure of the tenant to pay rent at the time and manner stipulated; and consequently whether this action, which was instituted prior to the termination of the full period fixed by the lease, can be considered premature. Upon this point, it may be recalled as rudimentary in the law governing leases of rural and urban property, that it is the duty of the lessee to pay the price of the lease in the manner agreed upon (art. 1555, Civ. Code). Furthermore, the failure on the part of the lessee to comply with this obligation supplies a ground for rescission of the contract and recovery of damages by the lessor (art. 1556, Civ. Code). Again, in section 80 of the Code of Civil Procedure, it is in effect, among other things, declared that any landlord against whom the possession of any land is unlawfully withheld after the determination of the right to hold possession shall, at any time with one year after the commencement of such unlawful withholding of possession, be entitled, as against the person so depriving him of possession, to restitution of the land, together with the damages and costs. From these provisions it is clear that upon non-payment of rent by the lessee, the lessor may elect to treat the contract as rescinded and thereby determine the right of the lessee to continue in possession; and this right to recover possession may be enforced in an action of unlawful detainer. It is not necessary, in such situation, that an independent action for the recission of the lease should first be instituted, in the Court of First Instance, for the purpose of putting an end to the right of the tenant to remain in possession under the lease. Indeed, the proviso to the section of the Code of Civil Procedure last above cited, gives express recognition to the right of the landlord to recover possession in an ordinary action of detainer, for non-payment of rent by the lessee, the condition being that non-payment of the rent must have continued for the period of at least three days after demand duly made.

It appears from the record that after this action was begun, and before the case was decided, the defendant voluntarily surrendered possession of the land to the plaintiff. Upon this it is contended by the attorney for the defendant that the court of the justice of the peace — and consequently the Court of First Instance — lost jurisdiction to entertain the action. This contention is of course untenable. The jurisdiction of the court having once attached, that jurisdiction continues until the complete remedy is granted. The defendant-appellant further contends that inasmuch as he set up a


counterclaim for damages in the amount of P6,000, the jurisdiction of the court of justice of the peace over the main action was destroyed. But this proposition also is untenable.

What has been said disposes of the main points raised in the appeal of the defendant. With respect to the plaintiff's appeal, we note, first, a provision in the contract of lease to the effect that if the stipulated rent should not be paid at the times stated, the lessee must indemnify the lessor in an additional amount equivalent to 15 per centum annually, or 1.25 per cent of each month of delay, to be calculated upon the highest quotation registered in the market, for the commodity which should have been paid, within the sixty days following the due date of such rent. The trial court refused to give effect to this stipulation on the ground that, in effect, it was a stipulation for the payment of usurious interest. In this connection it will be recalled that at that time the contract in question was made, the highest rate that could be legally collected upon any unsecured loan or forebearance of money, goods, or credits, was 14 per centum per annum. In view of this provision, we are of the opinion that the trial court committed no error in refusing to allow the interest thus stipulated for. In dealing with situations of this kind it is the duty of the court to look through the form and into the substance of the transaction, and we are of the opinion that this stipulation really contemplated interest, as interest, and that the stipulation did not contemplate what may be called liquidated damages, as contended by the plaintiff-appellant.

The second fault involved in the plaintiff's appeal has reference to the refusal of the trial court to allow an attorney's fee. In paragraph 11 of the contract, it is stipulated that in case of litigation for non-compliance with the lease, the lessee shall pay to the lessor the sum of P1000 for his attorney's fee and other expenses. The justice of the peace, before whom the case was brought, refused to take cognizance of this item on the ground that the sum exceeded the amount over which he could take jurisdiction. Upon appeal, the Court of First Instance held that as it was only exercising its appellate jurisdiction, it could not take cognizance of matters beyond the jurisdiction of the justice of the peace court.

In our opinion, the views of the two lower courts are correct. A justice of the peace court is of limited jurisdiction, and the limits are fully and clearly defined in the statutes. This is an action for forcible entry and detainer and, as such, can only involve " the restitution of the land, building, and premises possession of which is unlawfully withheld, together with damages and costs" (see sec 80, Code of Civil Procedure). Damages do not include attorney's fees; whatever doubt there may be on that point should be dispelled by section 84 of the same code, which reads as follows:


If, upon trial, the court shall find that the complainant is not true, it shall enter judgement against the plaintiff for costs. If it finds the complaint to be true, it shall render judgement against the defendant in favor of the plaintiff for restitution of the premises, and cost of suit, and for all arrears of rent, or a reasonable compensation for the use and occupation of the premises. (Emphasis supplied.)

The costs referred to are fixed by section 491 of the code and do not include attorney's fees.

In conclusion we note that the defendant supposes that he is entitled to recover his own attorney's fee under section 7 of the Usury law (Act no. 2655), in view of the usurious character of the stipulation for the payment of 15 per cent interest to the lessor for the payment of overdue rents. This suggestion is untenable, since the right to the attorney's fee under the section referred to attaches only when usurious interest has in fact been paid. The circumstance that usurious interest is stipulated for does not entitle the borrower to an attorney's fee in an action declaring the stipulation usurious.

The judgement appealed from is in accordance with the law and the facts and is affirmed without costs. So ordered.



Manila

EN BANC

G.R. No. L-21280 February 9, 1924

VICENTE E. REYES, in his capacity as administrator of the estate of Felipa Alonso y de Mesa viuda de Mendiola, plaintiff-appellant, vs.HENRY W. ELSER, defendant-appellant. MARIANO ALONSO Y DE MESA, intervenor and appellee.

Santiago and Guerrero for plaintiff-appellant.F. Boomer for defendant-appellant.Modesto Reyes and E. Ymzon for intervenor-appellee.

STATEMENT

At the time of her death, Felipa Alonso y de Mesa, widow of Mendiola, was the sole owner of a parcel of land, known as lot 44-B subdivision of lot No. 44 of block No. 2130 of the cadastral survey of the City of Manila, together with the buildings and improvements thereon, consisting of 1,844.60 square meters, which is more fully described in transfer certificate of title No. 17652, issued by the register of deeds of Manila on June 22, 1922.

In August, 1921, after her death, the plaintiff, Vicente E. Reyes, was appointed as administrator of her estate, and duly qualified as such, and at all times since he has been and is now such administrator.

After some negotiations, and by and with the knowledge, consent and approval of the heirs of the deceased, and founded upon an order of the probate court, the administrator sold the land in question to the defendant Henry W. Elser at the agreed price of P74,242.69, of which P10,000 was paid at the time of the purchase, and on March 29, 1922, Elser made his note to the plaintiff, as administrator, for the balance of P64,242.69 made due and payable May 29, 1922. To secure the payment of the note and on the same day, Elser executed to the administrator a first and voluntary mortgage on the premises, which was duly registered. By the terms of the note and the


mortgage, the P64,242.69 was to bear interest at the rate of 12 per cent per annum from maturity until final payment. It was further provided that in case of a suit or action to collect the note and enforce the mortgage, Elser would pay the further sum of P5,000, as attorney's fees.

For failure to pay the note at maturity, and on July 5, 1922, this suit was commenced to foreclose the mortgage and have the property sold.

Among other things, the mortgage also provides:

(c) It is distinctly understood and agreed that all rents on the property above described from the date of the execution of this document until the full payment of the amount of the said note, shall be, as at present, collected by the party of the first part for the benefit of the estate under his administration.

In the original complaint, the plaintiff prayed for P64,242.69, with interest thereon from May 29, 1922, at 12 per cent per annum, and for P5,000, as attorney's fees, and the sale of the property, and the application of the proceeds of the sale to satisfy the debt. Later, the plaintiff filed a plea in which he admits having collected rent upon the mortgaged property from May 29, 1922 to November 8, 1922, and that he kept the amount collected to apply upon the payment of the necessary expenses upon the mortgaged premises, and the balance, if any, to be applied to the payment of interest, and "that the plaintiff is, and always has been, ready to make an accounting of the rent collected upon the mortgaged premises and the expenses incurred in its preservation, but the defendant has never asked the plaintiff for a formal accounting."

For answer, defendant Elser made a general denial, and further alleged that the plaintiff had collected all the rents upon the mortgaged premises from March 29, 1922, and never paid any part thereof to the defendant or given him credit therefor; that he has also collected from the defendant P104.80 as taxes which accrued prior to March 29, 1922, and further alleged that the "mortgage is invalid in that it provides for the payment of interest at the rate of 12 per cent per annum and for collection by the mortgagee for his benefit of the rents of the property alleged to have been mortgaged which amount to and have amounted to a sum in excess of P200 each month, constituting usury in violation of Act No. 2655, laws of the Philippine Islands."

Over the protest and objection of the plaintiff, Mariano Alonso y de Mesa was permitted to file a bill of intervention, in which he alleges that for the last six years he has been and is now the usufructuary and in the possession of a two-story house on a certain lot on the premises, and that he obtained it as a compensation "for the long and valuable services rendered by him in favor of Felipa Alonso who died on June 25, 1921;" that the right existed a long time


prior to her death, and was recognized and confirmed by the deceased in her will; that the real property described in the mortgage was sold by Vicente Reyes, as administrator of the estate of Felipa Alonso to Henry W. Elser for P74,242.69; that the intervenor gave his consent to the sale with the understanding that he would intervene in the execution of the deed of sale, and that he was to receive "the proportional amount corresponding to his right of usufruct and possession," and that he has never received any part thereof; that the intervenor is entitled to, should have and receive, his proportional part "which corresponds to his usufructuary right and possession, inasmuch as on account of said sale he would be deprived of his aforesaid right of usufruct and possession, and for the reason that he had and was enjoying said usufructuary right and possession even prior to the death of the late Felipa Alonso."

Wherefore, he prays a corresponding judgment for the value of the usufruct, or at least P4,640.

To the bill of intervention, the plaintiff made a general denial.

Pending the suit Mr. Elser died, and C.W. Rosenstock was appointed as administrator of his este, and, as such, was substituted as defendant.

The case was tried upon such issues, and the lower court rendered judgment in favor of the plaintiff and against the defendant Elser for the sum of P64,242.69, with interest thereon from May 29, 1922, at the rate of 12 per cent per annum, from which was deducted the sum of P1,812.29, the total amount of the rents received by the plaintiff, as shown by Exhibit J. The trial court also rendered judgment for the further sum of P5,000, as attorney's fees and the costs of the action, and dismissed the cross-complaint of the defendant Elser, and directed the sale of the property to satisfy the judgment. It also rendered judgment against the plaintiff, as administrator, in favor of Mariano Alonso y de Mesa, as intervenor, for the sum of P2,000 as the value of his right of occupation and usufruct, with interest from the date of the judgment, without costs. From the judgment against him and in favor of the plaintiff, as administrator, the defendant Rosenstock, as executor of the Elser estate, appeals and assigns the following errors:

I. The trial court erred in not finding that the sum or value reserved and secured by Exhibit A, paragraph 6, sub-paragraphs (a) and (c) was for the forbearance of P64,242.69 imported by the said exhibit and was greater than is allowed by section 2 of Act No. 2655.

II. The trial court erred in not finding that Exhibit A was tainted with usury and therefore void.


III. The trial court erred in condemning the defendant-appellant to pay to the plaintiff-appellant within the space of three months from April 30, 1923, the sum of P64,242.69 with interest at 12 per cent per annum less the sum of P1,812.29 and to pay the further sum of P5,000 as attorneys' fees and the costs of the action.

From the judgment against him and in favor of the intervenor, the plaintiff appeals and assigns the following errors:

I. The trial court erred in finding that the intervenor signed the petition asking for a license to sell the property, Exhibit D, with the understanding that he (intervenor) would intervene in the execution of the deed of sale and receive a remuneration as payment of his right of occupation in house No. 30 on Calle Almanza, which was included in the property sold to the defendant Henry W. Elser.

II. The trial court erred in holding that the intervenor had a right to receive P2,000, as reasonable compensation for his usufruct and right of occupation.

III. The trial court erred in accepting the intervenor's motion, asking permission to intervene, filed right at the trial of this case without serving previous notice to the plaintiff, as required by section 121 of the Code of Civil Procedure and section 10 of the rules of Courts of First Instance, and in not ordering the striking out of the record of the complaint in intervention, as prayed for by the plaintiff in his motion under date of November 15, 1922.

IV. The trial court erred in condemning the plaintiff to pay the intervenor the sum of P2,000 with legal interest.

JOHNS, J.:

The note and mortgage in question were executed by Mr. Elser, now deceased, to and in favor of the plaintiff, as administrator, and the whole transaction was authorized and approved by the court. It was the result of a series of negotiations between the plaintiff and Elser, and the sale itself was authorized and approved by the heirs of the deceased, including Mariano Alonso y de Mesa, the intervenor. It is true that clause C of the mortgage in question above quoted specifically provides "that all rents on the property above described from the date of the execution of this document until the full payment of the amount of the said note, shall be, as at present, collected by the party of the first part for the benefit of the state under his administration." Standing alone and within itself, it might be construed as tending to show that the plaintiff was to receive more than 12 per cent interest on the amount of the note.


March 22, 1922, Elser wrote the plaintiff as follows:

I have the honor to advise you that the said property is now sold to the undersigned under the following conditions:

The sum of ten thousand (P10,000) pesos to be paid upon the execution of the deed of sale, and

The balance to a term of sixty (60) days after the sale, same to be recorded on regular mortgage, upon the same property. It is understood that the said mortgage will carry no interest, during that period of sixty (60) days, but whatever rent to be derived from said property during said period to redound to the benefit of the estate.

Based upon that letter, the probate court made an order authorizing and approving the sale of the property.

March 25, 1922, Elser wrote the plaintiff another letter in which he said:

The balance to a term of sixty (60) days after the sale, same to be recorded on regular mortgage, upon the same property. It is understood that the said mortgage will carry no interest during that period of sixty (60) days, but whatever rent to be derived from said property during said period to redound to the benefit of the estate.

Upon its receipt, another order of the probate court was obtained authorizing the sale upon the terms stated in that letter.

It is important to note that all of the transactions between the plaintiff and Elser were authorized and approved by the probate court, and that the transaction was a sale of property as distinguished from a loan of money by one person to another. It is also important to note that the promissory note in question became due and payable sixty days after its execution, and that it specifically provides that it shall not draw interest until after maturity. It is very apparent that at the time the mortgage was executed, it was contemplated by both parties that the note would be paid at its maturity, and that the clause, giving the plaintiff the right to the rents for the first sixty days, was inserted in consideration of plaintiff's waiver of interest on the note for the first sixty days. In other words, it was contemplated that the note would be paid at maturity. Pending that time it did not draw interest, and for such reason the plaintiff was to have the rents pending the maturity of the note. That was the real purpose and intent of the parties. It is true that in the original complaint the plaintiff claimed both the interest and the rents from May 29, 1922. But in a subsequent pleading, the exclusive right to the rents after May 29th was waived, and the plaintiff offered to account for


them, and in its finding the lower court allowed the defendant credit for rents to the amount of P1,812.29, and as a payment pro tanto on the note.

Clause C in the mortgage is a literal copy of Elser's letter to the plaintiff of March 25th, in which he modified his proposition of March 22d. In other words, clause C of the mortgage in question was founded on Elser's own proposition. It is very apparent that neither the plaintiff nor Elser ever contemplated the making of an usurious contract, and that, at the time it was made, neither of them ever thought or understood that it was. There is no merit in the claim that it was an usurious transaction. It was a sale as distinguished from a loan, and was authorized and approved by the probate court, and upon that question the judgment of the lower court is in accord with the actual facts and the intention of the parties, and for such reason is affirmed, with costs in favor of the plaintiff and against the appellant Rosenstock, as administrator.

Upon the bill of intervention, the trial court rendered judgment in favor of the intervenor and against the plaintiff for the sum of P2,000, without costs.

Here, again, it will be noted that both the note and the mortgage were executed by Elser to, and in favor of, the plaintiff, as administrator, and that there are other heirs of the deceased Felipa Alonso y de Mesa, of which the intervenor is only one, and that the deceased was the sole owner of the real property in question at the time of her death; that there are other improvements upon it outside of those claimed by the intervenor; that the sale in question was authorized and consummated with both the knowledge, written consent and approval of the intervenor, and that he shared in the proceeds of the sale.

This is a suit to foreclose the mortgage, and the validity of the mortgage is the only question involved between the plaintiff and the defendant Elser. The note and mortgage, having been executed to, and in favor of, the plaintiff, as administrator, by and with the knowledge, consent and approval of the heirs of the deceased, as administrator, plaintiff is entitled to have and receive the proceeds from the sale of the property. The question as to how it should be divided, and to whom it should be paid, and the amount which each should receive, and which the intervenor now seeks to litigate in this case, is a matter solely between the heirs of the deceased, and between them only, and the intervenor is the only one of them, who is a party to this action, and the other heirs would not be bound by any judgment of preference rendered in favor of the intervenor. In other words, the questions sought to be litigated by the intervenor in this action are questions between the heirs of the deceased, and between them only, and to which all of them should be made a party.


Assuming, without deciding, that the intervenor has a just and equitable claim, as contended for in his bill of intervention, it is a matter which should be settled in the administration of the estate between the intervenor and his coheirs.

The judgment in his favor and against the plaintiff, as administrator, is reversed, without costs to either party, and without prejudice to any rights which the intervenor may have arising from, or growing out of, any of the matters alleged in his bill of intervention. So ordered.


Manila

EN BANC

G.R. No. L-21440 April 30, 1966

SUN BROS. APPLIANCES, INC., plaintiff-appellant, vs.ANGEL AL. CALUNTAD, defendant-appellee.

Dominador A. Alafriz and Associates for plaintiff-appellant.Eusebio V. Navarro for defendant-appellee.


Plaintiff filed before the Municipal Court of Manila a complaint based on a conditional sale of one G.E. Television Set, Model 21, Console 1960, Serial No. 652548, under the condition that the price would be P3,440.00, the down payment P894.00, and it would be paid in monthly installments of P142.00 each for eighteen (18) months. Defendant only paid the amount of P1,442.00, leaving a balance of P1,988.00, which he failed to pay since March, 1961, for which reason plaintiff prayed that if said balance is not paid, the property be returned to plaintiff.


Defendant denied owing said balance of P1,988.00 for he contends that what he bought from plaintiff was a Philco Television Set, Model 21, with a value of P1,700.00, payable within ninety (90) days, but that it was destroyed by plaintiff's technicians and so it was replaced with a G.E. set on a cash basis, payable within ninety (90) days, the advance payment on the original set to be credited on the second set. It was agreed that the true market value of the G.E. set would be P1,500.00 but defendant made plaintiff sign a deed of sale for P3,440.00 thereby adding more than 150% to the original price. It is alleged that plaintiff in effect entered into a usurious transaction under the guise of a contract of sale.

Apparently, the case was elevated to the court of first instance because of the question of law involved.

The allegation of usury made by defendant in his answer was not denied under oath by plaintiff and so the court a quo considered said allegation as admitted under Section 1, Rule 9 of the Rules of Court. Hence, the court a quo considered the transaction null and void and on that basis dismissed the complaint. Plaintiff brought this case on appeal directly before this Court when its motion for reconsideration was denied on the plea that the same merely involves questions of law.

Plaintiff in its complaint alleges that the transaction between the parties was a conditional sale the terms thereof having been specified therein. Defendant in his answer admits that what he originally bought from plaintiff was one Philco Television Set, Model 21, Console 1960, the terms of payment having been specified in the contract of sale. Defendant admits that he failed to pay the purchase price within the term of ninety (90) days agreed upon.1äwphï1.ñët

It appears, therefore, that the transaction that took place between the parties was a conditional sale based on an installment plan, and not a loan, so that the alleged increase in the price of the article sold cannot be considered as a mere pretext to cover a usurious loan. It has been held that "The increase of the price is not interest within the purview of the Usury Law, if the sale is made in good faith and not a mere pretext to cover a usurious loan" (Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513). And elaborating on said case, this Court said:

x x x 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.

In 27 R.C.L., p. 214, it is said: "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." And in 39 Cyc., p. 927, it is also established that: "A vendor may well fix upon his property one price for cash and another for credit, and the mere fact that the credit price exceeds the cost 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.

Defendant's contention that the failure of plaintiff to specifically deny under oath the allegation of usury in his answer constitutes an implied admission of usury is untenable. If it is alleged that defendant entered into a contract of loan with plaintiff in which the latter collected a usurious interest there is need to deny the transaction under oath, and if no oath is taken the only thing admitted is the allegation that the interest is usurious and not that the contract entered into is a loan. The nature of the transaction is not admitted. The fact that what is alleged is that the transaction was a loan under the guise of a conditional contract of sale and that by increasing its price by 150% the consideration became usurious, such is not deemed admitted by the mere failure to deny the answer under oath. This transaction must still be proven before usury can be invoked in the light of the following ruling of this Court:

It may, of course, be held in general that only that for which the law requires an oath is deemed admitted, should no oath be taken. If it is alleged in the complaint that the defendant, whether an individual or a corporation, has entered into a contract of loan with the plaintiff, there is no need for a sworn answer. But if it be added that on this loan the defendant has collected usurious interest, that is, interest in excess of the rate fixed by the law, then there is need of an oath. In that case, if no oath is taken to the answer, the only thing admitted is the allegation that the interest charged is usurious, not that the contract entered into is a loan, which is something that must be proved independently of the admission, especially when, as in the one in question, this allegation is disputed.

The intervenor Hilarion Soriano not only alleges that the plaintiff charged, and that he paid him, usurious interest, but also that the


contract they made, under the guise of a sale subject to repurchase, according to its terms, was in reality a contract of loan herein usurious interest was stipulated and collected. He should therefore have shown by competent evidence that contract was really a loan. But, not only is there not a scintilla of evidence to this effect, but, on the contrary, the evidence of record, which is the contract itself, shows conclusively that it was a sale subject to repurchase. Wherefore, as the plaintiff and the intervenor did not enter into a contract of loan by virtue of which usurious interest could be collected, and as the contract entered into between them was a sale upon which usurious interest could not be collected, the admission established by the law that such interest was in fact collected, does not exist. The law cannot presume an absurdity. In order that this admission of the collection of usurious interest may be invoked, it is necessary first to establish the contract by virtue of which interest could be collected. (Lo Bun Chay vs. Paulino, 54 Phil. 144, 147-148.)

The contract entered into between the parties being a conditional sale, the increase in price over the cash price cannot be considered interest, and so the dismissal of the case by the court a quo is not justified.

Wherefore, the decision appealed from is reversed. The case is remanded to the lower court for further proceedings, without pronouncement as to costs.


Manila

EN BANC

G.R. No. L-44106 January 19, 1937

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs.JOSE VACA Y GARRIDO and ANA CALDERON, defendants-appellants.

Cardenas and Casal for appellants.Office of the Solicitor-General Hilado for appellee.

VILLA-REAL, J.:


The defendants, Jose Vaca y Garrido and Ana Calderon, appeal to this court from the judgment of the Court of First Instance of Cavite, the dispositive part of which reads as follows:

In view of all the foregoing, judgment is rendered:

On the first cause of action:

(a) The defendants are ordered to pay to the plaintiff the total amount of P46,693.39 plus the interest on the capital of P38,000 at 9 per cent per annum computed semi-annually from April 30, 1935, until fully paid, together with compound interest at 9 per cent per annum on all semi-annual interest due and unpaid from said date until fully paid;

(b) The said defendants are likewise ordered to pay interest at 9 per cent per annum on the total amount of P2,065.45, the insurance premiums and land taxes advanced by the Philippine Postal Savings Bank on the mortgaged properties, from April 30, 1935, until fully paid, and

(c) Likewise to pay the sum of P1,000 as costs, expenses and attorney's fees.

On the second cause of action:

(a) The defendants are ordered to pay to the plaintiffs the total amounts of P3,042.63 plus the interest on the capital of P2,500 at 9 per cent per annum computed semi-annually from April 30, 1935, until fully paid, together with compound interest at 9 per cent per annum on all semi-annual interest due and paid from said date until fully paid;

(b) Likewise to pay the sum of P125 as costs, expenses and attorney's fees, and.

(c) Finally, said defendants are likewise ordered to pay to the plaintiff any amount it might pay after April 29, 1935, as land taxes and insurance premiums or expenses for the repair of the mortgaged properties, plus interest at 9 percent per annum on said sums, until fully paid.

The defendants shall pay to the plaintiffs all the sums adjudicated to the latter by virtue of this decision, within the period of 120 days from the date this decision becomes final, otherwise the mortgaged properties shall be sold in order to satisfy to the plaintiff, with the proceeds thereof, all the sums to which it is entitled by virtue of this decision. So ordered.


In support of their appeal, the appellants assign two alleged errors as committed by the court a quo in its decision in question, to wit:

1. The lower court has fallen into error in rendering judgment against defendants for the amount represented by 9 per cent per annum on semi-annual interest due and unpaid of the capital loans of P38,000 and P2,500; and in sentencing defendants to pay further the sum of P1,125 as attorney's fees.

2. The lower court also has committed an error in not granting the defendant's motion for new trial based on statutory grounds.

The first question to be decided in the present appeal, which is raised in the first assignment of alleged error, is whether or not court a quo erred in ordering the defendants to pay interest at 9 per cent per annum on the semi-annual interest due and unpaid on the loans of P38,000 and P2,500, respectively.

The appellant's claim that the interest of 9 per cent per annum on the semi-annual interest due and unpaid on the loans of P38,000 and P2,500 is usurious.

The legal question herein raised has already been decided by this Court in the case of the Government of the Philippine Islands vs. Conde (61 Phil., 714), which states:

It is well settled in this jurisdiction that when there is an express agreement to charge interest on interest, such fact should not be taken into consideration in determining whether or not the stipulated interest exceeds the limit prescribed by the Usury Law. (Government of the Philippine Islands vs. Schenkel and Gonzales, 43 Phil., 616; Villaruel vs. Alvayda and Vicencio, 46 Phil., 277; Valdezco vs. Francisco, 52 Phil., 350).

The appellants likewise that the sums of P1,000 and P125, stipulated as penalties for costs, collection expenses and attorney's fees, are excessive and should be taken into consideration in determining whether or not the Usury Law has been violated. This question has likewise been decided by this court in the case of the Government of the Philippines Islands vs. Macanaya (G.R. No. L-40333[60 Phil., 409], wherein this court stated:

The errors assigned will have to be sustained. In the second paragraph of the note and in the mortgage contract, the defendant agreed in case of nonpayment on demand to pay to the Postal Savings Bank the sum of P1,000 in full, without any deduction, as and for costs, expenses, and attorney's fees for collection whether actually incurred or not. In


other words, the defendant bound himself to pay said amount regardless of the fact of whether it was actually spent for attorney's fees or not. So whether the plaintiff was represented by the provincial fiscal was not important, for this official was in the service of the Government of the Philippine Islands and was paid by it.

In the case of the Government of the Philippine Islands vs. Lim (61 Phil., 737), this court likewise stated:

In the promissory notes executed by the defendants and incorporated in the mortgage deeds, they voluntarily undertook to pay the sum of P1,300 as court costs, expenses of collection, and attorney's fees, whether incurred or not. This stipulation is a valid and permissible penal clause, not to contrary to any law, morals, or public order, and is, therefore, strictly binding upon the defendants. (Arts. 1091,1152, and 1258, Civil Code; Lambert vs. Fox, 26 Phil., 588; Bachrach vs. Golingco, 39 Phil., 138; Compañia General de Tobaccos vs. Jalandoni, 50 Phil., 501; Bachrach Motor Co. vs. Espiritu, 52 Phil., 346; Manila Building and Loan Association vs. Green, 54 Phil., 507.) It is neither excessive nor exorbitant, and the defendants have not made any payment upon their principal obligations, wherefore, the discretion conferred by article 1154 of the Civil Code may not be exercised to reduce the penalty.

In the light of the rulings above-cited, this court finds no merit in the foregoing assignments of error.

With respect to the costs, inasmuch as they are included in the penalties of P1,000 and P125, respectively, stipulated by the parties in the two mortgage contracts, the plaintiff's petition relative thereto should not be granted (Garcia vs. Lim Chu Sing, 59 Phil., 562; Bank of the Philippine Islands vs. Yulo, 31 Phil., 476).

In view of the foregoing, and finding the appealed judgment in accordance with the law, it is affirmed in toto, without special pronouncement as to costs. So ordered.


Manila

SECOND DIVISION


G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., petitioner-appellant, vs.THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-appellees.


Petition to review the Order of the respondent judge dated August 24, 1977. The facts are simple.

Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No. 2414 of the Court of First Instance of La Union. On January 22, 1973, the respondent judge rendered judgment in said case, the dispositive portion of which reads: têñ.£îhqwâ£

IN VIEW OF THE FOREGOING, the Court hereby renders judgment and sentences the defendant to pay Concordia Garcia Navalta the amount of P75,000.00 with legal interest from October, 1968, Pl,000.00, as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No. 52675-R but was affirmed on February 7, 1977. On February 24, 1977, the petitioner paid the following amounts to the private respondent: têñ.£îhqwâ£

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00

Total P114,250.00

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


and in the absence of stipulation, the legal interest, which is six per cent per annum." This appears to be the basis for awarding interest at the legal rate from October, 1968, although the debt was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the payment was not in fun satisfaction of the judgment because the former had to pay compound interest or an additional sum of P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent secure a writ of execution for the same which the former sought to quash over the opposition of the latter. In resolving the question the respondent judge issued an Order on August 24, 1977 as follows: têñ.£îhqwâ£

After hearing and consideration of the motion of the plaintiff for the issuance of an alias writ of execution, and the written manifestation and opposition filed by the defendant and finding as it appears that the written schedule of interest computation, which was submitted, is correct and in order, because compound interest has been computed from July 6, 1970 when the claim was judicially demanded, let an alias writ of execution issue to satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the question as to whether or not the petitioner is obligated to pay compound interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought to be executed ordered the payment of simple "legal interest" only. It said nothing about the payment of compound interest. Accordingly, when the respondent judge ordered the payment of compound interest he went beyond the confines of his own judgment which had been affirmed by the Court of Appeals and which had become final. Fundamental is the rule that execution must conform to that ordained or decreed in the dispositive part of the decision. Likewise, a court can not, except for clerical errors or omissions, amend a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960]; Ablaza vs. Sycip, et al., 110 Phil., 4 [1960].)

Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: "In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or, in default thereof, whenever the debt is judicially claimed in which last case it shall draw six per centum per annum


interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." Both legal provisions are in applicable for they contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913]; Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil. 539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest had been stipulated by the parties. In other words, there was no accrued conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is hereby set aside. No special pronouncement as to costs.

SO ORDERED.



Manila

SECOND DIVISION

G.R. No. L-57314 November 29, 1983

TEODORO SANCHEZ, petitioner, vs.HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of First Instance of Camarines Sur, Iriga City, and ALEJO SANCHEZ, respondents.

Andres C. Regalado for petitioner.

The Solicitor General for respondents.


This is a petition to review a decision rendered by the defunct Court of First Instance of Camarines Sur, Branch VII, with following factual background.

On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor Santilles in the Municipal Court of Bato, Camarines Sur, for the recovery of P2,000.00 which the latter had promised to pay in two notes. Said notes also contained stipulations for interest at the rate of 10% per month The Municipal Court rendered judgment ordering Teodoro Sanchez only to pay to Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the filing of the complaint.

Teodoro appealed to the Court of First Instance of Camarines Sur which rendered the following judgment: têñ.£îhqwâ£

WHEREFORE, the judgment rendered by the lower court is hereby AFFIRMED with modification as to costs. Judgment is hereby rendered, ordering the defendant to pay his indebtedness to plaintiff in the total sum of P2,000.00, plus interest thereon at the legal rate from the firing of the complaint in this case to actual payment. Defendant to pay double the costs of this suit. (Rollo p. 30.)

In his petition for review, Teodoro claims that in a loan with usurious interest both the loan and the usurious interest are void.


Alejo was required to comment on the petition but it appears that he died sometime in the latter part of 1980 and the early part of 1981. (Rollo, p. 42.) Accordingly, his children were impleaded as respondents and required to file comment which they failed to do despite notice to them.

The absence of comment on the part of the private respondents notwithstanding, We resolve the petition without any difficulty.

It is now well-settled that: "the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his right to recover of the borrower the money actually loaned this only in the case that the interest collected is usurious. The law, as it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contract ... (Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, 275 [1925].)

True it is that in Briones vs. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404, Chief Justice Concepcion and now Chief Justice Fernando concurred with Justice Castro who opined that both loan and usurious interest are void. However, it must be emphasized that eight other justices maintained that only the usurious interest is void but not the principal obligation.

WHEREFORE, finding the judgment sought to be reviewed to be in accordance with law, the petition is hereby dismissed for lack of merit with costs against the petitioner.

SO ORDERED.1äwphï1.ñët



SECOND DIVISION

G.R. No. 128990 September 21, 2000

INVESTORS FINANCE CORPORATION, petitioner, vs.AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY DEVELOPMENT CORPORATION,respondents.

BELLOSILLO, J.:

INVESTORS FINANCE CORPORATION seeks a review of the Decision of the Court of Appeals which ruled that the financing firm had entered into a usurious loan transaction with Autoworld Sales Corporation, thus entitling the latter to reimbursement of excess interest payments amounting to P2,586,035.44.1

Petitioner Investors Finance Corporation, then known also as FNCB Finance (now doing business under the name of Citytrust Finance Corporation), is a financing company doing business with private respondent Autoworld Sales Corporation (AUTOWORLD) since 1975. Anthony Que, president of AUTOWORLD, also held the same position at its affiliate corporation, private respondent Pio Barretto Realty Corporation (BARRETTO).

Sometime in August 1980 Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for loan was denied.

But sometime thereafter, FNCB's Assistant Vice President, Mr. Leoncio Araullo, informed Anthony Que that although it could not grant direct loans it could extend funds to AUTOWORLD by purchasing any of its outstanding receivables at a discount. After a series of negotiations the parties agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed. The mechanics of the proposed "IPP" transaction was —

(1) First, Pio Barretto (BARRETTO) would execute a Contract to Sell a parcel of land in favor of AUTOWORLD for P12,999,999.60 payable in sixty (60) equal monthly installments of P216,666.66. Consequently,


BARRETTO would acquire P12,999,999.60 worth of receivables from AUTOWORLD;

(2) FNCB would then purchase the receivables worth P12,999,999.60 from BARRETTO at a discounted value of P6,980,000.00 subject to the condition that such amount would be "flowed back" to AUTOWORLD;

(3) BARRETTO, would in turn, execute a Deed of Assignment (in favor of FNCB) obliging AUTOWORLD to pay the installments of the P12,999,999.60 purchase price directly to FNCB;2 and

(4) Lastly, to secure the payment of the receivables under the Deed of Assignment, BARRETTO would mortgage the property subject of the sale to FNCB.

On 17 November 1980 FNCB informed AUTOWORLD that its Executive Committee approved the proposed "IPP" transaction.3 The lawyers of FNCB then drafted the contracts needed and furnished Anthony Que with copies thereof.4

On 9 February 1981 the parties signed three (3) contracts to implement the "IPP" transaction:

(1) Contract to Sell whereby BARRETTO sold a parcel of land to AUTOWORLD, situated in San Miguel, Manila, together with the improvements thereon, covered by TCT No. 129763 for the price of P12,999,999.60 payable in sixty (60) consecutive and equal monthly installments of P216,666.66.

(2) Deed of Assignment whereby BARRETTO assigned and sold in favor of FNCB all its rights, title and interest to all the money and other receivables due from AUTOWORLD under the Contract to Sell, subject to the condition that the assignee (FNCB) has the right of recourse against the assignor (BARRETTO) in the event that the payor (AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the property subject of the Contract to Sell to FNCB as security for payment of its obligation under the Deed of Assignment.5

After the three (3) contracts were concluded AUTOWORLD started paying the monthly installments to FNCB.

On 18 June 1982 AUTOWORLD transacted with FNCB for the second time obtaining a loan of P3,000,000.00 with an effective interest rate of 28% per annum.6 AUTOWORLD and BARRETTO, as co-makers, then signed a


promissory note in favor of FNCB worth P5,604,480.00 payable in sixty (60) consecutive monthly installments of P93,408.00.7 To secure the promissory note, AUTOWORLD mortgaged a parcel of land located in Sampaloc, Manila, to FNCB.8 Thereafter, AUTOWORLD began paying the installments.

In December 1982, after paying nineteen (19) monthly installments of P216,666.66 on the first transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments of P93,408.00 on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to preterminate the two (2) transactions by paying their outstanding balances in full. It then requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78, where P6,784,551.24 was the amount to settle the first transaction while P3,242,165.54 was the amount to settle the second transaction.9

On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the latter's computation of its outstanding balances.10 On 27 December 1982 FNCB replied that it would only be willing to reconcile its accounting records with AUTOWORLD upon payment of the amounts demanded.11 Thus, despite its objections, AUTOWORLD reluctantly paid FNCB P10,026,736.78 through its UCPB account.12

On 5 January 1983 AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of P3,082,021.84.13 According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00 to settle the second transaction.14

The parties attempted to reconcile their accounting figures but the subsequent negotiations broke down prompting AUTOWORLD to file an action before the Regional Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise prayed for the nullification of thePromissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982.

In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts of P2,586,035.44 as excess payment for the first transaction and P418,262.00 as excess payment for the second transaction. AUTOWORLD also asked for P500,000.00 as exemplary damages and P100,000.00 as attorney's fees.

FNCB argued that the contracts dated 9 February 1981 were not executed to hide a usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally engage in as a financing company. With


regard to the second transaction, the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling rates for loans having a period of more than three hundred sixty-five (365) days. FNCB also prayed for P2,000,000.00 as moral damages and P500,000.00 as attorney's fees.

On 18 January 1985 FNCB filed a Third-Party Complaint against BARRETTO based on the Deed of Assignment, which expressly provided that FNCB as assignee had a right of recourse against BARRETTO as assignor in case AUTOWORLD defaulted in its payments.15

BARRETTO countered that it could not be held liable for AUTOWORLD's alleged default in its payments since theDeed of Assignment, together with the Contract to Sell and the Real Estate Mortgage, was simulated and perfected only to facilitate a usurious loan. It prayed for P1,600,000.00 as damages and P100,000.00 as attorney's fees.16

On 11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB declaring that the parties voluntarily and knowingly executed a legitimate "IPP" transaction or the discounting of receivables. AUTOWORLD was not entitled to any reimbursement since it was unable to prove the existence of a usurious loan. On the other hand, it was ordered to pay FNCB P50,000.00 for attorney's fees.17

The Court of Appeals modified the decision of the trial court and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the time it was executed the ceiling rates imposed by the Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest.18 The appellate court deleted the award of P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was exercised in good faith. Hence, this petition of FNCB.

We stress at the outset that this petition concerns itself only with the first transaction involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the three (3) contracts of 9 February 1981. As to the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any interest rate.


The pivotal issue therefore is whether the three (3) contracts all dated 9 February 1981 were executed to implement a legitimate Installment Paper Purchase ("IPP") transaction or merely to conceal a usurious loan. Generally, the courts only need to rely on the face of written contracts to determine the intention of the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury."19 The following circumstances show that such scheme was indeed employed:

First, petitioner claims that it was never a party to the Contract to Sell between AUTOWORLD and BARRETTO.20As far as it was concerned, it merely purchased receivables at a discount from BARRETTO as evidenced by the Deed of Assignment dated 9 February 1981. Whether the Contract to Sell was fictitious or not would have no effect on its right to claim the receivables of BARRETTO from AUTOWORLD since the two contracts were entirely separate and distinct from each other.

Curiously however, petitioner admitted that its lawyers were the ones who drafted all the three (3) contracts involved21 which were executed on the same day.22 Also, petitioner was the one who procured the services of the Asian Appraisal Company to determine the fair market value of the land to be sold way back in September of 1980 or six (6) months prior to the sale.23 If it were true that petitioner was never privy to the Contract to Sell, then why was it interested in appraising the lot six (6) months prior to the sale? And why did petitioner's own lawyers prepare the Contract to Sell? Obviously, petitioner actively participated in the sale to ensure that the appraised lot would serve as adequate collateral for the usurious loan it gave to AUTOWORLD.

Second, petitioner insists that the 9 February 1981 transaction was a legitimate "IPP" transaction where it only bought the receivables of BARRETTO from AUTOWORLD amounting to P12,999,999.60 at a discounted price of P6,980,000.00. However, per instruction of petitioner in its letter to BARRETTO dated 17 November 1980 the whole purchase price of the receivables was to be "flowed back" to AUTOWORLD.24 And in its subsequent letter of 24 February 1981 petitioner also gave instructions on how BARRETTO should apply the proceeds worth P6,980,000.00, thus —

Gentlemen:

This serves to inform you of-the various application of the proceeds (P6,980,000.00) of your real estate transaction per your authorization/letter dated 2.10.81:


1. P1,937,884.20 — Paid to Paramount Finance Corp. on Feb. 16, 1981, inclusive of P2.00 SC for Manager's Check.

2. P111,818.87 — Paid to Agcaoili and Associates of Feb. 16, 1981 inclusive of P2.00 SC for Manager's Check for the preparation of documents, legal review, registration and transfer of ownership.

3. P3,179,700.00 — Paid to FNCB Finance on Feb. 20, 1981 for full payment of DB transaction (Account No. 06156)

4. P3,108.40 — Payment for the appraisal fee conducted by the Asian Appraisal Company. Inc.

5. P100.00 — Payment for the title search fee conducted by Agcaoili and Associates.

6. P2,500.00 — Payment for legal and professional fee (Agcaoili and Associates)

7. P638,601.60 — Payment to FNCB Finance for the partial payment of DB transaction (Account No. 40150 — sold units)

8. P122,640.00 — Payment to FNCB Finance for the partial payment of DB transaction (Account No. 406149 — sold units)

9. P983,646.93 — Balance after application, Payable to Pio Barreto Dev. Inc.

P6,980,000.00 — Total

Should you need any clarification on the matter, please do not hesitate to call on the undersigned.

Very truly yours,

L.V. Araullo, Asst. Vice-President25

It can be seen that out of the nine (9) items of appropriation stated above, Item Nos. 2-8 had to be returned to petitioner. Thus, in compliance with the aforesaid letter, BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to petitioner to settle some of AUTOWORLD's previous debts to it.26 Any remaining amount after the application of the proceeds would then be surrendered to AUTOWORLD in compliance with the letter of 17 November 1980; none went to BARRETTO.


The foregoing circumstances confirm that the P6,980,000.00 was really an indirect loan extended to AUTOWORLD so that it could settle its previous debts to petitioner. Had petitioner entered into a legitimate purchase of receivables, then BARRETTO, as seller, would have received the whole purchase price, and free to dispose of such proceeds in any manner it wanted. It would not have been obliged to follow the "Application of Proceeds" stated in petitioner's letter.

Third, in its 17 November 1980 letter to BARRETTO, petitioner itself designated the proceeds of the "IPP" transaction as a "loan."27 In that letter, petitioner stated that the "loan proceeds" amounting to P6,980,000.00 would be released to BARRETTO only upon submission of the documents it required. And as previously mentioned, one of the required documents was a letter agreement between BARRETTO and AUTOWORLD stipulating that the P6,980,000.00 should be "flowed back" to AUTOWORLD. If it were a genuine "IPP" transaction then petitioner would not have designated the money to be released as "loan proceeds" and BARRETTO would have been the end recipient of such proceeds with no obligation to turn them over to AUTOWORLD.

Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner extended on 18 June 1982 a direct loan of P3,000,000.00 to AUTOWORLD. This time however, with no more ceiling rates to hinder it, petitioner imposed a 28% effective interest rate on the loan.28 And no longer having a need to cloak the exorbitant interest rate, the promissory note evidencing the second transaction glaringly bore the 28% interest rate on its face.29 We are therefore of the impression that had there been no interest rate ceilings in 1981, petitioner would not have resorted to the fictitious "IPP" transaction; instead, it would have directly loaned the money to AUTOWORLD with an interest rate higher than 12%. Gregorio Anonas, Senior Vice President of petitioner, effectively admitted that it only employed discounting of receivables due to the ceiling rates imposed by the Usury Law. Thus he testified —

Q: And is it not a fact further that FNCB Finance at the time could not or would not want to extend direct loan because of a ceiling fixed by the Usury Law on interest?

A: We haven't at that time giving direct loan, it is a discounting business.

Q: You mean never have you extended direct loan?

A: We did at a certain period of time and then we stopped, we go to discounting business because we transferred to direct loan.


Q: After the ceiling was removed, ceiling on interest was removed, you again, FNCB, extended direct loan, correct?

A: Yes, sir.

Q: Shall we say that the reason why you did not extend direct loan was because you did not want to be confined on the ceiling on interest under Usury Law?

A: Probably yes, because as you know the cost, in the operating cost of finance company is extremely different from a bank and we cannot survive, and this normally has been the case.

Q: And so, therefore, the only way you could generate more income for your company would be to encourage discounting of receivables?

A: That was our business. It is not to generate more income, that is our business. . .30

Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD.

Petitioner anchors its defense on Sec. 7 of the Usury Law which states —

Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of the Act and said purchase was not a part of the original usurious transaction. In any case however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in any case of litigation, also the costs and such attorney's fees as may be allowed by the court.

Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the provisions of the Usury Law and that the purchase was not a part of the original usurious transaction.


Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides —

Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9 February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should therefore be declared void. Having declared the transaction between the parties as void, we are now tasked to determine how much reimbursement AUTOWORLD is entitled to. The Court of Appeals, adopting the computation of AUTOWORLD in its plaintiff-appellant's brief, ruled —

According to plaintiff-appellant, defendant-appellee was able to collect P3,921,217.7831 in interests from appellant. This is not denied by the appellee. Computed at 12% the effective interest should have been P1,545,400.00.32 Hence, appellant may recover P2,586,035.44,33 representing overpayment arising from usurious interest rate charged by appellee.34

While we do not dispute the appellate court's finding that the first transaction was a usurious loan, we do not agree with the amount of reimbursement awarded to AUTOWORLD. Indeed, it erred in awarding only the interest paid in excess of the 12% ceiling. In usurious loans, the creditor can always recover the principal debt.35 However, the stipulation on the interest is considered void thus allowing the debtor to claim the whole interest paid. In a loan of P1,000.00 with interest at 20% per annum or P200.00 per year, if the borrower pays P200.00, the whole P200.00 would be considered usurious interest, not just the portion thereof in excess of the interest allowed by law.36

In the instant case, AUTOWORLD obtained a loan of P6,980,000.00. Thereafter, it paid nineteen (19) consecutive installments of P216,666.66 amounting to a total of P4,116,666.54, and further paid a balance of P6,784,551.24 to settle it. All in all, it paid the aggregate amount of P10,901,217.78 for a debt of P6,980,000.00. For the 23-month period of the existence of the loan covering the period February 1981 to January 1982, AUTOWORLD paid a total of P3,921,217.78 in interests.37 Applying the 12% interest ceiling rate mandated by the Usury Law, AUTOWORLD should have only paid a total of P1,605,400.00 in interests.38 Hence, AUTOWORLD is entitled to recover the whole usurious interest amounting to P3,921,217.78.

We are not unaware of Sanchez v. Buenviaje39 where the Court allowed the usurer to recover legal interest on the principal amount loaned. But such


interest arose from the debtor's delay in paying the principal from the time of the creditor's demand. That is the reason why legal interest was counted only from the time the creditor filed his complaint for the recovery of a debt. In this case however, the debtor was never in delay. As a matter of fact, AUTOWORLD paid the principal of P6,980,000.00 and the whole usurious interest of P3,921,217.88 upon petitioner's insistent demand. Thus, the case of Sanchez v. Buenviaje herein cited will not apply to petitioner and it will not be entitled to legal interest on the amount of the principal loan.

Under Sec. 6 of the Usury Law, AUTOWORLD is also entitled to reasonable attorney's fees and costs

SECTION 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed, to be taken or received, may recover the whole interest, commission, premiums, penalties and surcharges paid or delivered with costs and attorney's fees in such sum as may be allowed by the court in an action against a person or corporation who took or received them if such action is brought within two years after such payment or delivery (emphasis ours).

Although the Court has discretion to fix the amount of attorney's fees, it has no discretion to deny it altogether. Thus, in Delgado v. Valgona,40 we held —

When the right of action to recover interest paid upon a usurious contract is established, a reasonable attorney's fee should be allowed as a matter of course, the same as costs are awarded. The purpose of the law is to encourage persons who have suffered from contracts of this character to come into court and vindicate their rights, and the imposition upon the usurer of the obligation to pay attorney's fee will serve at once as an encouragement to the oppressed and as a wholesome deterrent to the taking of usurious interests.

Quite obviously, Anthony Que, the President of AUTOWORLD, actively and knowingly participated in the execution of the usurious loan transaction. As a seasoned businessman he must have been aware of the consequences of his business dealings. But, although we find his actions extremely reprehensible, we must abide by the principle laid down in Go Chioco v. Martinez41 where we held that the pari delicto rule does not apply to usury cases which entitle the borrower to recover the whole interest paid; otherwise, the avowed policy of discouraging usurious transactions would not be served, for the mere invocation of the pari delicto rule would allow the usurer to reap the benefits of his unlawful act.


WHEREFORE, the assailed Decision of the Court of Appeals dated 24 May 1996 declaring the 9 February 1981 transaction as a usurious loan is AFFIRMED, subject to the MODIFICATION that petitioner Investors Finance Corporation is ordered to pay private respondent Autoworld Sales Corporation the amount of P3,921,217.78 representing the entire usurious interest it paid on the 9 February 1981 loan, as well as P50,000 00 as attorney's fees and the costs.

SO ORDERED.

Digest

Facts: Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for loan was denied. But however remedied to extend funds by purchasing any of its outstanding receivables at a discount, the parties agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed. The parties signed three contracts to implement the "IPP" transaction. After which it was concluded AUTOWORLD started paying the monthly installments to FNCB.

After paying nineteen (19) monthly installments on the first transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to pre-terminate the two (2) transactions by paying their outstanding balances in full. It then requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78.

AUTOWORLD disagreed with the latter's computation of its outstanding balances. However, FNCB replied that it would only be willing to reconcile its accounting records with AUTOWORLD upon payment of the amounts demanded. Thus, despite its objections, AUTOWORLD reluctantly paid.

AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of P3,082,021.84. According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00 to settle the second transaction.

The parties attempted to reconcile their accounting figures but the subsequent negotiations broke down prompting AUTOWORLD to file an action before the Regional Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real Estate Mortgage all dated 9 February


1981. It likewise prayed for the nullification of the Promissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982.

In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts of P2,586,035.44 as excess payment for the first transaction and P418,262.00 as excess payment for the second transaction.

FNCB argued that the contracts were not executed to hide a usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally engage in as a financing company. With regard to the second transaction, the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling rates for loans having a period of more than three hundred sixty-five (365) days.

The Regional Trial Court of Makati ruled in favor of FNCB. The Court of Appeals modified the decision of the trial court and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the time it was executed the ceiling rates imposed by the Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest. The appellate court deleted the award of P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was exercised in good faith. Hence, this petition of FNCB.

Issue: Whether the three (3) contracts that were executed to implement a legitimate Installment Paper Purchase ("IPP") transaction are concealment to a usurious loan.

Held: We stress at the outset that this petition concerns itself only with the first transaction involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the three 3 contracts of 9 February 1981. As to the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any interest rate.


Generally, the courts only need to rely on the face of written contracts to determine the intention of the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.” The following circumstances show that such scheme was indeed.

Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD.

Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the provisions of the Usury Law and that the purchase was not a part of the original usurious transaction. Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides — Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9 February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should therefore be declared void.



Baguio City

FIRST DIVISION

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner, vs.THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx


III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of preliminary injunction. Petitioners


filed a motion for reconsideration. In the interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the


mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.


Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must


be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and


provisions governing agreements between parties, which agreements — while they may be the law between the contracting parties — implicitly incorporate provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law


increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest


is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over


the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans.10 In facilitating collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution.11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in the


PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.


Manila

FIRST DIVISION

G.R. No. 122079 June 27, 1997


SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, petitioners, vs.HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as nominal party-defendants, THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who conducted the auction sale and the REGISTER OF DEEDS or his representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION, respondents.

VITUG, J.:

The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the instant petition for review oncertiorari, the decision, 1 dated 15 September 1995, of the Court of Appeals, affirming with modification the judgment of the Regional Trial Court ("RTC"), 2 Branch 157, of Pasig City, 3 that dismissed the complaint of herein petitioners against private respondents.

The facts, hereunder narrated, are culled from the findings of the appellate court.

On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life Savings and Trust Company) granted to the Concepcions a loan amounting to P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a promissory note and a real estate mortgage over their property located at 11 Albany St., Greenhills, San Juan, Metro Manila. The loan was payable in equal quarterly amortizations for a period of fifteen (15) years and carried an interest rate of sixteen percent (16%) per annum. The promissory note provided that the Concepcions had authorized —

. . . the Bank to correspondingly increase the interest rate presently stipulated in this transaction without advance notice to me/us in the event the Central Bank of the Philippines raises its rediscount rate to member banks, and/or the interest rate on savings and time deposit, and/or the interest rate on such loans and/or advances. 4

In accordance with the above provision, the bank unilaterally increased the interest rate from 16% to 21% effective 17 February 1980; from 21% to 30% effective 17 October 1984; and from 30% to 38% effective 17 November 1984, increasing the quarterly amortizations from P67,830.00 to, respectively, P77,619.72, P104,661.10, and P123,797.05 for the periods aforestated. The Concepcions paid, under


protest, the increased amortizations of P77,619.72 and P104,661.10 until January 1985 but thereafter failed to pay the quarterly amortization of P123,797.05 (starting due date of 17 April 1985).

In a letter, dated 15 July 1985, the bank's President made a demand on the Concepcions for the payment of the arrearages. The Concepcions failed to pay, constraining the bank's counsel to send a final demand letter, dated 26 August 1985, for the payment of P393,878.81, covering the spouses' due account for three quarterly payments plus interest, penalty, and service charges. Still, no payment was received.

On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of Pasig City a petition for extrajudicial foreclosure of the real estate mortgage executed by the Concepcions. A notice of sale was issued on 15 May 1986, setting the public auction sale on 11 June 1986. The notice was published in the newspaper "Mabuhay." A copy of the notice was sent to the Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City and/or at 11 Albany St., Greenhills Subdivision, San Juan, Metro Manila. The public auction sale went on as scheduled with the bank emerging as the highest bidder. A Certificate of Sale was issued in favor of the bank.

The Concepcions were unable to exercise their right of redemption within the one-year period provided under Act No. 3135. The bank thus consolidated its title over the property and, after the cancellation of the title in the name of the Concepcions, a new transfer certificate of title (No. 090-R) was issued in the name of Home Savings Bank and Trust Company.

On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje Realty Corporation and a new certificate of title was issued in the latter's name.

Meanwhile, on 29 July 1987, the Concepcions filed an action against Home Savings Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and the Register of Deeds of San Juan, Metro Manila, for the cancellation of the foreclosure sale, the declaration of nullity of the consolidation of title in favor of the bank, and the declaration of nullity of the unilateral increases of the interest rates on their loan. The spouses likewise claimed damages against the defendants. The Concepcions, having learned of the sale of the property to Asaje Realty Corporation, filed an amended complaint impleading the realty corporation and so praying as well for the cancellation of the sale executed between said corporation and the bank and the cancellation of the certificate of title issued in the name of Asaje.

On 31 August 1992, the trial court found for the defendants and ruled:


In view of all the foregoing premises, this Court finally concludes that the plaintiffs have no cause of action either against defendant Home Savings Bank & Trust Company or defendant Asaje Realty Corporation; and under the circumstances of this case, it deems it just and equitable that attorney's fees and expenses of litigation should be recovered by said defendants.

WHEREFORE, judgment is hereby rendered dismissing the amended complaint of plaintiffs Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the defendants for lack of merit, and ordering the said plaintiffs to pay attorney's fees and expenses of litigation in the sum of P30,000.00 to defendant Home Savings Bank & Trust Company and in the amount of P25,000.00 to defendant Asaje Realty Corporation, in addition to their respective costs of suit.

SO ORDERED. 5

The Concepcions went to the Court of Appeals.

On 15 September 1995, the appellate court affirmed the trial court's decision, with modification, as follows:

Under the facts and circumstances of the case at bench, the award of attorney's fees, expenses of litigation and costs of suit in favor of defendant-appellee should be deleted. It is not a sound policy to place a penalty on the right to litigate, nor should counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court of Appeals, 169 SCRA 558).

WHEREFORE, the appealed judgment is AFFIRMED with the modification that the award of attorneys fees, litigation expenses and costs of suit in favor of defendant-appellees are deleted from the dispositive portion.

SO ORDERED. 6

The Concepcions forthwith filed with this Court a petition for review on certiorari, contending that they have been denied their contractually stipulated right to be personally notified of the foreclosure proceedings on the mortgaged property.

There is some merit in the petition.

The three common types of forced sales arising from a failure to pay a mortgage debt include (a) an extrajudicial foreclosure sale, governed by Act


No. 3135; (b) a judicial foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an ordinary execution sale, covered by Rule 39 of the Rules of Court. 7 Each mode, peculiarly, has its own requirements.

In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135 8 is the law applicable; 9 the provision reads:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication of the same in a newspaper of general circulation. 10 Personal notice to the mortgagor is not necessary. 11, Nevertheless, the parties to the mortgage contract are not precluded from exacting additional requirements.

In the case at bar, the mortgage contract stipulated that —

All correspondence relative to this Mortgage, including demand letters, summons, subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the Mortgagor for all legal purposes, and fact that any communication is not actually received by the Mortgagor, or that it has been returned unclaimed to the Mortgagee, or that no person was found at the address given, or that the address is fictitious or cannot be located, shall not excuse or relieve Mortgagor from the effects of such notice. 12

The stipulation, not being contrary to law, morals, good customs, public order or public policy, is the law between the contracting parties and should be faithfully complied with. 13

Private respondent bank maintains that the stipulation that "all correspondence relative to (the) Mortgage . . . shall be sent to the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee" 14 gives the mortgagee an alternative to send its correspondence either at the old or the new address


given. 15 This stand is illogical. It could not have been the intendment of the parties to defeat the very purpose of the provision referred to which is obviously to apprise the mortgagors of the bank's action that might affect the property and to accord to them an opportunity to safeguard their rights. The Court finds the bank's failure to comply with its agreement with petitioners an inexcusable breach of the mortgagee's covenant. Neither petitioners' subsequent opportunity to redeem the property nor their failed negotiations with the bank for a new schedule of payments, 16 can be a valid justification for the breach.

The foregoing notwithstanding, petitioners may no longer seek the reconveyance of the property from private respondent Asaje Realty Corporation, the latter having been, evidently, an innocent purchaser in good faith. 17The realty corporation purchased the property when the title was already in the name of the bank. It was under no obligation to investigate the title of the bank or to look beyond what clearly appeared to be on the face of the certificate. 18

Private respondent bank, however, can still be held to account for the bid price of Asaje Realty Corporation over and above, if any, the amount due the bank on the basis of the original interest rate, the unilateral increases made by the bank having been correctly invalidated by the Court of Appeals.

The validity of "escalation" or "escalator" clauses in contracts, in general, was upheld by the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hen. Navarro and Del Valle. 19 Hence:

Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence actual meeting of the minds of the parties or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.

The Court further finds as a matter of law that the cost of living index adjustment, or substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been


universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs. 20

In Philippine National Bank vs. Court of Appeals, 21 the Court further elucidated, as follows:

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who contracts his act has no more efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v.Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . (T)he unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force or law between the parties, there must be mutuality


between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . . Hence, even assuming that the. . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not equal footing the weaker party's (the debtor) participation being reduced to the alternative to take it or leave it'. . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. (Citationsomitted.) 22

Even if we were to consider that petitioners were bound by their agreement allowing an increase in the interest rate despite the lack of advance notice to them, the escalation should still be subject, as so contractually stipulated, to a corresponding increase by the Central Bank of its rediscount rate to member banks, or of the interest rate on savings and time deposit, or of the interest rate on such loans and advances. The notices sent to petitioners merely read:

Letter of 19 July 1984:

Please be informed that the Bank has increased the interest rate of your existing loan from 21 to 30%per annum beginning October 17, 1984. This increase of interest rate is in accordance with the provision of Section 2 of Presidential Decree No. 1684 23 amending Act No. 2655. This provision of the decree is reiterated under paragraph 1 of your Promissory Note. Your quarterly amortization has been increased to P104,661.10.

We trust that you will be guided accordingly. 24

Letter of 14 November 1984:

On account of the prevailing business and economic condition, we are compelled to increase the interest rate of your existing loan from 30% to 38 % per annum effective November 17, 1984. This increase is in accordance with your agreement (escalation clause) in your promissory note/s.


In view of this increase in the interest rate of your loan, your Quarterly amortization correspondingly increased to P123,797.05 commencing on April 17, 1985.

We trust that you will understand our position and please be guided accordingly. 25

Given the circumstances, the Court sees no cogent reasons to fault the appellate court in its finding that there are no sufficient valid justifications aptly shown for the unilateral increases by private respondent bank of the interest rates on the loan.

WHEREFORE, the, decision of the appellate court is AFFIRMED subject to the MODIFICATION that private respondent Home Savings Bank and Trust Company shall pay to petitioners the excess, if any, of the bid price it received from Asaje Realty Corporation for the foreclosed property in question over and above the unpaid balance of the loan computed at the original interest rate. This case is REMANDED to the trial court for the above determination. No costs.

SO ORDERED.

Digest

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

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

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

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

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


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

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

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

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

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

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



Manila

THIRD DIVISION

G.R. No. 119379 September 25, 1998

RODELO G. POLOTAN, SR., petitioner, vs.HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, respondents.

ROMERO, J.:

Assailed before this Court in a Petition for Review on Certiorari is the decision 1 of the Court of Appeals in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial Court of Makati City.

Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments. Said goods and services are reimbursed later on by cardholders upon proper billing.

Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with Diners Club in October 1985. The application form


contained terms and conditions governing the use and availment of the Diners Club card, among which is for the cardholder to pay all charges made through the use of said card within the period indicated in the statement of account and any remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank & Trust Company. Notably, in the application form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly and severally with petitioner the latter's obligation to private respondent.

Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and service charges in the aggregate amount of P33,819.84 which had become due and demandable.

Demands for payment made against petitioner proved futile. Hence, private respondent filed a Complaint for Collection of Sum of Money against petitioner before the lower court.

The lower court rued, thus:

WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally plaintiff:

a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service charges of 2% per month starting May 9, 1987 until the entire obligation is fully paid;

b) An amount equivalent to 25% of any and all amounts due and payable as attorney's fees, plus costs of suit.

With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff.

The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner assigns the following errors:

I

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID AND LEGAL THE FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO WIT:


PAYMENT OF CHARGES — . . . The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder.

The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder.

II

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN EFFECT THAT PRIVATE RESPONDENT'S STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING THE PROPER BASIS FOR THE INTRODUCTION OF CONTRARY EVIDENCE;

III

RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE;

IV

RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO PETITIONER.

In the first assignment of error, petitioner argues that the provision on interest rate is "obscure and ambiguous and not susceptible of reasonable interpretation" particularly the terms "prime rate", "prevailing market rate" and "guiding rate". In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioner added that the said provision was also illegal as it violated the laws and Central Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a downward adjustment of the same.


In his second and third assignment of error, petitioner claimed that Diners Club admitted, through its statement of account, that petitioner's wife, Mrs. Polotan, had no more account with it. But then, he claimed that the lower court and the Court of Appeals allowed the testimony of one Mr. Vicente explaining that the reason why Mrs. Polotan had no more account with it was that being a supplementary cardholder, her account was consolidated with that of petitioner in accordance with its new policy. He argued that since Diners Club admitted that Mrs. Polotan had no more account with it, the only way it could contradict such admission was by declaring that the same was a result of a palpable mistake in accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting said explanation, the lower court and the Court of Appeals violated the rule on the weight to be accorded conflicting evidence. In effect, petitioner insists that both courts favored the uncorroborated testimonial evidence of Mr. Vicente over the documentary evidence presented by petitioner and admitted by Diners Club.

In its fourth assignment of error, petitioner claimed that he should have been awarded damages because of Diners Club's bad faith.

This Court finds Petitioner's contentions without merit.

The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's submission of the above errors, however, the core issue is basically one of fact. This case stemmed from a simple complaint for collection of sum of money. The lower court and the Court of Appeals found that petitioner indeed owed Diners Club the amount being demanded.

In the case of Reyes v. CA, 2 this Court held that factual findings of the trial court, adopted and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion and (10) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by the evidence on record.


Only a clear showing that any of the above-cited exceptions exists would justify a review of the findings of fact made by the lower court and upheld by the Court of Appeals. In the instant case, a review of the decisions of the lower court, as well as the Court of Appeals, shows that the conclusions have been logically arrived at and substantially supported by the evidence presented by the parties.

Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based on petitioner's claim that since the contract he signed with Diners Club was a contract of adhesion, the obscure provision on interest should be resolved in his favor.

A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. 3

Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by Diners Club. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against private respondent.

Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee", and "guiding rate" are technical terms which are beyond the ken of an ordinary layman. To be sure, petitioner hardly falls into the category of an "ordinary layman." As aptly observed by the Court of Appeals:

. . . [A]ppellant by his own admission is a "lawyer by profession, a reputable businessman and a note leader of a number of socio-civic organizations." With such impressive credentials, this Court is hard-put to fathom someone of his calibre entering into a contract with eyes "blindfolded". 4

Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. 5

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract


which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. 6 It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided. 7

In this case, petitioner, in effect, claims that the subject contract is one-sided in that the contract allows for the escalation of interests, but does not provide for a downward adjustment of the same in violation of Central Bank Circular 905.

The claim is without basis. First, by signing the contract, petitioner and private respondent agreed upon the rate as stipulated in the subject contract. Such is now allowed by C.B. Circular 905. 8 Second, petitioner failed to cite any particular provision of said Circular which was allegedly violated by the subject contract.

Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. 9

Petitioner further argues that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by Diners Club.

In Florendo v. CA, 10 this Court has held that:

. . . the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]):

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. . . .

The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the


monthly statement served to the Cardholder." This could not be considered an escalation clause for the reason that it neither states all increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates . . ." is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. 11 Obviously, the fluctuation in the markets rates is beyond the control of private respondent.

As to the second and third assignments of error, it is misleading for petitioner to say that private respondent had judicially admitted that its statement of account is proof that Mrs. Polotan has already paid her account with private respondent. Proceeding from said premise, it is further misleading for petitioner to conclude that private respondent's testimonial evidence about a new policy contradicted its judicially admitted documentary evidence without laying the proper basis for the introduction of contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules on Evidence, which provides that:

Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings do not require proof and can be contradicted unless previously shown to have been made through palpable mistake.

Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But to conclude that said Statement of Account was likewise an admission that Mrs. Polotan has no more account with Diners Club would be equivocatory, or non-sequitur.

While private respondent admitted the existence of Exhibit "2", it could not have agreed to the purpose for which the exhibit was presented. As satisfactorily found by the Court of Appeals and to which this Court agrees:


Appellant's allegation is misleading. On the contrary, appellee's rebuttal witness, Alfredo Vicente, categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed a zero balance (Exh. "2") was due to the fact that effective February 1989, under a new system, separate monthly statements were produced on supplementary card members. Prior to February 1989, the availment of Mr. and Mrs. Polotan were incorporated under one statement.

Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or "02/08/89" (Exh. "2"). This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs. Polotan's name.

Although said exhibit would, by itself, show that Mrs. Polotan had no more account with Diners Club, it would not have been conclusive to prove that said account was already paid. The proper evidence would have been a receipt of payment.

Significantly, petitioner did not contest the purchases as indicated in the statements of account but merely alleged that some of the purchases being claimed to have been made by petitioner were not supported by invoices. The lower court found otherwise. 12

In light of the above, this Court sees no reason to award damages to petitioner.

WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees are reduced to 15%.

SO ORDERED.

Digest

Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments.

Petitioner argues that the provision on interest rate is obscure and ambiguous and not susceptible of reasonable interpretation particularly the


terms prime rate, prevailing market rate and guiding rate. In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioners contract with private respondent in this case, expressly provides for an escalation clause but not a de-escalation clause. The Supreme Court ruled that notwithstanding this, the contract provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction and that said provision on the increase of interest rates is not dependent solely on the will of private respondent as it is also dependent on the prevailing market rates. A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by the Company. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against the Company. Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided


Manila

EN BANC


G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs.HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees:

WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan.

SO ORDERED.

The facts are not in dispute:

On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads:

3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift


banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.

x x x x x x x x x

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides:

Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months.

The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:

September 24, 1976

Mr. Florante del Valle14 Palanca StreetB.F. Homes, ParanaqueRizal

Dear Mr. del Valle:


This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum.

A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note:

I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:

l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that:

a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and

2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date.

The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses.

We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.


Very truly yours,

(Sgd.) MERCEDES C. PAREDESDirector

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan.

It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties would like to end this matter once and for all."

However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.


At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono2and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3

The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid.

Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined


arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4

The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a lawshould be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone.


CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."


While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender.

2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage.

Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty.

On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).1avvphi1

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section,10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read:


SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty.


WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.

The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494.

SO ORDERED.

Digest


Manila

EN BANC

G.R. No. L-31125 January 21, 1930

TIBURCIO LUTERO, plaintiff-appellant, vs.SIULIONG and CO., defendant-appellant.

Guevara, Francisco and Recto and Tiburcio Lutero for plaintiff-appellant.Power and Hill for defendant-appellant.

VILLA-REAL, J.:

These are two appeals taken by plaintiff Tiburcio Lutero and by defendant Siuliong & Co. from the judgment of the Court of First Instance of Iloilo


absolving the defendant from the complaint, and the plaintiff from the cross-complaint, without costs.

In support of his appeal, the plaintiff assigns the following alleged errors as committed by the court below in its judgment, to wit:

The lower court erred:

1. In refusing to permit witness Rufino Abordo to testify with regard to a conversation between the plaintiff and the deceased manager of the defendant.

2. In holding: (a) That Exhibits A and C are contracts of sale of sugar; (b) that the P3,000 and P5,600 mentioned in said contracts are advances on the selling price of 500 and 800 piculs of sugar, respectively.

3. In not holding: (a) That Exhibits A and C are contracts of loans of money payable in sugar; (b) that said contracts are usurious; (c) therefore, the current market price at the time of delivery, or P30 per picul, should be fixed as the price of the sugar delivered by the plaintiff to the defendant; (d) consequently, the plaintiff is entitled to a balance of P8,187.75 against the defendant.

4. In not ordering the defendant to pay plaintiff said amount of P8,187.75.

5. In denying the plaintiff's motion for a new trial.

On the other hand, the defendant, in support of its appeal, assigns the following alleged errors as committed by the court below in its judgment, to wit:

The court erred in all of the following particulars:

1. In finding that the defendant by its silence had renounced its rights under its contracts with the plaintiff.

2. In refusing to allow defendant interest at eight per cent per annum as provided for in Exhibit C.

3. In refusing to allow defendant attorney's fees as provided for in contracts Exhibits A and C.

4. In not rendering judgment in favor of the defendant and against plaintiff for all of the amounts prayed for in defendant's counter-


complaint, including interest, attorney's fees, penalties and payment for sugar at prices agreed upon in the contracts between plaintiff and defendant.

The following facts were proved at the trial without dispute:

On June 30, 1919, the plaintiff Tiburcio Lutero and the defendant Siuliong & Co. entered into a contract (Exhibit A), the pertinent parts of which are as follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and a resident of the municipality of January, Province of Iloilo, Philippine Islands,

DO HEREBY STATE:

That I own a sugar plantation located in the municipality of January, Iloilo, called San Ramon, from which I expect a crop of at least 1,200 to 1,500 piculs of sugar, more or less.

That I have agreed with the firm of Siuliong & Co., of this City of Iloilo, represented by Mr. Yap-Inchong, to fix the selling price of 500 piculs of my sugar crop from said plantation during the season of 1919-1920 at the rate of P12 per picul for high class No. 1 sugar; P11.50 for No. 2, and P11 for No. 3, to be delivered to said firm in the month of March of next year, 1920.

That by virtue of this agreement to sell, the firm of Siuliong & Co., through its manager, binds, itself to advance to Mr. Tiburcio Lutero the amount of P3,000, Philippine currency, or, at the rate of P6 a picul for No. 1; and P0.50 less for each succeeding picul, as an advance upon the sale of said 500 piculs, and the remainder shall be paid to said Mr. Lutero from time to time, as he sends his sugar to the Iloilo market, until the full price of said 500 piculs of sugar is covered.

I further state that should I be unable to deliver said 500 piculs, I bind myself to pay in specie to said form of Siuliong & Co., the price of the undelivered portion according to the current market price during said month of March.

I state likewise that for the security of Siuliong & Co., I, Tiburcio Lutero, constitute a second mortgage in favor of said firm on a sugar plantation located in the barrio of Ramirez, municipality of Janiuay, Province of Iloilo, with all the improvements thereon, consisting of a six-horse power steam engine with an eight-horse power boiler; a


battery with two ovens and eight cauas and a warehouse of mixed materials, which plantation is encumbered by a first mortgage in favor of the National Bank, and is described as follows: . . . .

That for the security of Siuliong & Co., I, Maximino Jalandoni, farmer, landowner, and resident of the municipality of Jaro, Province of Iloilo, P. I., do hereby bind myself as joint and several surety for Mr. Tiburcio Lutero in favor of Messrs. Siuliong & Co., for the sum of three thousand pesos (P3,000) in case said Mr. Lutero should be unable to fulfill his obligations stipulated in this contract. "Any of the parties failing to fulfill the terms of this contract hereby binds himself to pay an indemnity of P200 as costs and attorney's fees.

In witness whereof, we sign these presents in Iloilo, this thirtieth day of June, 1919.

(Sgd.) TIBURCIO LUTERO SIULIONG & CO.

(Sgd.) YAP-INCHONG

On August 21, 1919, the same parties entered into another contract (Exhibit C), the pertinent parts of which are as follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and resident of the municipality of Janiuay, Province of Iloilo, P. I.

DO HEREBY STATE:

That I, Tiburcio Lutero, own a sugar plantation located in the municipality of Janiuay, Province of Iloilo, P. I., from which I expect a crop of one thousand two hundred to one thousand five hundred piculs of sugar more or less.

That I have agreed with the firm Siuliong & Co., through its branch in this City of Iloilo, Province of Iloilo, to fix the selling price of Eight hundred (800) piculs of sugar from my crop from said plantation during the season of 1919-1920 at the rate of fourteen pesos (P14) a picul for No. 1 sugar; thirteen pesos and fifty centavos (P13.50) a picul for No. 2 sugar; thirteen pesos (P13) for No. 3; twelve pesos and fifty centavos (P12.50) for No. 4; and twelve pesos (P12) for No. 5; to be delivered to said firm in the months of December, January, February, March, and April of said year of 1920.


That by virtue of this agreement to sell, the firm Siuliong & Co., through its manager, binds itself to advance to me the amount of five thousand six hundred pesos (P5,600), Philippine currency, that is, at the rate of P7 per picul as an advance payment upon the selling price of said eight hundred piculs of sugar, and the balance shall be paid to me from time to time as I forward my sugar to the Iloilo market, until the full price of said eight hundred piculs (800) is covered.

I likewise state that should I be unable to deliver said eight hundred piculs of sugar of any part thereof, I bind myself to pay in specie the price of the undelivered portion to said firm of Siuliong & Co., according to the current market price in said months and on the day of the settlement of my account.

I state further that to secure to said firm of Siuliong & Co., the sum of five thousand six hundred pesos (P5,600) which I have received from the same as an advance upon this sale, I hereby mortgaged to said firm all the sugar cane now planted on my said San Ramon plantation, situated in the municipality of Janiuay, Province of Iloilo, P. I., with the exception of the five hundred (500) piculs, which was the subject of my contract with the same firm of Siuliong & Co., dated June 30th of this year.

That for a further security of said firm of Siuliong & Co., and by virtue of the power of attorney conferred upon me by Mr. Ramon Masa, attorney, farmer, and resident of the municipality of Sibalum, Province of Antique, P.I., which power remains to this day unrevoked, duly acknowledged before the justice of the peace of Sibalum, Province of Antique, Mr. Nicolas Tordecillas, on August 15, of this year, I do hereby mortgage in favor of said firm of Siuliong & Co., the forty head of cattle, consisting of cows and carabaos, all of which are at present on said Mr. Masa's farm in the municipality of San Remigio, Province of Antique, which are free from all liens and incubrances, and of which the documents of ownership are described as follows:

x x x x x x x x x

Should any or all of said animals thus mortgaged die, I bind myself to replace the loss with my own carabaos.

I hereby state that the amount of five thousand six hundred pesos (P5,600) Philippine currency, advanced to me by the firm of Siuliong & Co., shall earn 8 per cent annual interest until full settlement of my account.


I hereby state that the date of maturity of this contract was fixed as April 30, 1920.

I, Florentino Magalona, of age, married, resident of the district of Molo, municipality of Iloilo, Province of Iloilo, P.I., farmer, landowner, do hereby state that I hereby bind myself as joint and several surety for Mr. Tiburcio Lutero in favor of the firm of Siuliong & Co., should he be unable to meet his obligation stipulated in this contract.

Any of the parties who fails to comply with the terms of this contract shall be bound to pay an indemnity of five hundred pesos (P500) as costs and attorney's fees.

In witness whereof, we have hereunto set our hands in Iloilo, this 21st day of August, 1919.

(Sgd.) TIBURCIO LUTERO (Sgd.) FLORENTINO MAGALONA

SIULIONG & CO. By (Sgd.) YAP-INCHONG

By virtue of the contract Exhibit A, the plaintiff delivered to the defendant a total of 337 piculs and 57 cates of muscovado sugar of different classes, and on different dates, the total price of which amounts of P3,405.58 (Exhibit 1), leaving an undelivered balance of 162 piculs and 44 cates. The plaintiff received from the defendant in kind and specie the amount of P4,606.15.

In conformity with the contract Exhibit C, the plaintiff delivered to the defendant 309 piculs and 77 cates of muscovado sugar, the total price of which amounts to P3,822.40 (Exhibit 2), leaving an undelivered balance of 490 piculs and 24 cates. The plaintiff received by virtue of said contract Exhibit C, in kind and specie, the sum of P6,862 (Exhibit 2).

The first question to be decided in the present appeal is whether the contracts Exhibits A and C, entered into by and between the plaintiff Tiburcio Lutero and the defendant Siuliong & Co. are for usurious loans of money payable in sugar.

By contract Exhibit A, the plaintiff bound himself to sell to the defendant during the month of March, 1920, 500 piculs of sugar from the crop of the agricultural year 1919-1920, at the rate of P12 a picul for No. 1 superior sugar; P11.50 for No. 2; and P11 for No. 3.

By virtue of the second contract Exhibit C, the plaintiff bound himself to sell to the defendant 800 piculs of sugar from his crop of the agricultural year 1919-1920 at the rate of P14 a picul for No. 1 sugar; P13.50 for No. 2; P13 for


No. 3; P12.50 for No. 4; and P12 for No. 5, to be delivered in the months of December, January, February, March, and April, of the year 1920.

It is contended by the plaintiff-appellant that the defendant having advanced money to the plaintiff upon both contracts, said money was given as a loan payable in sugar, which, according to the law, must be computed on the basis of the market price at the time of delivery; and that as the maximum price of sugar on the respective dates of delivery was P30, and the price stipulated in said contracts was not even one-half of the market price, said contracts are usurious.

According to both contracts, the defendant was bound to buy the 500 piculs of sugar mentioned in the contract Exhibit A, and the 800 piculs of sugar mentioned in the contract Exhibit C, at the price stipulated in said contracts. It is no contended by the plaintiff-appellant that contracts for the sale of agricultural products to be delivered in future cannot be entered into. If so, the contracts made by the plaintiff and the defendant are perfectly valid, and the fact that on the date of delivery of the sugar, its market price is higher than that stipulated, does not make them usurious or illegal, because the defendant assumed the same risk of a loss taken by the plaintiff, due to difference in price, and if the price, instead of rising, had slumped, the defendant would have had to pay the price stipulated, and not the market price, as has happened to many farmers and merchants due to the sudden slump of prices at the end of the world war.

For the foregoing considerations, we are of the opinion and so hold that the contracts of sale of agricultural products to be delivered in future, fixing a selling price, are not usurious or illegal, even when the market price of the products sold should turn out to be higher at the time of delivery.

The second question to be decided in the present appeal is whether or not the plaintiff must pay to be defendant for the sugar which the former failed to deliver in accordance with the aforesaid contracts, Exhibits A and C.

The court below, considering the price of each picul of sugar to be P30, held that the defendant had been more than paid with the sugar delivered by the plaintiff, and considering also that from the month of July, 1921, when the defendant demanded of the plaintiff the delivery of the remaining portion of the sugar, until December 8, 1927, when the cross-complaint was filed, almost six years had elapsed, said court held that the defendant had renounced its rights and had been satisfied with the sugar theretofore received from plaintiff. This opinion of the court below is based neither on law nor on equity. That the defendant had not waived its rights to the balance of the amount of sugar specified in said contracts, is shown by the fact that it several times required the plaintiff, by means of letters, to deliver said balance and that the latter kept on asking for extension of time by


reason of his critical financial situation. The defendant, taking this circumstance into account, did not press its demands on the plaintiff, and allowed some six years to elapse, until the plaintiff brought this action against the defendant, praying that said contracts be declared usurious, and that the defendant be sentenced to return the amount of P16,410, as the sum collected in excess of plaintiff's debt.

For laches and neglect on the part of those, who, under the law are entitled to require of others the fulfillment of their obligations, the statute of limitations has been enacted, which provides that such rights prescribe after a certain period of time, in order that it may serve alike as a punishment for those who do not know how to look after their own interest, and as a source of reassurance to those who may have rested in the belief that their creditors had waived their rights, and also to insure economic stability and the certainty of rights. In the case before us, there are written contracts by virtue of which the parties incurred mutual obligations, and, according to section 43, No. 1 of the Code of Civil Procedure, the action which one of the parties may bring against the other to require the fulfillment of his obligation, does not prescribed until after ten years. Inasmuch as only six years, more or less, have elapsed from the time the defendant last demanded of the plaintiff the fulfillment of the obligation incurred by him by virtue of the contracts Exhibits A and C until it filed its counterclaim herein, said action has not prescribed, and the defendant is entitled to have a judicial pronouncement thereon.

Now then, if the defendant is entitled to demand of the plaintiff the fulfillment of his obligations under the terms of the contracts Exhibits A and C, and if of the 500 piculs of sugar which the plaintiff bound himself to deliver in pursuance of the contract Exhibit A, he only delivered 337 piculs and 57 cates of sugar, thus incurring a shortage of 162 piculs and 44 cates; and if out of the 800 piculs of sugar which he bound himself to deliver in accordance with the contract Exhibit C, he only delivered 309 piculs and 77 cates, thereby defaulting with respect to 490 piculs and 23 cates, and as he cannot now deliver said shortages since the period for delivery has elapsed, what damages is the defendant entitled to?

Under contract Exhibit A, the plaintiff had received from the defendant in cash, goods, and other expenses the amount of P4,606.15. Having delivered 337 piculs and 57 cates of muscovado, the total value of which is P3,405.58, he had still a balance of P1,199.87 to pay, and 162 piculs and 44 cates of sugar to deliver.

Under contract Exhibit C, the plaintiff received from the defendant in cash, goods, and other expenses the total sum of P6,862. Having delivered 319 piculs and 77 cates of muscovado, the full value whereof is P3,822.44, he


had still a balance of P3,031.54 to pay, and 490 piculs and 24 cates of sugar to deliver.

In accordance with contracts Exhibits A and C, mentioned above, the plaintiff bound himself to pay in cash, according to the current market price, for the undelivered difference.

The minimum market price of muscovado in the month of May, 1920, was P19 per picul. Fixing the average price of the sugar, which the plaintiff failed to deliver to the defendant, according to the respective contracts, at P10 under the contract Exhibit A, and at P12 under the contract Exhibit C, the difference between said respective contracts and the minimum market price would be the loss sustained by the defendant through plaintiff's failure to deliver the sugar at the proper time according to said contracts.

The undelivered quantity of 162 piculs and 44 cates of sugar under contract Exhibit A, at P19 a picul, yields a total sum of P3,086.36, and at P10 a picul, a total of P1,624.40, leaving a difference of P1,461.96. Inasmuch as under said contract the plaintiff owned the defendant P1,199.87, this amount and the difference just mentioned, give a total of P2,661.83, which is the aggregate amount which the plaintiff should pay to the defendant under said contract Exhibit A.

The undelivered quantity of 490 piculs and 24 cates of sugar under the contract Exhibit C, at the minimum price of P19 yields a total of P9,314.56, and at P12, a total of P5,882.88, leaving a difference of P3,431.68. Inasmuch as the plaintiff owed a balance of P3,031.54, this amount and the difference just mentioned, give a total of P6,463.22, which is the aggregate amount which the plaintiff should pay to the defendant under the aforesaid contract Exhibit C.

With respect to interest upon the sums advanced by the defendant to the plaintiff, and the attorney's fees, we do not believe it equitable to award them, considering the circumstances of this case.

For the foregoing considerations, we are of opinion and so hold: (1) That the sale of sugar to be delivered at a future definite time and for a fixed price, a part of which is advanced by the purchaser to the vendor, is neither usurious nor illegal even though said price should prove to be much less than the market price on the date of delivery; (2) that the fact that the purchaser does not bring suit against the vendor immediately upon the latter's default in the delivery of the sugar sold, and that he allows six years to elapse, does not deprive him of his right to bring such action on account of laches, inasmuch as such action, arising from a written contract, does not prescribed until after ten years from the time the cause of action arises. (section 43, Code of Civil Procedure); and (3) that the purchaser is entitled to damages


sustained on account of the vendor's default, said damages consisting in the difference between the price stipulated and the market price of the goods at the time delivery thereof should have been made.

By virtue whereof, the judgment appealed from is reversed, and the defendant is absolved from the complaint; and the plaintiff is ordered, by virtue of the defendant's counterclaim to pay to the latter, under contract Exhibit A, the sum of P2,661.83 with legal interest from the date of the filing of the counterclaim until fully paid; and, under contract Exhibit C, the sum of P6,463.22 with legal interest from the date of the filing of the counterclaim until fully paid, with costs against the appellee. So ordered.

Digest

Doctrine:

Contracts of sale of agricultural products to be delivered in future, fixing a

selling price, are not usurious or illegal, even when the market price of the

products sold should turn out to be higher at the time of delivery.

Facts:

Plaintiff entered into a contract with defendant to sell the former’s future

sugar crop harvest to the latter at a price depending on the class of the

sugar. The defendant bound itself to pay an advance amount of Php. 3,000

and the remainder shall be paid from time to time. The contract also stated

that should the plaintiff fail to deliver, he shall pay the amount of the

undelivered portion to the defendant. The plaintiff also entered into a

mortgage agreement to secure his performance in the contract.

Issue:

Whether or not future products are invalid subjects in a contract of sale

Held:

No. The contracts of sale of agricultural products to be delivered in future,

fixing a selling price, are not usurious or illegal, even when the market price

of the products sold should turn out to be higher at the time of delivery.



Manila

EN BANC

G.R. No. L-17165 September 26, 1962

EMMA R. GENIZA, AURELIO GENIZA, LORENZO RIVERA, CATALINA CARREON RIVERA and ZACARIAS RIVERA, plaintiffs-appellants, vs.HENRY SY and ASIA MERCANTILE CORPORATION, defendants-appellants.

Vicente J. Francisco for plaintiffs-appellants.Dakila F. Castro for defendants-appellees.

LABRADOR, J.:

The original decision rendered by Us in the above entitled case refers to a first decision rendered by the Court of First Instance of Quezon City, Hon. Nicasio Yatco, presiding, dated March 30, 1960. It so happened, however, that the above decision was amended by said court on May 18, 1960, but upon our study of the record of the case the amended decision was overlooked. The original decision of the court of first instance refers to the mortgage contract, Exhibit "A", while the amended decision refers to both contracts of mortgage, Exhibits "A" and "E", executed on the same date. The appeal was made against the amended decision and involves identical questions on the foreclosure of the two mortgages above mentioned. In view of the fact that We overlooked the amended decision, especially as regards


the second contract of mortgage, it has become necessary to render this amended decision on both of the contracts of mortgage, already referred to.

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum. Paragraph 4 of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when due, the mortgage shall become due and demandable and without necessity of demand the mortgagee may immediately foreclose the mortgage, judicially or extrajudicially, and for this purpose the mortgagor appoints the mortgagee as his attorney-in-fact to sell the property and to sign all documents and perform any act requisite and necessary to accomplish said purpose. It was further expressly agreed that in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and unpaid as attorney's fees and liquidated damages, exclusive of costs and expenses of the sale.

On the same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo Rivera over two parcels of registered land for the sum of P50,000.00, and with the same conditions as the mortgage executed by the spouses Catalina Carreon and Zacarias Rivera. Copies of the contracts of mortgage are annexed to the complaint in this case as Annex "A" an Annex "B". The mortgagors in both mortgage contract defaulted in the payment of their respective obligations. The mortgage executed by Catalina Carreon Rivera an Zacarias Rivera was foreclosed extra-judicially and the proceeds of the sale of the land amounting to P68,567.57 was disposed of by the mortgagee as follows:

1. P50,000.00 — as mortgage loan

2. P12,500.00 — as the 12% interest on the loan as December 7, 1957 plus daily interest thereafter until the obligation is legally terminated.

3. P15,000.00 — as Attorney's fees and liquidated damages.1awphîl.nèt

4. The fees and expense of foreclosure and sale.

Plaintiffs brought this action to obtain a judicial declaration that the stipulation in the deeds of mortgage fixing the amount of 30% as attorney's fees and liquidated damages is excessive, unconscionable and iniquitous and that the same should be reduced to P200.00. The complainants also asked for P5,000.00 as attorney's fees for bringing this action. The defendants set up the defense that the complaint states no cause of action; that the mortgage executed by Emma R. Geniza and Aurelio Geniza has not yet been


foreclosed; that the mortgagors are estopped from alleging that the stipulation regarding liquidated damages and attorney's fees is excessive and unreasonable.

The case having been tried in the Court of First Instance of Quezon City, Hon. Nicasio Yatco, presiding, rendered judgment dismissing the action of plaintiffs Emma Geniza and Aurelio Geniza as premature, and ordering the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P13,567.57 which represents the excess of the total obligations of the mortgagor based on the following computation:

Proceeds of Sale (TCT No. 7464)

P68,567.57

Less:

Amount of LoanP50,000.0

012% Interest 2,000.005% Attorney's fees and liquidated damages

2,500.00

Total ObligationP55,000.0

0

Excess Recoverable 13,567.57

A motion for reconsideration having been presented to the effect that the parcels of land subject of the mortgage in Exhibit "A" were foreclosed on March 22, 1960 and sold to the defendant Henry Sy for P51,965.80, the court on May 18, 1960 rendered an amended decision the dispositive parts of which read as follows:

WHEREFORE, judgment is hereby rendered one in favor of the plaintiffs and against the defendant by ordering the reduction of the stipulated 30% attorney's fees and liquidated damages to 5% in the mortgage contracts entered into by them (Exhs. A and B); ordering the defendant Henry Sy to return to plaintiffs Aurelio Geniza, Emma Geniza and Lorenzo Rivera the sum of P5,277.30 representing the excess of the public sales of said plaintiffs' mortgaged properties (TCT No. 39230, TCT No. T-22028 and TCT No. 20384) in the total amount of P60,277.30 over the obligations of same plaintiffs in the amount of P55,000.00 based on the following computation:

Proceeds of Sales (TCT No. 39230, TCT No. 22028 and

P60,277.30


TCT No. 20384)Less:



2,500.00

Total ObligationsP55,000.0

0


ordering the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P13,567.57 representing the excess of the public sale of said plaintiff's mortgaged land (TCT No. 7464) in the amount of P68,567.57 over the total obligations of same plaintiff in the amount of P55,000.00 based also on the following computation:

Proceeds of Sale (TCT No. 7464

P68,167.57

Less:



2,500.00

Total ObligationsP55,000.0

0


without pronouncement as to costs.

SO ORDERED.

It is against the above judgment that the plaintiff have prosecuted the appeal to this Court, claiming that the lower court erred in not reducing the liquidated damages and the attorney's fees to not more than P500.00 and in not declaring the stipulation exacting attorney's fees and liquidated


damages as a usurious stipulation, by reason of which plaintiffs (appellants herein) should be entitled to attorney's fees amounting to P5,000.00.

In reducing the 30% attorney's fees and liquidated damages to 5%, the judge below appears to be fully justified. As the loans were for a period of thirty days only, damages amounting to 30% of the loans of P50,000.00 each would appear to be iniquitous and subject to reduction in accordance with the provisions of Articles 1227 and 1229 of the Civil Code of the Philippines. We do not agree with counsel for plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the mortgagee's intention was to exact a usurious interest, nor evidence to that effect. Neither is there any allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded the insertion of the iniquitous clause or 30% damages to cover a usurious deal. Under these circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious one; so that we hold that the trial court was fully justified in considering the provision only as an iniquitous clause subject to reduction.

We also find the reduced liquidated damages and attorney's fees to be fair and we find no reason for disturbing the discretion of the court below in this respect.

WHEREFORE, the judgment appealed from is hereby affirmed, with costs against the plaintiffs-appellants.

Digest

4. GENIZA VS HENRY SY

Facts:

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum.

Paragraph 4 of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when due, the mortgage shall become due and demandable and without necessity of demand the mortgagee may immediately foreclose the mortgage, judicially or extra judicially. It was further expressly agreed that


in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and unpaid as attorney's fees and liquidated damages, exclusive of costs and expenses of the sale.

On the same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo Rivera overtwo parcels of registered land for the sum of P50,000.00, and with the same conditions as the mortgage executed by thespouses Catalina Carreon and Zacarias Rivera.

The mortgagors in both mortgage contract defaulted in the payment of their respective obligations Plaintiffs brought this action to obtain a judicial declaration that the stipulation in the deeds of mortgage fixing the amountof 30% as attorney's fees and liquidated damages is excessive, unconscionable and iniquitous and that the same should be reduced to P200.00.

Trial court ruled did reduced the 30% attorney’s fees and liquidation fees to 5% of the mortgage contract Plaintiffs further appealed that stating that the court erred in not declaring the 30% attorneys fees and liquidateddamages unconscionable and reducing it to P200.

Issue:

Whether or not the trial court erred in reducing the 30% to 5% rather than declaring it as P200.00.

Ruling:

In reducing the 30% attorney's fees and liquidated damages to 5%, the judge below appears to be fully justified.

As the loans were for a period of thirty days only, damages amounting to 30% of the loans of P50,000.00 each wouldappear to be Iniquitous and subject to reduction in accordance with the provisions of Articles 1227 and 1229 of the CivilCode of the Philippines.

We do not agree with counsel for plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the mortgagee's intention was to exact a usurious interest, nor evidence to that effect.

Neither is there any allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded the insertion of the iniquitous clause or 30% damages to cover a usurious deal.


Under these circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious one; so that we hold that the trial court was fully justified in considering the provision only as an iniquitous clause subject to reduction.

We also find the reduced liquidated damages and attorney's fees to be fair and we find no reason for disturbing the discretion of the court below in this respect


Manila

SECOND DIVISION

G.R. No. 141811 November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the


Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and declared that the fees provided for in the Underwriting and Consultancy Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage the usurious interest charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.4

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly amortizations to commence at the beginning of the thirteenth month from the date of the first release in accordance with the Schedule of Amortization.5 In case of default, an acceleration clause was, among others, provided and the amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were hired.6

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents7 as security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land being utilized as the site of its development project with an area of approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements, as well as all the machineries, equipment, furnishings and furnitures existing thereon; and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the


obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) each.8

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment by respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the execution of and in accordance with the terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render general consultancy services.9

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public offering of the common shares of stock of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, in accordance to the Underwriting Agreement.10 The said amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC.

AS OF JUNE 23, 1980

PARTICULARS AMOUNT

Total amount due as of 11-22-78 per revised P7,999,631.4


amortization schedule dated 1-3-78 2

Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-22-79 (92 days)

327,096.04

Balance 8,326,727.46

One time penalty of 20% of the entire unpaid obligations under Section 6.02 (ii) of Loan Agreement 1,665,345.49

Past due interest under Section 6.02 (iii) of loan Agreement:@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)

1,481,879.931,200,714.10

Other charges — publication of extra judicial foreclosure of REM made on 5-23-80 & 6-6-80

4,964.00

Total Amount Due and Collectible as of June 23, 1980

P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980.12At the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980.13

Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their continuing surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to each of them,14 petitioner instituted on November 11, 1980 the instant collection suit15 against the respondents to collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus


interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up several special and affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements executed simultaneously with and as integral parts of the Loan Agreement and which provided for the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest being charged by petitioner FMIC.16

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management Group, as well as documentary evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus the amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.

Defendants' counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial court. The appellate court found and declared that the fees provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages and attorney's fees were "excessive, iniquitous, unconscionable and revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint as against the individual respondents sureties and


ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner and what is due to respondent Este del Sol, based on the following computation:17

A: DUE TO THE [PETITIONER]

Principal of LoanP7,382,500.0

0

Add: 20% one-time Penalty Attorney's fees

1,476,500.00

900,000.00P9,759,000.0

0

Less: Proceeds of foreclosure Sale

9,000,000.00

Deficiency P759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of: Underwriting fee Supervision fee Consultancy fee

P 200,000.00200,000.00

1,330,000.00

Total amount due EsteP1,730,000.0

0

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was denied in a Resolution18 dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors:19

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT.


b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon the veracity of the appellate court's factual findings and conclusion is not the function of this Court for the Supreme Court is not a trier of facts. Only when the factual findings of the trial court and the appellate court are opposed to each other does this Court exercise its discretion to re-examine the factual findings of both courts and weigh which, after considering the record of the case, is more in accord with law and justice.

After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from the findings of the appellate court.

First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of


maturity, should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity.21 The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed.23

Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception.24 The form of the contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.25

In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a period of four (4) years27 to coincide ultimately with the term of the Loan Agreement.28 This fact means that all the said agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement29 and specifically mentioned that such underwriting agreement is a condition precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as admitted by petitioner FMIC's employees,31that such Underwriting Agreement is "part and parcel of the Loan Agreement."32

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00)33 as consultancy fee despite the clear provision in the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five


Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy fee shall be due upon signing of the said consultancy agreement.34

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).36 It is from this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were conducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol.37

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under the Underwriting Agreement.38 Besides, there was really no need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell its shares and all its shares have been sold through its marketing arm.39

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,40 aside from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's officers appeared to be more competent to be consultants in the development of the projected sports/resort complex.41

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent transactions. The Underwriting and Consultancy Agreements which were executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender's services which are of little value or which are not in fact to be rendered, such as in the instant case.42 In this connection, Article 1957 of the New Civil Code clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.


In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.43 The reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises44 where this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive back the principal amount of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily.45

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival in case of default. And true enough, ESTE folded up when the appellee extrajudicially foreclosed on its (ESTE's) development project and literally closed its offices as both the appellee and ESTE were at the time holding office in the same building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds of the foreclosure sale as attorney's fees would suffice to compensate the appellee, especially so because there is no clear showing that the appellee hired the services of counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery of the alleged deficiency.

Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as such stipulation does not contravene any law, morals, or public order, it is binding upon the parties. Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is "iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the


debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the appellate court that a reduction of the attorney's fees to ten (10%) percent is appropriate and reasonable under the facts and circumstances of this case.

Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by the allegations of the respondents as well as by the facts as found by the appellate court. A party is entitled to as much relief as the facts may warrant 47

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

Digest

FACTS FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal. Under the agreement, the interest was 16% pa based on the diminishing balance. In case of default, an acceleration clause was provided and the amount due is subject to 20% one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law. respondent executed a REM, individual continuing suretyship and an underwriting agreement whereby FMIC shall underwrite the public offering of one P120,000 common shares of respondent’s capital stock for one-time underwriting fee of P200,000. For failure to pay its obligation, FMIC caused the foreclosure of the REM. At the public auction, FIC was the highest bidder. Petitioner filed to collect for alleged deficiency


balance against respondents since it failed to collect from the sureties, plus interest at 21% pa. the trial court ruled in favor of FMIC. Respondents appealed before the CA which held that the fees provided for in the Underwriting and Consultacy Agreements were mere subterfuges to camouflage the excessively usurious interest charged. The CA ordered FMIC to reimburse petitioner representing what is ue to petitioner and what is due to respondent.

ISSUE Whether or not the interests are lawful

HELD No. an apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract for the payment by the borrower for the lender’s services which re of little value or which are not in fact to be rendered. Article 1957 clearly provides: contracts and stipulations, under any cloak or device whatever, intended to circumvent the law agaistn usury shall be void. The borrower may recover in accordance with the laws on usury.



Manila

THIRD DIVISION

G.R. No. 125944 June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs.JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M-91, "Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar" for annulment of mortgage. The dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorney’s fees; and


4. To pay the costs.

SO ORDERED."1

The facts as summarized by the Court of Appeals in its decision being challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real estate mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure payment of a loan of P60,000.00 payable within a period of four (4) months, with interest thereon at the rate of 6% per month (Exh. "B").

On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land to the defendant-appellee, to secure payment of a loan of P136,512.00, payable within a period of one (1) year, with interest thereon at the legal rate (Exh. "1").

On December 29, 1990, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land in favor of defendant-appellee, to secure payment of a loan in the amount of P230,000.00 payable within a period of four (4) months, with interest thereon at the legal rate (Exh. "2", Exh. "C").

This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the mortgaged property. They alleged that they obtained only one loan form the defendant-appellee, and that was for the amount of P60,000.00, the payment of which was secured by the first of the above-mentioned mortgages. The subsequent mortgages were merely continuations of the first one, which is null and void because it provided for unconscionable rate of interest. Moreover, the defendant-appellee assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. They have already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but the latter has initiated foreclosure proceedings for their alleged failure to pay the loan P230,000.00 plus interest.1âwphi1.nêt

On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the above-described mortgages were executed to secure three separate loans of P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but the last one was not. He denied having represented that he will not foreclose the mortgage as long as the plaintiffs-appellants pay interest."


In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following errors:

1. The Court of Appeals erred in holding that three (3) mortgage contracts were executed by the parties instead of one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate mortgage with an interest of 72% per cent per annum or 6% per month is not unconscionable;

4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN PAID when the mortgagee himself states in his ANSWER that the same was already paid; and

5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the appellants.

In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due course as it raises questions of facts which are not allowed in a petition for review on certiorari.

We find no merit in the instant petition.

The core of the present controversy is the validity of the third contract of mortgage which was foreclosed.

Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they signed the third mortgage contract in view of respondent’s assurance that the same will not be foreclosed. The trial court, which is in the best position to evaluate the evidence presented before it, did not give credence to petitioners’ corroborated testimony and ruled:

"The testimony is improbable. The real estate mortgage was signed not only by Ursula Solangon but also by her husband including the Promissory Note appended to it. Signing a document without knowing its contents is contrary to common experience. The uncorroborated testimony of Ursula Solangon cannot be given weight."2

Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the amount of P136,512.00, or the second loan. In fact, such payment was confirmed by respondent Salazar in his answer to their complaint.


It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law may be raised and they must be distinctly set forth. The settled rule is that findings of fact of the lower courts (including the Court of Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to those of the trial court; and (7) when the findings of fact are conclusions without citation of specific evidence on which they are based.3

None of these instances are extant in the present case.

Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month is not unconscionable.

The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury Law had been repealed by Central Bank Circular No. 905 there is no more maximum rate of interest and the rate will just depend on the mutual agreement of the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic Sawmill Co.4

The factual circumstances of the present case require the application of a different jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.5 In Medel v. Court of Appeals,6 this court had the occasion to rule on this question - whether or not the stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was not usurious, this Court held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant, thus:

"We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate ‘usurious’ because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22,


1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now ‘legally inexistent.’

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. Indeed, we have held that ‘a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that ‘by virtue of CB Circular 905, the Usury Law has been rendered ineffective.’ ‘Usury Law has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.’

Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals (‘contra bonos mores’), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable." (Emphasis supplied)

In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum.

SO ORDERED.

Digest

Facts:

Petitioner-spouses executed 3 real estate mortgages on a parcel of land situated in Bulacan, in favor of the same Respondent Salazar to secure payment of loans of P60 K, P136 K and P230 K payable within 4 months, 1 year, and 4 months in that order, with 6% monthly interest on the first loan, and legal interests on the others.

This action was initiated by the Petitioner-spouses to prevent the foreclosure of the mortgaged property.


They alleged that they obtained only one loan from the Respondent which was the P60 K secured by the first mortgage. Also, Petitioner-spouses opined that the 6% monthly interest was unconscionable.

The subsequent mortgages were merely continuations of the first one, which is null and void.

Moreover, the Respondent assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. Petitioner-spouses substantially paid the loans with interest but were unable to pay it in full.

On the other hand, the Respondent claimed that the mortgages were executed to secure 3 separate loans of and that the first two loans were paid, but the last one was not.

He denied having represented that he will not foreclose the mortgage as long as the Petitioner-spouses pay interest.

Lower courts ruled in favour of Respondent. Thus, this petition.

Issue:

Whether or not the 6% monthly interest is unconscionable?

Ruling:

Yes. The SC ruled that this is unconscionable.

While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

In Medel v. Court of Appeals, the Court decreed that the 5.5% interest or 66% per annum was not usurious but held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant , and hence, contrary to morals (‘contra bonos mores’), if not against the law.

In the case at bench, Petitioner-spouses stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate.

Hence, the interest rate must be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.


TABLE OF CONTENTS

G.R. No. L-19190 November 29, 1922THE PEOPLE OF THE PHILIPPINE ISLANDS, , vs.VENANCIO CONCEPCION, . ------------------------------------------------------------------1

G.R. No. L-16106 December 30, 1961REPUBLIC OF THE PHILIPPINES, , vs.PHILIPPINE NATIONAL BANK, ET AL., , THE FIRST NATIONAL CITY BANK OF NEW YORK, . ---------------------------------7


G.R. No. L-24968 April 27, 1972SAURA IMPORT and EXPORT CO., INC., , vs.DEVELOPMENT BANK OF THE PHILIPPINES, . ---------------------------------------11

G.R. No. L-49101 October 24, 1983RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, , vs.THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, . -----------------------------------------------------------------------------------21

G.R. No. L-45710 October 3, 1985CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, , vs.THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO,---------31

G.R. No. L-17474 October 25, 1962REPUBLIC OF THE PHILIPPINES, , vs.JOSE V. BAGTAS, , FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, - . ----------------------------------------------------------------------------40


G.R. No. 80294-95 September 21, 1988CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, , vs.COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, . ---------------------------------------------------------------------------------------------------------47

G.R. No. L-46240 November 3, 1939MARGARITA QUINTOS and ANGEL A. ANSALDO, , vs.BECK, . -------------------------------------------------------------------------------------------58

G.R. No. L-20240 December 31, 1965REPUBLIC OF THE PHILIPPINES, , vs.JOSE GRIJALDO, . -----------------------------------------------------------------------------62

G.R. No. L-38745 August 6, 1975LUCIA TAN, , vs.ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, ------------------------------67

G.R. No. 138739 July 6, 2000RADIOWEALTH FINANCE COMPANY, , vs.


Spouses VICENTE and MA. SUMILANG DEL ROSARIO, . --------------------------73

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, , v. THE HON. COURT OF APPEALS and AMBROSIO PADILLA, . ----------------------------------------------------------------------81

G.R. No. 97412 July 12, 1994EASTERN SHIPPING LINES, INC., , vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., . --------------------------------------------------------------------------------------------------------90

G.R. No. 128721 March 9, 1999CRISMINA GARMENTS, INC., , vs.COURT OF APPEALS and NORMA SIAPNO, . -----------------------------------------104

G.R. No. L-47180 May 19, 1980THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., - , vs.THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, --------------------110


G.R. No. L-23559 October 4, 1971AURELIO G. BRIONES, , vs.PRIMITIVO P. CAMMAYO, ET AL., . ----------------------------------------------------113

G.R. No. L-32644 October 4, 1930CU UNJIENG E HIJOS, , vs.THE MABALACAT SUGAR CO., ET AL., . THE MABALACAT SUGAR CO., . ----------------------------------------------------------123

G.R. No. 135046 August 17, 1999SPOUSES FLORANTE and LAARNI BAUTISTA, , vs.PILAR DEVELOPMENT CORPORATION, . ---------------------------------------------127

G.R. No. L-30771 May 28, 1984LIAM LAW, , vs.OLYMPIC SAWMILL CO. and ELINO LEE CHI, . -------------------------------------135

G.R. No. 116285 October 19, 2001ANTONIO TAN, , vs.COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES------138


G.R. No. 113926 October 23, 1996SECURITY BANK AND TRUST COMPANY, , vs.REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA, . ----------------------------------------------------------------------151

G.R. No. 131622 November 27, 1998LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, , vs.COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", . ------------------------------------------------158

G.R. No. L-48349 December 29, 1986FRANCISCO HERRERA, , vs.PETROPHIL CORPORATION, . -----------------------------------------------------------166

G.R. No. L-18208 February 14, 1922THE UNITED STATES, , vs.VICENTE DIAZ CONDE and APOLINARIA R. DE CONDE, . -----------------------173

G.R. No. L-1927 May 31, 1949CRISTOBAL ROÑO, , vs.


JOSE L. GOMEZ, ET AL., . ------------------------------------------------------------------176

G.R. No. L-35697-99 April 15, 1988ELADlA DE LIMA, POTENCIANO REQUIJO, NEMESIO FLORES, REYNALDO REQUIJO, DOMINADOR REQUIJO and MARIO REQUIJO, , vs.LAGUNA TAYABAS CO., CLARO SAMONTE, SANTIAGO SYJUCO, INC., (SEVEN-UP BOTTLING CO., OF THE PHILIPPINES) and PORVENIR ABAJAR BARRETO, . ------------------------------------------------------------------------------------181

G.R. No. 120262 July 17, 1997PHILIPPINE AIRLINES, INC., , vs.COURT OF APPEALS and LEOVIGILDO A. PANTEJO, . ----------------------------189

G.R. No. 120097 September 23, 1996FOOD TERMINAL, INC., , vs.COURT OF APPEALS and TAO DEVELOPMENT, INC., . ----------------------------197

G.R. No. 119974 June 30, 1999RUPERTO L. VILORIA, , vs.COURT OF APPEALS, LIDA C. AQUINO, assisted by her husband Gregorio Aquino, MANUEL V. CACANANDO, as heirs of the late Felicitacion V. Cacanando, RODOLFO V. ANCHETA, ESTRELLA V. ANCHETA and CARMEN A. NICOLASURA, assisted by her husband Ramon Nicolasura, as heirs of the late Josefina V. Ancheta and ANASTACIO L. VILORIA, . -------------------------------201


G.R. No. 127135 January 18, 1999EASTERN ASSURANCE AND SURETY CORPORATION (EASCO), , vs.HON. COURT OF APPEALS, HON. TEOFISTO L. CALUMPANG, in his capacity as Presiding Judge of the Regional Trial Court of Dumaguete City, Branch 40, and VICENTE TAN, . -------------------------------------------------------------------------209

G.R. No. L-28497 November 6, 1928THE BACHRACH MOTOR CO., INC., , vs.FAUSTINO ESPIRITU, .------------------------------G.R. No. L-28498 November 6, 1928THE BACHRACH MOTOR CO., INC., , vs.FAUSTINO ESPIRITU, , and ROSARIO ESPIRITU, intervenor- . --------------------------------------------------------218

G.R. No. 82082 March 25, 1988INSULAR BANK OF ASIA AND AMERICA, , vs.SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, .------------------------223

G.R. No. L-9262 July 10, 1959MARINO S. UMALI, , vs.EFRAIN Y. MICLAT, . -----------------------------------------------------------------------228


G.R. No. L-29292 March 13, 1929TOMASA C. VIUDA DE PAMINTUAN, , vs.JUAN TIGLAO, -------------------------------------------------------------------------------232

G.R. No. L-21280 February 9, 1924VICENTE E. REYES, in his capacity as administrator of the estate of Felipa Alonso y de Mesa viuda de Mendiola, , vs.HENRY W. ELSER, . MARIANO ALONSO Y DE MESA, -----------------------------------------------------------236

G.R. No. L-21440 April 30, 1966SUN BROS. APPLIANCES, INC., , vs.ANGEL AL. CALUNTAD, . -------------------------------------------------------------------242

G.R. No. L-44106 January 19, 1937THE GOVERNMENT OF THE PHILIPPINE ISLANDS, , vs.JOSE VACA Y GARRIDO and ANA CALDERON, . ------------------------------------245

G.R. No. L-47180 May 19, 1980THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., - , vs.THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA----------------------. 248


G.R. No. L-57314 November 29, 1983TEODORO SANCHEZ, , vs.HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of First Instance of Camarines Sur, Iriga City, and ALEJO SANCHEZ, .---------------- 251

G.R. No. 128990 September 21, 2000INVESTORS FINANCE CORPORATION, , vs.AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY DEVELOPMENT CORPORATION, .------------------------------------------------------- 253

G.R. No. 113412 April 17, 1996Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, , vs.THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, . ----------------265

G.R. No. 122079 June 27, 1997SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, , vs.HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as nominal party- , THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who conducted the auction sale and the REGISTER OF DEEDS or his representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION, . ----------------------------------------------------------------------------275


G.R. No. 119379 September 25, 1998RODELO G. POLOTAN, SR., , vs.HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, . ----------------------------------------------------------------------------284

G.R. No. L-46591 July 28, 1987BANCO FILIPINO SAVINGS and MORTGAGE BANK, , vs.HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, . -------------------------------------------292

G.R. No. L-31125 January 21, 1930TIBURCIO LUTERO, , vs.SIULIONG and CO., . -----------------------------------------------------------------------301

G.R. No. L-17165 September 26, 1962EMMA R. GENIZA, AURELIO GENIZA, LORENZO RIVERA, CATALINA CARREON RIVERA and ZACARIAS RIVERA, , vs.HENRY SY and ASIA MERCANTILE CORPORATION, . -----------------------------310


G.R. No. 141811 November 15, 2001FIRST METRO INVESTMENT CORPORATION, , vs. ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, . ----------------------------------------------------------------------------------------------------------316

G.R. No. 125944 June 29, 2001SPOUSES DANILO SOLANGON and URSULA SOLANGON, , vs.JOSE AVELINO SALAZAR, . ---------------------------------------------------------------327




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