Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No.

113236 March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents. QUISUMBING, J.: This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages. The facts of this case, adopted by the CA and based on findings by the trial court, are as follows: . . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca. In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products. On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products. On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:

DATE June 15, 1978 July 15, 1978 Aug. 15, 1978 Sep. 15, 1978

WITHDRAWAL SLIP NO. 42127 42128 42129 42130

AMOUNT P1,198,092.80 940,190.00 880,000.00 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of FojasArca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B"). However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence. On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant. Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 13, Dec.; pp. 368-370, id).3 Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips. On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits. Hence, the instant petition, alleging the following assignment of error: 25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the twointermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New Civil Code.8 The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips. The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention arose. On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action. At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this case. 10Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks. In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.12 The withdrawal slips in question lacked this character. A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care. 14 In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15 The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank and petitioner as account-holder must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake. WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner. SO ORDERED.
5

ARTICLE 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.
6

ARTICLE 19. The local civil registrar shall require the payment of the fees prescribed by law or regulations before the issuance of the marriage license. No other sum shall be collected in the nature of a fee or tax of any kind for the issuance of said license. It shall, however, be issued free of charge to indigent parties, that is, those who have no visible means of income or whose income is insufficient for their subsistence, a fact established by their affidavit or by their oath before the local civil registrar.
7

ARTICLE 20. The license shall be valid in any part of the Philippines for a period of one hundred twenty days from the date of issue, and shall be deemed automatically cancelled at the expiration of said period if the contracting parties have not made use of it. The expiry date shall be stamped in bold characters on the face of every license issued.
8

Rollo, p. 13. Id. at 19; Petition, paragraph 34, subparagraph B. NEGOTIABLE INSTRUMENTS LAW ACT NO. 2031 SECTION 89. To whom notice of dishonor must be given. Except as otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice

10

is not given is discharge. SECTION 103. Where parties reside in same place. Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: (a) If given at the place of business of the person to receive notice, it must be given before the close of business hours the day following; (b) If given at his residence, it must be given before the usual hours of rest on the day following; (c) If sent by mail, it must be deposited in the post-office in time to reach him in usual course on the day following. SECTION 104. Where parties reside in different places. Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: (a) If sent by mail, it must be deposited in the post-office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter; (b) If given otherwise than through the post-office, then within the time that notice would have been received in due course of mail if it had been deposited in the post-office within the time specified in the last subdivision.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 97626 March 14, 1997 PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners, vs. THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its President & General Manager, respondents.

HERMOSISIMA, JR., J.: Challenged in this petition for review is the Decision dated February 28, 1991 1 rendered by public respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288 entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce, now absorbed by Philippine Commercial and Industrial Bank." The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC for brevity), represented by its President and General Manager Romeo Lipana, to recover from the former Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial International Bank, the sum of P304,979.74 representing various deposits it had made in its current account with said bank but which were not credited to its account, and were instead deposited to the account of one Bienvenido Cotas, allegedly due to the gross and inexcusable negligence of the petitioner bank. RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7, with the Pasig Branch of PBC in connection with its business of selling appliances. In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The deposit slip has an upper portion or stub, which is detached and given to the depositor or his agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are prepared in duplicate by the depositor. The original of the deposit slip is retained by the bank, while the duplicate copy is returned or given to the depositor.

From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in the current accounts of RMC with PBC. It turned out, however, that these deposits, on all occasions, were not credited to RMC's account but were instead deposited to Account No. 53-01734-7 of Yabut's husband, Bienvenido Cotas who likewise maintains an account with the same bank. During this period, petitioner bank had, however, been regularly furnishing private respondent with monthly statements showing its current accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to check these monthly statements of account reposing complete trust and confidence on petitioner bank. Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit slip, an original and a duplicate. The original showed the name of her husband as depositor and his current account number. On the duplicate copy was written the account number of her husband but the name of the account holder was left blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp both the original and the duplicate of these deposit slips retaining only the original copy despite the lack of information on the duplicate slip. The second copy was kept by Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and change the account number written thereon, which is that of her husband's, and make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3. With the daily remittance records also prepared by Ms. Yabut and submitted to private respondent RMC together with the validated duplicate slips with the latter's name and account number, she made her company believe that all the while the amounts she deposited were being credited to its account when, in truth and in fact, they were being deposited by her and credited by the petitioner bank in the account of Cotas. This went on in a span of more than one (1) year without private respondent's knowledge. Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but as its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch 160. The trial court found petitioner bank negligent and ruled as follows: WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of Commerce, now absorbed by defendant Philippine Commercial & Industrial Bank, and defendant Azucena Mabayad to pay the plaintiff, jointly and severally, and without prejudice to any criminal action which may be instituted if found warranted: 1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at the legal rate from the filing of the complaint; 2. A sum equivalent to 14% thereof, as exemplary damages; 3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and 4. Costs. Defendants' counterclaim is hereby dismissed for lack of merit. 2 On appeal, the appellate court affirmed the foregoing decision with modifications, viz: WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the awards of exemplary damages and attorney's fees specified therein are eliminated and instead, appellants are ordered to pay plaintiff, in addition to the principal sum of P304,979.74 representing plaintiff's lost deposit plus legal interest thereon from the

filing of the complaint, P25,000.00 attorney's fees and costs in the lower court as well as in this Court. 3 Hence, this petition anchored on the following grounds: 1) The proximate cause of the loss is the negligence of respondent Rommel Marketing Corporation and Romeo Lipana in entrusting cash to a dishonest employee. 2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut. 3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing Corporation are falsified and are not proof that the amounts appearing thereon were deposited to respondent Rommel Marketing Corporation's account with the bank, 4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up her fraudulent acts against respondent Rommel Marketing Corporation, and not as records of deposits she made with the bank. 4 The petition has no merit. Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune of P304,979.74, suffered by the private respondent RMC petitioner bank's negligence or that of private respondent's? Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut. 5 According to them, it was impossible for the bank to know that the money deposited by Ms. Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will be depositing cash to its account. Thus, it was impossible for the bank to know the fraudulent design of Yabut considering that her husband, Bienvenido Cotas, also maintained an account with the bank. For the bank to inquire into the ownership of the cash deposited by Ms. Irene Yabut would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a dishonest employee which provided Ms. Irene Yabut the opportunity to defraud RMC. 6 Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips was not completely accomplished. We sustain the private respondent. Our law on quasi-delicts states: Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.

There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damages incurred by the plaintiff. 7 In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the damage where the parties point to each other as the culprit. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, 8 provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that. Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut, despite the glaring fact that the duplicate copy was not completely accomplished contrary to the self-imposed procedure of the bank with respect to the proper validation of deposit slips, original or duplicate, as testified to by Ms. Mabayad herself, thus: Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs. Mabayad your important duties and functions? A: I accept current and savings deposits from depositors and encashments. Q: Now in the handling of current account deposits of bank clients, could you tell us the procedure you follow? A: The client or depositor or the authorized representative prepares a deposit slip by filling up the deposit slip with the name, the account number, the date, the cash breakdown, if it is deposited for cash, and the check number, the amount and then he signs the deposit slip. Q: Now, how many deposit slips do you normally require in accomplishing current account deposit, Mrs. Mabayad? A: The bank requires only one copy of the deposit although some of our clients prepare the deposit slip in duplicate. Q: Now in accomplishing current account deposits from your clients, what do you issue to the depositor to evidence the deposit made?

A: We issue or we give to the clients the depositor's stub as a receipt of the deposit. Q: And who prepares the deposit slip? A: The depositor or the authorized representative sir? Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad, is it with the deposit slip? A: The depositor's stub is connected with the deposit slip or the bank's copy. In a deposit slip, the upper portion is the depositor's stub and the lower portion is the bank's copy, and you can detach the bank's copy from the depositor's stub by tearing it sir. Q: Now what do you do upon presentment of the deposit slip by the depositor or the depositor's authorized representative? A: We see to it that the deposit slip 9 is properly accomplished and then we count the money and then we tally it with the deposit slip sir. Q: Now is the depositor's stub which you issued to your clients validated? A: Yes, sir. 10 [Emphasis ours] Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the duplicate slip was not compulsorily required by the bank in accepting deposits should not relieve the petitioner bank of responsibility. The odd circumstance alone that such duplicate copy lacked one vital information that of the name of the account holder should have already put Ms. Mabayad on guard. Rather than readily validating the incomplete duplicate copy, she should have proceeded more cautiously by being more probing as to the true reason why the name of the account holder in the duplicate slip was left blank while that in the original was filled up. She should not have been so naive in accepting hook, line and sinker the too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy was only for her personal record, she would simply fill up the blank space later on. 11 A "reasonable man of ordinary prudence" 12 would not have given credence to such explanation and would have insisted that the space left blank be filled up as a condition for validation. Unfortunately, this was not how bank teller Mabayad proceeded thus resulting in huge losses to the private respondent. Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr. Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to the effect that, while he ordered the investigation of the incident, he never came to know that blank deposit slips were validated in total disregard of the bank's validation procedures, viz: Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the deposit slips and they validated the same with the

machine, the fact that those deposit slips were unfilled up, is there any report similar to that? A: No, it was not the cashier but the teller. Q: The teller validated the blank deposit slip? A: No it was not reported. Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit slip? A: I am not aware of that. Q: It is only now that you are aware of that? A: Yes, sir. 13 Prescinding from the above, public respondent Court of Appeals aptly observed: xxx xxx xxx It was in fact only when he testified in this case in February, 1983, or after the lapse of more than seven (7) years counted from the period when the funds in question were deposited in plaintiff's accounts (May, 1975 to July, 1976) that bank manager Bonifacio admittedly became aware of the practice of his teller Mabayad of validating blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence in the appellant bank's supervision of its employees. 14 It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the selection and supervision of its bank teller, which was the proximate cause of the loss suffered by the private respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted by the petitioners. Proximate cause is determined on the facts of each case upon mixed considerations of logic, common sense, policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the Phil. Islands v. Court of Appeals, 17 defines proximate cause as "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. . . ." In this case, absent the act of Ms. Mabayad in negligently validating the incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not have the facility with which to perpetrate her fraudulent scheme with impunity. Apropos, once again, is the pronouncement made by the respondent appellate court, to wit: . . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by plaintiff, she would not have been able to deposit those funds in her husband's current account, and then make plaintiff believe that it was in the latter's accounts wherein she had deposited them, had it not been for bank teller Mabayad's aforesaid gross and reckless negligence. The latter's negligence was thus the proximate, immediate and efficient cause that brought about the loss claimed by plaintiff in this case, and the failure of plaintiff to discover the same soon enough by failing to scrutinize

the monthly statements of account being sent to it by appellant bank could not have prevented the fraud and misappropriation which Irene Yabut had already completed when she deposited plaintiff's money to the account of her husband instead of to the latter's accounts. 18 Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in essence, states that where both parties are negligent, but the negligent act of one is appreciably later in time than that of the other, or when it is impossible to determine whose fault or negligence should be attributed to the incident, the one who had the last clear opportunity to avoid the impending harm and failed to do so is chargeable with the consequences thereof. 19 Stated differently, the rule would also mean that an antecedent negligence of a person does not preclude the recovery of damages for the supervening negligence of, or bar a defense against liability sought by another, if the latter, who had the last fair chance, could have avoided the impending harm by the exercise of due diligence. 20 Here, assuming that private respondent RMC was negligent in entrusting cash to a dishonest employee, thus providing the latter with the opportunity to defraud the company, as advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the last clear opportunity to avert the injury incurred by its client, simply by faithfully observing their self-imposed validation procedure. At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing with their clients. The New Civil Code provides: Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) In the case of banks, however, the degree of diligence required is more than that of a good father of a family. Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to treat the accounts of their clients with the highest degree of care. 21 As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind

the fiduciary nature of their relationship. In the case before us, it is apparent that the petitioner bank was remiss in that duty and violated that relationship. Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut. We do not agree. While it is true that had private respondent checked the monthly statements of account sent by the petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by the petitioners to escape liability. This omission on the part of the private respondent does not change the fact that were it not for the wanton and reckless negligence of the petitioners' employee in validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not have occurred. Considering, however, that the fraud was committed in a span of more than one (1) year covering various deposits, common human experience dictates that the same would not have been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the performance of her duties as bank teller nonetheless. Thus, the petitioners are entitled to claim reimbursement from her for whatever they shall be ordered to pay in this case. The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent in not checking its monthly statements of account. Had it done so, the company would have been alerted to the series of frauds being committed against RMC by its secretary. The damage would definitely not have ballooned to such an amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This omission by RMC amounts to contributory negligence which shall mitigate the damages that may be awarded to the private respondent 23 under Article 2179 of the New Civil Code, to wit: . . . When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only the balance of 60% needs to be paid by the petitioners. The award of attorney's fees shall be borne exclusively by the petitioners. WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of actual damages private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena Mabayad the amount they would pay the private respondent. Private respondent shall have recourse against Ms. Irene Yabut. In all other respects, the appellate court's decision is AFFIRMED. Proportionate costs. SO ORDERED. Bellosillo, Vitug and Kapunan, JJ., concur

Separate Opinions PADILLA, J., dissenting: I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this case." It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene Yabut, RMC's own employee, who should have been charged with estafa or estafa through falsification of private document. Interestingly, the records are silent on whether RMC had ever filed any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for damages. Why is RMC insulating Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer? To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976, Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47). Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad was just unfortunate that private respondent's documentary evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank. Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip. PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub and the lower part was called the bank copy. Both parts were detachable from each other. The deposit slip was prepared and signed by the depositor or his representative, who indicated therein the current account number to which the deposit was to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in checks. (Rollo, p. 137) Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it did, then the teller proceeded to verify whether the current account number matched with the current account name as written in the deposit slip. In the earlier days before the age of full computerization, a bank normally maintained a ledger which served as a repository of accounts to which debits and credits resulting from transactions with the bank were posted from books of original entry. Thus, it was only after the transaction was posted in the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction.

It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut. The teller, however, detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the original deposit slip, but with the account name purposely left blank by Yabut, on the assumption that it would serve no other purpose but for a personal record to complement the original validated depositor's stub. Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit slip, tampered with its account number, and superimposed RMC's account number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear evidence of tampering with any of the material entries in a deposit slip, the genuineness and due execution of the document become an issue in resolving whether or not the transaction had been fair and regular and whether the ordinary course of business had been followed by the bank. It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut, its employee, deposited the money of RMC in her husband's name and account number instead of that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut that directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her husband's name and to his account. Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the damage had already been done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would have done afterwards like tampering both the account number and the account name on the stub of the original deposit slip and on the duplicate copy in order to cover up her crime. Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the bank tellers were absolutely unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to RMC. The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had no choice but to accept and validate the deposit as written in the original deposit slip under the account number and name of Yabut's husband. Hence, the act of validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish something which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with the account number of the duplicate deposit slip after filling in the name of RMC in the blank space. Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate cause of the injury. In short, there must be a last and a clear chance, not a last possible chance, to avoid the accident or injury. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the resulting damage to himself.

In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest opportunity. Private respondent failed to examine these bank statements not because it was prevented by some cause in not doing so, but because it was purposely negligent as it admitted that it does not normally check bank statements given by banks. It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence, therefore, is not contributory but the immediate and proximate cause of its injury. I vote to grant the petition. Separate Opinions PADILLA, J., dissenting: I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this case." It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene Yabut, RMC's own employee, who should have been charged with estafa or estafa through falsification of private document. Interestingly, the records are silent on whether RMC had ever filed any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for damages. Why is RMC insulating Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer? To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July 1976, Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47). Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad was just unfortunate that private respondent's documentary evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank. Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip. PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub and the lower part was called the bank copy. Both parts were detachable from each other. The deposit slip was prepared and signed by the depositor or his representative, who indicated therein the current account number to which the deposit was

to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in checks. (Rollo, p. 137) Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it did, then the teller proceeded to verify whether the current account number matched with the current account name as written in the deposit slip. In the earlier days before the age of full computerization, a bank normally maintained a ledger which served as a repository of accounts to which debits and credits resulting from transactions with the bank were posted from books of original entry. Thus, it was only after the transaction was posted in the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction. It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut. The teller, however, detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the original deposit slip, but with the account name purposely left blank by Yabut, on the assumption that it would serve no other purpose but for a personal record to complement the original validated depositor's stub. Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit slip, tampered with its account number, and superimposed RMC's account number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear evidence of tampering with any of the material entries in a deposit slip, the genuineness and due execution of the document become an issue in resolving whether or not the transaction had been fair and regular and whether the ordinary course of business had been followed by the bank. It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut, its employee, deposited the money of RMC in her husband's name and account number instead of that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut that directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her husband's name and to his account. Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the damage had already been done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would have done afterwards like tampering both the account number and the account name on the stub of the original deposit slip and on the duplicate copy in order to cover up her crime. Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the bank tellers were absolutely unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to RMC.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had no choice but to accept and validate the deposit as written in the original deposit slip under the account number and name of Yabut's husband. Hence, the act of validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish something which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with the account number of the duplicate deposit slip after filling in the name of RMC in the blank space. Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate cause of the injury. In short, there must be a last and a clear chance, not a last possible chance, to avoid the accident or injury. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the resulting damage to himself. In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest opportunity. Private respondent failed to examine these bank statements not because it was prevented by some cause in not doing so, but because it was purposely negligent as it admitted that it does not normally check bank statements given by banks. It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence, therefore, is not contributory but the immediate and proximate cause of its injury. I vote to grant the petition.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 108052 July 24, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ, 1 doing business under the name and style SAPPHIRE SHIPPING, respondents.

PANGANIBAN, J.:p Does a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual with another local bank, and apply the said funds to certain obligations owed to it by the said individual? Assailed in this petition is the Decision of respondent Court of Appeals 2 in CA-G.R. CV No. 27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the dispositive portion of which read: 3 WHEREFORE, judgment is hereby rendered: 1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private respondent herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal rate from January 13, 1987, the date of judicial demand; 2) The plaintiff's supplemental complaint is hereby dismissed (sic); 3) The defendant's counterclaims are likewise dismissed. The Facts The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being undisputed by the parties: 4

The body of the decision reads: After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes the following conclusions: (a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defense of compensation for what is owing to it on the principle of solution (sic) indebiti. (b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to the credited to his account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the plaintiff's account with the defendant, No. 830-2410; (c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of $2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference; (d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He claims, however, that plaintiff's claim has prescribed. (e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11 months from November 1980, and 5 years and 9 months from January 1981. Such letter was answered by the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the defendant through Exh. 13; (f) The deduction of P34,340.58 was made by the defendant not without the knowledge and consent of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant. There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981 created an extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle of solutio indebiti, as follows: If something is received when there is no right to demand it, and it was unduly delivered through (sic) mistake, the obligation to return it arises. (Article 2154, Civil Code of the Phil.) Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified in making the compensation or set-off against the two remittances coursed through it in favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the principlesolutio indebiti, and second, whether or not petitioner's claim is barred by the statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows: 5

Article 1279 of the Civil Code provides: In order that compensation may prosper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there by any retention or controversy, commenced by third persons and communicated in due time to the debtor. In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of money, are both due, liquidated and demandable, and over neither of them is there a retention or controversy commenced by third persons and communicated in due time to the debtor. The question, however, is, where both of the obligors bound principally, and was each one of them a debtor and creditor of the other at the same time? Analyzing now the relationship between the parties, it appears that: (a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor respectively (Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA 577); (b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local bank asking the latter to pay an amount to a beneficiary is a stipulation pourautrui. (Bank of America NT & SA vs. IAC, 145 SCRA 419). A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475). Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows: When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic). (c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly, received something (sic) by mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the defendant to return what he unduly received. Thus, there was created between them a relationship of obligor and obligee, or of debtor and creditor under a quasicontract.

In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect to the $2,627.11 from Jeddah; neither are they at the same time principal creditor of the other. Therefore, as matters stand, the parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned. They are debtor and creditor only with respect to the double payments; but are trustee-beneficiary as to the fund transfer of $2,627.11. Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of $2,627.11. Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23 and $5,885.38 erroneously doubly credited to his account, the defendant's actuation in intercepting the amount of $2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust and confidence of the international banking community in the banking system of the country, something we can ill afford at this time when we need to attract and invite deposits of foreign currencies. It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to plaintiff's account No. 830-2410 with the defendant bank. However, the defendant alleged this for the first time in its Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was neither any allegation thereof in its pleadings, nor was there any evidence to prove such fact. On the contrary, the defendant admitted that the telex advice was for credit of the amount of $2,627.11 to plaintiff's account with Citibank, Greenhills, San Juan, Metro-Manila (Pls. see par. of defendant's Answer with Compulsary Counterclaim, in relation to plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against the double payments to plaintiff's account is not in accordance with law. On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no express contract of agency. On the other hand, were we to infer that there was an implied agency, the same would not be between the plaintiff and defendant, but rather, between the National Commercial Bank of Jeddah as principal on the one hand, and the defendant as agent on the other. Thus, in case of violation of the agency, the cause of action would accrue to the NCB and not to the plaintiff. The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is a receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts receivables with RICB Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated February 28, 1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last paragraph of defendant's memorandum. The same is in accordance with the defendant's answer, as follows: The retention and application of the amount of P34,340.58 was done in a manner consonant with basic due process considering that plaintiff was not only furnished documented proof of the cause but was also given the opportunity to con(tro)vert such proof .

Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to the retention and application of the amount in question. (Pls. see paragraphs 8-9, defendant's Answer with Compulsary Counterclaim to Plaintiff's Supplemental Complaint). This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt was handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from Libya. At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum Marketing Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court believes that insofar as the amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the subject of compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as the amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44. Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a quasi contract (such as solution indebiti) at six years. In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The court dismissed all other claims and counterclaims. On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the US$2,627.11 in payment of the private respondent's indebtedness by way of compensation or set-off, as provided under Art. 1279 of the Civil Code. The respondent Court of Appeals rejected such argument, saying: The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of plaintiff with the Citibank, Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's corresponden(t) bank in the Philippines. The credit account, or simply account means that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citibank, and, in that sense, presupposes a creditor-debtor relationship between the plaintiff, as creditor and the Citibank, as debtor. Withal the telegraphic money transfer, no such creditor-debtor relationship could have been created between the plaintiff and defendant. The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between the two banks a sort of communication exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Some such responsibility of the

corresponden(t) bank is akin to section 7 of the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, ". . . to take charge of the prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to the account of the plaintiff with the said bank. That is all that the PNB can do under the remittance arrangement that it has with the NCB. With its responsibility as defined as well as by the nature of its banking business and the responsibility attached to it, and through which the industry, trade and commerce of all countries and communities are carried on, the PNB's liability as corresponden(t) bank continues until it has completely (sic) performed and discharged it(s) obligation thereunder." (emphasis ours) Hence, the respondent Court affirmed the trial court's holding in toto. Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision. The Issue Petitioner's arguments revolve around one single issue: 6 WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME AMOUNT FROM PRIVATE RESPONDENT. The Court's Ruling We note that in framing the issue in the manner aforecited, the petitioner implicity admits the correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have done otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate court, we find no reversible error whatsoever in either ruling, and see no need to add to the extensive discussions already made regarding the non-existence of all the requisites for legal compensation to take place. But petitioner has adopted a novel theory, contending that since respondent Court found that private respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private respondent (resulting in legal compensation), the (h)onorable respondent court should have ordered private respondent to pay PNB what the latter is bound by the trial court's decision to return the former." 7 By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court and the appellate Court, and have this Court validate its original misdeed, thereby making a mockery of the entire judicial process of this country. What the petitioner bank is effectively saying is that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply intercept fundsbeing coursed through it, for transmittal to another bank, and eventually to be deposited to the account of an individual who happens to owe some amount of money to the petitioner, and because respondent Court order petitioner bank to return intercepted amount to said

individual, who in turn was found by the appellate Court to be indebted to petitioner bank, THEREFORE, there must now be legal compensation of the amounts each owes the other, and hence, there is no need for petitioner bank to actually return the amount, and finally, that petitioner bank ends up in exactly the same position as when it first took the improper and unwarranted shortcut by intercepting the said money transfer, notwithstanding the assailed Decision saying that this could not be done! We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner bank, with the not impossible intention of using this case as a precedent for similar acts of interception in the future. This piratical attitude of the nation's premier bank deserves a warning that it should not abuse the justice system in its collection efforts, particularly since we are aware that if the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten minutes flat by means of an exchange of checks with private respondent for the same amount. The litigation could have ended there, but it did not. Instead, this plainly unmeritorious case had to clog our docket and take up the valuable time of this Court. WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed Decision is AFFIRMED in toto. Costs against petitioner. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 104612 May 10, 1994 BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents. Leonen, Ramirez & Associates for petitioner. Constante A. Ancheta for private respondents.

DAVIDE, JR., J.: The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331,261.44 which represents the outstanding balance of their account with the plaintiff. As culled from the records and the pleadings of the parties, the following facts were duly established: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and" account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market. Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General Manager of Eastern, 2 one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was payable on demand with interest at 14% per annum. For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X" meaning unsecured, while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest. And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the non-resolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder. In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. 8 Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.

After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. 12 Both parties appealed from the said decision to the Court of Appeals. Their appeal was docketed as CA-G.R. CV No. 25739. On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." 14 On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are the rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00 representing the security required for the note and must return the rest. 16 The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a Rejoinder thereto. We gave due course to the petition and required the parties to submit simultaneously their memoranda. The key issues in this case are whether BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco.

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the promissory note is a negotiable instrument." 17 It further correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement. We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. 19 Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal. The "suspensive condition" theory of the petitioner is, therefore, untenable. The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. 22 The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. 23 Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership

of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. 24 Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set aside. The award on the counterclaim is sustained subject to a modification of the interest. WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified: (1) Private respondents are ordered to pay the petitioner the promissory note for P73,000.00 with interest at: (a) 14% per annum on 18 August 1978 until payment; the principal, computed from

(b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint, computed from that date until payment pursuant to Article 2212 of the Civil Code. (2) The award of P331,264.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim. No pronouncement as to costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 112590* July 12, 2001

STATE INVESTMENT HOUSE INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER INDUSTRIES, INC., AMANDA MALONJAO, and RUFINO MALONJAO, respondents. KAPUNAN, J.: This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial Court, National Capital region, branch 38 in Civil Case No. 83-18464 for a sum of money. The undisputed facts, as quoted from the respondent court's decision are as follows: in that sale that should a receivable remain unpaid, plaintiff, at its discretion, may impose a penalty fee of 3% per month. To secure the payment of the receivables, the Malonjaos also executed in favor of plaintiff, a real estate mortgage over their real property covered by Transfer Certificates of Title Nos. (445856) S-65586 and No. (162775) S-65585 (Exh. "B"). Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to plaintiff for a total consideration of P2,558,073.75 (Exhs. "C", "D", "E" and "F"), various receivables consisting of checks as follows: TCBTC 618821 TCBTC 618820 TCBTC 618819 TCBTC 618818 TCBTC 618817 TCBTC 618816 TCBTC 618814 TCBTC 618828 MBTC 06659490 June 9, 1978 P371,319.58

September 9, 1978 P371,319.58 December 9, 1978 P371,319.58 March 9, 1978 June 9, 1979 P371,319.58 P371,319.58

September 9, 1979 P371,319.58 December 9, 1979 P371,319.58 March 9, 1979 September 1978 P371,319.58 30, 60,000.00

(Exhs. "C-1", D-1", "E-1", "F-1" and "G" to "G-7").

TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of payee Lomuyon which in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and Trust Company) check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in turn, indorsed said check to plaintiff. When plaintiff presented the checks for payment to the drawee banks, the same were dishonored for having been drawn against insufficient funds (Exhs. "H" and "H-7") except for TCBTC 618821. Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the penalty charges it has imposed thereon, (Exhs. "I", "J", "K", "L", "L-1", "M" and "N"). Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake foreclosure of the real estate mortgage. On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real estate mortgage dated September 28, 1981. In said petition, plaintiff alleged among others, that as of said date, September 28, 1981, defendants' outstanding obligation, inclusive of interest and charges, is P4,809,187.12 (Exh. "O"). On February 14, 1983, the Provincial Sheriff sold at public auction, defendants mortgaged properties to plaintiff who was the highest bidder for P4,233,874.00. The following day, the Provincial Sheriff issued a Certificate of Sale (Exh. "P"). On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties from defendants' outstanding obligation, there remains a deficiency of P2,601,147.62 as of February 14, 1983, which as of May 31, 1983 amounted to P2,876,929.27 inclusive of interest and charges. As an alternative cause of action, plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to P2,239,237.10. Plaintiff further prayed that it be awarded exemplary damages, attorney's fees and litigation expenses (Records, pp. 1-38). In their answer, defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor of the checks. However, defendants contended that plaintiff's computation of their outstanding obligation is erroneous. Thus, by way of special affirmative defenses, defendants alleged that: "12. x x x. "13. The complaint states no cause of action; "14. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the defendants; "15. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low; "16. Assuming for the sake of argument, that the outstanding obligation of the defendants as of September 26, 1981 (sic) was P4,809,187.12 per statement of account as alleged in the complaint and the alleged purchase price at public auction wasP4,233,874.00, the deficiency would only be P575,313.12 and not P2,601,147.62 as erroneously alleged in the complaint.

"17. No demand was ever made upon the defendant; "18. The interest and charges made by plaintiff is usurious and unconscionable" (id., pp. 91-92).1 On January 11, 1981, the trial court rendered its decision with the following dispositive portion: WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants; 2. Dismissing defendants' counterclaim; and 3. Ordering the plaintiff and defendants to pay the costs of suit. SO ORDERED.2 On appeal, petitioner assigned the following errors committed by the trial court: I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES' OBLIGATION TO SIHI AS OF THE TIME OF FORE-CLOSURE AUCTION SALE AMOUNTED TO P6,835,021.62 THUS, AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62. II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS. III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.3 On August 17, 1992, the respondent court rendered the assailed decision disallowing the claim for deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and unconscionable. The subsequent motion for reconsideration was, likewise, denied. Hence, petitioner filed the instant petition raising the sole issue that: THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE.4 In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction sale was sufficient to cover the principal obligation of the private respondent including interest, penalty and other charges, Both the respondent court and the trial court took particular attention on the penalty charge of 3% a month which was imposed on the principal obligation as a result of their default in payments. Undaunted by the disallowance of its claim in the August 27, 1992 decision, petitioner reiterated its position in a motion for reconsideration, averring that the respondent court and the trial court failed to reconcile the figures due it. Petitioner asserts that as of September 26, 1981, private respondent's obligation amounted to P4,809,187.12. At that time of the foreclosure sale on February 14, 1982, the obligation to SIHI was computed to be P6,833,021.62 inclusive of interest and penalty charges. Considering that the bid price of the foreclosed properties was only P4,233,874.00, petitioner was still entitled to a deficiency of about P2,601,147.62. Petitioner further added that until the original obligation is fully paid, private respondent's outstanding

obligation continue to earn interest and penalty charges from day to day. Thus, from the time of the foreclosure sale on February 14,1983 (P2,601,147.62) up to the filing of the complaint for the deficiency claim on May 31, 1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC, private respondent's outstanding obligation to SIHI rose to P7,651,969.41. There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable.5 Petitioner argues that while it recognizes the authority of the court to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not have the authority to delete the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of contracts between the parties. This contention is not well-taken. The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per Statement of Account dated September 21, 1981, the obligation of the private respondent was computed to be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be a balance of only about P575,313.l2. 1wphi1.nt Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it found that tile principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.8M as of September 21,1991 if not for the penalty charge of 3% per month or 36% per annum. The trial court justified, to wit; x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions, it is shown that the amount including interests and other charges, is P2,970,566.64. For a two year period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809,187.12. In other words, the money of the plaintiff has already earned interests and other charges to more or less P1,638,630.48. As alleged in plaintiff's complaint, the total amount purchased by plaintiff was only for P2,500,000.00. There is reason to believe that the P2,970,566.64 represented by the various checks include therein, the interest and other charges upon their maturity dates. Deducting the amount of P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2,000,000.00.6 Contrary to petitioner's contention, the respondent court acted in accordance to of Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner. In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,7 we held that: xxx

On the issue of payment of surcharges and penalties, we party agree that GOYU's pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. x x x Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court, rules the surcharges rates ranging, anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely inquitious and unconscionable. x x x Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per annum inquitious and unconscionable. Petitioner computed the amount of P4,809,187.12, as the outstanding obligation of the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties located in Makati8 are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-1981) by way of penalty charges. Although petitioner claims that the penalty charge was well within the banking and business practice, no proof was adduced thereof. To allow the petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2,558.073.75 is rather unwarranted. We quote with favor the respondent court's ratiocination: The lower court did not err in its ruling under its statement that "since plaintiff had already recovered fully the receivables from the defendants, the court, considering that the plaintiff or the two properties foreclosed by it bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which was only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed" (Decision, p. 8). After due consideration and reflection on all the factual circumstances obtaining in the case at bar, it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable. x x x9 While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of tile New Civil Code clearly provides:

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. Likewise, Article 2227 provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. ACCORDINGLY, the judgment appealed from is hereby AFFIRMED. SO ORDERED.

THIRD DIVISION [G.R. No. 138544. October 3, 2000] SECURITY BANK AND TRUST COMPANY, Inc., Petitioner, vs. RODOLFO M. CUENCA, Respondent. DECISION PANGANIBAN, J.: Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows: WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment. Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit. In all other respect[s], the decision appealed from is AFFIRMED.[2 Also challenged is the April 14, 1999 CA Resolution,[3 which denied petitioners Motion for Reconsideration. Modified by the CA was the March 6, 1997 Decision[4 of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows: WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73

representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs. SO ORDERED.
The Facts

The facts are narrated by the Court of Appeals as follows:[5 The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR). On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations. The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981: JOINT CONDITIONS: 1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca. 2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies; 3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines; 4. Lines shall expire on November 30, 1981; and 5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. (Emphasis supplied.) To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows: xxx Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C). Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendantappellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction. Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line. Appellant SIMC, however, encountered difficulty[6 in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans: a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-BCuenca, Expediente, et Vol I, pp. 33 to 34) and b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34). It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement. Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendantappellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank: PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 P8,800,000.00 RL/74/597/88 P3,400,000.00 ------------------TOTAL P12,200,000.00 (Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343). To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides: 1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow. 1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33) From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165) Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively. Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation. The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety. The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation. Hence, this recourse to this Court.[7
The Issues

In its Memorandum, petitioner submits the following for our consideration:[8 A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon; i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981; ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code; iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement; B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC; C. Whether or not petitioners Motion for Reconsideration was pro-forma; D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure. Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will also be addressed.
The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.[9Consequently, the Petition was filed out of time.[10 We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11 Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v. Flojo,[12 the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma. It held: We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows: SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed. Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail. We do not think so. The Court held in Solar Entertainment v. Ricafort[13 that the aforecited rule was mandatory, and that only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with. In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.[14 This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.

First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows: ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[15 Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16 Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were not more onerous.[17 Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement. We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation[18 obtained under the 1980 credit accomodation. This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows: 1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.[19 (Italics supplied.) The testimony of an officer[20 of the bank that the proceeds of the 1989 Loan Agreement were used to payoff the original indebtedness serves to strengthen this ruling.[21 Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22 the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different. Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23 Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24 Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:

ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.
Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25 This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26 the Court explained the rationale of this provision in this wise: The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.
Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use. We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation.[27 Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise: 4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980. Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.[28 Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in

which he held himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal, which connotes cessation of an old contract and birth of another one x x x.[29 At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,[30 [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability. In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation - finds no support in the text of the Indemnity Agreement, which is reproduced hereunder: Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference. While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof. Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.[31 Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity.[32 In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition: 5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[33 We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation.[34 Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The latters liability would thus be more burdensome than that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35 The present controversy must be distinguished from Philamgen v. Mutuc,[36 in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified. In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement. In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement. This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately.[37 In Dino v. CA,[38 the Court held that a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million. Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower. No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation. Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation. Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan. In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame. In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation. In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

Republic of the Philippines SUPREME COURT 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 2) PN No. TL/74/1296/83 P83,333.00 as of August 3) PN No. TL/74/1991/83 P65,000.00 as of August 1983. 1983. 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.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 112590* July 12, 2001

STATE INVESTMENT HOUSE INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER INDUSTRIES, INC., AMANDA MALONJAO, and RUFINO MALONJAO, respondents. KAPUNAN, J.: This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial Court, National Capital region, branch 38 in Civil Case No. 83-18464 for a sum of money. The undisputed facts, as quoted from the respondent court's decision are as follows: in that sale that should a receivable remain unpaid, plaintiff, at its discretion, may impose a penalty fee of 3% per month. To secure the payment of the receivables, the Malonjaos also executed in favor of plaintiff, a real estate mortgage over their real property covered by Transfer Certificates of Title Nos. (445856) S-65586 and No. (162775) S-65585 (Exh. "B"). Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to plaintiff for a total consideration of P2,558,073.75 (Exhs. "C", "D", "E" and "F"), various receivables consisting of checks as follows: TCBTC 618821 TCBTC 618820 TCBTC 618819 TCBTC 618818 TCBTC 618817 TCBTC 618816 TCBTC 618814 TCBTC 618828 MBTC 06659490 June 9, 1978 P371,319.58

September 9, 1978 P371,319.58 December 9, 1978 P371,319.58 March 9, 1978 June 9, 1979 P371,319.58 P371,319.58

September 9, 1979 P371,319.58 December 9, 1979 P371,319.58 March 9, 1979 September 1978 P371,319.58 30, 60,000.00

(Exhs. "C-1", D-1", "E-1", "F-1" and "G" to "G-7"). TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of payee Lomuyon which in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and Trust Company) check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in turn, indorsed said check to plaintiff. When plaintiff presented the checks for payment to the drawee banks, the same were dishonored for having been drawn against insufficient funds (Exhs. "H" and "H-7") except for TCBTC 618821. Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the penalty charges it has imposed thereon, (Exhs. "I", "J", "K", "L", "L-1", "M" and "N"). Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake foreclosure of the real estate mortgage. On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real estate mortgage dated September 28, 1981. In said petition, plaintiff alleged among others, that as of said date, September 28, 1981, defendants' outstanding obligation, inclusive of interest and charges, is P4,809,187.12 (Exh. "O"). On February 14, 1983, the Provincial Sheriff sold at public auction, defendants mortgaged properties to plaintiff who was the highest bidder for P4,233,874.00. The following day, the Provincial Sheriff issued a Certificate of Sale (Exh. "P"). On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties from defendants' outstanding obligation, there remains a deficiency of P2,601,147.62 as of February 14, 1983, which as of May 31, 1983 amounted to P2,876,929.27 inclusive of interest and charges. As an alternative cause of action, plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to P2,239,237.10. Plaintiff further prayed that it be awarded exemplary damages, attorney's fees and litigation expenses (Records, pp. 1-38). In their answer, defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor of the checks. However, defendants contended that plaintiff's computation of their outstanding obligation is erroneous. Thus, by way of special affirmative defenses, defendants alleged that: "12. x x x. "13. The complaint states no cause of action; "14. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the defendants; "15. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low; "16. Assuming for the sake of argument, that the outstanding obligation of the defendants as of September 26, 1981 (sic) was P4,809,187.12 per statement of account as alleged in the complaint and

the alleged purchase price at public auction wasP4,233,874.00, the deficiency would only be P575,313.12 and not P2,601,147.62 as erroneously alleged in the complaint. "17. No demand was ever made upon the defendant; "18. The interest and charges made by plaintiff is usurious and unconscionable" (id., pp. 91-92).1 On January 11, 1981, the trial court rendered its decision with the following dispositive portion: WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants; 2. Dismissing defendants' counterclaim; and 3. Ordering the plaintiff and defendants to pay the costs of suit. SO ORDERED.2 On appeal, petitioner assigned the following errors committed by the trial court: I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES' OBLIGATION TO SIHI AS OF THE TIME OF FORE-CLOSURE AUCTION SALE AMOUNTED TO P6,835,021.62 THUS, AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62. II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS. III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.3 On August 17, 1992, the respondent court rendered the assailed decision disallowing the claim for deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and unconscionable. The subsequent motion for reconsideration was, likewise, denied. Hence, petitioner filed the instant petition raising the sole issue that: THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE.4 In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction sale was sufficient to cover the principal obligation of the private respondent including interest, penalty and other charges, Both the respondent court and the trial court took particular attention on the penalty charge of 3% a month which was imposed on the principal obligation as a result of their default in payments. Undaunted by the disallowance of its claim in the August 27, 1992 decision, petitioner reiterated its position in a motion for reconsideration, averring that the respondent court and the trial court failed to reconcile the figures due it. Petitioner asserts that as of September 26, 1981, private respondent's obligation amounted to P4,809,187.12. At that time of the foreclosure sale on February 14, 1982, the obligation to SIHI was computed to be

P6,833,021.62 inclusive of interest and penalty charges. Considering that the bid price of the foreclosed properties was only P4,233,874.00, petitioner was still entitled to a deficiency of about P2,601,147.62. Petitioner further added that until the original obligation is fully paid, private respondent's outstanding obligation continue to earn interest and penalty charges from day to day. Thus, from the time of the foreclosure sale on February 14,1983 (P2,601,147.62) up to the filing of the complaint for the deficiency claim on May 31, 1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC, private respondent's outstanding obligation to SIHI rose to P7,651,969.41. There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable. 5 Petitioner argues that while it recognizes the authority of the court to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not have the authority to delete the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of contracts between the parties. This contention is not well-taken. The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per Statement of Account dated September 21, 1981, the obligation of the private respondent was computed to be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be a balance of only about P575,313.l2. 1wphi1.nt Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it found that tile principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.8M as of September 21,1991 if not for the penalty charge of 3% per month or 36% per annum. The trial court justified, to wit; x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions, it is shown that the amount including interests and other charges, is P2,970,566.64. For a two year period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809,187.12. In other words, the money of the plaintiff has already earned interests and other charges to more or less P1,638,630.48. As alleged in plaintiff's complaint, the total amount purchased by plaintiff was only for P2,500,000.00. There is reason to believe that the P2,970,566.64 represented by the various checks include therein, the interest and other charges upon their maturity dates. Deducting the amount of P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2,000,000.00.6 Contrary to petitioner's contention, the respondent court acted in accordance to of Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner. In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,7 we held that:

xxx On the issue of payment of surcharges and penalties, we party agree that GOYU's pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. x x x Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court, rules the surcharges rates ranging, anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely inquitious and unconscionable. x x x Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per annum inquitious and unconscionable. Petitioner computed the amount of P4,809,187.12, as the outstanding obligation of the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties located in Makati8 are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-1981) by way of penalty charges. Although petitioner claims that the penalty charge was well within the banking and business practice, no proof was adduced thereof. To allow the petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2,558.073.75 is rather unwarranted. We quote with favor the respondent court's ratiocination: The lower court did not err in its ruling under its statement that "since plaintiff had already recovered fully the receivables from the defendants, the court, considering that the plaintiff or the two properties foreclosed by it bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which was only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed" (Decision, p. 8). After due consideration and reflection on all the factual circumstances obtaining in the case at bar, it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable. x x x9

While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of tile New Civil Code clearly provides: 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. Likewise, Article 2227 provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. ACCORDINGLY, the judgment appealed from is hereby AFFIRMED. SO ORDERED.

Republic of the Philippines SUPREME COURT 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 deescalation, 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.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 97218 May 17, 1993 PROVIDENT SAVINGS BANK, petitioner, vs. COURT OF APPEALS, Former SPECIAL EIGHTH DIVISION and WILSON CHUA, respondents. Gonzales, Batiller, Bilog & Associates for petitioner. Resty R. Villanueva for private respondent. MELO, J.: The error, if error it be, of respondent Court of Appeals which petitioner seeks to rectify via the petitioner forcertiorari before us refers to respondent court's major conclusion arrived at in CA-G.R. CV No. 21312 (Javellana (P), Kalalo, Dayrit, JJ) barring petitioner from foreclosing the subject realty on account of prescription. Petitioner begs to differ, insisting that the period during which it was placed under receivership by the Central Bank is akin to a caso fortuito and should not thus be reckoned against it. Both petitioner and private respondent accepted the synthesized factual backdrop formulated by respondent court, to wit: This an appeal by both plaintiff and defendant from the decision of the Regional Trial Court of the National Capital Judicial 29 September 1988, in Civil Case No. 977-NW, which directed plaintiff-appellant to pay defendant-appellant the personal obligation of the spouses Guarin to defendant-appellant in the amount of P62,500.00, together with the interest, penalties, and bank charges due thereon, and ordering defendant-appellant thereafter to: (1) release the real estate mortgage executed by the spouses Lorenzo K. Guarin and Liwayway J. Guarin in favor of defendant bank on 16 February 1967; (2) return to surrender to plaintiff-appellant, as successor-in-interest of the spouses Guarin, the latter's Owner's Duplicate of Title No. 177014; (3) pay plaintiff-appellant P20,000.00 as and for attorney's fees; and, (4) pay the costs of suit. The established fact are: On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. Guarin (Guarins) obtained a loan from defendant-appellant in the amount of P62,500.00 payable on or before 20 June

1967. As security for the loan, they executed a real estate mortgage in favor of defendantappellant over a parcel of land covered by TCT No. 177014. (Exhs. C and D). In September, 1972, defendant-appellant was placed under receivership by the Central Bank of the Philippines until 27 July 1981 when the receivership was set aside by the Honorable Supreme Court. On 11 December 1984, Lorenzo K. Guarin, in reply to the letter of latter's counsel informing that the mortgaged property would be sold at public auction on 27 December 1984, assured he and his wife had every intention of paying their obligation and requesting for a recomputation of their account and a postponement of the foreclosure sale. (Exh. 1). On 10 February 1986, the Guarins received a Statement of Account from defendant-appellant showing two outstanding accounts as of 15 February 1986. One was account of Lorenzo K. Guarin in the amount of P591,088.80, and the other was the account of L.K. Guarin Manufacturing Co., Inc. in the amount of P6,287,380.27 (Attachment to Exh. 2) On 26 February 1986, Lorenzo K. Guarin wrote defendant-appellant stating that he was ready and willing to pay his obligation in the total amount of P591,088.80 as recomputed by defendant-appellant whenever defendant-appellant was already to receive the payment and inquiring as to when his mortgaged title would be available for him to pick up. (Exh. 2) Defendant-appellant replied on 27 February 1986 that Lorenzo K. Guarin may make payment at its office in Makati, Metro Manila, but that the mortgaged title could not be released to him even after the payment of the obligation of P591,088.80 as it also served as security for the indebtedness of L.Y. Guarin Manufacturing Co., Inc., to defendant-appellant which was undertaken by Lorenzo K. Guarin in his personal capacity and as president of the corporation. (Exh. 3) On 20 May 1986, plaintiff-appellant wrote defendant-appellant saying that the mortgaged property of the Guarins had been offered to him as payment of the judgment he obtained against the Guarins in Civil Case No. Q-47465 entitled, "Wilson Chua vs. Lorenzo K. Guarin", and requesting for defendant-appellant's conformity to the assignment and expressing his willingness to pay for the obligation of Mr. Guarin so that the title could be released by defendant-appellant. (Exh. 4) On 10 July 1986, the Guarins and plaintiff-appellant executed a Deed of Absolute Sale With Assumption of Mortgaged whereby the Guarins sold the mortgaged property to Guarins sold the appellant for the sum of P250,000.00 and plaintiff-appellant undertook to assume the mortgaged obligation of the Guarins with defendant-appellant which as of 15 February 1985 amounted to P591,088.80.(Exh. B). On 5 August 1986, plaintiff-appellant informed defendant-appellant that as a result of the judgment in Civil Case No. Q-47645, the mortgaged property had been sold to him by the Guarins, as evidenced by the Deed of Sale enclosed for guidance and information of defendantappellant. He requested that he be allowed to pay the loan secured by the mortgaged, otherwise, he would be constrained to bring the matter to court. (Exh. 5) In reply, defendantappellant, on 11 August 1986, informed plaintiff-appellant that his request could be granted if

he would settle the obligation of L.K. Guarin Manufacturing Co., Inc., as well and defendantappellant's letter to Mr. Guarin dated 27 February 1986. (Exh. 6) On 3 August 1987, counsel for plaintiff-appellant addressed a letter to defendant-appellant informing that plaintiff-appellant had purchased the mortgaged property from the Guarin's and requesting that the owner's copy of TCT No. 177014 in the possession of defendant-appellant be released to him so that he can register the sale and have the title to the property transferred in his name. He likewise, informed defendant-appellant that it had lost whatever right or action had against the Guarins because of prescription. (Exh. E) Defendant-appellant replied on 10 August 1987 stating the reasons why they could not comply with plaintiff-appellant's demands. (Exh. F) On 21 August 1986, plaintiff-appellant filed a complaint against defendant-appellant to compel the latter to: (1) release the real estate mortgaged executed by the Guarins in favor of defendant-appellant on 16 February 1967; (2) return or surrender to plaintiff-appellant, as successor-in-interest of the Guarins, the latter's owner's duplicate of TCT No. 177014; and (3) pay plaintiff-appellant P2,750,000.00 as actual and/or consequential damages, moral damages as may be proved during the trial, exemplary damages as may be reasonably assessed by the court, and attorney's fees of P50,00.00. Defendant-appellant answered the complaint thereof and setting up special and affirmative defenses. After trial, judgment was rendered as stated in the opening paragraph hereof from which both parties appealed . . . . (pp. 35-37, Rollo.) Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to initiate the action to compel the release of the real estate mortgage and the delivery of the owner's duplicate copy of the certificate of title, respondent court noted that Wilson Chua can be considered a real-property-in-interest because he is the successor-in-interest of the Guarins who is naturally entitled to the realty as against the socalled right of Provident Savings Bank, as mortgagee, to foreclose the mortgage which had become stale through sheer lapse of time. The matter of novation in the form of substitution of the debtor without corresponding acquiesence of the mortgagee was viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the change of obligors, which act was construed as equivalent to consent. To the question of whether petitioner can still foreclose the subject realty, respondent court gave a negative response on account of the absence of proof to indicate that the bank was precluded from collecting indebtedness while it was under receivership from September, 1972 until July 20,1981. Thus, there was no legal interruption of the pres-criptive period to speak of, said respondent court, which intervened between June 20, 1967, the date the mortgage matured, and June 20, 1977 the last day within which petitioner could have foreclosed the mortgage. Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's assumption of the mortgage on July 10, 1986 as tantamount to an explicit acknowledgement that the obligation was outstanding and had not yet prescribed. As a result of these observations, respondent court reversed the decision of the trial court insofar as it ordered Wilson Chua to pay the sum of P591,088.80 to the bank and affirmed the other dispositions made the court of origin (p. 42, Rollo). Following the unfavorable judgment, the bank filed a motion for reconsideration and a motion for new trial premised on newly discovered evidence relative to a statement of account unearthed by the bank's liaison

officer from the loose folders on October 18, 1990 which it believed to be of legal significance to the case. But respondent court was unperturbed, observing that the vital piece of document could have been located in the course of trial had the slightest degree of prudence been exercised, considering that the statement of account sprouted the same day the liaison officer was advised to take an inventory of the records ( p. 45, Rollo). Hence, the petitioner at bar. Consistent with its theory premised on fuerza major, petitioner insists that it can not be blamed for not lifting a finger, so speak, during the period when it was enjoined by the Central Bank on September 15, 1972 from transacting business until this Court affirmed on July 27,1981 the decision of the Court of Appeals annulling the proscription against petitioner in Central Bank vs. Court of Appeals (106 SCRA 143 [1981]. We are not unaware of the rule laid down in Teal Motor Co. vs. Court of First Instance of Manila (51 Phil. 549 [1928]; Martin, Commentaries and Jurisprudence on the Philippine Commercial Laws, 1986 Revised ed., p.125) that the appointment of a receiver does not dissolve the corporation nor does it interfere with the exercise of its corporate rights. But this principles is, of course, applicable to a situation where there is no restraint imposed on the corporation, unlike in the case at bar where petitioner Provident Savings Bank was specifically forbidden and immobilized from doing business in the Philippines on September 15, 1972 through Monetary Board Resolution No. 1766 until 1981 when the decision in Central Bank vs. Court of Appeals (supra, at p. 150) was rendered. The question which immediately crops up is whether a foreclose proceeding falls within the purview of the phrase "doing business". In Mentholatum Co., Inc., et al. vs. Mangaliman, et al. (72 Phil. 524 [1941]; Moreno, Philippine Law Dictionary, Second ed., 1972, p. 186), the term was construed by Justice Laurel to refer to: . . . a continuity of commercial dealings and arrangements, and contemplates to that extent, the exercise of some of the words or the normally incident to, and in progressive prosecution of, the purpose ands object of its organizations. (p. 528; emphasis supplied.) Withal, we believe that a foreclose is deemed embraced by the phrase "doing business" as a preparatory measure to acquiring or holding property for petitioner as a saving bank under Section 34 of the General Banking Act. Like any other banking institution, petitioner is vested with the usual attributes and powers of a corporation under Section 36 of the Corporation Code (Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 475). The prerogative of a bank to foreclose is implicit from and is even necessary to enforce collection of secured debts under Section 36(11) and 45 of the Corporation Code, in conjunction with Section 29 of the General Banking Act (6 Fletcher, 206; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1990 ed., p. 325). When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such bank, that bank would not be able to do new business, i.e., to grant new loans or to accept new deposits. However, the receiver of the bank is obliged to collect debts owing to the bank, which debts form part of the assets of the bank. The receiver must assemble the assets and pay the obligation of the bank under receivership, and take steps to prevent dissipation of such assets. Accordingly, the the receiver of the bank is obliged to collect preexisting debts due to the bank, and in connection therewith, to foreclose mortgages securing debts. This is not to ignore The Philippine Trust Co. vs. HSBC (67 Phil. 204 [1939], for in that case, the Court simply rejected the objections of certain creditors to the report of a receiver, that is, objections that the receiver did not report the collection made before the beginning of his receivership. It would follow that the bank is bound by the acts, or failure to act, of the receiver. At the same time, the receiver is liable to the bank for culpable or negligent failure to collect the assets of such bank and to safeguard said assets.

Having arrived at the conclusion that the foreclosure is part of bank's business activity which could not have been pursued by the receiver then because of the circumstances discussed in the Central Bank case, we are thus convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the prohibition imposed by the Monetary Board against petitioner from transacting business, until the directive of the board was nullified in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against him (Article 1154, New Civil Code). When prescription is interrupted, all the benefits acquired so far from the possession cease and when prescription starts anew, it will be entirely a new one. This concept should not be equated with suspension where the past period is included in the computation being added to the period after prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when the closure of was set aside in 1981, the period of ten years within which to foreclose under Article 1142 of the New Civil Code began to run again and, therefore, the action filed on August 21, 1986 to compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's own suit foreclosure had prescribed. What exacerbates the situation is the letter of private respondent requesting petitioner on August 6, 1986 that private respondent be allowed to pay the loan secured by the mortgage as the result of the Deed of Sale executed by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo). In point of law, this written communication is synonymous to an express acknowledgment of the obligation and had the effect of interrupting the prescription for the second time (Article 1155, New Civil Code; Osmea vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino, supra at p. 50). And this piece of document necessarily estops private respondent from setting up prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right of the petitioner to foreclose had long prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58, Rollo). Contrary to respondent court's prescription of the existence of novation, the evidence at hand does not buttress a finding along this line from the mere fact that petitioner supposedly did not question the substitution when the bank reacted to private respondent's offer to pay the loan (p. 39, Rollo). What seems to have escaped respondent court's attention was the condition imposed by the petitioner that it will grant private respondent's request if the latter will also shoulder the obligation incurred by Lorenzo Guarin in his capacity as president of the corporation (p.37, Rollo). The consent of the petitioner to the substitution, as creditor, was thus erroneously appreciated. With the conclusions reached, we need not discuss the other issues raised in the petition. WHEREFORE, the petition is hereby GRANTED. The decision dated August 31, 1990, including the resolution dated February 6, 1991 of respondent court are hereby set aside and another one entered dismissing Wilson Chua's complaint. No special pronouncement is made to costs. Bidin, Davide, Jr., and Romero, JJ., concur. Feliciano, J., concurs in the result.