ARTICLE 1308

SAMPAGUITA BUILDERS v PNB

Mini digest:
Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in the
loan w/o informing Sampaguita. PNB c l a i m e d t h e y w e r e a u t h o r i z e d t o d o i t a s t h e r e
w a s a c l a u s e i n t h e agreement that they may do so. Besides, Usury law was no longer in force=
SC
said
NO!
PNB
cannot
do so;
it
will
violate mutuality
of
contracts
under1 3 0 8 . B e s i d e s , S C m a y i n t e r v e n e w h e n a m o u n t o f i n t e r e s t i s
unconscionable.
Facts
:Sampaguita secured a loan from PNB in an aggregate amount of 8M pesos,mortgaging the properties of
Sampaguitas president and chairman
Of theb o a r d . S a m p a g u i t a a l s o e x e c u t e d s e v e r a l p r o m i s s o r y n o t e s d u e o n different
dates (payment dates). The first promissory note had 19.5%interest rate. The 2nd and 3rd
had 21.5%. a uniform clause therein permitted PNB to increase the rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future x x x, without
even giving prior notice to petitioners. There was also a clause in the promissory note that
stated that if the same is not paid 2 years after release then it shall be converted to a medium
term loan and the interest rate for such loan would apply. Later on, Sampaguita defaulted on its
payments and failed to comply with obligations on promissory notes. Sampaguita thus requested for a 90
day extension to pay the loan. Again they defaulted, so they asked for loan restructuring. It
partly
paid
the
loan
and
promised
to
pay
the
balance
latero n . A G A I N t h e y f a i l e d t o p a y s o P N B e x t r a j u d i c i a l l y f o r e c l o s e d t h e mortgaged
properties. It was sold for 10M. PNB claimed that Sampaguita owed it 12M so they filed a case in
court asking sampaguita to pay for
deficiency. RTC found that Sampaguita
was automatically entitled to the debt relief package of PNB and ruled that the latter had no cause
of action against the former. CA reversed, saying Sampaguita was not entitled, thus ordered
them to pay the deficiency Appeal = Went to SC. Sampaguita claims the loan was bloated
s o t h e y d o n t r e a l l y o w e P N B a n y m o r e , b u t i t j u s t overcharged them!
Issues/Ruling:
W/N the loan accounts are bloated: YES. There is no deficiency; there is actually an
overpayment of more than 3M based on the computation of the SC. Whether PNB could unilaterally
increase interest rates: NO
Ratio:
Sampaguitas accessory duty to pay interest did not give PNB unrestrained freedom to charge any rate
other than that which was agreed upon. No interest shall be due, unless expressly stipulated in writing. It
would be thez e n i t h o f f a r c i c a l i t y t o s p e c i f y a n d a g r e e u p o n r a t e s t h a t c o u l d b e
subsequently
upgraded
at
whim by
only
one
party
to
the agreement. T h e u n i l a t e r a l d e t e r m i n a t i o n a n d i m p o s i t i o n o f i n c r e a s e d r a t e s i s
violative of the principle of mutuality of contracts ordained in Article 1308of the Civil Code. Onesided impositions do not have the force of law between the parties, because such
impositions are not based on the parties essential equality. Although escalation clauses are
valid in maintaining fiscal stability and retaining the value of money on long-term contracts, giving
respondent an unbridled right to adjust the interest independently and upwardly would completely take
away from petitioners the right to assent to an important modification in their agreement and
would also negate the element of mutuality in their contracts. The clause cited earlier made the
fulfillment of the contracts dependent exclusively upon the uncontrolled will of respondent
and was therefore void. Besides, the pro forma promissory notes have the character of a
contract
dadhsion,
where
the
parties
don o t b a r g a i n o n e q u a l f o o t i n g , t h e w e a k e r p a r t y s [ t h e d e b t o r s ] participati
on being reduced to the alternative to take it or leave it. C i r c u l a r t h a t l i f t e d

t h e c e i l i n g o f i n t e r e s t r a t e s o f u s u r y l a w d i d not authorize either party to unilaterally

raise the interest rate without the others consent. the interest ranging from 26 percent to 35
percent in the statements of account -- must be equitably reduced for being iniquitous,
unconscionable and exorbitant. Rates found to be iniquitous or unconscionable are void, as if it there
were no express contract thereon. Above all, it is undoubtedly against public policy to charge excessively
for the use of money. It cannot be argued that assent to the increases can be implied either from the June
18, 1991 request of petitioners for loan restructuring or from theirlack of response to the statements of
account sent by respondent. Such request does not indicate any agreement to an interest increase;
there can be no implied waiver of a right when there is no clear, unequivocal and decisive
act showing such purpose. Besides, the statements were not letters of information sent to
secure their conformity; and even if we were to presume these as an offer, there was no acce ptance. No
one
receivinga p r o p o s a l t o m o d i f y a l o a n c o n t r a c t , e s p e c i a l l y i n t e r e s t - - a v i t a l compone
nt -- is obliged to answer the proposal. Besides, PNB did not comply with its own stipulation that should
the loan not be paid 2 years after release of money then it shall be converted to a medium term
loan.*Court applied 12% interest rate instead for being a forbearance of money(there were some
pieces of evidence presented by PNB in court that sampaguita objected to. Lower courts
overruled
the
objections
but
SC
said
the objections were correct and
t h e e v i d e n c e s h o u l d n o t h a v e b e e n admitted. i.e. contract wasnt signed by the parties, a part
of the contract wasnt properly annexed/no reference was made in the main contract.)In addition to the
preceding
discussion,
it
is
then
useless
to
labor
the
pointt h a t t h e i n c r e a s e i n r a t e s v i o l a t e s t h e i m p a i r m e n t c l a u s e o f t h e Const
itution, because the sole purpose of this provision is to safeguard the integrity of valid contractual
agreements against unwarranted interference by the State in the form of laws. Private individuals
intrusions on interest rates is governed by statutory enactments like the Civil Code.

DBP v. Arcilla Jr.

Facts:
Atty. Felipe Arcilla Jr. was employed by the DBP. After he was assigned to the legal department, he decided to
avail of a loan under the Individual Housing Project (IHP) of the bank for the payment of the parcel of land
purchased by him and for its construction. When Arcilla resigned from DBP, the bank notified him that
his loan has been converted to a regular housing loan. Arcilla agreed to the reservation by the DBP of its
right to increase the rate of interest on the loan, as well as all other fees and charges on loans and
advances pursuant to such policy as it may adopt from time to time during the period of the loan.
Issue:
Whether or not DBP violated RA 3765 otherwise known as The Truth in Lending Act .
Ruling:
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank,
as creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to the
extent applicable and in accordance with the rules and regulations prescribed by the Monetary
Board of the Central Bank of the Philippines, the followinginformation:
1. the cash price or delivered price of the property or service to be acquired;
2. the amounts, if any, to be credited as down payment and/or trade-in;
3. the difference between the amounts set forth under clauses(1) and (2);

4. the charges, individually itemized, which are paid or to be paid by such person in connection with
the transaction but which are not incident to the extension of credit;
5. the total amount to be financed;
6. the finance charges expressed in terms of pesos and centavos; and
7. the percentage that the finance charge bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
If the borrower is not duly informed of the data required by the law prior to the consummation
of the availment or drawdown, the lender will have no right to collect such charge or increases
thereof, even if stipulated in the promissory note. However, such failure shall not affect the validity or
enforceability of any contract or transaction.

(People vs. Judge Nitafan, G.R. No. 75954, October 22, 1992)
Facts:
Private respondent K.T. Lim was charged with violation of B.P. 22. He moved to quash the Information of
the ground that the facts charged did not constitute a felony as B.P. 22 was unconstitutional and that the
check he issued was a memorandum check which was in the nature of a promissory note, perforce, civil
in nature. Judge Nitafan, ruling that B.P. 22 on which the Information was based was unconstitutional,
issued the questioned Order quashing the Information. Hence, the appeal.
Issue:
Wether a memorandum check is within the coverage of B.P. 22
Held:
A memorandum check is in the form of an ordinary check, with the word "memorandum", "memo" or
"mem" written across its face, signifying that the maker or drawer engages to pay the bona fide holder
absolutely, without any condition concerning its presentment. Such a check is an evidence of debt against
the drawer, and although may not be intended to be presented, has the same effect as an ordinary check,
and

if

passed

to

the

third

person,

will

be

valid

in

his

hands

like

any

other

check.

A memorandum check comes within the meaning of Sec. 185 of the Negotiable Instruments Law which
defines a check as "a bill of exchange drawn on a bank payable on demand. A memorandum check, upon
presentment, is generally accepted by the bank. Hence it does not matter whether the check issued is in

the nature of a memorandum as evidence of indebtedness or whether it was issued is partial fulfillment of
a pre-existing obligation, for what the law punishes is the issuance itself of a bouncing check and not the
purpose for which it was issuance. The mere act of issuing a worthless check, whether as a deposit, as a
guarantee,

or

even

as

an

evidence

of

pre-existing

debt,

is

malum

prohibitum.

A memorandum check may carry with it the understanding that it is not be presented at the bank but will
be redeemed by the maker himself when the loan fall due. However, with the promulgation of B.P. 22,
such understanding or private arrangement may no longer prevail to exempt it from penal sanction
imposed by the law. To require that the agreement surrounding the issuance of check be first looked into
and thereafter exempt such issuance from the punitive provision of B.P. 22 on the basis of such
agreement or understanding would frustrate the very purpose for which the law was enacted to stem
the proliferation of unfunded checks. After having effectively reduced the incidence of worthless checks
changing hands, the country will once again experience the limitless circulation of bouncing checks in the
guise of memorandum checks if such checks will be considered exempt from the operation of B.P. 22. It is
common practice in commercial transactions to require debtors to issue checks on which creditors must
rely as guarantee of payment. To determine the reasons for which checks are issued, or the terms and
conditions for their issuance, will greatly erode the faith the public responses in the stability and
commercial value of checks as currency substitutes, and bring about havoc in trade and in banking
communities.

Colinares vs CA GR# 90828 Sept 5, 2000

Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the
latters convent at Camaman-an, Cagayan de Oro City. Colinares applied for a commercial
letter of credit with the Philippine Banking Corporation, Cagayan de Oro City branch
(hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of credit
for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma
trust receipt as security.
PBC debited P6,720 from Petitioners marginal deposit as partial payment of the loan. After
the initial payment, the spouses defaulted. PBC wrote to Petitioners demanding that the
amount be paid within seven days from notice. Instead of complying with PBCs demand,
Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and
requested for a grace period of until 15 June 1980 to settle the account. Colinares

proposed that the terms of payment of the loan be modified P2,000 on or before 3
December 1980, and P1,000 per month . Pending approval of the proposal, Petitioners
paid P1,000 to PBC on 4 December 1980, and thereafter P500 on 11 February 1981, 16
March 1981, and 20 April 1981. Concurrently with the separate demand for attorneys fees
by PBCs legal counsel, PBC continued to demand payment of the balance. On 14 January
1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in
relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal
guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed
the documents without reading the fine print, only learning of the trust receipt implication
much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the
trust receipt was a mere formality. The Trust Receipts Law does not seek to enforce
payment of the loan, rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether the latter is
the owner. Here, it is crystal clear that on the part of Petitioners there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC.
Petitioners continually endeavored to meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust
Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979.
On that day, ownership over the merchandise was already transferred to Petitioners who
were to use the materials for their construction project. It was only a day later, 31 October
1979, that they went to the bank to apply for a loan to pay for the merchandise. This
situation belies what normally obtains in a pure trust receipt transaction where goods are
owned by the bank and only released to the importer in trust subsequent to the grant of the
loan.
The bank acquires a security interest in the goods as holder of a security title for the
advances it had made to the entrustee. The ownership of the merchandise continues to be
vested in the person who had advanced payment until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned over to him
by the importer or by his representative or successor in interest. To secure that the bank

shall be paid, it takes full title to the goods at the very beginning and continues to hold that
title as his indispensable security until the goods are sold and the vendee is called upon to
pay for them; hence, the importer has never owned the goods and is not able to deliver
possession. In a certain manner, trust receipts partake of the nature of a conditional sale
where the importer becomes absolute owner of the imported merchandise as soon as he
has paid its price. There are two possible situations in a trust receipt transaction. The first is
covered by the provision which refers to money received under the obligation involving the
duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered
by the provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale of the
goods, covered by the trust receipt to the entruster or to return said goods if they were not
disposed of in accordance with the terms of the trust receipt shall be punishable as estafa
under Article 315 (1) of the Revised Penal Code, without need of proving intent to defraud.

Tupaz vs CA GR# 145578 November 18, 2001

Facts: Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for Operations and
Vice-President/Treasurer, respectively, of El

Oro

Engraver

Corporation

(El

Oro

Corporation). El Oro Corporation had a contract with the Philippine Army to supply the
latter with survival bolos.
To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of
El Oro Corporation, applied with respondent Bank of the Philippine Islands (respondent
bank) for two commercial letters of credit. The letters of credit were in favor of El Oro
Corporations suppliers, Tanchaoco Manufacturing Incorporated Simultaneous with the
issuance of the letters of credit, petitioners signed trust receipts in favor of respondent bank.
On 30 September 1981, petitioner Jose C. Tupaz IV (petitioner Jose Tupaz) signed, in his
personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for P564,871.05). Petitioners did not comply with their undertaking under the trust receipts.
Respondent bank made several demands for payments but El Oro Corporation made partial
payments only. On 27 June 1983 and 28 June 1983, respondent banks counsel and its
representative respectively sent final demand letters to El Oro Corporation. El Oro

Corporation replied that it could not fully pay its debt because the Armed Forces of the
Philippines had delayed paying for the survival bolos.
Issue: Whether or not Tupaz can escape liability in violation of the Trust Receipt Law by the
delayed payment of the bolo
Held: A corporate representative signing as a solidary guarantee as corporate
representative did not undertake to guarantee personally the payment of the corporations
debts. In the trust receipt dated 9 October 1981, petitioners signed below this clause as
officers of El Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the
words Vice-PresTreasurer and under petitioner Jose Tupazs signature are the words
Vice-PresOperations. By so signing that trust receipt, petitioners did not bind themselves
personally liable for El Oro Corporations obligation. In Ong v. Court of Appeals, a corporate
representative signed a solidary guarantee clause in two trust receipts in his capacity as
corporate representative. There, the Court held that the corporate representative did not
undertake to guarantee personally the payment of the corporations debts.
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not
theirs but the direct liability of the corporation they represent. As an exception, directors or
officers are personally liable for the corporations debts only if they so contractually agree or
stipulate. ; Excussion is not a prerequisite to secure judgment against a guarantor; The
benefit of excussion may be waived.

Allied Banking Corporation v Ordonez GR No. 82495 : December

10, 1990.

The crime of estafa for violation of the Trust Receipts Law is a special
offense or mala prohibita. It is a fundamental rule in criminal law that
when the crime is punished by a special law, the act alone, irrespective
of its motives, constitutes the offense. In the instant case the failure of
the entrustee to pay complainant the remaining balance of the value of

the goods covered by the trust receipt when the same became due
constitutes the offense penalized under Section 13 of P.D. No. 115
Facts: Philippine Blooming Mills (PBM, for short) thru its duly authorized officer, private
respondent Alfredo Ching, applied for the issuance of commercial letters of credit with
petitioners Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and
one (1) Lot High Fired Refractory Sliding Nozzle Bricks. Allied Bank issued an irrevocable
letter of credit in favor of Nikko Industry Co., Ltd. (Nikko) by virtue of which the latter drew
four (4) drafts which were accepted by PBM and duly honored and paid by the petitioner
bank. To secure payment of the amount covered by the drafts, and in consideration of the
transfer by petitioner of the possession of the goods to PBM, the latter as entrustee, thru
private respondent, executed four (4) Trust Receipt Agreements with maturity dates on
acknowledging petitioners ownership of the goods and its (PBMS) obligation to turn over
the proceeds of the sale of the goods, if sold, or to return the same, if unsold within the
stated period.
PBM defaulted on the payment of the trust receipts.. Despite repeated demands, PBM
failed and refused to either turn over the proceeds of the sale of the goods or to return the
same. Allied Bank filed a criminal complaint against private respondent for violation of PD
115 before the office of the Provincial Fiscal of Rizal. The Fiscal found a prima facie case for
violation of PD 115 on four (4) counts and filed the corresponding information in court. PBM
contended that since it was under rehabilitation receivership, no criminal liability can be
imputed to Ching.
Issue: Whether or not rehabilitation bars the filing of the estafa case against Ching
Held: It cannot be denied that the offense was consummated long before the appointment
of rehabilitation receivers. The filing of a criminal case against respondent Ching is not only
for the purpose of effectuating a collection of a debt but primarily for the purpose of
punishing an offender for a crime committed not only against the complaining witness but
also against the state. The crime of estafa for violation of the Trust Receipts Law is a
special offense or mala prohibita. It is a fundamental rule in criminal law that when the crime
is punished by a special law, the act alone, irrespective of its motives, constitutes the
offense. In the instant case the failure of the entrustee to pay complainant the remaining
balance of the value of the goods covered by the trust receipt when the same became due
constitutes the offense penalized under Section 13 of P.D. No. 115; and on the basis of this

failure alone, the prosecution has sufficient evidence to establish a prima facie case (Res.
No. 671, s. 1981; Allied Banking Corporation vs. Reinhard Sagemuller, et al., Provincial
Fiscal of Rizal, September 18, 1981).
In examination of P.D. 115 shows the growing importance of trust receipts in Philippine
business, the need to provide for the rights and obligations of parties to a trust receipt
transaction, the study of the problems involved and the action by monetary authorities, and
the necessity of regulating the enforcement of rights arising from default or violations of trust
receipt agreements. The legislative intent to meet a pressing need is clearly expressed .

DBP vs Prudential Bank GR# 143772

Litex could not have subjected the goods under the trust receipt to a
chattel mortgage. Thus, the inclusion in the mortgage was void and
had no legal effect. There being no valid mortgage, there could also be
no valid foreclosure or valid auction sale. Thus, DBP could not be
considered either as a mortgagee or as a purchaser in good faith
Facts: Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with
respondent Prudential Bank for US$498,000. This was in connection with its importation of
5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning
frame and various accessories, spare parts and tool gauge. These were released to Litex
under covering trust receipts it executed in favor of Prudential Bank. Litex installed and
used the items in its textile mill located in Montalban, Rizal. 9 years later, DBP granted a
foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex
executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including
the buildings and other improvements, machineries and equipments there. Among the
machineries and equipments mortgaged in favor of DBP were the articles covered by the
trust receipts.

Sometime in June 1982, Prudential Bank learned about DBPs plan for the

overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its
claim over the various items covered by the trust receipts which had been installed and
used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and
juridical owner of the said items and they were thus not part of the mortgaged assets that
could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extrajudicially foreclosed on the real estate and chattel mortgages, including the articles claimed

by Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP acquired the
foreclosed properties as the highest bidder.

Learning of the intended public auction,

Prudential Bank wrote a letter dated September 6, 1984 to DBP reasserting its claim over
the items covered by trust receipts in its name and advising DBP not to include them in the
auction. It also demanded the turn-over of the articles or alternatively, the payment of their
value.
Issue: Whether or not the chattel mortgage covers the goods under the trust receipt
Held: No. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or
mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the
things pledged or mortgaged. Article 2085 (3) further mandates that the person constituting
the pledge or mortgage must have the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership,
free disposal nor the authority to freely dispose of the articles. Litex could not have
subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no
legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid
auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in
good faith.
No one can transfer a right to another greater than what he himself has. Nemo dat quod
non habet. Hence, Litex could not transfer a right that it did not have over the disputed
items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest
had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of
Litex as trustee of the imported articles with an obligation to pay their value or to return
them on Prudential Banks demand. By its failure to pay or return them despite Prudential
Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge
and conformity, DBP became a trustee ex maleficio. As a consequence of the release of the
goods and the execution of the trust receipt, a two-fold obligation is imposed on the
entrustee, namely: (1) to hold the designated goods, documents or instruments in trust for
the purpose of selling or otherwise disposing of them and (2) to turn over to the entruster
either the proceeds thereof to the extent of the amount owing to the entruster or as appears
in the trust receipt, or the goods, documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt. In the case of goods, they may also be released for other purposes substantially
equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or

processing with the purpose of ultimate sale, in which case the entruster retains his title
over the said goods whether in their original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or (c) the loading, unloading,
shipment or transshipment or otherwise dealing with them in a manner preliminary or
necessary to their sale. Thus, in a trust receipt transaction, the release of the goods to the
entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is
necessarily connected with their ultimate or subsequent sale.