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G.R. No.

154878 March 16, 2007 petitioner the amounts of US$100,000 with monthly interest
of 3% and P500,000 at a monthly interest of 4%:20
CAROLYN M. GARCIA, Petitioner,
vs. WHEREFORE, finding preponderance of evidence to sustain
RICA MARIE S. THIO, Respondent. the instant complaint, judgment is hereby rendered in favor of
[petitioner], sentencing [respondent] to pay the former the
Assailed in this petition for review on certiorari 1 are the June amount of:
19, 2002 decision2 and August 20, 2002 resolution 3of the
Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside 1. [US$100,000.00] or its peso equivalent with
the February 28, 1997 decision of the Regional Trial Court interest thereon at 3% per month from October 26,
(RTC) of Makati City, Branch 58. 1995 until fully paid;

Sometime in February 1995, respondent Rica Marie S. Thio 2. P500,000.00 with interest thereon at 4% per
received from petitioner Carolyn M. Garcia a crossed month from November 5, 1995 until fully paid.
check4 dated February 24, 1995 in the amount of US$100,000
payable to the order of a certain Marilou 3. P100,000.00 as and for attorneys fees; and
Santiago.5 Thereafter, petitioner received from respondent
every month (specifically, on March 24, April 26, June 26 and
4. P50,000.00 as and for actual damages.
July 26, all in 1995) the amount of US$3,0006 and P76,5007 on
July 26,8 August 26, September 26 and October 26, 1995.
For lack of merit, [respondents] counterclaim is perforce
dismissed.
In June 1995, respondent received from petitioner another
crossed check9 dated June 29, 1995 in the amount
of P500,000, also payable to the order of Marilou With costs against [respondent].
Santiago.10 Consequently, petitioner received from respondent
the amount of P20,000 every month on August 5, September IT IS SO ORDERED.21
5, October 5 and November 5, 1995.11

On appeal, the CA reversed the decision of the RTC and ruled


According to petitioner, respondent failed to pay the principal that there was no contract of loan between the parties:
amounts of the loans (US$100,000 and P500,000) when they
fell due. Thus, on February 22, 1996, petitioner filed a
A perusal of the record of the case shows that [petitioner]
complaint for sum of money and damages in the RTC of
failed to substantiate her claim that [respondent] indeed
Makati City, Branch 58 against respondent, seeking to collect
borrowed money from her. There is nothing in the record
the sums of US$100,000, with interest thereon at 3% a month
that shows that [respondent] received money from
from October 26, 1995 and P500,000, with interest thereon at
[petitioner]. What is evident is the fact that [respondent]
4% a month from November 5, 1995, plus attorneys fees and
received a MetroBank [crossed] check dated February 24,
actual damages.12
1995 in the sum of US$100,000.00, payable to the order of
Marilou Santiago and a CityTrust [crossed] check dated June
Petitioner alleged that on February 24, 1995, respondent 29, 1995 in the amount of P500,000.00, again payable to the
borrowed from her the amount of US$100,000 with interest order of Marilou Santiago, both of which were issued by
thereon at the rate of 3% per month, which loan would mature [petitioner]. The checks received by [respondent], being
on October 26, 1995.13 The amount of this loan was covered crossed, may not be encashed but only deposited in
by the first check. On June 29, 1995, respondent again the bank by the payee thereof, that is, by Marilou
borrowed the amount of P500,000 at an agreed monthly Santiago herself.
interest of 4%, the maturity date of which was on November
5, 1995.14 The amount of this loan was covered by the second
It must be noted that crossing a check has the following
check. For both loans, no promissory note was executed since
effects: (a) the check may not be encashed but only deposited
petitioner and respondent were close friends at the
in the bank; (b) the check may be negotiated only onceto
time.15 Respondent paid the stipulated monthly interest for
one who has an account with the bank; (c) and the act of
both loans but on their maturity dates, she failed to pay the
crossing the check serves as warning to the holder that the
principal amounts despite repeated demands.161awphi1.nt
check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose,
Respondent denied that she contracted the two loans with otherwise, he is not a holder in due course.
petitioner and countered that it was Marilou Santiago to whom
petitioner lent the money. She claimed she was merely asked
Consequently, the receipt of the [crossed] check by
by petitioner to give the crossed checks to Santiago. 17 She
[respondent] is not the issuance and delivery to the payee in
issued the checks for P76,000 and P20,000 not as payment of
contemplation of law since the latter is not the person who
interest but to accommodate petitioners request that
could take the checks as a holder, i.e., as a payee or indorsee
respondent use her own checks instead of Santiagos.18
thereof, with intent to transfer title thereto. Neither could she
be deemed as an agent of Marilou Santiago with respect to
In a decision dated February 28, 1997, the RTC ruled in favor
of petitioner.19 It found that respondent borrowed from
1 | L O A N C r e d i t Tr a n s
the checks because she was merely facilitating the Several factors support this conclusion.
transactions between the former and [petitioner].
First, respondent admitted that petitioner did not personally
With the foregoing circumstances, it may be fairly inferred know Santiago.31 It was highly improbable that petitioner
that there were really no contracts of loan that existed would grant two loans to a complete stranger without
between the parties. x x x (emphasis supplied) 22 requiring as much as promissory notes or any written
acknowledgment of the debt considering that the amounts
Hence this petition.23 involved were quite big. Respondent, on the other hand,
already had transactions with Santiago at that time. 32

As a rule, only questions of law may be raised in a petition for


review on certiorari under Rule 45 of the Rules of Court. Second, Leticia Ruiz, a friend of both petitioner and
However, this case falls under one of the exceptions, i.e., respondent (and whose name appeared in both parties list of
when the factual findings of the CA (which held that there witnesses) testified that respondents plan was for petitioner
were no contracts of loan between petitioner and respondent) to lend her money at a monthly interest rate of 3%, after
and the RTC (which held that there were contracts of loan) are which respondent would lend the same amount to Santiago at
contradictory.24 a higher rate of 5% and realize a profit of 2%. 33 This explained
why respondent instructed petitioner to make the checks
payable to Santiago. Respondent has not shown any reason
The petition is impressed with merit.
why Ruiz testimony should not be believed.

A loan is a real contract, not consensual, and as such is


Third, for the US$100,000 loan, respondent admitted issuing
perfected only upon the delivery of the object of the
her own checks in the amount of P76,000 each (peso
contract.25 This is evident in Art. 1934 of the Civil Code which
equivalent of US$3,000) for eight months to cover the
provides:
monthly interest. For the P500,000 loan, she also issued her
own checks in the amount of P20,000 each for four
An accepted promise to deliver something by way of months.34 According to respondent, she merely
commodatum or simple loan is binding upon the parties, but accommodated petitioners request for her to issue her own
the commodatum or simple loan itself shall not be checks to cover the interest payments since petitioner was
perfected until the delivery of the object of the not personally acquainted with Santiago.35 She claimed,
contract. (Emphasis supplied) however, that Santiago would replace the checks with
cash.36 Her explanation is simply incredible. It is difficult to
Upon delivery of the object of the contract of loan (in this case believe that respondent would put herself in a position where
the money received by the debtor when the checks were she would be compelled to pay interest, from her own funds,
encashed) the debtor acquires ownership of such money or for loans she allegedly did not contract. We declared in one
loan proceeds and is bound to pay the creditor an equal case that:
amount.26
In the assessment of the testimonies of witnesses, this Court
It is undisputed that the checks were delivered to respondent. is guided by the rule that for evidence to be believed, it must
However, these checks were crossed and payable not to the not only proceed from the mouth of a credible witness, but
order of respondent but to the order of a certain Marilou must be credible in itself such as the common experience of
Santiago. Thus the main question to be answered is: who mankind can approve as probable under the circumstances.
borrowed money from petitioner respondent or Santiago? We have no test of the truth of human testimony except its
conformity to our knowledge, observation, and experience.
Whatever is repugnant to these belongs to the miraculous,
Petitioner insists that it was upon respondents instruction
and is outside of juridical cognizance.37
that both checks were made payable to Santiago. 27She
maintains that it was also upon respondents instruction that
both checks were delivered to her (respondent) so that she Fourth, in the petition for insolvency sworn to and filed by
could, in turn, deliver the same to Santiago. 28 Furthermore, Santiago, it was respondent, not petitioner, who was listed as
she argues that once respondent received the checks, the one of her (Santiagos) creditors.38
latter had possession and control of them such that she had
the choice to either forward them to Santiago (who was Last, respondent inexplicably never presented Santiago as a
already her debtor), to retain them or to return them to witness to corroborate her story.39 The presumption is that
petitioner.29 "evidence willfully suppressed would be adverse if
produced."40 Respondent was not able to overturn this
We agree with petitioner. Delivery is the act by which presumption.
the res or substance thereof is placed within the actual or
constructive possession or control of another. 30 Although We hold that the CA committed reversible error when it ruled
respondent did not physically receive the proceeds of the that respondent did not borrow the amounts of US$100,000
checks, these instruments were placed in her control and and P500,000 from petitioner. We instead agree with the
possession under an arrangement whereby she actually re- ruling of the RTC making respondent liable for the principal
lent the amounts to Santiago. amounts of the loans.

2 | L O A N C r e d i t Tr a n s
We do not, however, agree that respondent is liable for the The established antecedents of the case are narrated below.
3% and 4% monthly interest for the US$100,000
and P500,000 loans respectively. There was no written proof AMEX is a resident foreign corporation engaged in the
of the interest payable except for the verbal agreement that business of providing credit services through the operation of
the loans would earn 3% and 4% interest per month. Article a charge card system. Pantaleon has been an AMEX
1956 of the Civil Code provides that "[n]o interest shall be due cardholder since 1980.3
unless it has been expressly stipulated in writing."

In October 1991, Pantaleon, together with his wife (Julialinda),


Be that as it may, while there can be no stipulated interest, daughter (Regina), and son (Adrian Roberto), went on a
there can be legal interest pursuant to Article 2209 of the Civil guided European tour. On October 25, 1991, the tour group
Code. It is well-settled that: arrived in Amsterdam. Due to their late arrival, they
postponed the tour of the city for the following day.4
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of The next day, the group began their sightseeing at around
money, the interest due should be that which may have been 8:50 a.m. with a trip to the Coster Diamond House (Coster). To
stipulated in writing. Furthermore, the interest due shall itself have enough time for take a guided city tour of Amsterdam
earn legal interest from the time it is judicially demanded. In before their departure scheduled on that day, the tour group
the absence of stipulation, the rate of interest shall be 12% planned to leave Coster by 9:30 a.m. at the latest.
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
While at Coster, Mrs. Pantaleon decided to purchase some
Article 1169 of the Civil Code.41
diamond pieces worth a total of US$13,826.00. Pantaleon
presented his American Express credit card to the sales clerk
Hence, respondent is liable for the payment of legal to pay for this purchase. He did this at around 9:15 a.m. The
interest per annum to be computed from November 21, 1995, sales clerk swiped the credit card and asked Pantaleon to sign
the date when she received petitioners demand letter. 42 From the charge slip, which was then electronically referred to
the finality of the decision until it is fully paid, the amount due AMEXs Amsterdam office at 9:20 a.m.5
shall earn interest at 12% per annum, the interim period being
deemed equivalent to a forbearance of credit. 43
At around 9:40 a.m., Coster had not received approval from
AMEX for the purchase so Pantaleon asked the store clerk to
The award of actual damages in the amount of P50,000 cancel the sale. The store manager, however, convinced
and P100,000 attorneys fees is deleted since the RTC decision Pantaleon to wait a few more minutes. Subsequently, the
did not explain the factual bases for these damages. store manager informed Pantaleon that AMEX was asking for
bank references; Pantaleon responded by giving the names of
WHEREFORE, the petition is hereby GRANTED and the June his Philippine depository banks.
19, 2002 decision and August 20, 2002 resolution of the Court
of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET At around 10 a.m., or 45 minutes after Pantaleon presented
ASIDE. The February 28, 1997 decision of the Regional Trial his credit card, AMEX still had not approved the purchase.
Court in Civil Case No. 96-266 is AFFIRMED with Since the city tour could not begin until the Pantaleons were
the MODIFICATION that respondent is directed to pay onboard the tour bus, Coster decided to release at around
petitioner the amounts of US$100,000 and P500,000 at 10:05 a.m. the purchased items to Pantaleon even without
12% per annum interest from November 21, 1995 until the AMEXs approval.
finality of the decision. The total amount due as of the date of
finality will earn interest of 12% per annum until fully paid.
When the Pantaleons finally returned to the tour bus, they
The award of actual damages and attorneys fees is deleted.
found their travel companions visibly irritated. This irritation
intensified when the tour guide announced that they would
G.R. No. 174269 August 25, 2010 have to cancel the tour because of lack of time as they all had
to be in Calais, Belgium by 3 p.m. to catch the ferry to
POLO S. PANTALEON, Petitioner, London.6
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent. From the records, it appears that after Pantaleons purchase
was transmitted for approval to AMEXs Amsterdam office at
We resolve the motion for reconsideration filed by respondent 9:20 a.m.; was referred to AMEXs Manila office at 9:33 a.m.;
American Express International, Inc. (AMEX) dated June 8, and was approved by the Manila office at 10:19 a.m. At 10:38
2009,1 seeking to reverse our Decision dated May 8, 2009 a.m., AMEXs Manila office finally transmitted the Approval
where we ruled that AMEX was guilty of culpable delay in Code to AMEXs Amsterdam office. In all, it took AMEX a total
fulfilling its obligation to its cardholder petitioner Polo of 78 minutes to approve Pantaleons purchase and to
Pantaleon. Based on this conclusion, we held AMEX liable for transmit the approval to the jewelry store.7
moral and exemplary damages, as well as attorneys fees and
costs of litigation.2 After the trip to Europe, the Pantaleon family proceeded to the
United States. Again, Pantaleon experienced delay in securing
FACTUAL ANTECEDENTS approval for purchases using his American Express credit card

3 | L O A N C r e d i t Tr a n s
on two separate occasions. He experienced the first delay THE MOTION FOR RECONSIDERATION
when he wanted to purchase golf equipment in the amount of
US$1,475.00 at the Richard Metz Golf Studio in New York on In its motion for reconsideration, AMEX argues that this Court
October 30, 1991. Another delay occurred when he wanted to erred when it found AMEX guilty of culpable delay in
purchase childrens shoes worth US$87.00 at the Quiency complying with its obligation to act with timely dispatch on
Market in Boston on November 3, 1991. Pantaleons purchases. While AMEX admits that it normally
takes seconds to approve charge purchases, it emphasizes
Upon return to Manila, Pantaleon sent AMEX a letter that Pantaleon experienced delay in Amsterdam because his
demanding an apology for the humiliation and inconvenience transaction was not a normal one. To recall, Pantaleon sought
he and his family experienced due to the delays in obtaining to charge in a single transaction jewelry items purchased
approval for his credit card purchases. AMEX responded by from Coster in the total amount of US$13,826.00
explaining that the delay in Amsterdam was due to the or P383,746.16. While the total amount of Pantaleons
amount involved the charged purchase of US$13,826.00 previous purchases using his AMEX credit card did exceed
deviated from Pantaleons established charge purchase US$13,826.00, AMEX points out that these purchases were
pattern. Dissatisfied with this explanation, Pantaleon filed an made in a span of more than 10 years, not in a single
action for damages against the credit card company with the transaction.
Makati City Regional Trial Court (RTC).
Because this was the biggest single transaction that Pantaleon
On August 5, 1996, the RTC found AMEX guilty of delay, and ever made using his AMEX credit card, AMEX argues that the
awarded Pantaleon P500,000.00 as moral transaction necessarily required the credit authorizer to
damages, P300,000.00 as exemplary damages, P100,000.00 carefully review Pantaleons credit history and bank
as attorneys fees, and P85,233.01 as litigation expenses. references. AMEX maintains that it did this not only to ensure
Pantaleons protection (to minimize the possibility that a third
On appeal, the CA reversed the awards. 8 While the CA party was fraudulently using his credit card), but also to
recognized that delay in the nature of mora accipiendi or protect itself from the risk that Pantaleon might not be able to
creditors default attended AMEXs approval of Pantaleons pay for his purchases on credit. This careful review, according
purchases, it disagreed with the RTCs finding that AMEX had to AMEX, is also in keeping with the extraordinary degree of
breached its contract, noting that the delay was not attended diligence required of banks in handling its transactions. AMEX
by bad faith, malice or gross negligence. The appellate court concluded that in these lights, the thorough review of
found that AMEX exercised diligent efforts to effect the Pantaleons credit record was motivated by legitimate
approval of Pantaleons purchases; the purchase at Coster concerns and could not be evidence of any ill will, fraud, or
posed particularly a problem because it was at variance with negligence by AMEX.
Pantaleons established charge pattern. As there was no proof
that AMEX breached its contract, or that it acted in a wanton, AMEX further points out that the proximate cause of
fraudulent or malevolent manner, the appellate court ruled Pantaleons humiliation and embarrassment was his own
that AMEX could not be held liable for any form of damages. decision to proceed with the purchase despite his awareness
that the tour group was waiting for him and his wife.
Pantaleon questioned this decision via a petition for review on Pantaleon could have prevented the humiliation had he
certiorari with this Court. cancelled the sale when he noticed that the credit approval
for the Coster purchase was unusually delayed.

In our May 8, 2009 decision, we reversed the appellate courts


decision and held that AMEX was guilty of mora solvendi, or In his Comment dated February 24, 2010, Pantaleon maintains
debtors default. AMEX, as debtor, had an obligation as the that AMEX was guilty of mora solvendi, or delay on the part of
credit provider to act on Pantaleons purchase requests, the debtor, in complying with its obligation to him. Based on
whether to approve or disapprove them, with "timely jurisprudence, a just cause for delay does not relieve the
dispatch." Based on the evidence on record, we found that debtor in delay from the consequences of delay; thus, even if
AMEX failed to timely act on Pantaleons purchases. AMEX had a justifiable reason for the delay, this reason would
not relieve it from the liability arising from its failure to timely
act on Pantaleons purchase.
Based one ly, tual obligations. 271,ct; moral damages le.
uitable that attorney'workers;plaitniff' the testimony of
AMEXs credit authorizer Edgardo Jaurique, the approval time In response to AMEXs assertion that the delay was in keeping
for credit card charges would be three to four seconds under with its duty to perform its obligation with extraordinary
regular circumstances. In Pantaleons case, it took AMEX 78 diligence, Pantaleon claims that this duty includes the timely
minutes to approve the Amsterdam purchase. We attributed or prompt performance of its obligation.
this delay to AMEXs Manila credit authorizer, Edgardo
Jaurique, who had to go over Pantaleons past credit history, As to AMEXs contention that moral or exemplary damages
his payment record and his credit and bank references before cannot be awarded absent a finding of malice, Pantaleon
he approved the purchase. Finding this delay unwarranted, we argues that evil motive or design is not always necessary to
reinstated the RTC decision and awarded Pantaleon moral and support a finding of bad faith; gross negligence or wanton
exemplary damages, as well as attorneys fees and costs of disregard of contractual obligations is sufficient basis for the
litigation. award of moral and exemplary damages.

4 | L O A N C r e d i t Tr a n s
OUR RULING Under RA 8484, the credit card that is issued by banks in
general, or by non-banks in particular, refers to "any card x x
We GRANT the motion for reconsideration. x or other credit device existing for the purpose of obtaining x
x x goods x x x or services x x x on credit;" and is being used
"usually on a revolving basis." This means that the consumer-
Brief historical background
credit arrangement that exists between the issuer and the
holder of the credit card enables the latter to procure goods or
A credit card is defined as "any card, plate, coupon book, or services "on a continuing basis as long as the outstanding
other credit device existing for the purpose of obtaining balance does not exceed a specified limit." The card holder is,
money, goods, property, labor or services or anything of value therefore, given "the power to obtain present control of goods
on credit."9 It traces its roots to the charge card first or service on a promise to pay for them in the future."
introduced by the Diners Club in New York City in
1950.10 American Express followed suit by introducing its own
Business establishments may extend credit sales through the
charge card to the American market in 1958. 11
use of the credit card facilities of a non-bank credit card
company to avoid the risk of uncollectible accounts from their
In the Philippines, the now defunct Pacific Bank was customers. Under this system, the establishments do not
responsible for bringing the first credit card into the country in deposit in their bank accounts the credit card drafts that arise
the 1970s.12 However, it was only in the early 2000s that from the credit sales. Instead, they merely record their
credit card use gained wide acceptance in the country, as receivables from the credit card company and periodically
evidenced by the surge in the number of credit card holders send the drafts evidencing those receivables to the latter.
then.13
The credit card company, in turn, sends checks as payment to
Nature of Credit Card Transactions these business establishments, but it does not redeem the
drafts at full price. The agreement between them usually
To better understand the dynamics involved in credit card provides for discounts to be taken by the company upon its
transactions, we turn to the United States case of Harris Trust redemption of the drafts. At the end of each month, it then
& Savings Bank v. McCray14 which explains: bills its credit card holders for their respective drafts
redeemed during the previous month. If the holders fail to pay
the amounts owed, the company sustains the loss.
The bank credit card system involves a tripartite relationship
between the issuer bank, the cardholder, and merchants
participating in the system. The issuer bank establishes an Simply put, every credit card transaction involves three
account on behalf of the person to whom the card is issued, contracts, namely: (a) the sales contract between the credit
and the two parties enter into an agreement which governs card holder and the merchant or the business establishment
their relationship. This agreement provides that the bank will which accepted the credit card; (b) the loan agreement
pay for cardholders account the amount of merchandise or between the credit card issuer and the credit card holder; and
services purchased through the use of the credit card and will lastly, (c) the promise to pay between the credit card issuer
also make cash loans available to the cardholder. It also states and the merchant or business establishment. 16
that the cardholder shall be liable to the bank for advances
and payments made by the bank and that the cardholders Credit card issuer cardholder relationship
obligation to pay the bank shall not be affected or impaired by
any dispute, claim, or demand by the cardholder with respect
When a credit card company gives the holder the privilege of
to any merchandise or service purchased.
charging items at establishments associated with the
issuer,17 a necessary question in a legal analysis is when
The merchants participating in the system agree to honor the does this relationship begin? There are two diverging views on
banks credit cards. The bank irrevocably agrees to honor and the matter. In City Stores Co. v. Henderson,18 another U.S.
pay the sales slips presented by the merchant if the merchant decision, held that:
performs his undertakings such as checking the list of revoked
cards before accepting the card. x x x.
The issuance of a credit card is but an offer to extend a line of
open account credit. It is unilateral and supported by no
These slips are forwarded to the member bank which consideration. The offer may be withdrawn at any time,
originally issued the card. The cardholder receives a without prior notice, for any reason or, indeed, for no reason
statement from the bank periodically and may then decide at all, and its withdrawal breaches no duty for there is no
whether to make payment to the bank in full within a specified duty to continue it and violates no rights.
period, free of interest, or to defer payment and ultimately
incur an interest charge.
Thus, under this view, each credit card transaction is
considered a separate offer and acceptance.
We adopted a similar view in CIR v. American Express
International, Inc. (Philippine branch),15 where we also
Novack v. Cities Service Oil Co.19 echoed this view, with the
recognized that credit card issuers are not limited to banks.
court ruling that the mere issuance of a credit card did not
We said:
create a contractual relationship with the cardholder.

5 | L O A N C r e d i t Tr a n s
On the other end of the spectrum is Gray v. American Express pay for their purchases, they merely offer to enter into loan
Company20 which recognized the card membership agreement agreements with the credit card company. Only after the latter
itself as a binding contract between the credit card issuer and approves the purchase requests that the parties enter into
the card holder. Unlike in the Novack and the City Stores binding loan contracts, in keeping with Article 1319 of the Civil
cases, however, the cardholder in Gray paid an annual fee for Code, which provides:
the privilege of being an American Express cardholder.
Article 1319. Consent is manifested by the meeting of the
In our jurisdiction, we generally adhere to the Gray ruling, offer and the acceptance upon the thing and the cause which
recognizing the relationship between the credit card issuer are to constitute the contract. The offer must be certain and
and the credit card holder as a contractual one that is the acceptance absolute. A qualified acceptance constitutes a
governed by the terms and conditions found in the card counter-offer.
membership agreement.21 This contract provides the rights
and liabilities of a credit card company to its cardholders and This view finds support in the reservation found in the card
vice versa. membership agreement itself, particularly paragraph 10,
which clearly states that AMEX "reserve[s] the right to
We note that a card membership agreement is a contract of deny authorization for any requested Charge." By so
adhesion as its terms are prepared solely by the credit card providing, AMEX made its position clear that it has no
issuer, with the cardholder merely affixing his signature obligation to approve any and all charge requests made by its
signifying his adhesion to these terms. 22 This circumstance, card holders.
however, does not render the agreement void; we have
uniformly held that contracts of adhesion are "as binding as ii. AMEX not guilty of culpable delay
ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely." 23 The only
Since AMEX has no obligation to approve the purchase
effect is that the terms of the contract are construed strictly
requests of its credit cardholders, Pantaleon cannot claim that
against the party who drafted it.24
AMEX defaulted in its obligation. Article 1169 of the Civil
Code, which provides the requisites to hold a debtor guilty of
On AMEXs obligations to Pantaleon culpable delay, states:

We begin by identifying the two privileges that Pantaleon Article 1169. Those obliged to deliver or to do something incur
assumes he is entitled to with the issuance of his AMEX credit in delay from the time the obligee judicially or extrajudicially
card, and on which he anchors his claims. First, Pantaleon demands from them the fulfillment of their obligation. x x x.
presumes that since his credit card has no pre-set spending
limit, AMEX has the obligation to approve all his charge
The three requisites for a finding of default are: (a) that the
requests. Conversely, even if AMEX has no such obligation, at
obligation is demandable and liquidated; (b) the debtor delays
the very least it is obliged to act on his charge requests within
performance; and (c) the creditor judicially or extrajudicially
a specific period of time.
requires the debtors performance.26

i. Use of credit card a mere offer to enter into loan


Based on the above, the first requisite is no longer met
agreements
because AMEX, by the express terms of the credit card
agreement, is not obligated to approve Pantaleons purchase
Although we recognize the existence of a relationship request. Without a demandable obligation, there can be no
between the credit card issuer and the credit card holder upon finding of default.
the acceptance by the cardholder of the terms of the card
membership agreement (customarily signified by the act of
Apart from the lack of any demandable obligation, we also
the cardholder in signing the back of the credit card), we have
find that Pantaleon failed to make the demand required by
to distinguish this contractual relationship from the creditor-
Article 1169 of the Civil Code.
debtor relationship which only arises after the credit card
issuer has approved the cardholders purchase request. The
first relates merely to an agreement providing for credit As previously established, the use of a credit card to pay for a
facility to the cardholder. The latter involves the actual credit purchase is only an offer to the credit card company to enter a
on loan agreement involving three contracts, namely: loan agreement with the credit card holder. Before the
the sales contract between the credit card holder and the credit card issuer accepts this offer, no obligation
merchant or the business establishment which accepted the relating to the loan agreement exists between
credit card; the loan agreement between the credit card issuer them. On the other hand, a demand is defined as the
and the credit card holder; and the promise to pay between "assertion of a legal right; xxx an asking with authority,
the credit card issuer and the merchant or business claiming or challenging as due."27 A demand presupposes
establishment. the existence of an obligation between the parties.

From the loan agreement perspective, the contractual Thus, every time that Pantaleon used his AMEX credit card to
relationship begins to exist only upon the meeting of the pay for his purchases, what the stores transmitted to AMEX
offer25 and acceptance of the parties involved. In more were his offers to execute loan contracts. These obviously
concrete terms, when cardholders use their credit cards to could not be classified as the demand required by law to make

6 | L O A N C r e d i t Tr a n s
the debtor in default, given that no obligation could arise on would still not be enough to establish a legally demandable
the part of AMEX until after AMEX transmitted its acceptance right; as a general rule, a practice or custom is not a source of
of Pantaleons offers. Pantaleons act of "insisting on and a legally demandable or enforceable right.30
waiting for the charge purchases to be approved by AMEX" 28 is
not the demand contemplated by Article 1169 of the Civil We next examine the credit card membership agreement, the
Code. contract that primarily governs the relationship between
AMEX and Pantaleon. Significantly, there is no provision in
For failing to comply with the requisites of Article 1169, this agreement that obligates AMEX to act on all
Pantaleons charge that AMEX is guilty of culpable delay in cardholder purchase requests within a specifically
approving his purchase requests must fail. defined period of time. Thus, regardless of whether the
obligation is worded was to "act in a matter of seconds" or to
iii. On AMEXs obligation to act on the offer within a "act in timely dispatch," the fact remains that no obligation
specific period of time exists on the part of AMEX to act within a specific period of
time. Even Pantaleon admits in his testimony that he could
not recall any provision in the Agreement that guaranteed
Even assuming that AMEX had the right to review his credit
AMEXs approval of his charge requests within a matter of
card history before it approved his purchase requests,
minutes.31
Pantaleon insists that AMEX had an obligation to act on his
purchase requests, either to approve or deny, in "a matter of
seconds" or "in timely dispatch." Pantaleon impresses upon us Nor can Pantaleon look to the law or government issuances as
the existence of this obligation by emphasizing two points: (a) the source of AMEXs alleged obligation to act upon his credit
his card has no pre-set spending limit; and (b) in his twelve card purchases within a matter of seconds. As the following
years of using his AMEX card, AMEX had always approved his survey of Philippine law on credit card transactions
charges in a matter of seconds. demonstrates, the State does not require credit card
companies to act upon its cardholders purchase requests
within a specific period of time.
Pantaleons assertions fail to convince us.

Republic Act No. 8484 (RA 8484), or the Access Devices


We originally held that AMEX was in culpable delay when it
Regulation Act of 1998, approved on February 11, 1998, is the
acted on the Coster transaction, as well as the two other
controlling legislation that regulates the issuance and use of
transactions in the United States which took AMEX
access devices,32 including credit cards. The more salient
approximately 15 to 20 minutes to approve. This conclusion
portions of this law include the imposition of the obligation on
appears valid and reasonable at first glance, comparing the
a credit card company to disclose certain important financial
time it took to finally get the Coster purchase approved (a
information33 to credit card applicants, as well as a definition
total of 78 minutes), to AMEXs "normal" approval time of
of the acts that constitute access device fraud.
three to four seconds (based on the testimony of Edgardo
Jaurigue, as well as Pantaleons previous experience). We
come to a different result, however, after a closer look at the As financial institutions engaged in the business of providing
factual and legal circumstances of the case. credit, credit card companies fall under the supervisory
powers of the Bangko Sentral ng Pilipinas (BSP). 34 BSP Circular
No. 398 dated August 21, 2003 embodies the BSPs policy
AMEXs credit authorizer, Edgardo Jaurigue, explained that
when it comes to credit cards
having no pre-set spending limit in a credit card simply means
that the charges made by the cardholder are approved based
on his ability to pay, as demonstrated by his past spending, The Bangko Sentral ng Pilipinas (BSP) shall foster the
payment patterns, and personal development of consumer credit through innovative products
resources.29 Nevertheless, every time Pantaleon charges a such as credit cards under conditions of fair and sound
purchase on his credit card, the credit card company consumer credit practices. The BSP likewise encourages
still has to determine whether it will allow this charge, competition and transparency to ensure more efficient
based on his past credit history. This right to review a delivery of services and fair dealings with customers.
card holders credit history, although not specifically set out in (Emphasis supplied)
the card membership agreement, is a necessary implication of
AMEXs right to deny authorization for any requested charge. Based on this Circular, "x x x [b]efore issuing credit cards,
banks and/or their subsidiary credit card companies must
As for Pantaleons previous experiences with AMEX (i.e., that exercise proper diligence by ascertaining that applicants
in the past 12 years, AMEX has always approved his charge possess good credit standing and are financially capable of
requests in three or four seconds), this record does not fulfilling their credit commitments." 35 As the above-quoted
establish that Pantaleon had a legally enforceable obligation policy expressly states, the general intent is to foster "fair and
to expect AMEX to act on his charge requests within a matter sound consumer credit practices."
of seconds. For one, Pantaleon failed to present any evidence
to support his assertion that AMEX acted on purchase Other than BSP Circular No. 398, a related circular is BSP
requests in a matter of three or four seconds as an Circular No. 454, issued on September 24, 2004, but this
established practice. More importantly, even if Pantaleon did circular merely enumerates the unfair collection practices of
prove that AMEX, as a matter of practice or custom, acted on credit card companies a matter not relevant to the issue at
its customers purchase requests in a matter of seconds, this hand.

7 | L O A N C r e d i t Tr a n s
In light of the foregoing, we find and so hold that AMEX is results in damage to another, a legal wrong is thereby
neither contractually bound nor legally obligated to act on its committed for which the wrongdoer must be held
cardholders purchase requests within any specific period of responsible. But while Article 19 lays down a rule of conduct
time, much less a period of a "matter of seconds" that for the government of human relations and for the
Pantaleon uses as his standard. The standard therefore is maintenance of social order, it does not provide a remedy for
implicit and, as in all contracts, must be based on fairness and its violation. Generally, an action for damages under either
reasonableness, read in relation to the Civil Code provisions Article 20 or Article 21 would be proper.
on human relations, as will be discussed below.
In the context of a credit card relationship, although there is
AMEX acted with good faith neither a contractual stipulation nor a specific law requiring
the credit card issuer to act on the credit card holders offer
Thus far, we have already established that: (a) AMEX had within a definite period of time, these principles provide the
neither a contractual nor a legal obligation to act upon standard by which to judge AMEXs actions.
Pantaleons purchases within a specific period of time; and (b)
AMEX has a right to review a cardholders credit card According to Pantaleon, even if AMEX did have a right to
history. Our recognition of these entitlements, however, review his charge purchases, it abused this right when it
does not give AMEX an unlimited right to put off action unreasonably delayed the processing of the Coster charge
on cardholders purchase requests for indefinite purchase, as well as his purchase requests at the Richard
periods of time. In acting on cardholders purchase Metz Golf Studio and Kids Unlimited Store; AMEX should have
requests, AMEX must take care not to abuse its rights and known that its failure to act immediately on charge referrals
cause injury to its clients and/or third persons. We cite in this would entail inconvenience and result in humiliation,
regard Article 19, in conjunction with Article 21, of the Civil embarrassment, anxiety and distress to its cardholders who
Code, which provide: would be required to wait before closing their transactions.39

Article 19. Every person must, in the exercise of his rights and It is an elementary rule in our jurisdiction that good faith is
in the performance of his duties, act with justice, give presumed and that the burden of proving bad faith rests upon
everyone his due and observe honesty and good faith. the party alleging it.40 Although it took AMEX some time
before it approved Pantaleons three charge requests, we find
Article 21. Any person who willfully causes loss or injury to no evidence to suggest that it acted with deliberate intent to
another in a manner that is contrary to morals, good customs cause Pantaleon any loss or injury, or acted in a manner that
or public policy shall compensate the latter for the damage. was contrary to morals, good customs or public policy. We
give credence to AMEXs claim that its review procedure was
done to ensure Pantaleons own protection as a cardholder
Article 19 pervades the entire legal system and ensures that a
and to prevent the possibility that the credit card was being
person suffering damage in the course of anothers exercise of
fraudulently used by a third person.
right or performance of duty, should find himself without
relief.36 It sets the standard for the conduct of all persons,
whether artificial or natural, and requires that everyone, in the Pantaleon countered that this review procedure is primarily
exercise of rights and the performance of obligations, must: intended to protect AMEXs interests, to make sure that the
(a) act with justice, (b) give everyone his due, and (c) observe cardholder making the purchase has enough means to pay for
honesty and good faith. It is not because a person invokes his the credit extended. Even if this were the case, however, we
rights that he can do anything, even to the prejudice and do not find any taint of bad faith in such motive. It is but
disadvantage of another.37 natural for AMEX to want to ensure that it will extend credit
only to people who will have sufficient means to pay for their
purchases. AMEX, after all, is running a business, not a
While Article 19 enumerates the standards of conduct, Article
charity, and it would simply be ludicrous to suggest that it
21 provides the remedy for the person injured by the willful
would not want to earn profit for its services. Thus, so long as
act, an action for damages. We explained how these two
AMEX exercises its rights, performs its obligations, and
provisions correlate with each other in GF Equity, Inc. v.
generally acts with good faith, with no intent to cause harm,
Valenzona:38
even if it may occasionally inconvenience others, it cannot be
held liable for damages.
[Article 19], known to contain what is commonly referred to as
the principle of abuse of rights, sets certain standards which
We also cannot turn a blind eye to the circumstances
must be observed not only in the exercise of one's rights but
surrounding the Coster transaction which, in our opinion,
also in the performance of one's duties. These standards are
justified the wait. In Edgardo Jaurigues own words:
the following: to act with justice; to give everyone his due;
and to observe honesty and good faith. The law, therefore,
recognizes a primordial limitation on all rights; that in their Q 21: With reference to the transaction at the Coster
exercise, the norms of human conduct set forth in Article 19 Diamond House covered by Exhibit H, also Exhibit 4
must be observed. A right, though by itself legal because for the defendant, the approval came at 2:19 a.m.
recognized or granted by law as such, may after the request was relayed at 1:33 a.m., can you
nevertheless become the source of some illegality. explain why the approval came after about 46
When a right is exercised in a manner which does not minutes, more or less?
conform with the norms enshrined in Article 19 and

8 | L O A N C r e d i t Tr a n s
A21: Because we have to make certain As borne by the records, Pantaleon knew even before entering
considerations and evaluations of [Pantaleons] past Coster that the tour group would have to leave the store by
spending pattern with [AMEX] at that time before 9:30 a.m. to have enough time to take the city tour of
approving plaintiffs request because [Pantaleon] was Amsterdam before they left the country. After 9:30 a.m.,
at that time making his very first single charge Pantaleons son, who had boarded the bus ahead of his family,
purchase of US$13,826 [this is below the returned to the store to inform his family that they were the
US$16,112.58 actually billed and paid for by the only ones not on the bus and that the entire tour group was
plaintiff because the difference was already waiting for them. Significantly, Pantaleon tried to cancel the
automatically approved by [AMEX] office in sale at 9:40 a.m. because he did not want to cause any
Netherland[s] and the record of [Pantaleons] inconvenience to the tour group. However, when Costers sale
past spending with [AMEX] at that time does manager asked him to wait a few more minutes for the credit
not favorably support his ability to pay for such card approval, he agreed, despite the knowledge that he had
purchase. In fact, if the foregoing internal policy of already caused a 10-minute delay and that the city tour could
[AMEX] had been strictly followed, the transaction not start without him.
would not have been approved at all considering that
the past spending pattern of the plaintiff with [AMEX] In Nikko Hotel Manila Garden v. Reyes, 45 we ruled that a
at that time does not support his ability to pay for person who knowingly and voluntarily exposes himself to
such purchase.41 danger cannot claim damages for the resulting injury:

xxxx The doctrine of volenti non fit injuria ("to which a person
assents is not esteemed in law as injury") refers to self-
Q: Why did it take so long? inflicted injury or to the consent to injury which precludes the
recovery of damages by one who has knowingly and
A: It took time to review the account on credit, so, if voluntarily exposed himself to danger, even if he is not
there is any delinquencies [sic] of the cardmember. negligent in doing so.
There are factors on deciding the charge itself which
are standard measures in approving the This doctrine, in our view, is wholly applicable to this case.
authorization. Now in the case of Mr. Pantaleon Pantaleon himself testified that the most basic rule when
although his account is single charge purchase of travelling in a tour group is that you must never be a cause of
US$13,826. [sic] this is below the US$16,000. plus any delay because the schedule is very strict. 46 When
actually billed x x x we would have already declined Pantaleon made up his mind to push through with his
the charge outright and asked him his bank account purchase, he must have known that the group would become
to support his charge. But due to the length of his annoyed and irritated with him. This was the natural,
membership as cardholder we had to make a foreseeable consequence of his decision to make them all
decision on hand.42 wait.

As Edgardo Jaurigue clarified, the reason why Pantaleon had We do not discount the fact that Pantaleon and his family did
to wait for AMEXs approval was because he had to go over feel humiliated and embarrassed when they had to wait for
Pantaleons credit card history for the past twelve months. 43 It AMEX to approve the Coster purchase in Amsterdam. We have
would certainly be unjust for us to penalize AMEX for merely to acknowledge, however, that Pantaleon was not a helpless
exercising its right to review Pantaleons credit history victim in this scenario at any time, he could have cancelled
meticulously. the sale so that the group could go on with the city tour. But
he did not.
Finally, we said in Garciano v. Court of Appeals that "the right
to recover [moral damages] under Article 21 is based on More importantly, AMEX did not violate any legal duty to
equity, and he who comes to court to demand equity, must Pantaleon under the circumstances under the principle of
come with clean hands. Article 21 should be construed as damnum absque injuria, or damages without legal wrong, loss
granting the right to recover damages to injured persons who without injury.47 As we held in BPI Express Card v. CA:48
are not themselves at fault." 44 As will be discussed below,
Pantaleon is not a blameless party in all this. We do not dispute the findings of the lower court that private
respondent suffered damages as a result of the cancellation of
Pantaleons action was the proximate cause for his his credit card. However, there is a material distinction
injury between damages and injury. Injury is the illegal invasion of a
legal right; damage is the loss, hurt, or harm which results
Pantaleon mainly anchors his claim for moral and exemplary from the injury; and damages are the recompense or
damages on the embarrassment and humiliation that he felt compensation awarded for the damage suffered. Thus, there
when the European tour group had to wait for him and his wife can be damage without injury in those instances in which the
for approximately 35 minutes, and eventually had to cancel loss or harm was not the result of a violation of a legal duty. In
the Amsterdam city tour. After thoroughly reviewing the such cases, the consequences must be borne by the injured
records of this case, we have come to the conclusion that person alone, the law affords no remedy for damages
Pantaleon is the proximate cause for this embarrassment and resulting from an act which does not amount to a legal injury
humiliation.

9 | L O A N C r e d i t Tr a n s
or wrong. These situations are often called damnum absque vs.
injuria. HON. COURT OF APPEALS AND FRANKLIN
VIVES, respondents.
In other words, in order that a plaintiff may maintain an action
for the injuries of which he complains, he must establish that This is a petition for review on certiorari of the Decision1 of the
such injuries resulted from a breach of duty which the Court of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791
defendant owed to the plaintiff - a concurrence of injury to the and of its Resolution2 dated May 5, 1994, denying the motion
plaintiff and legal responsibility by the person causing it. The for reconsideration of said decision filed by petitioner
underlying basis for the award of tort damages is the premise Producers Bank of the Philippines.
that an individual was injured in contemplation of law. Thus,
there must first be a breach of some duty and the imposition Sometime in 1979, private respondent Franklin Vives was
of liability for that breach before damages may be awarded; asked by his neighbor and friend Angeles Sanchez to help her
and the breach of such duty should be the proximate cause of friend and townmate, Col. Arturo Doronilla, in incorporating
the injury. his business, the Sterela Marketing and Services ("Sterela" for
brevity). Specifically, Sanchez asked private respondent to
Pantaleon is not entitled to damages deposit in a bank a certain amount of money in the bank
account of Sterela for purposes of its incorporation. She
Because AMEX neither breached its contract with Pantaleon, assured private respondent that he could withdraw his money
nor acted with culpable delay or the willful intent to cause from said account within a months time. Private respondent
harm, we find the award of moral damages to Pantaleon asked Sanchez to bring Doronilla to their house so that they
unwarranted. could discuss Sanchezs request.3

Similarly, we find no basis to award exemplary damages. In On May 9, 1979, private respondent, Sanchez, Doronilla and a
contracts, exemplary damages can only be awarded if a certain Estrella Dumagpi, Doronillas private secretary, met
defendant acted "in a wanton, fraudulent, reckless, oppressive and discussed the matter. Thereafter, relying on the
or malevolent manner."49 The plaintiff must also show that he assurances and representations of Sanchez and Doronilla,
is entitled to moral, temperate, or compensatory damages private respondent issued a check in the amount of Two
before the court may consider the question of whether or not Hundred Thousand Pesos (P200,000.00) in favor of Sterela.
exemplary damages should be awarded.50 Private respondent instructed his wife, Mrs. Inocencia Vives, to
accompany Doronilla and Sanchez in opening a savings
account in the name of Sterela in the Buendia, Makati branch
As previously discussed, it took AMEX some time to approve
of Producers Bank of the Philippines. However, only Sanchez,
Pantaleons purchase requests because it had legitimate
Mrs. Vives and Dumagpi went to the bank to deposit the
concerns on the amount being charged; no malicious intent
check. They had with them an authorization letter from
was ever established here. In the absence of any other
Doronilla authorizing Sanchez and her companions, "in
damages, the award of exemplary damages clearly lacks legal
coordination with Mr. Rufo Atienza," to open an account for
basis.1avvphi1
Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were
Neither do we find any basis for the award of attorneys fees Inocencia Vives and/or Angeles Sanchez. A passbook for
and costs of litigation. No premium should be placed on the Savings Account No. 10-1567 was thereafter issued to Mrs.
right to litigate and not every winning party is entitled to an Vives.4
automatic grant of attorney's fees. 51 To be entitled to
attorneys fees and litigation costs, a party must show that he
Subsequently, private respondent learned that Sterela was no
falls under one of the instances enumerated in Article 2208 of
longer holding office in the address previously given to him.
the Civil Code.52 This, Pantaleon failed to do. Since we
Alarmed, he and his wife went to the Bank to verify if their
eliminated the award of moral and exemplary damages, so
money was still intact. The bank manager referred them to Mr.
must we delete the award for attorney's fees and litigation
Rufo Atienza, the assistant manager, who informed them that
expenses.
part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained
Lastly, although we affirm the result of the CA decision, we do therein. He likewise told them that Mrs. Vives could not
so for the reasons stated in this Resolution and not for those withdraw said remaining amount because it had to answer for
found in the CA decision. some postdated checks issued by Doronilla. According to
Atienza, after Mrs. Vives and Sanchez opened Savings Account
WHEREFORE, premises considered, we SET ASIDE our May No. 10-1567, Doronilla opened Current Account No. 10-0320
8, 2009 Decision and GRANT the present motion for for Sterela and authorized the Bank to debit Savings Account
reconsideration. The Court of Appeals Decision dated August No. 10-1567 for the amounts necessary to cover overdrawings
18, 2006 is hereby AFFIRMED. No costs. in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan
of P175,000.00 from the Bank. To cover payment thereof,
G.R. No. 115324 February 19, 2003
Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or
PRODUCERS BANK OF THE PHILIPPINES (now FIRST withdraw the money in Savings Account No. 10-1567 because
INTERNATIONAL BANK), petitioner, he was the sole proprietor of Sterela.5

10 | L O A N C r e d i t T r a n s
Private respondent tried to get in touch with Doronilla through DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE
Sanchez. On June 29, 1979, he received a letter from LOAN AND NOT ACCOMMODATION;
Doronilla, assuring him that his money was intact and would
be returned to him. On August 13, 1979, Doronilla issued a II.
postdated check for Two Hundred Twelve Thousand Pesos
(P212,000.00) in favor of private respondent. However, upon
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
presentment thereof by private respondent to the drawee
THAT PETITIONERS BANK MANAGER, MR. RUFO ATIENZA,
bank, the check was dishonored. Doronilla requested private
CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
respondent to present the same check on September 15,
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
1979 but when the latter presented the check, it was again
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE
dishonored.6
UNDER THE PRINCIPLE OF NATURAL JUSTICE;

Private respondent referred the matter to a lawyer, who made


III.
a written demand upon Doronilla for the return of his clients
money. Doronilla issued another check for P212,000.00 in
private respondents favor but the check was again THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING
dishonored for insufficiency of funds.7 THE ENTIRE RECORDS OF THE REGIONAL TRIAL COURT AND
AFFIRMING THE JUDGMENT APPEALED FROM, AS THE
FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A
Private respondent instituted an action for recovery of sum of
MISAPPREHENSION OF FACTS;
money in the Regional Trial Court (RTC) in Pasig, Metro Manila
against Doronilla, Sanchez, Dumagpi and petitioner. The case
was docketed as Civil Case No. 44485. He also filed criminal IV.
actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the THE HONORABLE COURT OF APPEALS ERRED IN DECLARING
case was pending before the trial court. On October 3, 1995, THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29
the RTC of Pasig, Branch 157, promulgated its Decision in Civil SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
Case No. 44485, the dispositive portion of which reads: ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;

IN VIEW OF THE FOREGOING, judgment is hereby rendered V.


sentencing defendants Arturo J. Doronila, Estrella Dumagpi
and Producers Bank of the Philippines to pay plaintiff Franklin
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
Vives jointly and severally
THE DECISION OF THE LOWER COURT THAT HEREIN
PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH
(a) the amount of P200,000.00, representing the THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00
money deposited, with interest at the legal rate from REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00
the filing of the complaint until the same is fully paid; FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE
(b) the sum of P50,000.00 for moral damages and a COSTS OF SUIT.11
similar amount for exemplary damages;
Private respondent filed his Comment on September 23, 1994.
(c) the amount of P40,000.00 for attorneys fees; and Petitioner filed its Reply thereto on September 25, 1995. The
Court then required private respondent to submit a rejoinder
to the reply. However, said rejoinder was filed only on April 21,
(d) the costs of the suit.
1997, due to petitioners delay in furnishing private
respondent with copy of the reply12 and several substitutions
SO ORDERED.8 of counsel on the part of private respondent. 13 On January 17,
2001, the Court resolved to give due course to the petition
Petitioner appealed the trial courts decision to the Court of and required the parties to submit their respective
Appeals. In its Decision dated June 25, 1991, the appellate memoranda.14 Petitioner filed its memorandum on April 16,
court affirmed in toto the decision of the RTC.9 It likewise 2001 while private respondent submitted his memorandum on
denied with finality petitioners motion for reconsideration in March 22, 2001.
its Resolution dated May 5, 1994.10
Petitioner contends that the transaction between private
On June 30, 1994, petitioner filed the present petition, arguing respondent and Doronilla is a simple loan (mutuum) since all
that the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a
I. consumable thing; and second, the transaction was onerous
as Doronilla was obliged to pay interest, as evidenced by the
check issued by Doronilla in the amount of P212,000.00,
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
or P12,000 more than what private respondent deposited in
THAT THE TRANSACTION BETWEEN THE DEFENDANT
Sterelas bank account.15 Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to

11 | L O A N C r e d i t T r a n s
recover his money from Doronilla shows that the transaction At the outset, it must be emphasized that only questions of
was not merely gratuitous but "had a business angle" to it. law may be raised in a petition for review filed with this Court.
Hence, petitioner argues that it cannot be held liable for the The Court has repeatedly held that it is not its function to
return of private respondents P200,000.00 because it is not analyze and weigh all over again the evidence presented by
privy to the transaction between the latter and Doronilla.16 the parties during trial.24 The Courts jurisdiction is in principle
limited to reviewing errors of law that might have been
It argues further that petitioners Assistant Manager, Mr. Rufo committed by the Court of Appeals.25 Moreover, factual
Atienza, could not be faulted for allowing Doronilla to findings of courts, when adopted and confirmed by the Court
withdraw from the savings account of Sterela since the latter of Appeals, are final and conclusive on this Court unless these
was the sole proprietor of said company. Petitioner asserts findings are not supported by the evidence on record. 26 There
that Doronillas May 8, 1979 letter addressed to the bank, is no showing of any misapprehension of facts on the part of
authorizing Mrs. Vives and Sanchez to open a savings account the Court of Appeals in the case at bar that would require this
for Sterela, did not contain any authorization for these two to Court to review and overturn the factual findings of that court,
withdraw from said account. Hence, the authority to withdraw especially since the conclusions of fact of the Court of Appeals
therefrom remained exclusively with Doronilla, who was the and the trial court are not only consistent but are also amply
sole proprietor of Sterela, and who alone had legal title to the supported by the evidence on record.
savings account.17 Petitioner points out that no evidence other
than the testimonies of private respondent and Mrs. Vives was No error was committed by the Court of Appeals when it ruled
presented during trial to prove that private respondent that the transaction between private respondent and Doronilla
deposited his P200,000.00 in Sterelas account for purposes of was a commodatum and not a mutuum. A circumspect
its incorporation.18 Hence, petitioner should not be held liable examination of the records reveals that the transaction
for allowing Doronilla to withdraw from Sterelas savings between them was a commodatum. Article 1933 of the Civil
account.1a\^/phi1.net Code distinguishes between the two kinds of loans in this
wise:
Petitioner also asserts that the Court of Appeals erred in
affirming the trial courts decision since the findings of fact By the contract of loan, one of the parties delivers to another,
therein were not accord with the evidence presented by either something not consumable so that the latter may use
petitioner during trial to prove that the transaction between the same for a certain time and return it, in which case the
private respondent and Doronilla was a mutuum, and that it contract is called a commodatum; or money or other
committed no wrong in allowing Doronilla to withdraw from consumable thing, upon the condition that the same amount
Sterelas savings account.19 of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Finally, petitioner claims that since there is no wrongful act or
omission on its part, it is not liable for the actual damages Commodatum is essentially gratuitous.
suffered by private respondent, and neither may it be held
liable for moral and exemplary damages as well as attorneys Simple loan may be gratuitous or with a stipulation to pay
fees.20 interest.

Private respondent, on the other hand, argues that the In commodatum, the bailor retains the ownership of the thing
transaction between him and Doronilla is not a mutuum but loaned, while in simple loan, ownership passes to the
an accommodation,21 since he did not actually part with the borrower.
ownership of his P200,000.00 and in fact asked his wife to
deposit said amount in the account of Sterela so that a
The foregoing provision seems to imply that if the subject of
certification can be issued to the effect that Sterela had
the contract is a consumable thing, such as money, the
sufficient funds for purposes of its incorporation but at the
contract would be a mutuum. However, there are some
same time, he retained some degree of control over his
instances where a commodatum may have for its object a
money through his wife who was made a signatory to the
consumable thing. Article 1936 of the Civil Code provides:
savings account and in whose possession the savings account
passbook was given.22
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object,
He likewise asserts that the trial court did not err in finding
as when it is merely for exhibition.
that petitioner, Atienzas employer, is liable for the return of
his money. He insists that Atienza, petitioners assistant
manager, connived with Doronilla in defrauding private Thus, if consumable goods are loaned only for purposes of
respondent since it was Atienza who facilitated the opening of exhibition, or when the intention of the parties is to lend
Sterelas current account three days after Mrs. Vives and consumable goods and to have the very same goods returned
Sanchez opened a savings account with petitioner for said at the end of the period agreed upon, the loan is a
company, as well as the approval of the authority to debit commodatum and not a mutuum.
Sterelas savings account to cover any overdrawings in its
current account.23 The rule is that the intention of the parties thereto shall be
accorded primordial consideration in determining the actual
There is no merit in the petition. character of a contract.27 In case of doubt, the

12 | L O A N C r e d i t T r a n s
contemporaneous and subsequent acts of the parties shall be XXX
considered in such determination.28
But the scheme could not have been executed successfully
As correctly pointed out by both the Court of Appeals and the without the knowledge, help and cooperation of Rufo Atienza,
trial court, the evidence shows that private respondent agreed assistant manager and cashier of the Makati (Buendia) branch
to deposit his money in the savings account of Sterela of the defendant bank. Indeed, the evidence indicates that
specifically for the purpose of making it appear "that said firm Atienza had not only facilitated the commission of the fraud
had sufficient capitalization for incorporation, with the but he likewise helped in devising the means by which it can
promise that the amount shall be returned within thirty (30) be done in such manner as to make it appear that the
days."29 Private respondent merely "accommodated" Doronilla transaction was in accordance with banking procedure.
by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to To begin with, the deposit was made in defendants Buendia
the transaction that the money would not be removed from branch precisely because Atienza was a key officer therein.
Sterelas savings account and would be returned to private The records show that plaintiff had suggested that
respondent after thirty (30) days. the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must
Doronillas attempts to return to private respondent the be in defendants branch in Makati for "it will be easier for
amount of P200,000.00 which the latter deposited in Sterelas them to get a certification". In fact before he was introduced
account together with an additional P12,000.00, allegedly to plaintiff, Doronilla had already prepared a letter addressed
representing interest on the mutuum, did not convert the to the Buendia branch manager authorizing Angeles B.
transaction from a commodatum into a mutuum because such Sanchez and company to open a savings account for Sterela
was not the intent of the parties and because the in the amount of P200,000.00, as "per coordination with Mr.
additional P12,000.00 corresponds to the fruits of the lending Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1).
of the P200,000.00. Article 1935 of the Civil Code expressly This is a clear manifestation that the other defendants had
states that "[t]he bailee in commodatum acquires the use of been in consultation with Atienza from the inception of the
the thing loaned but not its fruits." Hence, it was only proper scheme. Significantly, there were testimonies and admission
for Doronilla to remit to private respondent the interest that Atienza is the brother-in-law of a certain Romeo Mirasol, a
accruing to the latters money deposited with petitioner. friend and business associate of Doronilla.1awphi1.nt

Neither does the Court agree with petitioners contention that Then there is the matter of the ownership of the fund.
it is not solidarily liable for the return of private respondents Because of the "coordination" between Doronilla and Atienza,
money because it was not privy to the transaction between the latter knew before hand that the money deposited did not
Doronilla and private respondent. The nature of said belong to Doronilla nor to Sterela. Aside from such
transaction, that is, whether it is a mutuum or a foreknowledge, he was explicitly told by Inocencia Vives that
commodatum, has no bearing on the question of petitioners the money belonged to her and her husband and the deposit
liability for the return of private respondents money because was merely to accommodate Doronilla. Atienza even declared
the factual circumstances of the case clearly show that that the money came from Mrs. Vives.
petitioner, through its employee Mr. Atienza, was partly
responsible for the loss of private respondents money and is Although the savings account was in the name of Sterela, the
liable for its restitution. bank records disclose that the only ones empowered to
withdraw the same were Inocencia Vives and Angeles B.
Petitioners rules for savings deposits written on the passbook Sanchez. In the signature card pertaining to this account (Exh.
it issued Mrs. Vives on behalf of Sterela for Savings Account J), the authorized signatories were Inocencia Vives &/or
No. 10-1567 expressly states that Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be
"2. Deposits and withdrawals must be made by the depositor made by persons whose authorized signatures are in the
personally or upon his written authority duly authenticated, signature cards on file with the bank. He, however, said that
and neither a deposit nor a withdrawal will be permitted this procedure was not followed here because Sterela was
except upon the production of the depositor savings bank owned by Doronilla. He explained that Doronilla had the full
book in which will be entered by the Bank the amount authority to withdraw by virtue of such ownership. The Court
deposited or withdrawn."30 is not inclined to agree with Atienza. In the first place, he was
all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they
Said rule notwithstanding, Doronilla was permitted by
were only accommodating Doronilla so that a certification can
petitioner, through Atienza, the Assistant Branch Manager for
be issued to the effect that Sterela had a deposit of so much
the Buendia Branch of petitioner, to withdraw therefrom even
amount to be sued in the incorporation of the firm. In the
without presenting the passbook (which Atienza very well
second place, the signature of Doronilla was not authorized in
knew was in the possession of Mrs. Vives), not just once, but
so far as that account is concerned inasmuch as he had not
several times. Both the Court of Appeals and the trial court
signed the signature card provided by the bank whenever a
found that Atienza allowed said withdrawals because he was
deposit is opened. In the third place, neither Mrs. Vives nor
party to Doronillas "scheme" of defrauding private
Sanchez had given Doronilla the authority to withdraw.
respondent:

13 | L O A N C r e d i t T r a n s
Moreover, the transfer of fund was done without the passbook violated some of petitioners rules such as those stipulated in
having been presented. It is an accepted practice that its savings account passbook. 35 It was established that the
whenever a withdrawal is made in a savings deposit, the bank transfer of funds from Sterelas savings account to its current
requires the presentation of the passbook. In this case, such account could not have been accomplished by Doronilla
recognized practice was dispensed with. The transfer from the without the invaluable assistance of Atienza, and that it was
savings account to the current account was without the their connivance which was the cause of private respondents
submission of the passbook which Atienza had given to Mrs. loss.
Vives. Instead, it was made to appear in a certification signed
by Estrella Dumagpi that a duplicate passbook was issued to The foregoing shows that the Court of Appeals correctly held
Sterela because the original passbook had been surrendered that under Article 2180 of the Civil Code, petitioner is liable
to the Makati branch in view of a loan accommodation for private respondents loss and is solidarily liable with
assigning the savings account (Exh. C). Atienza, who Doronilla and Dumagpi for the return of the P200,000.00 since
undoubtedly had a hand in the execution of this certification, it is clear that petitioner failed to prove that it exercised due
was aware that the contents of the same are not true. He diligence to prevent the unauthorized withdrawals from
knew that the passbook was in the hands of Mrs. Vives for he Sterelas savings account, and that it was not negligent in the
was the one who gave it to her. Besides, as assistant manager selection and supervision of Atienza. Accordingly, no error was
of the branch and the bank official servicing the savings and committed by the appellate court in the award of actual,
current accounts in question, he also was aware that the moral and exemplary damages, attorneys fees and costs of
original passbook was never surrendered. He was also suit to private respondent.
cognizant that Estrella Dumagpi was not among those
authorized to withdraw so her certification had no effect
WHEREFORE, the petition is hereby DENIED. The assailed
whatsoever.
Decision and Resolution of the Court of Appeals are
AFFIRMED.
The circumstance surrounding the opening of the current
account also demonstrate that Atienzas active participation
G.R. No. 146364 June 3, 2004
in the perpetration of the fraud and deception that caused the
loss. The records indicate that this account was opened three
days later after the P200,000.00 was deposited. In spite of his COLITO T. PAJUYO, petitioner,
disclaimer, the Court believes that Atienza was mindful and vs.
posted regarding the opening of the current account COURT OF APPEALS and EDDIE GUEVARRA, respondents.
considering that Doronilla was all the while in "coordination"
with him. That it was he who facilitated the approval of the The Case
authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard to
Before us is a petition for review1 of the 21 June 2000
comprehend.
Decision2 and 14 December 2000 Resolution of the Court of
Appeals in CA-G.R. SP No. 43129. The Court of Appeals set
Clearly Atienza had committed wrongful acts that had resulted aside the 11 November 1996 decision 3 of the Regional Trial
to the loss subject of this case. x x x. 31 Court of Quezon City, Branch 81, 4 affirming the 15 December
1995 decision5 of the Metropolitan Trial Court of Quezon City,
Under Article 2180 of the Civil Code, employers shall be held Branch 31.6
primarily and solidarily liable for damages caused by their
employees acting within the scope of their assigned tasks. To The Antecedents
hold the employer liable under this provision, it must be
shown that an employer-employee relationship exists, and
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400
that the employee was acting within the scope of his assigned
to a certain Pedro Perez for the rights over a 250-square
task when the act complained of was committed. 32 Case law in
meter lot in Barrio Payatas, Quezon City. Pajuyo then
the United States of America has it that a corporation that
constructed a house made of light materials on the lot. Pajuyo
entrusts a general duty to its employee is responsible to the
and his family lived in the house from 1979 to 7 December
injured party for damages flowing from the employees
1985.
wrongful act done in the course of his general authority, even
though in doing such act, the employee may have failed in its
duty to the employer and disobeyed the latters instructions.33 On 8 December 1985, Pajuyo and private respondent Eddie
Guevarra ("Guevarra") executed a Kasunduan or agreement.
Pajuyo, as owner of the house, allowed Guevarra to live in the
There is no dispute that Atienza was an employee of
house for free provided Guevarra would maintain the
petitioner. Furthermore, petitioner did not deny that Atienza
cleanliness and orderliness of the house. Guevarra promised
was acting within the scope of his authority as Assistant
that he would voluntarily vacate the premises on Pajuyos
Branch Manager when he assisted Doronilla in withdrawing
demand.
funds from Sterelas Savings Account No. 10-1567, in which
account private respondents money was deposited, and in
transferring the money withdrawn to Sterelas Current In September 1994, Pajuyo informed Guevarra of his need of
Account with petitioner. Atienzas acts of helping Doronilla, a the house and demanded that Guevarra vacate the house.
customer of the petitioner, were obviously done in furtherance Guevarra refused.
of petitioners interests34 even though in the process, Atienza

14 | L O A N C r e d i t T r a n s
Pajuyo filed an ejectment case against Guevarra with the On 8 January 1997, the First Division of the Supreme Court
Metropolitan Trial Court of Quezon City, Branch 31 ("MTC"). issued a Resolution9 referring the motion for extension to the
Court of Appeals which has concurrent jurisdiction over the
In his Answer, Guevarra claimed that Pajuyo had no valid title case. The case presented no special and important matter for
or right of possession over the lot where the house stands the Supreme Court to take cognizance of at the first instance.
because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed On 28 January 1997, the Thirteenth Division of the Court of
out that from December 1985 to September 1994, Pajuyo did Appeals issued a Resolution 10 granting the motion for
not show up or communicate with him. Guevarra insisted that extension conditioned on the timeliness of the filing of the
neither he nor Pajuyo has valid title to the lot. motion.

On 15 December 1995, the MTC rendered its decision in favor On 27 February 1997, the Court of Appeals ordered Pajuyo to
of Pajuyo. The dispositive portion of the MTC decision reads: comment on Guevaras petition for review. On 11 April 1997,
Pajuyo filed his Comment.
WHEREFORE, premises considered, judgment is
hereby rendered for the plaintiff and against On 21 June 2000, the Court of Appeals issued its decision
defendant, ordering the latter to: reversing the RTC decision. The dispositive portion of the
decision reads:
A) vacate the house and lot occupied by the
defendant or any other person or persons WHEREFORE, premises considered, the assailed
claiming any right under him; Decision of the court a quo in Civil Case No. Q-96-
26943 is REVERSED and SET ASIDE; and it is
B) pay unto plaintiff the sum of THREE hereby declared that the ejectment case filed against
HUNDRED PESOS (P300.00) monthly as defendant-appellant is without factual and legal
reasonable compensation for the use of the basis.
premises starting from the last demand;
SO ORDERED.11
C) pay plaintiff the sum of P3,000.00 as and
by way of attorneys fees; and Pajuyo filed a motion for reconsideration of the decision.
Pajuyo pointed out that the Court of Appeals should have
D) pay the cost of suit. dismissed outright Guevarras petition for review because it
was filed out of time. Moreover, it was Guevarras counsel and
not Guevarra who signed the certification against forum-
SO ORDERED.7
shopping.

Aggrieved, Guevarra appealed to the Regional Trial Court of


On 14 December 2000, the Court of Appeals issued a
Quezon City, Branch 81 ("RTC").
resolution denying Pajuyos motion for reconsideration. The
dispositive portion of the resolution reads:
On 11 November 1996, the RTC affirmed the MTC decision.
The dispositive portion of the RTC decision reads:
WHEREFORE, for lack of merit, the motion for
reconsideration is hereby DENIED. No costs.
WHEREFORE, premises considered, the Court finds
no reversible error in the decision appealed from,
SO ORDERED.12
being in accord with the law and evidence presented,
and the same is hereby affirmed en toto.
The Ruling of the MTC
8
SO ORDERED.
The MTC ruled that the subject of the agreement between
Pajuyo and Guevarra is the house and not the lot. Pajuyo is
Guevarra received the RTC decision on 29 November 1996.
the owner of the house, and he allowed Guevarra to use the
Guevarra had only until 14 December 1996 to file his appeal
house only by tolerance. Thus, Guevarras refusal to vacate
with the Court of Appeals. Instead of filing his appeal with the
the house on Pajuyos demand made Guevarras continued
Court of Appeals, Guevarra filed with the Supreme Court a
possession of the house illegal.
"Motion for Extension of Time to File Appeal by Certiorari
Based on Rule 42" ("motion for extension"). Guevarra
theorized that his appeal raised pure questions of law. The The Ruling of the RTC
Receiving Clerk of the Supreme Court received the motion for
extension on 13 December 1996 or one day before the right The RTC upheld the Kasunduan, which established the
to appeal expired. landlord and tenant relationship between Pajuyo and
Guevarra. The terms of the Kasunduan bound Guevarra to
On 3 January 1997, Guevarra filed his petition for review with return possession of the house on demand.
the Supreme Court.

15 | L O A N C r e d i t T r a n s
The RTC rejected Guevarras claim of a better right under The Court of Appeals rejected Pajuyos argument that the
Proclamation No. 137, the Revised National Government appellate court should have dismissed the petition for review
Center Housing Project Code of Policies and other pertinent because it was Guevarras counsel and not Guevarra who
laws. In an ejectment suit, the RTC has no power to decide signed the certification against forum-shopping. The Court of
Guevarras rights under these laws. The RTC declared that in Appeals pointed out that Pajuyo did not raise this issue in his
an ejectment case, the only issue for resolution is material or Comment. The Court of Appeals held that Pajuyo could not
physical possession, not ownership. now seek the dismissal of the case after he had extensively
argued on the merits of the case. This technicality, the
The Ruling of the Court of Appeals appellate court opined, was clearly an afterthought.

The Court of Appeals declared that Pajuyo and Guevarra are The Issues
squatters. Pajuyo and Guevarra illegally occupied the
contested lot which the government owned. Pajuyo raises the following issues for resolution:

Perez, the person from whom Pajuyo acquired his rights, was WHETHER THE COURT OF APPEALS ERRED OR
also a squatter. Perez had no right or title over the lot because ABUSED ITS AUTHORITY AND DISCRETION
it is public land. The assignment of rights between Perez and TANTAMOUNT TO LACK OF JURISDICTION:
Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did
not have any legal effect. Pajuyo and Guevarra are in pari 1) in GRANTING, instead of denying, Private
delicto or in equal fault. The court will leave them where they Respondents Motion for an Extension of
are. thirty days to file petition for review at the
time when there was no more period to
The Court of Appeals reversed the MTC and RTC rulings, which extend as the decision of the Regional Trial
held that the Kasunduan between Pajuyo and Guevarra Court had already become final and
created a legal tie akin to that of a landlord and tenant executory.
relationship. The Court of Appeals ruled that the Kasunduan is
not a lease contract but a commodatum because the 2) in giving due course, instead of
agreement is not for a price certain. dismissing, private respondents Petition for
Review even though the certification against
Since Pajuyo admitted that he resurfaced only in 1994 to forum-shopping was signed only by counsel
claim the property, the appellate court held that Guevarra has instead of by petitioner himself.
a better right over the property under Proclamation No. 137.
President Corazon C. Aquino ("President Aquino") issued 3) in ruling that the Kasunduan voluntarily
Proclamation No. 137 on 7 September 1987. At that time, entered into by the parties was in fact
Guevarra was in physical possession of the property. Under a commodatum, instead of a Contract of
Article VI of the Code of Policies Beneficiary Selection and Lease as found by the Metropolitan Trial
Disposition of Homelots and Structures in the National Court and in holding that "the ejectment
Housing Project ("the Code"), the actual occupant or caretaker case filed against defendant-appellant is
of the lot shall have first priority as beneficiary of the project. without legal and factual basis".
The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
4) in reversing and setting aside the
Decision of the Regional Trial Court in Civil
In denying Pajuyos motion for reconsideration, the appellate Case No. Q-96-26943 and in holding that the
court debunked Pajuyos claim that Guevarra filed his motion parties are in pari delicto being both
for extension beyond the period to appeal. squatters, therefore, illegal occupants of the
contested parcel of land.
The Court of Appeals pointed out that Guevarras motion for
extension filed before the Supreme Court was stamped "13 5) in deciding the unlawful detainer case
December 1996 at 4:09 PM" by the Supreme Courts based on the so-called Code of Policies of
Receiving Clerk. The Court of Appeals concluded that the the National Government Center Housing
motion for extension bore a date, contrary to Pajuyos claim Project instead of deciding the same under
that the motion for extension was undated. Guevarra filed the the Kasunduan voluntarily executed by the
motion for extension on time on 13 December 1996 since he parties, the terms and conditions of which
filed the motion one day before the expiration of the are the laws between themselves.13
reglementary period on 14 December 1996. Thus, the motion
for extension properly complied with the condition imposed by
The Ruling of the Court
the Court of Appeals in its 28 January 1997 Resolution. The
Court of Appeals explained that the thirty-day extension to file
the petition for review was deemed granted because of such The procedural issues Pajuyo is raising are baseless. However,
compliance. we find merit in the substantive issues Pajuyo is submitting for
resolution.

16 | L O A N C r e d i t T r a n s
Procedural Issues Court,18 we declared that the Court of Appeals could grant
extension of time in appeals by petition for review. In Liboro
Pajuyo insists that the Court of Appeals should have dismissed v. Court of Appeals,19 we clarified that the prohibition
outright Guevarras petition for review because the RTC against granting an extension of time applies only in a case
decision had already become final and executory when the where ordinary appeal is perfected by a mere notice of
appellate court acted on Guevarras motion for extension to appeal. The prohibition does not apply in a petition for review
file the petition. Pajuyo points out that Guevarra had only one where the pleading needs verification. A petition for review,
day before the expiry of his period to appeal the RTC decision. unlike an ordinary appeal, requires preparation and research
Instead of filing the petition for review with the Court of to present a persuasive position.20 The drafting of the petition
Appeals, Guevarra filed with this Court an undated motion for for review entails more time and effort than filing a notice of
extension of 30 days to file a petition for review. This Court appeal.21 Hence, the Court of Appeals may allow an extension
merely referred the motion to the Court of Appeals. Pajuyo of time to file a petition for review.
believes that the filing of the motion for extension with this
Court did not toll the running of the period to perfect the In the more recent case of Commissioner of Internal
appeal. Hence, when the Court of Appeals received the Revenue v. Court of Appeals,22 we held
motion, the period to appeal had already expired. that Liboros clarification of Lacsamana is consistent with
the Revised Internal Rules of the Court of Appeals and
We are not persuaded. Supreme Court Circular No. 1-91. They all allow an extension
of time for filing petitions for review with the Court of Appeals.
The extension, however, should be limited to only fifteen days
Decisions of the regional trial courts in the exercise of their
save in exceptionally meritorious cases where the Court of
appellate jurisdiction are appealable to the Court of Appeals
Appeals may grant a longer period.
by petition for review in cases involving questions of fact or
mixed questions of fact and law. 14 Decisions of the regional
trial courts involving pure questions of law are appealable A judgment becomes "final and executory" by operation of
directly to this Court by petition for review. 15 These modes of law. Finality of judgment becomes a fact on the lapse of the
appeal are now embodied in Section 2, Rule 41 of the 1997 reglementary period to appeal if no appeal is perfected. 23 The
Rules of Civil Procedure. RTC decision could not have gained finality because the Court
of Appeals granted the 30-day extension to Guevarra.

Guevarra believed that his appeal of the RTC decision involved


only questions of law. Guevarra thus filed his motion for The Court of Appeals did not commit grave abuse of discretion
extension to file petition for review before this Court on 14 when it approved Guevarras motion for extension. The Court
December 1996. On 3 January 1997, Guevarra then filed his of Appeals gave due course to the motion for extension
petition for review with this Court. A perusal of Guevarras because it complied with the condition set by the appellate
petition for review gives the impression that the issues he court in its resolution dated 28 January 1997. The resolution
raised were pure questions of law. There is a question of law stated that the Court of Appeals would only give due course to
when the doubt or difference is on what the law is on a certain the motion for extension if filed on time. The motion for
state of facts.16 There is a question of fact when the doubt or extension met this condition.
difference is on the truth or falsity of the facts alleged.17
The material dates to consider in determining the timeliness
In his petition for review before this Court, Guevarra no longer of the filing of the motion for extension are (1) the date of
disputed the facts. Guevarras petition for review raised these receipt of the judgment or final order or resolution subject of
questions: (1) Do ejectment cases pertain only to possession the petition, and (2) the date of filing of the motion for
of a structure, and not the lot on which the structure stands? extension.24 It is the date of the filing of the motion or
(2) Does a suit by a squatter against a fellow squatter pleading, and not the date of execution, that determines the
constitute a valid case for ejectment? (3) Should a Presidential timeliness of the filing of that motion or pleading. Thus, even
Proclamation governing the lot on which a squatters structure if the motion for extension bears no date, the date of filing
stands be considered in an ejectment suit filed by the owner stamped on it is the reckoning point for determining the
of the structure? timeliness of its filing.

These questions call for the evaluation of the rights of the Guevarra had until 14 December 1996 to file an appeal from
parties under the law on ejectment and the Presidential the RTC decision. Guevarra filed his motion for extension
Proclamation. At first glance, the questions Guevarra raised before this Court on 13 December 1996, the date stamped by
appeared purely legal. However, some factual questions still this Courts Receiving Clerk on the motion for extension.
have to be resolved because they have a bearing on the legal Clearly, Guevarra filed the motion for extension exactly one
questions raised in the petition for review. These factual day before the lapse of the reglementary period to appeal.
matters refer to the metes and bounds of the disputed
property and the application of Guevarra as beneficiary of Assuming that the Court of Appeals should have dismissed
Proclamation No. 137. Guevarras appeal on technical grounds, Pajuyo did not ask
the appellate court to deny the motion for extension and
The Court of Appeals has the power to grant an extension of dismiss the petition for review at the earliest opportunity.
time to file a petition for review. In Lacsamana v. Second Instead, Pajuyo vigorously discussed the merits of the case. It
Special Cases Division of the Intermediate Appellate was only when the Court of Appeals ruled in Guevarras favor

17 | L O A N C r e d i t T r a n s
that Pajuyo raised the procedural issues against Guevarras disputed lot allow the courts to renounce their jurisdiction
petition for review. over the case? The Court of Appeals believed so and held that
it would just leave the parties where they are since they are
A party who, after voluntarily submitting a dispute for in pari delicto.
resolution, receives an adverse decision on the merits, is
estopped from attacking the jurisdiction of the We do not agree with the Court of Appeals.
court.25 Estoppel sets in not because the judgment of the
court is a valid and conclusive adjudication, but because the Ownership or the right to possess arising from ownership is
practice of attacking the courts jurisdiction after voluntarily not at issue in an action for recovery of possession. The
submitting to it is against public policy.26 parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession
In his Comment before the Court of Appeals, Pajuyo also failed when necessary to resolve the issue of physical
to discuss Guevarras failure to sign the certification against possession.36 The same is true when the defendant asserts
forum shopping. Instead, Pajuyo harped on Guevarras the absence of title over the property. The absence of title
counsel signing the verification, claiming that the counsels over the contested lot is not a ground for the courts to
verification is insufficient since it is based only on "mere withhold relief from the parties in an ejectment case.
information."
The only question that the courts must resolve in ejectment
A partys failure to sign the certification against forum proceedings is - who is entitled to the physical possession of
shopping is different from the partys failure to sign personally the premises, that is, to the possession de facto and not to
the verification. The certificate of non-forum shopping must the possession de jure.37 It does not even matter if a partys
be signed by the party, and not by counsel. 27 The certification title to the property is questionable,38 or when both parties
of counsel renders the petition defective.28 intruded into public land and their applications to own the
land have yet to be approved by the proper government
On the other hand, the requirement on verification of a agency.39 Regardless of the actual condition of the title to the
pleading is a formal and not a jurisdictional requisite. 29 It is property, the party in peaceable quiet possession shall not be
intended simply to secure an assurance that what are alleged thrown out by a strong hand, violence or terror. 40 Neither is
in the pleading are true and correct and not the product of the the unlawful withholding of property allowed. Courts will
imagination or a matter of speculation, and that the pleading always uphold respect for prior possession.
is filed in good faith.30 The party need not sign the verification.
A partys representative, lawyer or any person who personally Thus, a party who can prove prior possession can recover
knows the truth of the facts alleged in the pleading may sign such possession even against the owner himself. 41Whatever
the verification.31 may be the character of his possession, if he has in his favor
prior possession in time, he has the security that entitles him
We agree with the Court of Appeals that the issue on the to remain on the property until a person with a better right
certificate against forum shopping was merely an lawfully ejects him.42 To repeat, the only issue that the court
afterthought. Pajuyo did not call the Court of Appeals has to settle in an ejectment suit is the right to physical
attention to this defect at the early stage of the proceedings. possession.
Pajuyo raised this procedural issue too late in the proceedings.
In Pitargue v. Sorilla,43 the government owned the land in
Absence of Title over the Disputed Property will not dispute. The government did not authorize either the plaintiff
Divest the Courts of Jurisdiction to Resolve the Issue of or the defendant in the case of forcible entry case to occupy
Possession the land. The plaintiff had prior possession and had already
introduced improvements on the public land. The plaintiff had
a pending application for the land with the Bureau of Lands
Settled is the rule that the defendants claim of ownership of
when the defendant ousted him from possession. The plaintiff
the disputed property will not divest the inferior court of its
filed the action of forcible entry against the defendant. The
jurisdiction over the ejectment case.32 Even if the pleadings
government was not a party in the case of forcible entry.
raise the issue of ownership, the court may pass on such issue
to determine only the question of possession, especially if the
ownership is inseparably linked with the possession. 33 The The defendant questioned the jurisdiction of the courts to
adjudication on the issue of ownership is only provisional and settle the issue of possession because while the application of
will not bar an action between the same parties involving title the plaintiff was still pending, title remained with the
to the land.34 This doctrine is a necessary consequence of the government, and the Bureau of Public Lands had jurisdiction
nature of the two summary actions of ejectment, forcible over the case. We disagreed with the defendant. We ruled that
entry and unlawful detainer, where the only issue for courts have jurisdiction to entertain ejectment suits even
adjudication is the physical or material possession over the before the resolution of the application. The plaintiff, by
real property.35 priority of his application and of his entry, acquired prior
physical possession over the public land applied for as against
other private claimants. That prior physical possession enjoys
In this case, what Guevarra raised before the courts was that
legal protection against other private claimants because only
he and Pajuyo are not the owners of the contested property
a court can take away such physical possession in an
and that they are mere squatters. Will the defense that the
ejectment case.
parties to the ejectment case are not the owners of the
18 | L O A N C r e d i t T r a n s
While the Court did not brand the plaintiff and the defendant believing themselves entitled to the
in Pitargue44 as squatters, strictly speaking, their entry into possession of property, resort to force to gain
the disputed land was illegal. Both the plaintiff and defendant possession rather than to some appropriate
entered the public land without the owners permission. Title action in the court to assert their
to the land remained with the government because it had not claims." (Supia and Batioco vs. Quintero and Ayala,
awarded to anyone ownership of the contested public land. 59 Phil. 312, 314.) So before the enactment of the
Both the plaintiff and the defendant were in effect squatting first Public Land Act (Act No. 926) the action of
on government property. Yet, we upheld the courts forcible entry was already available in the courts of
jurisdiction to resolve the issue of possession even if the the country. So the question to be resolved is, Did the
plaintiff and the defendant in the ejectment case did not have Legislature intend, when it vested the power and
any title over the contested land. authority to alienate and dispose of the public lands
in the Lands Department, to exclude the courts from
Courts must not abdicate their jurisdiction to resolve the issue entertaining the possessory action of forcible entry
of physical possession because of the public need to preserve between rival claimants or occupants of any land
the basic policy behind the summary actions of forcible entry before award thereof to any of the parties? Did
and unlawful detainer. The underlying philosophy behind Congress intend that the lands applied for, or all
ejectment suits is to prevent breach of the peace and criminal public lands for that matter, be removed from the
disorder and to compel the party out of possession to respect jurisdiction of the judicial Branch of the Government,
and resort to the law alone to obtain what he claims is so that any troubles arising therefrom, or any
his.45 The party deprived of possession must not take the law breaches of the peace or disorders caused by rival
into his own hands.46 Ejectment proceedings are summary in claimants, could be inquired into only by the Lands
nature so the authorities can settle speedily actions to recover Department to the exclusion of the courts? The
possession because of the overriding need to quell social answer to this question seems to us evident. The
disturbances.47 Lands Department does not have the means to police
public lands; neither does it have the means to
prevent disorders arising therefrom, or contain
We further explained in Pitargue the greater interest that is
breaches of the peace among settlers; or to pass
at stake in actions for recovery of possession. We made the
promptly upon conflicts of possession. Then its
following pronouncements in Pitargue:
power is clearly limited to disposition and
alienation, and while it may decide conflicts of
The question that is before this Court is: Are courts possession in order to make proper award, the
without jurisdiction to take cognizance of possessory settlement of conflicts of possession which is
actions involving these public lands before final recognized in the court herein has another
award is made by the Lands Department, and before ultimate purpose, i.e., the protection of actual
title is given any of the conflicting claimants? It is possessors and occupants with a view to the
one of utmost importance, as there are public lands prevention of breaches of the peace. The
everywhere and there are thousands of settlers, power to dispose and alienate could not have
especially in newly opened regions. It also involves a been intended to include the power to prevent
matter of policy, as it requires the determination of or settle disorders or breaches of the peace
the respective authorities and functions of two among rival settlers or claimants prior to the
coordinate branches of the Government in final award. As to this, therefore, the corresponding
connection with public land conflicts. branches of the Government must continue to
exercise power and jurisdiction within the limits of
Our problem is made simple by the fact that under their respective functions. The vesting of the
the Civil Code, either in the old, which was in force in Lands Department with authority to
this country before the American occupation, or in administer, dispose, and alienate public lands,
the new, we have a possessory action, the aim and therefore, must not be understood as
purpose of which is the recovery of the physical depriving the other branches of the
possession of real property, irrespective of the Government of the exercise of the respective
question as to who has the title thereto. Under the functions or powers thereon, such as the
Spanish Civil Code we had the accion interdictal, a authority to stop disorders and quell breaches
summary proceeding which could be brought within of the peace by the police, the authority on the
one year from dispossession (Roman Catholic Bishop part of the courts to take jurisdiction over
of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early possessory actions arising therefrom not
as October 1, 1901, upon the enactment of the Code involving, directly or indirectly, alienation and
of Civil Procedure (Act No. 190 of the Philippine disposition.
Commission) we implanted the common law action of
forcible entry (section 80 of Act No. 190), the object Our attention has been called to a principle
of which has been stated by this Court to be "to enunciated in American courts to the effect that
prevent breaches of the peace and criminal courts have no jurisdiction to determine the rights of
disorder which would ensue from the claimants to public lands, and that until the
withdrawal of the remedy, and the reasonable disposition of the land has passed from the control of
hope such withdrawal would create that some the Federal Government, the courts will not interfere
advantage must accrue to those persons who, with the administration of matters concerning the

19 | L O A N C r e d i t T r a n s
same. (50 C. J. 1093-1094.) We have no quarrel with Articles 1411 and 1412 of the Civil Code 48 embody the
this principle. The determination of the respective principle of pari delicto. We explained the principle of pari
rights of rival claimants to public lands is different delicto in these words:
from the determination of who has the actual
physical possession or occupation with a view to The rule of pari delicto is expressed in the maxims
protecting the same and preventing disorder and ex dolo malo non eritur actio and in pari delicto
breaches of the peace. A judgment of the court potior est conditio defedentis. The law will not aid
ordering restitution of the possession of a parcel of either party to an illegal agreement. It leaves the
land to the actual occupant, who has been deprived parties where it finds them.49
thereof by another through the use of force or in any
other illegal manner, can never be "prejudicial
The application of the pari delicto principle is not absolute, as
interference" with the disposition or alienation of
there are exceptions to its application. One of these
public lands. On the other hand, if courts were
exceptions is where the application of the pari delicto rule
deprived of jurisdiction of cases involving
would violate well-established public policy.50
conflicts of possession, that threat of judicial
action against breaches of the peace
committed on public lands would be In Drilon v. Gaurana,51 we reiterated the basic policy behind
eliminated, and a state of lawlessness would the summary actions of forcible entry and unlawful detainer.
probably be produced between applicants, We held that:
occupants or squatters, where force or might,
not right or justice, would rule. It must be stated that the purpose of an action of
forcible entry and detainer is that, regardless of the
It must be borne in mind that the action that would actual condition of the title to the property, the party
be used to solve conflicts of possession between in peaceable quiet possession shall not be turned out
rivals or conflicting applicants or claimants would be by strong hand, violence or terror. In affording this
no other than that of forcible entry. This action, both remedy of restitution the object of the statute is to
in England and the United States and in our prevent breaches of the peace and criminal disorder
jurisdiction, is a summary and expeditious remedy which would ensue from the withdrawal of the
whereby one in peaceful and quiet possession may remedy, and the reasonable hope such withdrawal
recover the possession of which he has been would create that some advantage must accrue to
deprived by a stronger hand, by violence or terror; its those persons who, believing themselves entitled to
ultimate object being to prevent breach of the peace the possession of property, resort to force to gain
and criminal disorder. (Supia and Batioco vs. possession rather than to some appropriate action in
Quintero and Ayala, 59 Phil. 312, 314.) The basis of the courts to assert their claims. This is the
the remedy is mere possession as a fact, of physical philosophy at the foundation of all these actions of
possession, not a legal possession. (Mediran vs. forcible entry and detainer which are designed to
Villanueva, 37 Phil. 752.) The title or right to compel the party out of possession to respect and
possession is never in issue in an action of forcible resort to the law alone to obtain what he claims is
entry; as a matter of fact, evidence thereof is his.52
expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With Clearly, the application of the principle of pari delicto to a
this nature of the action in mind, by no stretch of the case of ejectment between squatters is fraught with danger.
imagination can conclusion be arrived at that the use To shut out relief to squatters on the ground of pari
of the remedy in the courts of justice would delicto would openly invite mayhem and lawlessness. A
constitute an interference with the alienation, squatter would oust another squatter from possession of the
disposition, and control of public lands. To limit lot that the latter had illegally occupied, emboldened by the
ourselves to the case at bar can it be pretended at all knowledge that the courts would leave them where they are.
that its result would in any way interfere with the Nothing would then stand in the way of the ousted squatter
manner of the alienation or disposition of the land from re-claiming his prior possession at all cost.
contested? On the contrary, it would facilitate
adjudication, for the question of priority of
Petty warfare over possession of properties is precisely what
possession having been decided in a final manner by
ejectment cases or actions for recovery of possession seek to
the courts, said question need no longer waste the
prevent.53 Even the owner who has title over the disputed
time of the land officers making the adjudication or
property cannot take the law into his own hands to regain
award. (Emphasis ours)
possession of his property. The owner must go to court.

The Principle of Pari Delicto is not Applicable to Ejectment


Courts must resolve the issue of possession even if the parties
Cases
to the ejectment suit are squatters. The determination of
priority and superiority of possession is a serious and urgent
The Court of Appeals erroneously applied the principle of pari matter that cannot be left to the squatters to decide. To do so
delicto to this case. would make squatters receive better treatment under the law.
The law restrains property owners from taking the law into
their own hands. However, the principle of pari delicto as

20 | L O A N C r e d i t T r a n s
applied by the Court of Appeals would give squatters free rein In Pitargue,55 we ruled that courts have jurisdiction over
to dispossess fellow squatters or violently retake possession of possessory actions involving public land to determine the
properties usurped from them. Courts should not leave issue of physical possession. The determination of the
squatters to their own devices in cases involving recovery of respective rights of rival claimants to public land is, however,
possession. distinct from the determination of who has the actual physical
possession or who has a better right of physical
Possession is the only Issue for Resolution in an possession.56 The administrative disposition and alienation of
Ejectment Case public lands should be threshed out in the proper government
agency.57

The case for review before the Court of Appeals was a simple
case of ejectment. The Court of Appeals refused to rule on the The Court of Appeals determination of Pajuyo and Guevarras
issue of physical possession. Nevertheless, the appellate court rights under Proclamation No. 137 was premature. Pajuyo and
held that the pivotal issue in this case is who between Pajuyo Guevarra were at most merely potential beneficiaries of the
and Guevarra has the "priority right as beneficiary of the law. Courts should not preempt the decision of the
contested land under Proclamation No. 137." 54 According to administrative agency mandated by law to determine the
the Court of Appeals, Guevarra enjoys preferential right under qualifications of applicants for the acquisition of public lands.
Proclamation No. 137 because Article VI of the Code declares Instead, courts should expeditiously resolve the issue of
that the actual occupant or caretaker is the one qualified to physical possession in ejectment cases to prevent disorder
apply for socialized housing. and breaches of peace.58

The ruling of the Court of Appeals has no factual and legal Pajuyo is Entitled to Physical Possession of the
basis. Disputed Property

First. Guevarra did not present evidence to show that the Guevarra does not dispute Pajuyos prior possession of the lot
contested lot is part of a relocation site under Proclamation and ownership of the house built on it. Guevarra expressly
No. 137. Proclamation No. 137 laid down the metes and admitted the existence and due execution of the Kasunduan.
bounds of the land that it declared open for disposition to The Kasunduan reads:
bona fide residents.
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo.
The records do not show that the contested lot is within the Payatas, Quezon City, ay nagbibigay pahintulot kay G. Eddie
land specified by Proclamation No. 137. Guevarra had the Guevarra, na pansamantalang manirahan sa nasabing bahay
burden to prove that the disputed lot is within the coverage of at lote ng "walang bayad." Kaugnay nito, kailangang
Proclamation No. 137. He failed to do so. panatilihin nila ang kalinisan at kaayusan ng bahay at lote.

Second. The Court of Appeals should not have given Sa sandaling kailangan na namin ang bahay at lote, silay
credence to Guevarras unsubstantiated claim that he is the kusang aalis ng walang reklamo.
beneficiary of Proclamation No. 137. Guevarra merely alleged
that in the survey the project administrator conducted, he and Based on the Kasunduan, Pajuyo permitted Guevarra to reside
not Pajuyo appeared as the actual occupant of the lot. in the house and lot free of rent, but Guevarra was under
obligation to maintain the premises in good condition.
There is no proof that Guevarra actually availed of the Guevarra promised to vacate the premises on Pajuyos
benefits of Proclamation No. 137. Pajuyo allowed Guevarra to demand but Guevarra broke his promise and refused to heed
occupy the disputed property in 1985. President Aquino Pajuyos demand to vacate.
signed Proclamation No. 137 into law on 11 March 1986.
Pajuyo made his earliest demand for Guevarra to vacate the These facts make out a case for unlawful detainer. Unlawful
property in September 1994. detainer involves the withholding by a person from another of
the possession of real property to which the latter is entitled
During the time that Guevarra temporarily held the property after the expiration or termination of the formers right to hold
up to the time that Proclamation No. 137 allegedly segregated possession under a contract, express or implied.59
the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Where the plaintiff allows the defendant to use his property by
Pajuyo was reclaiming possession of the property, Guevarra tolerance without any contract, the defendant is necessarily
did not take any step to comply with the requirements of bound by an implied promise that he will vacate on demand,
Proclamation No. 137. failing which, an action for unlawful detainer will lie. 60 The
defendants refusal to comply with the demand makes his
Third. Even assuming that the disputed lot is within the continued possession of the property unlawful. 61 The status of
coverage of Proclamation No. 137 and Guevarra has a the defendant in such a case is similar to that of a lessee or
pending application over the lot, courts should still assume tenant whose term of lease has expired but whose occupancy
jurisdiction and resolve the issue of possession. However, the continues by tolerance of the owner.62
jurisdiction of the courts would be limited to the issue of
physical possession only.

21 | L O A N C r e d i t T r a n s
This principle should apply with greater force in cases where a The Kasunduan is not void for purposes of determining who
contract embodies the permission or tolerance to use the between Pajuyo and Guevarra has a right to physical
property. The Kasunduan expressly articulated Pajuyos possession of the contested property. The Kasunduan is the
forbearance. Pajuyo did not require Guevarra to pay any rent undeniable evidence of Guevarras recognition of Pajuyos
but only to maintain the house and lot in good condition. better right of physical possession. Guevarra is clearly a
Guevarra expressly vowed in the Kasunduan that he would possessor in bad faith. The absence of a contract would not
vacate the property on demand. Guevarras refusal to comply yield a different result, as there would still be an implied
with Pajuyos demand to vacate made Guevarras continued promise to vacate.
possession of the property unlawful.
Guevarra contends that there is "a pernicious evil that is
We do not subscribe to the Court of Appeals theory that sought to be avoided, and that is allowing an absentee
the Kasunduan is one of commodatum. squatter who (sic) makes (sic) a profit out of his illegal
act."72 Guevarra bases his argument on the preferential right
In a contract of commodatum, one of the parties delivers to given to the actual occupant or caretaker under Proclamation
another something not consumable so that the latter may use No. 137 on socialized housing.
the same for a certain time and return it. 63 An essential
feature of commodatum is that it is gratuitous. Another We are not convinced.
feature of commodatum is that the use of the thing belonging
to another is for a certain period. 64 Thus, the bailor cannot Pajuyo did not profit from his arrangement with Guevarra
demand the return of the thing loaned until after expiration of because Guevarra stayed in the property without paying any
the period stipulated, or after accomplishment of the use for rent. There is also no proof that Pajuyo is a professional
which the commodatum is constituted.65 If the bailor should squatter who rents out usurped properties to other squatters.
have urgent need of the thing, he may demand its return for Moreover, it is for the proper government agency to decide
temporary use.66 If the use of the thing is merely tolerated by who between Pajuyo and Guevarra qualifies for socialized
the bailor, he can demand the return of the thing at will, in housing. The only issue that we are addressing is physical
which case the contractual relation is called a possession.
precarium.67 Under the Civil Code, precarium is a kind of
commodatum.68
Prior possession is not always a condition sine qua non in
ejectment.73 This is one of the distinctions between forcible
The Kasunduan reveals that the accommodation accorded by entry and unlawful detainer.74 In forcible entry, the plaintiff is
Pajuyo to Guevarra was not essentially gratuitous. While deprived of physical possession of his land or building by
the Kasunduan did not require Guevarra to pay rent, it means of force, intimidation, threat, strategy or stealth. Thus,
obligated him to maintain the property in good condition. The he must allege and prove prior possession. 75 But in unlawful
imposition of this obligation makes the Kasunduan a contract detainer, the defendant unlawfully withholds possession after
different from a commodatum. The effects of the expiration or termination of his right to possess under any
the Kasunduan are also different from that of a commodatum. contract, express or implied. In such a case, prior physical
Case law on ejectment has treated relationship based on possession is not required.76
tolerance as one that is akin to a landlord-tenant relationship
where the withdrawal of permission would result in the
Pajuyos withdrawal of his permission to Guevarra terminated
termination of the lease.69 The tenants withholding of the
the Kasunduan. Guevarras transient right to possess the
property would then be unlawful. This is settled jurisprudence.
property ended as well. Moreover, it was Pajuyo who was in
actual possession of the property because Guevarra had to
Even assuming that the relationship between Pajuyo and seek Pajuyos permission to temporarily hold the property and
Guevarra is one of commodatum, Guevarra as bailee would Guevarra had to follow the conditions set by Pajuyo in
still have the duty to turn over possession of the property to the Kasunduan. Control over the property still rested with
Pajuyo, the bailor. The obligation to deliver or to return the Pajuyo and this is evidence of actual possession.
thing received attaches to contracts for safekeeping, or
contracts of commission, administration and
Pajuyos absence did not affect his actual possession of the
commodatum.70 These contracts certainly involve the
disputed property. Possession in the eyes of the law does not
obligation to deliver or return the thing received.71
mean that a man has to have his feet on every square meter
of the ground before he is deemed in possession.77 One may
Guevarra turned his back on the Kasunduan on the sole acquire possession not only by physical occupation, but also
ground that like him, Pajuyo is also a squatter. Squatters, by the fact that a thing is subject to the action of ones
Guevarra pointed out, cannot enter into a contract involving will.78 Actual or physical occupation is not always necessary. 79
the land they illegally occupy. Guevarra insists that the
contract is void.
Ruling on Possession Does not Bind Title to the Land in
Dispute
Guevarra should know that there must be honor even
between squatters. Guevarra freely entered into
We are aware of our pronouncement in cases where we
the Kasunduan. Guevarra cannot now impugn
declared that "squatters and intruders who clandestinely
the Kasunduan after he had benefited from it.
enter into titled government property cannot, by such act,
The Kasunduan binds Guevarra.
acquire any legal right to said property." 80 We made this
22 | L O A N C r e d i t T r a n s
declaration because the person who had title or who had the is counted from the last demand to vacate, which was on 16
right to legal possession over the disputed property was a February 1995.
party in the ejectment suit and that party instituted the case
against squatters or usurpers. WHEREFORE, we GRANT the petition. The Decision dated 21
June 2000 and Resolution dated 14 December 2000 of the
In this case, the owner of the land, which is the government, Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The
is not a party to the ejectment case. This case is between Decision dated 11 November 1996 of the Regional Trial Court
squatters. Had the government participated in this case, the of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
courts could have evicted the contending squatters, Pajuyo affirming the Decision dated 15 December 1995 of the
and Guevarra. Metropolitan Trial Court of Quezon City, Branch 31 in Civil
Case No. 12432, is REINSTATED with MODIFICATION. The
Since the party that has title or a better right over the award of attorneys fees is deleted. No costs.
property is not impleaded in this case, we cannot evict on our
own the parties. Such a ruling would discourage squatters G.R. No. L-17474 October 25, 1962
from seeking the aid of the courts in settling the issue of
physical possession. Stripping both the plaintiff and the REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
defendant of possession just because they are squatters vs.
would have the same dangerous implications as the JOSE V. BAGTAS, defendant,
application of the principle of pari delicto. Squatters would FELICIDAD M. BAGTAS, Administratrix of the Intestate
then rather settle the issue of physical possession among Estate left by the late Jose V. Bagtas, petitioner-appellant.
themselves than seek relief from the courts if the plaintiff and
defendant in the ejectment case would both stand to lose
The Court of Appeals certified this case to this Court because
possession of the disputed property. This would subvert the
only questions of law are raised.
policy underlying actions for recovery of possession.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of


Since Pajuyo has in his favor priority in time in holding the
the Philippines through the Bureau of Animal Industry three
property, he is entitled to remain on the property until a
bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari,
person who has title or a better right lawfully ejects him.
of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
Guevarra is certainly not that person. The ruling in this case,
year from 8 May 1948 to 7 May 1949 for breeding purposes
however, does not preclude Pajuyo and Guevarra from
subject to a government charge of breeding fee of 10% of the
introducing evidence and presenting arguments before the
book value of the bulls. Upon the expiration on 7 May 1949 of
proper administrative agency to establish any right to which
the contract, the borrower asked for a renewal for another
they may be entitled under the law.81
period of one year. However, the Secretary of Agriculture and
Natural Resources approved a renewal thereof of only one bull
In no way should our ruling in this case be interpreted to for another year from 8 May 1949 to 7 May 1950 and
condone squatting. The ruling on the issue of physical requested the return of the other two. On 25 March 1950 Jose
possession does not affect title to the property nor constitute V. Bagtas wrote to the Director of Animal Industry that he
a binding and conclusive adjudication on the merits on the would pay the value of the three bulls. On 17 October 1950 he
issue of ownership.82 The owner can still go to court to recover reiterated his desire to buy them at a value with a deduction
lawfully the property from the person who holds the property of yearly depreciation to be approved by the Auditor General.
without legal title. Our ruling here does not diminish the On 19 October 1950 the Director of Animal Industry advised
power of government agencies, including local governments, him that the book value of the three bulls could not be
to condemn, abate, remove or demolish illegal or reduced and that they either be returned or their book value
unauthorized structures in accordance with existing laws. paid not later than 31 October 1950. Jose V. Bagtas failed to
pay the book value of the three bulls or to return them. So, on
Attorneys Fees and Rentals 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him
The MTC and RTC failed to justify the award of P3,000 praying that he be ordered to return the three bulls loaned to
attorneys fees to Pajuyo. Attorneys fees as part of damages him or to pay their book value in the total sum of P3,241.45
are awarded only in the instances enumerated in Article 2208 and the unpaid breeding fee in the sum of P199.62, both with
of the Civil Code.83 Thus, the award of attorneys fees is the interests, and costs; and that other just and equitable relief be
exception rather than the rule.84 Attorneys fees are not granted in (civil No. 12818).
awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to On 5 July 1951 Jose V. Bagtas, through counsel Navarro,
litigate.85 We therefore delete the attorneys fees awarded to Rosete and Manalo, answered that because of the bad peace
Pajuyo. and order situation in Cagayan Valley, particularly in the
barrio of Baggao, and of the pending appeal he had taken to
We sustain the P300 monthly rentals the MTC and RTC the Secretary of Agriculture and Natural Resources and the
assessed against Guevarra. Guevarra did not dispute this President of the Philippines from the refusal by the Director of
factual finding of the two courts. We find the amount Animal Industry to deduct from the book value of the bulls
reasonable compensation to Pajuyo. The P300 monthly rental corresponding yearly depreciation of 8% from the date of
acquisition, to which depreciation the Auditor General did not

23 | L O A N C r e d i t T r a n s
object, he could not return the animals nor pay their value would be a lease of the bull. Under article 1671 of the Civil
and prayed for the dismissal of the complaint. Code the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession
After hearing, on 30 July 1956 the trial court render judgment of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable, because
article 1942 of the Civil Code provides that a bailee in a
contract of commodatum
. . . sentencing the latter (defendant) to pay the sum
of P3,625.09 the total value of the three bulls plus
the breeding fees in the amount of P626.17 with . . . is liable for loss of the things, even if it should be
interest on both sums of (at) the legal rate from the through a fortuitous event:
filing of this complaint and costs.
(2) If he keeps it longer than the period stipulated . . .
On 9 October 1958 the plaintiff moved ex parte for a writ of
execution which the court granted on 18 October and issued (3) If the thing loaned has been delivered with
on 11 November 1958. On 2 December 1958 granted an ex- appraisal of its value, unless there is a stipulation
parte motion filed by the plaintiff on November 1958 for the exempting the bailee from responsibility in case of a
appointment of a special sheriff to serve the writ outside fortuitous event;
Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of The original period of the loan was from 8 May 1948 to 7 May
the defendant Jose Bagtas who died on 23 October 1951 and 1949. The loan of one bull was renewed for another period of
as administratrix of his estate, was notified. On 7 January one year to end on 8 May 1950. But the appellant kept and
1959 she file a motion alleging that on 26 June 1952 the two used the bull until November 1953 when during a Huk raid it
bull Sindhi and Bhagnari were returned to the Bureau Animal was killed by stray bullets. Furthermore, when lent and
of Industry and that sometime in November 1958 the third delivered to the deceased husband of the appellant the bulls
bull, the Sahiniwal, died from gunshot wound inflicted during a had each an appraised book value, to with: the Sindhi, at
Huk raid on Hacienda Felicidad Intal, and praying that the writ P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
of execution be quashed and that a writ of preliminary P744.46. It was not stipulated that in case of loss of the bull
injunction be issued. On 31 January 1959 the plaintiff objected due to fortuitous event the late husband of the appellant
to her motion. On 6 February 1959 she filed a reply thereto. would be exempt from liability.
On the same day, 6 February, the Court denied her motion.
Hence, this appeal certified by the Court of Appeals to this
The appellant's contention that the demand or prayer by the
Court as stated at the beginning of this opinion.
appellee for the return of the bull or the payment of its value
being a money claim should be presented or filed in the
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the intestate proceedings of the defendant who died on 23
appellant by the late defendant, returned the Sindhi and October 1951, is not altogether without merit. However, the
Bhagnari bulls to Roman Remorin, Superintendent of the NVB claim that his civil personality having ceased to exist the trial
Station, Bureau of Animal Industry, Bayombong, Nueva court lost jurisdiction over the case against him, is untenable,
Vizcaya, as evidenced by a memorandum receipt signed by because section 17 of Rule 3 of the Rules of Court provides
the latter (Exhibit 2). That is why in its objection of 31 January that
1959 to the appellant's motion to quash the writ of execution
the appellee prays "that another writ of execution in the sum
After a party dies and the claim is not thereby
of P859.53 be issued against the estate of defendant
extinguished, the court shall order, upon proper
deceased Jose V. Bagtas." She cannot be held liable for the
notice, the legal representative of the deceased to
two bulls which already had been returned to and received by
appear and to be substituted for the deceased,
the appellee.
within a period of thirty (30) days, or within such
time as may be granted. . . .
The appellant contends that the Sahiniwal bull was
accidentally killed during a raid by the Huk in November 1953
and after the defendant's death on 23 October 1951 his
upon the surrounding barrios of Hacienda Felicidad Intal,
counsel failed to comply with section 16 of Rule 3 which
Baggao, Cagayan, where the animal was kept, and that as
provides that
such death was due to force majeure she is relieved from the
duty of returning the bull or paying its value to the appellee.
The contention is without merit. The loan by the appellee to Whenever a party to a pending case dies . . . it shall
the late defendant Jose V. Bagtas of the three bulls for be the duty of his attorney to inform the court
breeding purposes for a period of one year from 8 May 1948 promptly of such death . . . and to give the name and
to 7 May 1949, later on renewed for another year as regards residence of the executory administrator, guardian,
one bull, was subject to the payment by the borrower of or other legal representative of the deceased . . . .
breeding fee of 10% of the book value of the bulls. The
appellant contends that the contract was commodatum and The notice by the probate court and its publication in the Voz
that, for that reason, as the appellee retained ownership or de Manila that Felicidad M. Bagtas had been issue letters of
title to the bull it should suffer its loss due to force majeure. A administration of the estate of the late Jose Bagtas and that
contract of commodatum is essentially gratuitous.1 If the "all persons having claims for monopoly against the deceased
breeding fee be considered a compensation, then the contract
24 | L O A N C r e d i t T r a n s
Jose V. Bagtas, arising from contract express or implied, accounts with BPI-FB, San Francisco del Monte (SFDM) branch,
whether the same be due, not due, or contingent, for funeral in a series of transactions.
expenses and expenses of the last sickness of the said
decedent, and judgment for monopoly against him, to file said On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc.
claims with the Clerk of this Court at the City Hall Bldg., (Tevesteco) opened a savings and current account with BPI-
Highway 54, Quezon City, within six (6) months from the date FB. Soon thereafter, or on August 25, 1989, First Metro
of the first publication of this order, serving a copy thereof Investment Corporation (FMIC) also opened a time deposit
upon the aforementioned Felicidad M. Bagtas, the appointed account with the same branch of BPI-FB with a deposit
administratrix of the estate of the said deceased," is not a of P100,000,000.00, to mature one year thence.
notice to the court and the appellee who were to be notified of
the defendant's death in accordance with the above-quoted
Subsequently, on August 31, 1989, Franco opened three
rule, and there was no reason for such failure to notify,
accounts, namely, a current,4 savings,5 and time deposit,6 with
because the attorney who appeared for the defendant was the
BPI-FB. The current and savings accounts were respectively
same who represented the administratrix in the special
funded with an initial deposit of P500,000.00 each, while the
proceedings instituted for the administration and settlement
time deposit account had P1,000,000.00 with a maturity date
of his estate. The appellee or its attorney or representative
of August 31, 1990. The total amount of P2,000,000.00 used
could not be expected to know of the death of the defendant
to open these accounts is traceable to a check issued by
or of the administration proceedings of his estate instituted in
Tevesteco allegedly in consideration of Francos introduction
another court that if the attorney for the deceased defendant
of Eladio Teves,7 who was looking for a conduit bank to
did not notify the plaintiff or its attorney of such death as
facilitate Tevestecos business transactions, to Jaime
required by the rule.
Sebastian, who was then BPI-FB SFDMs Branch Manager. In
turn, the funding for the P2,000,000.00 check was part of
As the appellant already had returned the two bulls to the the P80,000,000.00 debited by BPI-FB from FMICs time
appellee, the estate of the late defendant is only liable for the deposit account and credited to Tevestecos current account
sum of P859.63, the value of the bull which has not been pursuant to an Authority to Debit purportedly signed by
returned to the appellee, because it was killed while in the FMICs officers.
custody of the administratrix of his estate. This is the amount
prayed for by the appellee in its objection on 31 January 1959
It appears, however, that the signatures of FMICs officers on
to the motion filed on 7 January 1959 by the appellant for the
the Authority to Debit were forged.8 On September 4, 1989,
quashing of the writ of execution.
Antonio Ong,9 upon being shown the Authority to Debit,
personally declared his signature therein to be a forgery.
Special proceedings for the administration and settlement of Unfortunately, Tevesteco had already effected several
the estate of the deceased Jose V. Bagtas having been withdrawals from its current account (to which had been
instituted in the Court of First Instance of Rizal (Q-200), the credited the P80,000,000.00 covered by the forged Authority
money judgment rendered in favor of the appellee cannot be to Debit) amounting to P37,455,410.54, including
enforced by means of a writ of execution but must be the P2,000,000.00 paid to Franco.
presented to the probate court for payment by the appellant,
the administratrix appointed by the court.
On September 8, 1989, impelled by the need to protect its
interests in light of FMICs forgery claim, BPI-FB, thru its Senior
ACCORDINGLY, the writ of execution appealed from is set Vice-President, Severino Coronacion, instructed Jesus
aside, without pronouncement as to costs. Arangorin10 to debit Francos savings and current accounts for
the amounts remaining therein. 11 However, Francos time
G.R. No. 123498 November 23, 2007 deposit account could not be debited due to the capacity
limitations of BPI-FBs computer.12
BPI FAMILY BANK, Petitioner,
vs. In the meantime, two checks 13 drawn by Franco against his
AMADO FRANCO and COURT OF APPEALS, Respondents. BPI-FB current account were dishonored upon presentment for
payment, and stamped with a notation "account under
Banks are exhorted to treat the accounts of their depositors garnishment." Apparently, Francos current account was
with meticulous care and utmost fidelity. We reiterate this garnished by virtue of an Order of Attachment issued by the
exhortation in the case at bench. Regional Trial Court of Makati (Makati RTC) in Civil Case No.
89-4996 (Makati Case), which had been filed by BPI-FB against
Franco et al.,14 to recover the P37,455,410.54 representing
Before us is a Petition for Review on Certiorari seeking the
Tevestecos total withdrawals from its account.
reversal of the Court of Appeals (CA) Decision 1 in CA-G.R. CV
No. 43424 which affirmed with modification the judgment 2 of
the Regional Trial Court, Branch 55, Manila (Manila RTC), in Notably, the dishonored checks were issued by Franco and
Civil Case No. 90-53295. presented for payment at BPI-FB prior to Francos receipt of
notice that his accounts were under garnishment. 15 In fact, at
the time the Notice of Garnishment dated September 27,
This case has its genesis in an ostensible fraud perpetrated on
1989 was served on BPI-FB, Franco had yet to be impleaded in
the petitioner BPI Family Bank (BPI-FB) allegedly by
the Makati case where the writ of attachment was issued.
respondent Amado Franco (Franco) in conspiracy with other
individuals,3 some of whom opened and maintained separate
25 | L O A N C r e d i t T r a n s
It was only on May 15, 1990, through the service of a copy of at large, were acquitted of the crime of Estafa as defined and
the Second Amended Complaint in Civil Case No. 89-4996, penalized under Article 351, par. 2(a) of the Revised Penal
that Franco was impleaded in the Makati case. 16 Immediately, Code.23 However, the civil case24 remains under litigation and
upon receipt of such copy, Franco filed a Motion to Discharge the respective rights and liabilities of the parties have yet to
Attachment which the Makati RTC granted on May 16, 1990. be adjudicated.
The Order Lifting the Order of Attachment was served on BPI-
FB on even date, with Franco demanding the release to him of Consequently, in light of BPI-FBs refusal to heed Francos
the funds in his savings and current accounts. Jesus demands to unfreeze his accounts and release his deposits
Arangorin, BPI-FBs new manager, could not forthwith comply therein, the latter filed on June 4, 1990 with the Manila RTC
with the demand as the funds, as previously stated, had the subject suit. In his complaint, Franco prayed for the
already been debited because of FMICs forgery claim. As following reliefs: (1) the interest on the remaining balance25 of
such, BPI-FBs computer at the SFDM Branch indicated that his current account which was eventually released to him on
the current account record was "not on file." October 31, 1991; (2) the balance26 on his savings account,
plus interest thereon; (3) the advance interest 27 paid to him
With respect to Francos savings account, it appears that which had been deducted when he pre-terminated his time
Franco agreed to an arrangement, as a favor to Sebastian, deposit account; and (4) the payment of actual, moral and
whereby P400,000.00 from his savings account was exemplary damages, as well as attorneys fees.
temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate BPI-FB traversed this complaint, insisting that it was correct in
of deposit which Quiaoit needed in connection with his visa freezing the accounts of Franco and refusing to release his
application at the Taiwan Embassy. As part of the deposits, claiming that it had a better right to the amounts
arrangement, Sebastian retained custody of Quiaoits savings which consisted of part of the money allegedly fraudulently
account passbook to ensure that no withdrawal would be withdrawn from it by Tevesteco and ending up in Francos
effected therefrom, and to preserve Francos deposits. accounts. BPI-FB asseverated that the claimed consideration
of P2,000,000.00 for the introduction facilitated by Franco
On May 17, 1990, Franco pre-terminated his time deposit between George Daantos and Eladio Teves, on the one hand,
account. BPI-FB deducted the amount of P63,189.00 from the and Jaime Sebastian, on the other, spoke volumes of Francos
remaining balance of the time deposit account representing participation in the fraudulent transaction.
advance interest paid to him.
On August 4, 1993, the Manila RTC rendered judgment, the
These transactions spawned a number of cases, some of dispositive portion of which reads as follows:
which we had already resolved.
WHEREFORE, in view of all the foregoing, judgment is hereby
FMIC filed a complaint against BPI-FB for the recovery of the rendered in favor of [Franco] and against [BPI-FB], ordering
amount of P80,000,000.00 debited from its account.17 The the latter to pay to the former the following sums:
case eventually reached this Court, and in BPI Family Savings
Bank, Inc. v. First Metro Investment Corporation,18 we upheld 1. P76,500.00 representing the legal rate of interest
the finding of the courts below that BPI-FB failed to exercise on the amount of P450,000.00 from May 18, 1990 to
the degree of diligence required by the nature of its obligation October 31, 1991;
to treat the accounts of its depositors with meticulous care.
Thus, BPI-FB was found liable to FMIC for the debited amount
2. P498,973.23 representing the balance on
in its time deposit. It was ordered to pay P65,332,321.99 plus
[Francos] savings account as of May 18, 1990,
interest at 17% per annum from August 29, 1989 until fully
together with the interest thereon in accordance with
restored. In turn, the 17% shall itself earn interest at 12%
the banks guidelines on the payment therefor;
from October 4, 1989 until fully paid.

3. P30,000.00 by way of attorneys fees; and


In a related case, Edgardo Buenaventura, Myrna Lizardo and
Yolanda Tica (Buenaventura, et al.),19 recipients of
a P500,000.00 check proceeding from the P80,000,000.00 4. P10,000.00 as nominal damages.
mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also The counterclaim of the defendant is DISMISSED for lack of
prevented from effecting withdrawals 20 from their current factual and legal anchor.
account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court
Costs against [BPI-FB].
docketed as BPI Family Bank v. Buenaventura, 21 we ruled that
BPI-FB had no right to freeze Buenaventura, et al.s accounts
and adjudged BPI-FB liable therefor, in addition to damages. SO ORDERED.28

Meanwhile, BPI-FB filed separate civil and criminal cases Unsatisfied with the decision, both parties filed their
against those believed to be the perpetrators of the multi- respective appeals before the CA. Franco confined his appeal
million peso scam.22 In the criminal case, Franco, along with to the Manila RTCs denial of his claim for moral and
the other accused, except for Manuel Bienvenida who was still exemplary damages, and the diminutive award of attorneys

26 | L O A N C r e d i t T r a n s
fees. In affirming with modification the lower courts decision, public sale, the owner cannot obtain its return without
the appellate court decreed, to wit: reimbursing the price paid therefor.

WHEREFORE, foregoing considered, the appealed decision is BPI-FBs argument is unsound. To begin with, the movable
hereby AFFIRMED with modification ordering [BPI-FB] to pay property mentioned in Article 559 of the Civil Code pertains to
[Franco] P63,189.00 representing the interest deducted from a specific or determinate thing. 30 A determinate or specific
the time deposit of plaintiff-appellant. P200,000.00 as moral thing is one that is individualized and can be identified or
damages and P100,000.00 as exemplary damages, deleting distinguished from others of the same kind.31
the award of nominal damages (in view of the award of moral
and exemplary damages) and increasing the award of In this case, the deposit in Francos accounts consists of
attorneys fees from P30,000.00 to P75,000.00. money which, albeit characterized as a movable, is generic
and fungible.32 The quality of being fungible depends upon the
Cost against [BPI-FB]. possibility of the property, because of its nature or the will of
the parties, being substituted by others of the same kind, not
SO ORDERED.29 having a distinct individuality.33

In this recourse, BPI-FB ascribes error to the CA when it ruled Significantly, while Article 559 permits an owner who has lost
that: (1) Franco had a better right to the deposits in the or has been unlawfully deprived of a movable to recover the
subject accounts which are part of the proceeds of a forged exact same thing from the current possessor, BPI-FB simply
Authority to Debit; (2) Franco is entitled to interest on his claims ownership of the equivalent amount of money, i.e., the
current account; (3) Franco can recover the P400,000.00 value thereof, which it had mistakenly debited from FMICs
deposit in Quiaoits savings account; (4) the dishonor of account and credited to Tevestecos, and subsequently traced
Francos checks was not legally in order; (5) BPI-FB is liable for to Francos account. In fact, this is what BPI-FB did in filing the
interest on Francos time deposit, and for moral and Makati Case against Franco, et al. It staked its claim on the
exemplary damages; and (6) BPI-FBs counter-claim has no money itself which passed from one account to another,
factual and legal anchor. commencing with the forged Authority to Debit.

The petition is partly meritorious. It bears emphasizing that money bears no earmarks of
peculiar ownership,34 and this characteristic is all the more
manifest in the instant case which involves money in a
We are in full accord with the common ruling of the lower
banking transaction gone awry. Its primary function is to pass
courts that BPI-FB cannot unilaterally freeze Francos accounts
from hand to hand as a medium of exchange, without other
and preclude him from withdrawing his deposits. However,
evidence of its title.35 Money, which had passed through
contrary to the appellate courts ruling, we hold that Franco is
various transactions in the general course of banking
not entitled to unearned interest on the time deposit as well
business, even if of traceable origin, is no exception.
as to moral and exemplary damages.

Thus, inasmuch as what is involved is not a specific or


First. On the issue of who has a better right to the deposits in
determinate personal property, BPI-FBs illustrative example,
Francos accounts, BPI-FB urges us that the legal consequence
ostensibly based on Article 559, is inapplicable to the instant
of FMICs forgery claim is that the money transferred by BPI-
case.
FB to Tevesteco is its own, and considering that it was able to
recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership There is no doubt that BPI-FB owns the deposited monies in
thereon and freeze Francos accounts. the accounts of Franco, but not as a legal consequence of its
unauthorized transfer of FMICs deposits to Tevestecos
account. BPI-FB conveniently forgets that the deposit of
BPI-FB contends that its position is not unlike that of an owner
money in banks is governed by the Civil Code provisions on
of personal property who regains possession after it is stolen,
simple loan or mutuum.36 As there is a debtor-creditor
and to illustrate this point, BPI-FB gives the following example:
relationship between a bank and its depositor, BPI-FB
where Xs television set is stolen by Y who thereafter sells it to
ultimately acquired ownership of Francos deposits, but such
Z, and where Z unwittingly entrusts possession of the TV set
ownership is coupled with a corresponding obligation to pay
to X, the latter would have the right to keep possession of the
him an equal amount on demand.37 Although BPI-FB owns the
property and preclude Z from recovering possession thereof.
deposits in Francos accounts, it cannot prevent him from
To bolster its position, BPI-FB cites Article 559 of the Civil
demanding payment of BPI-FBs obligation by drawing checks
Code, which provides:
against his current account, or asking for the release of the
funds in his savings account. Thus, when Franco issued checks
Article 559. The possession of movable property acquired in drawn against his current account, he had every right as
good faith is equivalent to a title. Nevertheless, one who has creditor to expect that those checks would be honored by BPI-
lost any movable or has been unlawfully deprived thereof, FB as debtor.
may recover it from the person in possession of the same.
More importantly, BPI-FB does not have a unilateral right to
If the possessor of a movable lost or of which the owner has freeze the accounts of Franco based on its mere suspicion that
been unlawfully deprived, has acquired it in good faith at a the funds therein were proceeds of the multi-million peso

27 | L O A N C r e d i t T r a n s
scam Franco was allegedly involved in. To grant BPI-FB, or any Second. With respect to its liability for interest on Francos
bank for that matter, the right to take whatever action it current account, BPI-FB argues that its non-compliance with
pleases on deposits which it supposes are derived from shady the Makati RTCs Order Lifting the Order of Attachment and
transactions, would open the floodgates of public distrust in the legal consequences thereof, is a matter that ought to be
the banking industry. taken up in that court.

Our pronouncement in Simex International (Manila), Inc. v. The argument is tenuous. We agree with the succinct holding
Court of Appeals38 continues to resonate, thus: of the appellate court in this respect. The Manila RTCs order
to pay interests on Francos current account arose from BPI-
The banking system is an indispensable institution in the FBs unjustified refusal to comply with its obligation to pay
modern world and plays a vital role in the economic life of Franco pursuant to their contract of mutuum. In other words,
every civilized nation. Whether as mere passive entities for from the time BPI-FB refused Francos demand for the release
the safekeeping and saving of money or as active instruments of the deposits in his current account, specifically, from May
of business and commerce, banks have become an ubiquitous 17, 1990, interest at the rate of 12% began to accrue
presence among the people, who have come to regard them thereon.39
with respect and even gratitude and, most of all, confidence.
Thus, even the humble wage-earner has not hesitated to Undeniably, the Makati RTC is vested with the authority to
entrust his lifes savings to the bank of his choice, knowing determine the legal consequences of BPI-FBs non-compliance
that they will be safe in its custody and will even earn some with the Order Lifting the Order of Attachment. However, such
interest for him. The ordinary person, with equal faith, usually authority does not preclude the Manila RTC from ruling on BPI-
maintains a modest checking account for security and FBs liability to Franco for payment of interest based on its
convenience in the settling of his monthly bills and the continued and unjustified refusal to perform a contractual
payment of ordinary expenses. x x x. obligation upon demand. After all, this was the core issue
raised by Franco in his complaint before the Manila RTC.
In every case, the depositor expects the bank to treat his
account with the utmost fidelity, whether such account Third. As to the award to Franco of the deposits in Quiaoits
consists only of a few hundred pesos or of millions. The bank account, we find no reason to depart from the factual findings
must record every single transaction accurately, down to the of both the Manila RTC and the CA.
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 Noteworthy is the fact that Quiaoit himself testified that the
money the depositor can dispose of as he sees fit, confident deposits in his account are actually owned by Franco who
that the bank will deliver it as and to whomever directs. A simply accommodated Jaime Sebastians request to
blunder on the part of the bank, such as the dishonor of the temporarily transfer P400,000.00 from Francos savings
check without good reason, can cause the depositor not a account to Quiaoits account.40 His testimony cannot be
little embarrassment if not also financial loss and perhaps characterized as hearsay as the records reveal that he had
even civil and criminal litigation. personal knowledge of the arrangement made between
Franco, Sebastian and himself.41
The point is that as a business affected with public interest
and because of the nature of its functions, the bank is under BPI-FB makes capital of Francos belated allegation relative to
obligation to treat the accounts of its depositors with this particular arrangement. It insists that the transaction with
meticulous care, always having in mind the fiduciary nature of Quiaoit was not specifically alleged in Francos complaint
their relationship. x x x. before the Manila RTC. However, it appears that BPI-FB had
impliedly consented to the trial of this issue given its
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, extensive cross-examination of Quiaoit.
is duty bound to know the signatures of its customers. Having
failed to detect the forgery in the Authority to Debit and in the Section 5, Rule 10 of the Rules of Court provides:
process inadvertently facilitate the FMIC-Tevesteco transfer,
BPI-FB cannot now shift liability thereon to Franco and the
Section 5. Amendment to conform to or authorize
other payees of checks issued by Tevesteco, or prevent
presentation of evidence. When issues not raised by the
withdrawals from their respective accounts without the
pleadings are tried with the express or implied consent of the
appropriate court writ or a favorable final judgment.
parties, they shall be treated in all respects as if they had
been raised in the pleadings. Such amendment of the
Further, it boggles the mind why BPI-FB, even without delving pleadings as may be necessary to cause them to conform to
into the authenticity of the signature in the Authority to Debit, the evidence and to raise these issues may be made upon
effected the transfer of P80,000,000.00 from FMICs to motion of any party at any time, even after judgment; but
Tevestecos account, when FMICs account was a time deposit failure to amend does not affect the result of the trial of these
and it had already paid advance interest to FMIC. Considering issues. If evidence is objected to at the trial on the ground
that there is as yet no indubitable evidence establishing that it is now within the issues made by the pleadings, the
Francos participation in the forgery, he remains an innocent court may allow the pleadings to be amended and shall do so
party. As between him and BPI-FB, the latter, which made with liberality if the presentation of the merits of the action
possible the present predicament, must bear the resulting loss and the ends of substantial justice will be subserved thereby.
or inconvenience.

28 | L O A N C r e d i t T r a n s
The court may grant a continuance to enable the amendment attributed bad faith to BPI-FB because it (1) completely
to be made. (Emphasis supplied) disregarded its obligation to Franco; (2) misleadingly claimed
that Francos deposits were under garnishment; (3)
In all, BPI-FBs argument that this case is not the right forum misrepresented that Francos current account was not on file;
for Franco to recover the P400,000.00 begs the issue. To and (4) refused to return the P400,000.00 despite the fact
reiterate, Quiaoit, testifying during the trial, unequivocally that the ostensible owner, Quiaoit, wanted the amount
disclaimed ownership of the funds in his account, and pointed returned to Franco.
to Franco as the actual owner thereof. Clearly, Francos action
for the recovery of his deposits appropriately covers the In this regard, we are guided by Article 2201 of the Civil Code
deposits in Quiaoits account. which provides:

Fourth. Notwithstanding all the foregoing, BPI-FB continues to Article 2201. In contracts and quasi-contracts, the damages
insist that the dishonor of Francos checks respectively dated for which the obligor who acted in good faith is liable shall be
September 11 and 18, 1989 was legally in order in view of the those that are the natural and probable consequences of the
Makati RTCs supplemental writ of attachment issued on breach of the obligation, and which the parties have foreseen
September 14, 1989. It posits that as the party that applied or could have reasonable foreseen at the time the obligation
for the writ of attachment before the Makati RTC, it need not was constituted.
be served with the Notice of Garnishment before it could place
Francos accounts under garnishment. In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
The argument is specious. In this argument, we perceive BPI- reasonably attributed to the non-performance of the
FBs clever but transparent ploy to circumvent Section obligation. (Emphasis supplied.)
4,42 Rule 13 of the Rules of Court. It should be noted that the
strict requirement on service of court papers upon the parties We find, as the trial court did, that BPI-FB acted out of the
affected is designed to comply with the elementary requisites impetus of self-protection and not out of malevolence or ill
of due process. Franco was entitled, as a matter of right, to will. BPI-FB was not in the corrupt state of mind contemplated
notice, if the requirements of due process are to be observed. in Article 2201 and should not be held liable for all damages
Yet, he received a copy of the Notice of Garnishment only on now being imputed to it for its breach of obligation. For the
September 27, 1989, several days after the two checks he same reason, it is not liable for the unearned interest on the
issued were dishonored by BPI-FB on September 20 and 21, time deposit.
1989. Verily, it was premature for BPI-FB to freeze Francos
accounts without even awaiting service of the Makati RTCs
Bad faith does not simply connote bad judgment or
Notice of Garnishment on Franco.
negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it partakes of the
Additionally, it should be remembered that the enforcement of nature of fraud.44 We have held that it is a breach of a known
a writ of attachment cannot be made without including in the duty through some motive of interest or ill will. 45 In the instant
main suit the owner of the property attached by virtue case, we cannot attribute to BPI-FB fraud or even a motive of
thereof. Section 5, Rule 13 of the Rules of Court specifically self-enrichment. As the trial court found, there was no denial
provides that "no levy or attachment pursuant to the writ whatsoever by BPI-FB of the existence of the accounts. The
issued x x x shall be enforced unless it is preceded, or computer-generated document which indicated that the
contemporaneously accompanied, by service of summons, current account was "not on file" resulted from the prior debit
together with a copy of the complaint, the application for by BPI-FB of the deposits. The remedy of freezing the account,
attachment, on the defendant within the Philippines." or the garnishment, or even the outright refusal to honor any
transaction thereon was resorted to solely for the purpose of
Franco was impleaded as party-defendant only on May 15, holding on to the funds as a security for its intended court
1990. The Makati RTC had yet to acquire jurisdiction over the action,46 and with no other goal but to ensure the integrity of
person of Franco when BPI-FB garnished his the accounts.
accounts.43 Effectively, therefore, the Makati RTC had no
authority yet to bind the deposits of Franco through the writ of We have had occasion to hold that in the absence of fraud or
attachment, and consequently, there was no legal basis for bad faith,47 moral damages cannot be awarded; and that the
BPI-FB to dishonor the checks issued by Franco. adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error
Fifth. Anent the CAs finding that BPI-FB was in bad faith and alone is not a ground for granting such damages.48
as such liable for the advance interest it deducted from
Francos time deposit account, and for moral as well as An award of moral damages contemplates the existence of
exemplary damages, we find it proper to reinstate the ruling the following requisites: (1) there must be an injury clearly
of the trial court, and allow only the recovery of nominal sustained by the claimant, whether physical, mental or
damages in the amount of P10,000.00. However, we retain psychological; (2) there must be a culpable act or omission
the CAs award of P75,000.00 as attorneys fees. factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by
In granting Francos prayer for interest on his time deposit the claimant; and (4) the award for damages is predicated on
account and for moral and exemplary damages, the CA any of the cases stated in Article 2219 of the Civil Code. 49

29 | L O A N C r e d i t T r a n s
Franco could not point to, or identify any particular Petitioner is the owner of a house and lot located at No. 589
circumstance in Article 2219 of the Civil Code, 50 upon which to Batangas East, Ayala Alabang, Muntinlupa, Metro Manila,
base his claim for moral damages.1wphi1 which she acquired from Island Masters Realty and
Development Corporation (IMRDC) by virtue of a Deed of Sale
Thus, not having acted in bad faith, BPI-FB cannot be held dated Nov. 16, 1990.3 The property is covered by TCT No.
liable for moral damages under Article 2220 of the Civil Code 168173 of the Register of Deeds of Makati in the name of
for breach of contract.51 IMRDC.4

We also deny the claim for exemplary damages. Franco should On December 7, 1990, petitioner, as the FIRST PARTY, and
show that he is entitled to moral, temperate, or compensatory Dra. Flora San Diego-Sison (respondent), as the SECOND
damages before the court may even consider the question of PARTY, entered into a Memorandum of Agreement 5 over the
whether exemplary damages should be awarded to him. 52 As property with the following terms:
there is no basis for the award of moral damages, neither can
exemplary damages be granted. NOW, THEREFORE, for and in consideration of the sum of
THREE MILLION PESOS (P3,000,000.00) receipt of which is
While it is a sound policy not to set a premium on the right to hereby acknowledged by the FIRST PARTY from the SECOND
litigate,53 we, however, find that Franco is entitled to PARTY, the parties have agreed as follows:
reasonable attorneys fees for having been compelled to go to
court in order to assert his right. Thus, we affirm the CAs 1. That the SECOND PARTY has a period of Six (6)
grant of P75,000.00 as attorneys fees. months from the date of the execution of this
contract within which to notify the FIRST PARTY of her
Attorneys fees may be awarded when a party is compelled to intention to purchase the aforementioned parcel of
litigate or incur expenses to protect his interest, 54or when the land together within (sic) the improvements thereon
court deems it just and equitable. 55 In the case at bench, BPI- at the price of SIX MILLION FOUR HUNDRED
FB refused to unfreeze the deposits of Franco despite the THOUSAND PESOS (P6,400,000.00). Upon notice to
Makati RTCs Order Lifting the Order of Attachment and the FIRST PARTY of the SECOND PARTYs intention to
Quiaoits unwavering assertion that the P400,000.00 was part purchase the same, the latter has a period of another
of Francos savings account. This refusal constrained Franco to six months within which to pay the remaining
incur expenses and litigate for almost two (2) decades in balance of P3.4 million.
order to protect his interests and recover his deposits.
Therefore, this Court deems it just and equitable to grant 2. That prior to the six months period given to the
Franco P75,000.00 as attorneys fees. The award is reasonable SECOND PARTY within which to decide whether or not
in view of the complexity of the issues and the time it has to purchase the above-mentioned property, the FIRST
taken for this case to be resolved.56 PARTY may still offer the said property to other
persons who may be interested to buy the same
Sixth. As for the dismissal of BPI-FBs counter-claim, we provided that the amount of P3,000,000.00 given to
uphold the Manila RTCs ruling, as affirmed by the CA, that the FIRST PARTY BY THE SECOND PARTY shall be paid
BPI-FB is not entitled to recover P3,800,000.00 as actual to the latter including interest based on prevailing
damages. BPI-FBs alleged loss of profit as a result of Francos compounded bank interest plus the amount of the
suit is, as already pointed out, of its own making. Accordingly, sale in excess of P7,000,000.00 should the property
the denial of its counter-claim is in order. be sold at a price more than P7 million.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of 3. That in case the FIRST PARTY has no other buyer
Appeals Decision dated November 29, 1995 is AFFIRMED with within the first six months from the execution of this
the MODIFICATION that the award of unearned interest on the contract, no interest shall be charged by the SECOND
time deposit and of moral and exemplary damages is PARTY on the P3 million however, in the event that on
DELETED. the sixth month the SECOND PARTY would decide not
to purchase the aforementioned property, the FIRST
PARTY has a period of another six months within
G.R. No. 155223 April 4, 2007
which to pay the sum of P3 million pesos provided
that the said amount shall earn compounded bank
BOBIE ROSE V. FRIAS, represented by her Attorney-in- interest for the last six months only. Under this
fact, MARIE F. FUJITA, Petitioner, circumstance, the amount of P3 million given by the
vs. SECOND PARTY shall be treated as [a] loan and the
FLORA SAN DIEGO-SISON, Respondent. property shall be considered as the security for the
mortgage which can be enforced in accordance with
Before us is a Petition for Review on Certiorari filed by Bobie law.
Rose V. Frias represented by her Attorney-in-fact, Marie Regine
F. Fujita (petitioner) seeking to annul the Decision 1 dated June x x x x.6
18, 2002 and the Resolution2 dated September 11, 2002 of
the Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner received from respondent two million pesos in cash
and one million pesos in a post-dated check dated February

30 | L O A N C r e d i t T r a n s
28, 1990, instead of 1991, which rendered said check affidavit of loss and to get the services of another lawyer to
stale.7 Petitioner then gave respondent TCT No. 168173 in the file a petition for the issuance of an owners duplicate copy;
name of IMRDC and the Deed of Absolute Sale over the that the petition for the issuance of a new owners duplicate
property between petitioner and IMRDC. copy was filed on her behalf without her knowledge and
neither did she sign the petition nor testify in court as falsely
Respondent decided not to purchase the property and notified claimed for she was abroad; that she was a victim of the
petitioner through a letter 8 dated March 20, 1991, which manipulations of Atty. Lozada and respondent as shown by the
petitioner received only on June 11, 1991, 9 reminding filing of criminal charges for perjury and false testimony
petitioner of their agreement that the amount of two million against her; that no interest could be due as there was no
pesos which petitioner received from respondent should be valid mortgage over the property as the principal obligation is
considered as a loan payable within six months. Petitioner vitiated with fraud and deception. She prayed for the
subsequently failed to pay respondent the amount of two dismissal of the complaint, counter-claim for damages and
million pesos. attorneys fees.

On April 1, 1993, respondent filed with the Regional Trial Court Trial on the merits ensued. On January 31, 1996, the RTC
(RTC) of Manila, a complaint10 for sum of money with issued a decision,17 the dispositive portion of which reads:
preliminary attachment against petitioner. The case was
docketed as Civil Case No. 93-65367 and raffled to Branch 30. WHEREFORE, judgment is hereby RENDERED:
Respondent alleged the foregoing facts and in addition thereto
averred that petitioner tried to deprive her of the security for 1) Ordering defendant to pay plaintiff the sum of P2
the loan by making a false report11 of the loss of her owners Million plus interest thereon at the rate of thirty two
copy of TCT No. 168173 to the Tagig Police Station on June 3, (32%) per cent per annum beginning December 7,
1991, executing an affidavit of loss and by filing a 1991 until fully paid.
petition12 for the issuance of a new owners duplicate copy of
said title with the RTC of Makati, Branch 142; that the petition
2) Ordering defendant to pay plaintiff the sum
was granted in an Order 13 dated August 31, 1991; that said
of P70,000.00 representing premiums paid by
Order was subsequently set aside in an Order dated April 10,
plaintiff on the attachment bond with legal interest
199214where the RTC Makati granted respondents petition for
thereon counted from the date of this decision until
relief from judgment due to the fact that respondent is in
fully paid.
possession of the owners duplicate copy of TCT No. 168173,
and ordered the provincial public prosecutor to conduct an
investigation of petitioner for perjury and false testimony. 3) Ordering defendant to pay plaintiff the sum
Respondent prayed for the ex-parte issuance of a writ of of P100,000.00 by way of moral, corrective and
preliminary attachment and payment of two million pesos exemplary damages.
with interest at 36% per annum from December 7,
1991, P100,000.00 moral, corrective and exemplary damages 4) Ordering defendant to pay plaintiff attorneys fees
and P200,000.00 for attorneys fees. of P100,000.00 plus cost of litigation.18

In an Order dated April 6, 1993, the Executive Judge of the The RTC found that petitioner was under obligation to pay
RTC of Manila issued a writ of preliminary attachment upon respondent the amount of two million pesos with compounded
the filing of a bond in the amount of two million pesos.15 interest pursuant to their Memorandum of Agreement; that
the fraudulent scheme employed by petitioner to deprive
Petitioner filed an Amended Answer 16 alleging that the respondent of her only security to her loaned money when
Memorandum of Agreement was conceived and arranged by petitioner executed an affidavit of loss and instituted a
her lawyer, Atty. Carmelita Lozada, who is also respondents petition for the issuance of an owners duplicate title knowing
lawyer; that she was asked to sign the agreement without the same was in respondents possession, entitled respondent
being given the chance to read the same; that the title to the to moral damages; and that petitioners bare denial cannot be
property and the Deed of Sale between her and the IMRDC accorded credence because her testimony and that of her
were entrusted to Atty. Lozada for safekeeping and were witness did not appear to be credible.
never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash The RTC further found that petitioner admitted that she
paid, Atty. Lozada took the one million pesos which has not received from respondent the two million pesos in cash but
been returned, thus petitioner had filed a civil case against the fact that petitioner gave the one million pesos to Atty.
her; that she was never informed of respondents decision not Lozada was without respondents knowledge thus it is not
to purchase the property within the six month period fixed in binding on respondent; that respondent had also proven that
the agreement; that when she demanded the return of TCT in 1993, she initially paid the sum of P30,000.00 as premium
No. 168173 and the Deed of Sale between her and the IMRDC for the issuance of the attachment bond, P20,000.00 for its
from Atty. Lozada, the latter gave her these documents in a renewal in 1994, and P20,000.00 for the renewal in 1995, thus
brown envelope on May 5, 1991 which her secretary placed in plaintiff should be reimbursed considering that she was
her attache case; that the envelope together with her other compelled to go to court and ask for a writ of preliminary
personal things were lost when her car was forcibly opened attachment to protect her rights under the agreement.
the following day; that she sought the help of Atty. Lozada
who advised her to secure a police report, to execute an

31 | L O A N C r e d i t T r a n s
Petitioner filed her appeal with the CA. In a Decision dated compounded bank interest for the last six months only; that
June 18, 2002, the CA affirmed the RTC decision with the CAs ruling that a loan always bears interest otherwise it is
modification, the dispositive portion of which reads: not a loan is contrary to Art. 1956 of the New Civil Code which
provides that no interest shall be due unless it has been
WHEREFORE, premises considered, the decision appealed expressly stipulated in writing.
from is MODIFIED in the sense that the rate of interest is
reduced from 32% to 25% per annum, effective June 7, 1991 We are not persuaded.
until fully paid.19
While the CAs conclusion, that a loan always bears interest
The CA found that: petitioner gave the one million pesos to otherwise it is not a loan, is flawed since a simple loan may be
Atty. Lozada partly as her commission and partly as a loan; gratuitous or with a stipulation to pay interest, 23 we find no
respondent did not replace the mistakenly dated check of one error committed by the CA in awarding a 25% interest per
million pesos because she had decided not to buy the annum on the two-million peso loan even beyond the second
property and petitioner knew of her decision as early as April six months stipulated period.
1991; the award of moral damages was warranted since even
granting petitioner had no hand in the filing of the petition for The Memorandum of Agreement executed between the
the issuance of an owners copy, she executed an affidavit of petitioner and respondent on December 7, 1990 is the law
loss of TCT No. 168173 when she knew all along that said title between the parties. In resolving an issue based upon a
was in respondents possession; petitioners claim that she contract, we must first examine the contract itself, especially
thought the title was lost when the brown envelope given to the provisions thereof which are relevant to the
her by Atty. Lozada was stolen from her car was hollow; that controversy.24 The general rule is that if the terms of an
such deceitful conduct caused respondent serious anxiety and agreement are clear and leave no doubt as to the intention of
emotional distress. the contracting parties, the literal meaning of its stipulations
shall prevail.25 It is further required that the various
The CA concluded that there was no basis for petitioner to say stipulations of a contract shall be interpreted together,
that the interest should be charged for six months only and no attributing to the doubtful ones that sense which may result
more; that a loan always bears interest otherwise it is not a from all of them taken jointly.26
loan; that interest should commence on June 7, 1991 20 with
compounded bank interest prevailing at the time the two In this case, the phrase "for the last six months only" should
million was considered as a loan which was in June 1991; that be taken in the context of the entire agreement. We agree
the bank interest rate for loans secured by a real estate with and adopt the CAs interpretation of the phrase in this
mortgage in 1991 ranged from 25% to 32% per annum as wise:
certified to by Prudential Bank,21 that in fairness to petitioner,
the rate to be charged should be 25% only.
Their agreement speaks of two (2) periods of six months each.
The first six-month period was given to plaintiff-appellee
Petitioners motion for reconsideration was denied by the CA (respondent) to make up her mind whether or not to purchase
in a Resolution dated September 11, 2002. defendant-appellants (petitioner's) property. The second six-
month period was given to defendant-appellant to pay the P2
Hence the instant Petition for Review on Certiorari filed by million loan in the event that plaintiff-appellee decided not to
petitioner raising the following issues: buy the subject property in which case interest will be
charged "for the last six months only", referring to the second
(A) WHETHER OR NOT THE COMPOUNDED BANK six-month period. This means that no interest will be charged
INTEREST SHOULD BE LIMITED TO SIX (6) MONTHS for the first six-month period while appellee was making up
AS CONTAINED IN THE MEMORANDUM OF her mind whether to buy the property, but only for the second
AGREEMENT. period of six months after appellee had decided not to buy the
property. This is the meaning of the phrase "for the last six
months only". Certainly, there is nothing in their agreement
(B) WHETHER OR NOT THE RESPONDENT IS
that suggests that interest will be charged for six months only
ENTITLED TO MORAL DAMAGES.
even if it takes defendant-appellant an eternity to pay the
loan.27
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE
AND EXEMPLARY DAMAGES AND ATTORNEYS FEES IS
The agreement that the amount given shall bear compounded
PROPER EVEN IF NOT MENTIONED IN THE TEXT OF
bank interest for the last six months only, i.e., referring to the
THE DECISION.22
second six-month period, does not mean that interest will no
longer be charged after the second six-month period since
Petitioner contends that the interest, whether at 32% per such stipulation was made on the logical and reasonable
annum awarded by the trial court or at 25% per annum as expectation that such amount would be paid within the date
modified by the CA which should run from June 7, 1991 until stipulated. Considering that petitioner failed to pay the
fully paid, is contrary to the parties Memorandum of amount given which under the Memorandum of Agreement
Agreement; that the agreement provides that if respondent shall be considered as a loan, the monetary interest for the
would decide not to purchase the property, petitioner has the last six months continued to accrue until actual payment of
period of another six months to pay the loan with the loaned amount.

32 | L O A N C r e d i t T r a n s
The payment of regular interest constitutes the price or cost executed the agreement on December 7, 1990, petitioner
of the use of money and thus, until the principal sum due is gave her the owners copy of the title to the property, the
returned to the creditor, regular interest continues to accrue Deed of Sale between petitioner and IMRDC, the certificate of
since the debtor continues to use such principal amount. 28 It occupancy, and the certificate of the Secretary of the IMRDC
has been held that for a debtor to continue in possession of who signed the Deed of Sale. 34 However, notwithstanding that
the principal of the loan and to continue to use the same after all those documents were in respondents possession,
maturity of the loan without payment of the monetary petitioner executed an affidavit of loss that the owners copy
interest, would constitute unjust enrichment on the part of the of the title and the Deed of Sale were lost.
debtor at the expense of the creditor.29
Although petitioner testified that her execution of the affidavit
Petitioner and respondent stipulated that the loaned amount of loss was due to the fact that she was of the belief that since
shall earn compounded bank interests, and per the she had demanded from Atty. Lozada the return of the title,
certification issued by Prudential Bank, the interest rate for she thought that the brown envelope with markings which
loans in 1991 ranged from 25% to 32% per annum. The CA Atty. Lozada gave her on May 5, 1991 already contained the
reduced the interest rate to 25% instead of the 32% awarded title and the Deed of Sale as those documents were in the
by the trial court which petitioner no longer same brown envelope which she gave to Atty. Lozada prior to
assailed.1awphi1.nt the transaction with respondent. 35 Such statement remained a
bare statement. It was not proven at all since Atty. Lozada had
In Bautista v. Pilar Development Corp.,30 we upheld the not taken the stand to corroborate her claim. In fact, even
validity of a 21% per annum interest on a P142,326.43 loan. petitioners own witness, Benilda Ynfante (Ynfante), was not
In Garcia v. Court of Appeals,31 we sustained the agreement of able to establish petitioner's claim that the title was returned
the parties to a 24% per annum interest on an P8,649,250.00 by Atty. Lozada in view of Ynfante's testimony that after the
loan. Thus, the interest rate of 25% per annum awarded by brown envelope was given to petitioner, the latter passed it
the CA to a P2 million loan is fair and reasonable. on to her and she placed it in petitioners attach case 36 and
did not bother to look at the envelope.37

Petitioner next claims that moral damages were awarded on


the erroneous finding that she used a fraudulent scheme to It is clear therefrom that petitioners execution of the affidavit
deprive respondent of her security for the loan; that such of loss became the basis of the filing of the petition with the
finding is baseless since petitioner was acquitted in the case RTC for the issuance of new owners duplicate copy of TCT No.
for perjury and false testimony filed by respondent against 168173. Petitioners actuation would have deprived
her. respondent of the security for her loan were it not for
respondents timely filing of a petition for relief whereby the
RTC set aside its previous order granting the issuance of new
We are not persuaded.
title. Thus, the award of moral damages is in order.

Article 31 of the Civil Code provides that when the civil action
The entitlement to moral damages having been established,
is based on an obligation not arising from the act or omission
the award of exemplary damages is proper. 38Exemplary
complained of as a felony, such civil action may proceed
damages may be imposed upon petitioner by way of example
independently of the criminal proceedings and regardless of
or correction for the public good. 39 The RTC awarded the
the result of the latter.32
amount of P100,000.00 as moral and exemplary damages.
While the award of moral and exemplary damages in an
While petitioner was acquitted in the false testimony and aggregate amount may not be the usual way of awarding said
perjury cases filed by respondent against her, those actions damages,40 no error has been committed by CA. There is no
are entirely distinct from the collection of sum of money with question that respondent is entitled to moral and exemplary
damages filed by respondent against petitioner. damages.

We agree with the findings of the trial court and the CA that Petitioner argues that the CA erred in awarding attorneys fees
petitioners act of trying to deprive respondent of the security because the trial courts decision did not explain the findings
of her loan by executing an affidavit of loss of the title and of facts and law to justify the award of attorneys fees as the
instituting a petition for the issuance of a new owners same was mentioned only in the dispositive portion of the RTC
duplicate copy of TCT No. 168173 entitles respondent to moral decision.
damages.1a\^/phi1.net Moral damages may be awarded
in culpa contractual or breach of contract cases when the
We agree.
defendant acted fraudulently or in bad faith. Bad faith does
not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious Article 220841 of the New Civil Code enumerates the instances
doing of wrong. It partakes of the nature of fraud.33 where such may be awarded and, in all cases, it must be
reasonable, just and equitable if the same were to be
granted.42 Attorney's fees as part of damages are not meant
The Memorandum of Agreement provides that in the event
to enrich the winning party at the expense of the losing
that respondent opts not to buy the property, the money
litigant. They are not awarded every time a party prevails in a
given by respondent to petitioner shall be treated as a loan
suit because of the policy that no premium should be placed
and the property shall be considered as the security for the
on the right to litigate.43 The award of attorney's fees is the
mortgage. It was testified to by respondent that after they
33 | L O A N C r e d i t T r a n s
exception rather than the general rule. As such, it is In accordance with the above provision, the bank
necessary for the trial court to make findings of facts and law unilaterally increased the interest rate from 16% to
that would bring the case within the exception and justify the 21% effective 17 February 1980; from 21% to 30%
grant of such award. The matter of attorney's fees cannot be effective 17 October 1984; and from 30% to 38%
mentioned only in the dispositive portion of the effective 17 November 1984, increasing the quarterly
decision.44 They must be clearly explained and justified by the amortizations from P67,830.00 to, respectively,
trial court in the body of its decision. On appeal, the CA is P77,619.72, P104,661.10, and P123,797.05 for the
precluded from supplementing the bases for awarding periods aforestated. The Concepcions paid, under
attorneys fees when the trial court failed to discuss in its protest, the increased amortizations of P77,619.72
Decision the reasons for awarding the same. Consequently, and P104,661.10 until January 1985 but thereafter
the award of attorney's fees should be deleted. failed to pay the quarterly amortization of
P123,797.05 (starting due date of 17 April 1985).
WHEREFORE, in view of all the foregoing, the Decision dated
June 18, 2002 and the Resolution dated September 11, 2002 In a letter, dated 15 July 1985, the bank's President made a
of the Court of Appeals in CA-G.R. CV No. 52839 demand on the Concepcions for the payment of the
are AFFIRMED with MODIFICATION that the award of arrearages. The Concepcions failed to pay, constraining the
attorneys fees is DELETED. bank's counsel to send a final demand letter, dated 26 August
1985, for the payment of P393,878.81, covering the spouses'
G.R. No. 122079 June 27, 1997 due account for three quarterly payments plus interest,
penalty, and service charges. Still, no payment was received.

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S.


CONCEPCION, petitioners, On 14 April 1986, the bank finally filed with the Office of the
vs. Provincial Sheriff of Pasig City a petition for extrajudicial
HON. COURT OF APPEALS, HOME SAVINGS BANK AND foreclosure of the real estate mortgage executed by the
TRUST COMPANY, and as nominal party-defendants, Concepcions. A notice of sale was issued on 15 May 1986,
THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, setting the public auction sale on 11 June 1986. The notice
and who conducted the auction sale and the REGISTER was published in the newspaper "Mabuhay." A copy of the
OF DEEDS or his representative of San Juan, Metro notice was sent to the Concepcions at 59 Whitefield St., White
Manila, and ASAJE REALTY CORPORATION, respondents. Plains Subdivision, Quezon City and/or at 11 Albany St.,
Greenhills Subdivision, San Juan, Metro Manila. The public
auction sale went on as scheduled with the bank emerging as
The spouses Antonio E.A. Concepcion and Manuela S.
the highest bidder. A Certificate of Sale was issued in favor of
Concepcion assail, via the instant petition for review
the bank.
on certiorari, the decision, 1 dated 15 September 1995, of the
Court of Appeals, affirming with modification the judgment of
the Regional Trial Court ("RTC"), 2 Branch 157, of Pasig The Concepcions were unable to exercise their right of
City, 3 that dismissed the complaint of herein petitioners redemption within the one-year period provided under Act No.
against private respondents. 3135. The bank thus consolidated its title over the property
and, after the cancellation of the title in the name of the
Concepcions, a new transfer certificate of title (No. 090-R) was
The facts, hereunder narrated, are culled from the findings of
issued in the name of Home Savings Bank and Trust Company.
the appellate court.

On 31 July 1987, the bank executed a Deed of Absolute Sale in


On 17 January 1979, the Home Savings Bank and Trust
favor of Asaje Realty Corporation and a new certificate of title
Company (now Insular Life Savings and Trust Company)
was issued in the latter's name.
granted to the Concepcions a loan amounting to
P1,400,000.00. The Concepcions, in turn, executed in favor of
the bank a promissory note and a real estate mortgage over Meanwhile, on 29 July 1987, the Concepcions filed an action
their property located at 11 Albany St., Greenhills, San Juan, against Home Savings Bank and Trust Company, the Sheriff of
Metro Manila. The loan was payable in equal quarterly San Juan, Metro Manila, and the Register of Deeds of San Juan,
amortizations for a period of fifteen (15) years and carried an Metro Manila, for the cancellation of the foreclosure sale, the
interest rate of sixteen percent (16%) per annum. The declaration of nullity of the consolidation of title in favor of the
promissory note provided that the Concepcions had bank, and the declaration of nullity of the unilateral increases
authorized of the interest rates on their loan. The spouses likewise
claimed damages against the defendants. The Concepcions,
having learned of the sale of the property to Asaje Realty
. . . the Bank to correspondingly increase
Corporation, filed an amended complaint impleading the
the interest rate presently stipulated in this
realty corporation and so praying as well for the cancellation
transaction without advance notice to me/us
of the sale executed between said corporation and the bank
in the event the Central Bank of the
and the cancellation of the certificate of title issued in the
Philippines raises its rediscount rate to
name of Asaje.
member banks, and/or the interest rate on
savings and time deposit, and/or the
interest rate on such loans and/or On 31 August 1992, the trial court found for the defendants
advances. 4 and ruled:

34 | L O A N C r e d i t T r a n s
In view of all the foregoing premises, this execution sale, covered by Rule 39 of the Rules of
Court finally concludes that the plaintiffs Court. 7 Each mode, peculiarly, has its own requirements.
have no cause of action either against
defendant Home Savings Bank & Trust In an extrajudicial foreclosure, such as here, Section 3 of Act
Company or defendant Asaje Realty No. 3135 8 is the law applicable; 9 the provision reads:
Corporation; and under the circumstances of
this case, it deems it just and equitable that
Sec. 3. Notice shall be given by posting
attorney's fees and expenses of litigation
notices of the sale for not less than twenty
should be recovered by said defendants.
days in at least three public places of the
municipality or city where the property is
WHEREFORE, judgment is hereby rendered situated, and if such property is worth more
dismissing the amended complaint of than four hundred pesos, such notice shall
plaintiffs Spouses Antonio E.A. Concepcion also be published once a week for at least
and Manuela S. Concepcion against the three consecutive weeks in a newspaper of
defendants for lack of merit, and ordering general circulation in the municipality or
the said plaintiffs to pay attorney's fees and city.
expenses of litigation in the sum of
P30,000.00 to defendant Home Savings
The Act only requires (1) the posting of notices of
Bank & Trust Company and in the amount of
sale in three
P25,000.00 to defendant Asaje Realty
public places, and (2) the publication of the same in
Corporation, in addition to their respective
a newspaper of general circulation. 10 Personal notice
costs of suit.
to the mortgagor is not necessary. 11, Nevertheless,
the parties to the mortgage contract are not
SO ORDERED. 5 precluded from exacting additional requirements.

The Concepcions went to the Court of Appeals. In the case at bar, the mortgage contract stipulated that

On 15 September 1995, the appellate court affirmed the trial All correspondence relative to this
court's decision, with modification, as follows: Mortgage, including demand letters,
summons, subpoenas, or notifications of any
Under the facts and circumstances of the judicial or extrajudicial actions shall be sent
case at bench, the award of attorney's fees, to the Mortgagor at the address given above
expenses of litigation and costs of suit in or at the address that may hereafter be
favor of defendant-appellee should be given in writing by the Mortgagor to the
deleted. It is not a sound policy to place a Mortgagee, and the mere act of sending any
penalty on the right to litigate, nor should correspondence by mail or by personal
counsel's fees be awarded everytime a delivery to the said address shall be valid
party wins a suit (Arenas vs. Court of and effective notice to the Mortgagor for all
Appeals, 169 SCRA 558). legal purposes, and fact that any
communication is not actually received by
WHEREFORE, the appealed judgment is the Mortgagor, or that it has been returned
AFFIRMED with the modification that the unclaimed to the Mortgagee, or that no
award of attorneys fees, litigation expenses person was found at the address given, or
and costs of suit in favor of defendant- that the address is fictitious or cannot be
appellees are deleted from the dispositive located, shall not excuse or relieve
portion. Mortgagor from the effects of such notice. 12

SO ORDERED. 6 The stipulation, not being contrary to law, morals,


good customs, public order or public policy, is the law
between the contracting parties and should be
The Concepcions forthwith filed with this Court a petition for
faithfully complied with. 13
review on certiorari, contending that they have been denied
their contractually stipulated right to be personally notified of
the foreclosure proceedings on the mortgaged property. Private respondent bank maintains that the stipulation that
"all correspondence relative to (the) Mortgage . . . shall be
sent to the Mortgagor at the address given above or at the
There is some merit in the petition.
address that may hereafter be given in writing by the
Mortgagor to the Mortgagee" 14 gives the mortgagee an
The three common types of forced sales arising from a failure alternative to send its correspondence either at the old or the
to pay a mortgage debt include (a) an extrajudicial foreclosure new address given. 15 This stand is illogical. It could not have
sale, governed by Act No. 3135; (b) a judicial foreclosure sale, been the intendment of the parties to defeat the very purpose
regulated by Rule 68 of the Rules of Court; and (c) an ordinary of the provision referred to which is obviously to apprise the
mortgagors of the bank's action that might affect the property

35 | L O A N C r e d i t T r a n s
and to accord to them an opportunity to safeguard their labor unions are other examples. That
rights. The Court finds the bank's failure to comply with its inflation, expected or otherwise, will cause a
agreement with petitioners an inexcusable breach of the particular bargain to be more costly in terms
mortgagee's covenant. Neither petitioners' subsequent of total dollars than originally contemplated
opportunity to redeem the property nor their failed can be of little solace to the plaintiffs. 20
negotiations with the bank for a new schedule of
payments, 16 can be a valid justification for the breach. In Philippine National Bank vs. Court of
Appeals, 21 the Court further elucidated, as follows:
The foregoing notwithstanding, petitioners may no longer
seek the reconveyance of the property from private It is basic that there can be no contract in
respondent Asaje Realty Corporation, the latter having been, the true sense in the absence of the
evidently, an innocent purchaser in good faith. 17The realty element of agreement, or of mutual assent
corporation purchased the property when the title was already of the parties. If this assent is wanting on
in the name of the bank. It was under no obligation to the part of one who contracts his act has no
investigate the title of the bank or to look beyond what clearly more efficacy than if it had been done under
appeared to be on the face of the certificate. 18 duress or by a person of unsound mind.

Private respondent bank, however, can still be held to account Similarly, contract changes must be made
for the bid price of Asaje Realty Corporation over and above, if with the consent of the contracting parties.
any, the amount due the bank on the basis of the original The minds of all the parties must meet as to
interest rate, the unilateral increases made by the bank the proposed modification especially when it
having been correctly invalidated by the Court of Appeals. affects an important aspect of the
agreement. In the case of loan contracts, it
The validity of "escalation" or "escalator" clauses in contracts, cannot be gainsaid that the rate of interest
in general, was upheld by the Supreme Court in Banco Filipino is component, for it can make or break a
Savings and Mortgage Bank vs. Hen. Navarro and Del capital venture. Thus, any change must
Valle. 19 Hence: be mutually agreed upon, otherwise, it is
bereft of any binding effect.
Some contracts contain what is known as an
"escalator clause," which is defined as one We cannot countenance petitioner bank's
in which the contract fixes a base price but posturing that the escalation clause at
contains a provision that in the event of bench gives it unbridled right
specified cost increases, the seller or to unilaterally upwardly adjust the interest
contractor may raise the price up to a fixed on private respondents' loan. That would
percentage of the base. Attacks on such a completely take away from private
clause have usually been based on the respondents the right to assent to an
claim that, because of the open price- important modification in their agreement,
provision, the contract was too indefinite to and would negate the element of mutuality
be enforceable and did not evidence actual in contracts. In Philippine National Bank
meeting of the minds of the parties or that v. Court of Appeals, et al., 196 SCRA 536,
the arrangement left the price to be 544-545 (1991) we held
determined arbitrarily by one party so that
the contract lacked mutuality. In most . . . (T)he unilateral action of the PNB in
instances, however, these attacks have increasing the interest rate on the private
been unsuccessful. respondent's loan violated the mutuality of
contracts ordained in Article 1308 of the
The Court further finds as a matter of law Civil Code:
that the cost of living index adjustment, or
substantively unconscionable. Art. 1308. The contract
must bind both
Cost of living index adjustment clauses are contracting parties; its
widely used in commercial contracts in an validity or compliance
effort to maintain fiscal stability and to cannot be left to the will of
retain "real dollar" value to the price terms one of them.
of long term contracts. The provision is a
common one, and has been universally In order that obligations arising from
upheld and enforced. Indeed, the Federal contracts may have the force or law
government has recognized the efficacy of between the parties, there must be
escalator clauses in tying Social Security mutuality between the parties based on
benefits to the cost of living index, 42 their essential equality. A contract
U.S.C.s 415(i). Pension benefits and labor containing a condition which makes its
contracts negotiated by most of the major fulfillment dependent exclusively upon the

36 | L O A N C r e d i t T r a n s
uncontrolled will of one of the contracting We trust that you will understand our
parties, is void . . . Hence, even assuming position and please be guided accordingly. 25
that the
. . . loan agreement between the PNB and Given the circumstances, the Court sees no cogent reasons to
the private respondent gave the PNB a fault the appellate court in its finding that there are no
license (although in fact there was none) to sufficient valid justifications aptly shown for the unilateral
increase the interest rate at will during the increases by private respondent bank of the interest rates on
term of the loan, that license would have the loan.
been null and void for being violative of the
principle of mutuality essential in contracts.
WHEREFORE, the, decision of the appellate court is AFFIRMED
It would have invested the loan agreement
subject to the MODIFICATION that private respondent Home
with the character of a contract of adhesion,
Savings Bank and Trust Company shall pay to petitioners the
where the parties do not equal footing the
excess, if any, of the bid price it received from Asaje Realty
weaker party's (the debtor) participation
Corporation for the foreclosed property in question over and
being reduced to the alternative to take it or
above the unpaid balance of the loan computed at the original
leave it'
interest rate. This case is REMANDED to the trial court for the
. . . Such a contract is a veritable trap for
above determination. No costs.
the weaker party whom the courts of justice
must protect against abuse and imposition.
(Citations G.R. No. 168940 November 24, 2009
omitted.) 22
SPS. ISAGANI CASTRO and DIOSDADA CASTRO,
Even if we were to consider that petitioners were bound by vs.
their agreement allowing an increase in the interest rate ANGELINA DE LEON TAN, SPS. CONCEPCION T.
despite the lack of advance notice to them, the escalation CLEMENTE and ALEXANDER C. CLEMENTE, SPS.
should still be subject, as so contractually stipulated, to a ELIZABETH T. CARPIO and ALVIN CARPIO, SPS. MARIE
corresponding increase by the Central Bank of its rediscount ROSE T. SOLIMAN and ARVIN SOLIMAN and JULIUS
rate to member banks, or of the interest rate on savings and AMIEL TAN, Respondents.
time deposit, or of the interest rate on such loans and
advances. The notices sent to petitioners merely read: The imposition of an unconscionable rate of interest on a
money debt, even if knowingly and voluntarily assumed, is
Letter of 19 July 1984: immoral and unjust. It is tantamount to a repugnant spoliation
and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles
Please be informed that the Bank has
of justice, or in the human conscience nor is there any reason
increased the interest rate of your existing
whatsoever which may justify such imposition as righteous
loan from 21 to 30% per annum beginning
and as one that may be sustained within the sphere of public
October 17, 1984. This increase of interest
or private morals.1
rate is in accordance with the provision of
Section 2 of Presidential Decree No.
1684 23 amending Act No. 2655. This In this Petition for Review on Certiorari, 2 petitioners assail the
provision of the decree is reiterated under October 29, 2004 Decision 3 and July 18, 2005 Resolution 4 of
paragraph 1 of your Promissory Note. Your the Court of Appeals (CA) in CA-G.R. CV No. 76842, affirming
quarterly amortization has been increased the June 11, 2002 Decision5 of the Regional Trial Court of
to P104,661.10. Bulacan, Branch 79, which equitably reduced the stipulated
interest rate in an agreement entered into by the parties from
60% per annum (or 5% per month) to 12% per annum, with
We trust that you will be guided
the modification that herein respondents may redeem the
accordingly. 24
mortgaged property notwithstanding the lapse of redemption
period on grounds of equity and substantial justice.
Letter of 14 November 1984:

Factual antecedents
On account of the prevailing business and
economic condition, we are compelled to
Respondent Angelina de Leon Tan, and her husband Ruben
increase the interest rate of your existing
Tan were the former registered owners of a 240-square meter
loan from 30% to 38 % per annum effective
residential lot, situated at Barrio Canalate, Malolos, Bulacan
November 17, 1984. This increase is in
and covered by Transfer Certificate of Title No. T-8540. On
accordance with your agreement (escalation
February 17, 1994, they entered into an agreement with
clause) in your promissory note/s.
petitioners spouses Isagani and Diosdada Castro denominated
as Kasulatan ng Sanglaan ng Lupa at Bahay (Kasulatan) to
In view of this increase in the interest rate of secure a loan of P30,000.00 they obtained from the latter.
your loan, your Quarterly amortization Under the Kasulatan, the spouses Tan undertook to pay the
correspondingly increased to P123,797.05 mortgage debt within six months or until August 17, 1994,
commencing on April 17, 1985. with an interest rate of 5% per month, compounded monthly.
37 | L O A N C r e d i t T r a n s
When her husband died on September 2, 1994, respondent SO ORDERED."8
Tan was left with the responsibility of paying the loan.
However, she failed to pay the same upon maturity. Proceedings before the Court of Appeals
Thereafter, she offered to pay petitioners the principal amount
of P30,000.00 plus a portion of the interest but petitioners
Petitioners appealed to the Court of Appeals which affirmed
refused and instead demanded payment of the total
the trial courts finding that the interest rate stipulated in the
accumulated sum of P359,000.00.
Kasulatan is iniquitous or unconscionable and, thus, its
equitable reduction to the legal rate of 12% per annum is
On February 5, 1999, petitioners caused the extrajudicial warranted.9 At the same time, the appellate court declared
foreclosure of the real estate mortgage and emerged as the that respondents may redeem the mortgaged property
only bidder in the auction sale that ensued. The period of notwithstanding the expiration of the period of redemption, in
redemption expired without respondent Tan having redeemed the interest of substantial justice and equity. 10 The dispositive
the property; thus title over the same was consolidated in portion of said Decision reads:
favor of petitioners. After a writ of possession was issued, the
Sheriff ejected respondents from the property and delivered
WHEREFORE, the appealed judgment is hereby AFFIRMED with
the possession thereof to petitioners.
the MODIFICATION that plaintiffs-appellees may redeem the
mortgaged property by paying the defendants-appellants
Proceedings before the Regional Trial Court spouses Isagani and Diosdada Castro the amount
of P30,000.00, with interest thereon at 12% per annum from
On September 26, 2000, respondent Tan, joined by February 17, 1994 until fully paid plus penalty charges at the
respondents Sps. Concepcion T. Clemente and Alexander C. same rate from February 17, 1994 to June 21, 2000.
Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps.
Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan SO ORDERED.11
filed a Complaint for Nullification of Mortgage and Foreclosure
and/or Partial Rescission of Documents and Damages 6 before
Petitioners Motion for Reconsideration was denied by the
the Regional Trial Court of Malolos, Bulacan. They
Court of Appeals in a Resolution dated July 18, 2005.
alleged, inter alia, that the interest rate imposed on the
principal amount of P30,000.00 is unconscionable.7
Issues
On June 11, 2002, the trial court rendered judgment in favor
of respondents, viz: Hence, the present Petition for Review on Certiorari raising the
following issues:
PREMISES CONSIDERED, this Court cannot declare the
mortgage and foreclosure null and void but the x x x 1. THE COURT OF APPEALS GROSSLY ERRED IN NULLIFYING
Kasulatan ng Sanglaan ng Lupa x x x herebelow quoted: THE INTEREST RATE VOLUNTARILY AGREED UPON BY THE
PETITIONERS AND RESPONDENTS AND EXPRESSLY
STIPULATED IN THE CONTRACT OF MORTGAGE ENTERED INTO
2. Na ang nasabing pagkakautang ay aming babayaran sa
BETWEEN THEM.
loob ng anim (6) na buwan simula sa petsa ng kasulatang ito
o dili kaya ay sa bago dumating ang Agosto 17, 1994 na may
pakinabang na 5% bawat buwan. Na ang tubo ay aani pa rin 2. THE COURT OF APPEALS GROSSLY ERRED IN MAKING A
ng tubong 5% bawat buwan. CONTRACT BETWEEN THE PETITIONERS AND RESPONDENTS
BY UNILATERALLY CHANGING THE TERMS AND CONDITIONS OF
THE CONTRACT OF MORTGAGE ENTERED INTO BETWEEN
Is partially rescinded to only 12% interest per annum and
THEM.
additional one percent a month penalty charges as
liquidated damages beginning February 17, 1994 up to June
21, 2000 per Delivery of Possession x x x and/or for the 3. THE COURT OF APPEALS GROSSLY ERRED IN EXTENDING
defendants to accept the offer of P200,000.00 by the plaintiffs THE PERIOD OF REDEMPTION IN FAVOR OF THE RESPONDENTS
to redeem or reacquire the property in litis. IN VIOLATION OF THE CLEAR AND UNEQUIVOCAL PROVISIONS
OF ACT NO. 3135 PROVIDING A PERIOD OF ONLY ONE YEAR
FOR THE REDEMPTION OF A FORECLOSED REAL PROPERTY.12
The Court is not inclined to award moral damages since
plaintiffs failed to buttress her claim of moral damages and/or
proof of moral damages. x x x Petitioners Arguments

No award of attorneys fees because the general rule is that Petitioners contend that with the removal by the Bangko
no [premium] should be placed on the right to litigate. x x x Sentral of the ceiling on the rate of interest that may be
stipulated in a contract of loan,13 the lender and the borrower
could validly agree on any interest rate on loans. Thus, the
The counterclaim of the defendants is hereby DISMISSED for
Court of Appeals gravely erred when it declared the stipulated
lack of merit.
interest in the Kasulatan as null as if there was no express
stipulation on the compounded interest.14
Costs against the defendants.

38 | L O A N C r e d i t T r a n s
Respondents Arguments loan, which must be complied with in good faith.22 Hence, they
assert that the Court of Appeals should have given due
On the other hand, respondents assert that the appellate respect to the provisions of the Kasulatan.23 They also stress
court correctly struck down the said stipulated interest for that it is a settled principle that the law will not relieve a party
being excessive and contrary to morals, if not against the from the effects of an unwise, foolish or disastrous contract,
law.15 They also point out that a contract has the force of law entered into with all the required formalities and with full
between the parties, but only when the terms, clauses and awareness of what he was doing.24
conditions thereof are not contrary to law, morals, public
order or public policy.16 Petitioners contentions deserve scant consideration. In Abe v.
Foster Wheeler Corporation,25 we held that the freedom of
Our Ruling contract is not absolute. The same is understood to be subject
to reasonable legislative regulation aimed at the promotion of
public health, morals, safety and welfare. One such legislative
The petition lacks merit.
regulation is found in Article 1306 of the Civil Code which
allows the contracting parties to "establish such stipulations,
The Court of Appeals correctly found that the 5% monthly clauses, terms and conditions as they may deem convenient,
interest, compounded monthly, is unconscionable and should provided they are not contrary to law, morals, good customs,
be equitably reduced to the legal rate of 12% per annum. public order or public policy."

While we agree with petitioners that parties to a loan To reiterate, we fully agree with the Court of Appeals in
agreement have wide latitude to stipulate on any interest rate holding that the compounded interest rate of 5% per month,
in view of the Central Bank Circular No. 905 s. 1982 which is iniquitous and unconscionable. Being a void stipulation, it is
suspended the Usury Law ceiling on interest effective January deemed inexistent from the beginning. The debt is to be
1, 1983, it is also worth stressing that interest rates whenever considered without the stipulation of the iniquitous and
unconscionable may still be declared illegal. There is certainly unconscionable interest rate. Accordingly, the legal interest of
nothing in said circular which grants lenders carte blanche 12% per annum must be imposed in lieu of the excessive
authority to raise interest rates to levels which will either interest stipulated in the agreement, in line with our ruling
enslave their borrowers or lead to a hemorrhaging of their in Ruiz v. Court of Appeals,26 thus:
assets.17
The foregoing rates of interests and surcharges are in accord
In several cases, we have ruled that stipulations authorizing with Medel vs. Court of Appeals, Garcia vs. Court of Appeals,
iniquitous or unconscionable interests are contrary to morals, Bautista vs. Pilar Development Corporation, and the recent
if not against the law. In Medel v. Court of Appeals, 18 we case of Spouses Solangon vs. Salazar. This Court invalidated a
annulled a stipulated 5.5% per month or 66% per annum stipulated 5.5% per month or 66% per annum interest on
interest on a P500,000.00 loan and a 6% per month or 72% a P500,000.00 loan in Medel and a 6% per month or 72% per
per annum interest on a P60,000.00 loan, respectively, for annum interest on a P60,000.00 loan in Solangon for being
being excessive, iniquitous, unconscionable and exorbitant. In excessive, iniquitous, unconscionable and exorbitant. In both
Ruiz v. Court of Appeals, 19 we declared a 3% monthly interest cases, we reduced the interest rate to 12% per annum. We
imposed on four separate loans to be excessive. In both held that while the Usury Law has been suspended by Central
cases, the interest rates were reduced to 12% per annum. Bank Circular No. 905, s. 1982, effective on January 1, 1983,
and parties to a loan agreement have been given wide
In this case, the 5% monthly interest rate, or 60% per annum, latitude to agree on any interest rate, still stipulated interest
compounded monthly, stipulated in the Kasulatan is even rates are illegal if they are unconscionable. Nothing in the said
higher than the 3% monthly interest rate imposed in the Ruiz circular grants lenders carte blanche authority to raise
case. Thus, we similarly hold the 5% monthly interest to be interest rates to levels which will either enslave their
excessive, iniquitous, unconscionable and exorbitant, contrary borrowers or lead to a hemorrhaging of their assets. On the
to morals, and the law. It is therefore void ab initio for being other hand, in Bautista vs. Pilar Development Corp., this Court
violative of Article 130620 of the Civil Code. With this, and in upheld the validity of a 21% per annum interest on
accord with the Medel and Ruiz cases, we hold that the Court a P142,326.43 loan, and in Garcia vs. Court of Appeals,
of Appeals correctly imposed the legal interest of 12% per sustained the agreement of the parties to a 24% per annum
annum in place of the excessive interest stipulated in interest on an P8,649,250.00 loan. It is on the basis of these
the Kasulatan. cases that we reduce the 36% per annum interest to 12%. An
interest of 12% per annum is deemed fair and reasonable.
While it is true that this Court invalidated a much higher
The Court of Appeals did not unilaterally change the terms
interest rate of 66% per annum in Medel and 72% in Solangon
and conditions of the Contract of Mortgage entered into
it has sustained the validity of a much lower interest rate of
between the petitioners and the respondents.
21% in Bautista and 24% in Garcia. We still find the 36% per
annum interest rate in the case at bar to be substantially
Petitioners allege that the Kasulatan was entered into by the greater than those upheld by this Court in the two (2)
parties freely and voluntarily.21 They maintain that there was aforecited cases. (Emphasis supplied, citations omitted)
already a meeting of the minds between the parties as
regards the principal amount of the loan, the interest thereon
From the foregoing, it is clear that there is no unilateral
and the property given as security for the payment of the
alteration of the terms and conditions of the Kasulatan

39 | L O A N C r e d i t T r a n s
entered into by the parties. Surely, it is more consonant with It is undisputed that sometime after the maturity of the loan,
justice that the subject interest rate be equitably reduced and respondent Tan attempted to pay the mortgage debt
the legal interest of 12% per annum is deemed fair and of P30,000.00 as principal and some interest. Said offer was
reasonable.27 refused by petitioners because they demanded payment of
the total accumulated amount of P359,000.00.34 Moreover,
The additional 1% per month penalty awarded as liquidated the trial court also mentioned an offer by respondent Tan of
damages does not have any legal basis. the amount of P200,000.00 to petitioners in order for her to
redeem or re-acquire the property in litis.35

In its June 11, 2002 Decision, 28 the trial court granted an


additional 1% per month penalty as liquidated From these, it is evident that despite considerable effort on
damages29 beginning February 17, 1994 up to June 21, her part, respondent Tan failed to redeem the mortgaged
2000.30 Since respondents did not file their appellees brief property because she was unable to raise the total amount
despite notice, the appellate court declared this to be not in of P359,000.00, an amount grossly inflated by the excessive
issue.31 interest imposed. Thus, it is only proper that respondents be
given the opportunity to repay the real amount of their
indebtedness.
Although the issue of the liquidated damages was not
presented squarely in either Memorandum of the parties, this
does not prevent us from ruling on the matter. In the exercise In the case of Heirs of Zoilo Espiritu v. Landrito, 36 which is on
of our appellate jurisdiction, we are clothed with ample all fours with the instant case, we held that:
authority to review findings and rulings of lower courts even if
they are not assigned as errors. This is especially so if we find Since the Spouses Landrito, the debtors in this case, were not
that their consideration is necessary in arriving at a just given an opportunity to settle their debt, at the correct
decision of the case. We have consistently held that an amount and without the iniquitous interest imposed, no
unassigned error closely related to an error properly assigned, foreclosure proceedings may be instituted. A judgment
or upon which a determination of the question raised by the ordering a foreclosure sale is conditioned upon a finding on
error properly assigned is dependent, will be considered the correct amount of the unpaid obligation and the failure of
notwithstanding the failure to assign it as an error. 32 On this the debtor to pay the said amount. In this case, it has not yet
premise, we deem it proper to pass upon the matter of been shown that the Spouses Landrito had already failed to
liquidated damages. pay the correct amount of the debt and, therefore, a
foreclosure sale cannot be conducted in order to answer for
Article 2226 of the Civil Code provides that "[L]iquidated the unpaid debt. The foreclosure sale conducted upon their
damages are those agreed upon by the parties to a contract, failure to pay P874,125.00 in 1990 should be nullified since
to be paid in case of breach thereof." the amount demanded as the outstanding loan was
overstated; consequently it has not been shown that the
mortgagors the Spouses Landrito, have failed to pay their
In the instant case, a cursory reading of the Kasulatan would
outstanding obligation. x x x
show that it is devoid of any stipulation with respect to
liquidated damages. Neither did any of the parties allege or
prove the existence of any agreement on liquidated damages. As a result, the subsequent registration of the foreclosure sale
Hence, for want of any stipulation on liquidated damages in cannot transfer any rights over the mortgaged property to the
the Kasulatan entered into by the parties, we hold that the Spouses Espiritu. The registration of the foreclosure sale,
liquidated damages awarded by the trial court and affirmed herein declared invalid, cannot vest title over the mortgaged
by the Court of Appeals to be without legal basis and must be property. x x x (Emphasis supplied)
deleted.
On this basis, we nullify the foreclosure proceedings held on
The foreclosure proceedings held on March 3, 1999 cannot be March 3, 1999 since the amount demanded as the
given effect. outstanding loan was overstated. Consequently, it has not
been shown that the respondents have failed to pay the
correct amount of their outstanding obligation. Accordingly,
The Court of Appeals modified the judgment of the trial court
we declare the registration of the foreclosure sale invalid and
by holding that respondents, in the interest of substantial
cannot vest title over the mortgaged property.
justice and equity, may redeem the mortgaged property
notwithstanding the lapse of the period of redemption.
Anent the allegation of petitioners that the Court of Appeals
erred in extending the period of redemption, same has been
Petitioners argue that this cannot be done because the right
rendered moot in view of the nullification of the foreclosure
of redemption had long expired and same is no longer
proceedings.
possible beyond the one-year period provided under Act No.
3135.33
WHEREFORE, the instant petition is DENIED. The assailed
Decision of the Court of Appeals dated October 29, 2004 as
On the other hand, respondents insist that to disallow them to
well as the Resolution dated July 18, 2005
redeem the property would render meaningless the
are AFFIRMED with the MODIFICATION that the award of
declaration that the stipulated interest is null and void.
1% liquidated damages per month be DELETED and that
petitioners are ORDERED to reconvey the subject property to

40 | L O A N C r e d i t T r a n s
respondents conditioned upon the payment of the loan could not validly collect interest on the loan because there
together with the rate of interest fixed herein. was no agreement between her and petitioner regarding
payment of interest. Since she paid petitioner a total amount
G.R. No. 173227 January 20, 2009 of P1,200,000.00 for the P540,000.00 worth of loan, and upon
being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for
SEBASTIAN SIGA-AN, Petitioner,
the return of the excess amount of P660,000.00. Petitioner,
vs.
despite receipt of the demand letter, ignored her claim for
ALICIA VILLANUEVA, Respondent.
reimbursement.8

Before Us is a Petition1 for Review on Certiorari under Rule 45


Respondent prayed that the RTC render judgment ordering
of the Rules of Court seeking to set aside the Decision, 2 dated
petitioner to pay respondent (1) P660,000.00 plus legal
16 December 2005, and Resolution, 3 dated 19 June 2006 of
interest from the time of demand; (2) P300,000.00 as moral
the Court of Appeals in CA-G.R. CV No. 71814, which affirmed
damages; (3) P50,000.00 as exemplary damages; and (4) an
in toto the Decision,4 dated 26 January 2001, of the Las Pinas
amount equivalent to 25% of P660,000.00 as attorneys fees.9
City Regional Trial Court, Branch 255, in Civil Case No. LP-98-
0068.
In his answer10 to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992,
The facts gathered from the records are as follows:
respondent approached and asked him if he could grant her a
loan, as she needed money to finance her business venture
On 30 March 1998, respondent Alicia Villanueva filed a with the PNO. At first, he was reluctant to deal with
complaint5 for sum of money against petitioner Sebastian respondent, because the latter had a spotty record as a
Siga-an before the Las Pinas City Regional Trial Court (RTC), supplier of the PNO. However, since respondent was an
Branch 255, docketed as Civil Case No. LP-98-0068. acquaintance of his officemate, he agreed to grant her a loan.
Respondent alleged that she was a businesswoman engaged Respondent paid the loan in full.11
in supplying office materials and equipments to the Philippine
Navy Office (PNO) located at Fort Bonifacio, Taguig City, while
Subsequently, respondent again asked him to give her a loan.
petitioner was a military officer and comptroller of the PNO
As respondent had been able to pay the previous loan in full,
from 1991 to 1996.
he agreed to grant her another loan. Later, respondent
requested him to restructure the payment of the loan because
Respondent claimed that sometime in 1992, petitioner she could not give full payment on the due date. He acceded
approached her inside the PNO and offered to loan her the to her request. Thereafter, respondent pleaded for another
amount of P540,000.00. Since she needed capital for her restructuring of the payment of the loan. This time he rejected
business transactions with the PNO, she accepted petitioners her plea. Thus, respondent proposed to execute a promissory
proposal. The loan agreement was not reduced in writing. note wherein she would acknowledge her obligation to him,
Also, there was no stipulation as to the payment of interest for inclusive of interest, and that she would issue several
the loan.6 postdated checks to guarantee the payment of her obligation.
Upon his approval of respondents request for restructuring of
On 31 August 1993, respondent issued a check the loan, respondent executed a promissory note dated 12
worth P500,000.00 to petitioner as partial payment of the September 1994 wherein she admitted having borrowed an
loan. On 31 October 1993, she issued another check in the amount of P1,240,000.00, inclusive of interest, from petitioner
amount of P200,000.00 to petitioner as payment of the and that she would pay said amount in March 1995.
remaining balance of the loan. Petitioner told her that since Respondent also issued to him six postdated checks
she paid a total amount of P700,000.00 for the P540,000.00 amounting to P1,240,000.00 as guarantee of compliance with
worth of loan, the excess amount of P160,000.00 would be her obligation. Subsequently, he presented the six checks for
applied as interest for the loan. Not satisfied with the amount encashment but only one check was honored. He demanded
applied as interest, petitioner pestered her to pay additional that respondent settle her obligation, but the latter failed to
interest. Petitioner threatened to block or disapprove her do so. Hence, he filed criminal cases for Violation of the
transactions with the PNO if she would not comply with his Bouncing Checks Law (Batas Pambansa Blg. 22) against
demand. As all her transactions with the PNO were subject to respondent. The cases were assigned to the Metropolitan Trial
the approval of petitioner as comptroller of the PNO, and Court of Makati City, Branch 65 (MeTC).12
fearing that petitioner might block or unduly influence the
payment of her vouchers in the PNO, she conceded. Thus, she Petitioner insisted that there was no overpayment because
paid additional amounts in cash and checks as interests for respondent admitted in the latters promissory note that her
the loan. She asked petitioner for receipt for the payments but monetary obligation as of 12 September 1994 amounted
petitioner told her that it was not necessary as there was to P1,240,000.00 inclusive of interests. He argued that
mutual trust and confidence between them. According to her respondent was already estopped from complaining that she
computation, the total amount she paid to petitioner for the should not have paid any interest, because she was given
loan and interest accumulated to P1,200,000.00.7 several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount
Thereafter, respondent consulted a lawyer regarding the to concluding that the loan was given interest-free. Based on
propriety of paying interest on the loan despite absence of the foregoing averments, he asked the RTC to dismiss
agreement to that effect. Her lawyer told her that petitioner respondents complaint.

41 | L O A N C r e d i t T r a n s
After trial, the RTC rendered a Decision on 26 January 2001 II.
holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING
excess amount to the former. It ratiocinated that respondents THE PRINCIPLE OF SOLUTIO INDEBITI.17
obligation was only to pay the loaned amount of P540,000.00,
and that the alleged interests due should not be included in
Interest is a compensation fixed by the parties for the use or
the computation of respondents total monetary debt because
forbearance of money. This is referred to as monetary interest.
there was no agreement between them regarding payment of
Interest may also be imposed by law or by courts as penalty
interest. It concluded that since respondent made an excess
or indemnity for damages. This is called compensatory
payment to petitioner in the amount of P660,000.00 through
interest.18 The right to interest arises only by virtue of a
mistake, petitioner should return the said amount to
contract or by virtue of damages for delay or failure to pay the
respondent pursuant to the principle of solutio indebiti.13
principal loan on which interest is demanded.19

The RTC also ruled that petitioner should pay moral damages
Article 1956 of the Civil Code, which refers to monetary
for the sleepless nights and wounded feelings experienced by
interest,20 specifically mandates that no interest shall be due
respondent. Further, petitioner should pay exemplary
unless it has been expressly stipulated in writing. As can be
damages by way of example or correction for the public good,
gleaned from the foregoing provision, payment of monetary
plus attorneys fees and costs of suit.
interest is allowed only if: (1) there was an express stipulation
for the payment of interest; and (2) the agreement for the
The dispositive portion of the RTC Decision reads: payment of interest was reduced in writing. The concurrence
of the two conditions is required for the payment of monetary
WHEREFORE, in view of the foregoing evidence and in the interest. Thus, we have held that collection of interest without
light of the provisions of law and jurisprudence on the matter, any stipulation therefor in writing is prohibited by law.21
judgment is hereby rendered in favor of the plaintiff and
against the defendant as follows: It appears that petitioner and respondent did not agree on the
payment of interest for the loan. Neither was there convincing
(1) Ordering defendant to pay plaintiff the amount proof of written agreement between the two regarding the
of P660,000.00 plus legal interest of 12% per annum payment of interest. Respondent testified that although she
computed from 3 March 1998 until the amount is accepted petitioners offer of loan amounting to P540,000.00,
paid in full; there was, nonetheless, no verbal or written agreement for
her to pay interest on the loan.22
(2) Ordering defendant to pay plaintiff the amount
of P300,000.00 as moral damages; Petitioner presented a handwritten promissory note dated 12
September 199423 wherein respondent purportedly admitted
(3) Ordering defendant to pay plaintiff the amount owing petitioner "capital and interest." Respondent, however,
of P50,000.00 as exemplary damages; explained that it was petitioner who made a promissory note
and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of
(4) Ordering defendant to pay plaintiff the amount
petitioner as comptroller of the PNO; that petitioner
equivalent to 25% of P660,000.00 as attorneys fees;
threatened to disapprove her transactions with the PNO if she
and
would not pay interest; that being unaware of the law on
interest and fearing that petitioner would make good of his
(5) Ordering defendant to pay the costs of suit. 14 threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own
Petitioner appealed to the Court of Appeals. On 16 December handwriting; and that such was the same promissory note
2005, the appellate court promulgated its Decision presented by petitioner as alleged proof of their written
affirming in toto the RTC Decision, thus: agreement on interest.24 Petitioner did not rebut the foregoing
testimony. It is evident that respondent did not really consent
to the payment of interest for the loan and that she was
WHEREFORE, the foregoing considered, the instant appeal is
merely tricked and coerced by petitioner to pay interest.
hereby DENIED and the assailed decision [is] AFFIRMED in
Hence, it cannot be gainfully said that such promissory note
toto.15
pertains to an express stipulation of interest or written
agreement of interest on the loan between petitioner and
Petitioner filed a motion for reconsideration of the appellate respondent.
courts decision but this was denied. 16 Hence, petitioner
lodged the instant petition before us assigning the following
Petitioner, nevertheless, claims that both the RTC and the
errors:
Court of Appeals found that he and respondent agreed on the
payment of 7% rate of interest on the loan; that the agreed
I. 7% rate of interest was duly admitted by respondent in her
testimony in the Batas Pambansa Blg. 22 cases he filed
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT against respondent; that despite such judicial admission by
NO INTEREST WAS DUE TO PETITIONER; respondent, the RTC and the Court of Appeals, citing Article

42 | L O A N C r e d i t T r a n s
1956 of the Civil Code, still held that no interest was due him defaulted in paying the loan. Also, as earlier found, no interest
since the agreement on interest was not reduced in writing; was due on the loan because there was no written agreement
that the application of Article 1956 of the Civil Code should as regards payment of interest.
not be absolute, and an exception to the application of such
provision should be made when the borrower admits that a Apropos the second assigned error, petitioner argues that the
specific rate of interest was agreed upon as in the present principle of solutio indebiti does not apply to the instant case.
case; and that it would be unfair to allow respondent to pay Thus, he cannot be compelled to return the alleged excess
only the loan when the latter very well knew and even amount paid by respondent as interest.30
admitted in the Batas Pambansa Blg. 22 cases that there was
an agreed 7% rate of interest on the loan.25
Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor, the
We have carefully examined the RTC Decision and found that provisions of the Civil Code concerning solutio indebiti shall be
the RTC did not make a ruling therein that petitioner and applied. Article 2154 of the Civil Code explains the principle
respondent agreed on the payment of interest at the rate of of solutio indebiti. Said provision provides that if something is
7% for the loan. The RTC clearly stated that although received when there is no right to demand it, and it was
petitioner and respondent entered into a valid oral contract of unduly delivered through mistake, the obligation to return it
loan amounting to P540,000.00, they, nonetheless, never arises. In such a case, a creditor-debtor relationship is created
intended the payment of interest thereon. 26 While the Court of under a quasi-contract whereby the payor becomes the
Appeals mentioned in its Decision that it concurred in the creditor who then has the right to demand the return of
RTCs ruling that petitioner and respondent agreed on a payment made by mistake, and the person who has no right
certain rate of interest as regards the loan, we consider this as to receive such payment becomes obligated to return the
merely an inadvertence because, as earlier elucidated, both same. The quasi-contract of solutio indebiti harks back to the
the RTC and the Court of Appeals ruled that petitioner is not ancient principle that no one shall enrich himself unjustly at
entitled to the payment of interest on the loan. The rule is the expense of another.31 The principle of solutio
that factual findings of the trial court deserve great weight indebiti applies where (1) a payment is made when there
and respect especially when affirmed by the appellate exists no binding relation between the payor, who has no duty
court.27 We found no compelling reason to disturb the ruling of to pay, and the person who received the payment; and (2) the
both courts. payment is made through mistake, and not through liberality
or some other cause.32 We have held that the principle
Petitioners reliance on respondents alleged admission in the of solutio indebiti applies in case of erroneous payment of
Batas Pambansa Blg. 22 cases that they had agreed on the undue interest.33
payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified It was duly established that respondent paid interest to
that after paying the total amount of loan, petitioner ordered petitioner. Respondent was under no duty to make such
her to pay interest.28 Respondent did not categorically declare payment because there was no express stipulation in writing
in the same case that she and respondent made to that effect. There was no binding relation between
an express stipulation in writing as regards payment of petitioner and respondent as regards the payment of interest.
interest at the rate of 7%. As earlier discussed, monetary The payment was clearly a mistake. Since petitioner received
interest is due only if there was an express stipulation in something when there was no right to demand it, he has an
writing for the payment of interest. obligation to return it.

There are instances in which an interest may be imposed even We shall now determine the propriety of the monetary award
in the absence of express stipulation, verbal or written, and damages imposed by the RTC and the Court of Appeals.
regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum
Records show that respondent received a loan amounting
of money, and the debtor incurs delay, a legal interest of 12%
to P540,000.00 from petitioner.34 Respondent issued two
per annum may be imposed as indemnity for damages if no
checks with a total worth of P700,000.00 in favor of petitioner
stipulation on the payment of interest was agreed upon.
as payment of the loan. 35 These checks were subsequently
Likewise, Article 2212 of the Civil Code provides that interest
encashed by petitioner.36 Obviously, there was an excess
due shall earn legal interest from the time it is judicially
of P160,000.00 in the payment for the loan. Petitioner claims
demanded, although the obligation may be silent on this
that the excess of P160,000.00 serves as interest on the loan
point.
to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount
All the same, the interest under these two instances may be of P175,000.00 to petitioner as interest.37 Although no receipts
imposed only as a penalty or damages for breach of reflecting the same were presented because petitioner
contractual obligations. It cannot be charged as a refused to issue such to respondent, petitioner, nonetheless,
compensation for the use or forbearance of money. In other admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22
words, the two instances apply only to compensatory interest cases that respondent paid him a total amount of P175,000.00
and not to monetary interest.29 The case at bar involves cash in addition to the two checks. Section 26 Rule 130 of the
petitioners claim for monetary interest. Rules of Evidence provides that the declaration of a party as
to a relevant fact may be given in evidence against him. Aside
Further, said compensatory interest is not chargeable in the from the amounts of P160,000.00 and P175,000.00 paid as
instant case because it was not duly proven that respondent interest, no other proof of additional payment as interest was
43 | L O A N C r e d i t T r a n s
presented by respondent. Since we have previously found that that she agreed to compensate her lawyer handling the
petitioner is not entitled to payment of interest and that the instant case such amount.44 The award, therefore, of
principle of solutio indebiti applies to the instant case, attorneys fees and its amount equivalent to 25% of the
petitioner should return to respondent the excess amount amount paid as interest by respondent to petitioner is proper.
of P160,000.00 and P175,000.00 or the total amount
of P335,000.00. Accordingly, the reimbursable amount to Finally, the RTC and the Court of Appeals imposed a 12% rate
respondent fixed by the RTC and the Court of Appeals should of legal interest on the amount refundable to respondent
be reduced from P660,000.00 to P335,000.00. computed from 3 March 1998 until its full payment. This is
erroneous.
As earlier stated, petitioner filed five (5) criminal cases for
violation of Batas Pambansa Blg. 22 against respondent. In We held in Eastern Shipping Lines, Inc. v. Court of
the said cases, the MeTC found respondent guilty of violating Appeals,45 that when an obligation, not constituting a loan or
Batas Pambansa Blg. 22 for issuing five dishonored checks to forbearance of money is breached, an interest on the amount
petitioner. Nonetheless, respondents conviction therein does of damages awarded may be imposed at the rate of 6% per
not affect our ruling in the instant case. The two checks, annum. We further declared that when the judgment of the
subject matter of this case, totaling P700,000.00 which court awarding a sum of money becomes final and executory,
respondent claimed as payment of the P540,000.00 worth of the rate of legal interest, whether it is a loan/forbearance of
loan, were not among the five checks found to be dishonored money or not, shall be 12% per annum from such finality until
or bounced in the five criminal cases. Further, the MeTC found its satisfaction, this interim period being deemed equivalent
that respondent made an overpayment of the loan by reason to a forbearance of credit.
of the interest which the latter paid to petitioner.39

In the present case, petitioners obligation arose from a quasi-


Article 2217 of the Civil Code provides that moral damages contract of solutio indebiti and not from a loan or forbearance
may be recovered if the party underwent physical suffering, of money. Thus, an interest of 6% per annum should be
mental anguish, fright, serious anxiety, besmirched imposed on the amount to be refunded as well as on the
reputation, wounded feelings, moral shock, social humiliation damages awarded and on the attorneys fees, to be computed
and similar injury. Respondent testified that she experienced from the time of the extra-judicial demand on 3 March
sleepless nights and wounded feelings when petitioner 1998,46 up to the finality of this Decision. In addition, the
refused to return the amount paid as interest despite her interest shall become 12% per annum from the finality of this
repeated demands. Hence, the award of moral damages is Decision up to its satisfaction.
justified. However, its corresponding amount of P300,000.00,
as fixed by the RTC and the Court of Appeals, is exorbitant and
WHEREFORE, the Decision of the Court of Appeals in CA-G.R.
should be equitably reduced. Article 2216 of the Civil Code
CV No. 71814, dated 16 December 2005, is
instructs that assessment of damages is left to the discretion
hereby AFFIRMED with the following MODIFICATIONS: (1)
of the court according to the circumstances of each case. This
the amount of P660,000.00 as refundable amount of interest
discretion is limited by the principle that the amount awarded
is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
should not be palpably excessive as to indicate that it was the
PESOS (P335,000.00); (2) the amount of P300,000.00 imposed
result of prejudice or corruption on the part of the trial
as moral damages is reduced to ONE HUNDRED FIFTY
court.40 To our mind, the amount of P150,000.00 as moral
THOUSAND PESOS (P150,000.00); (3) an interest of 6% per
damages is fair, reasonable, and proportionate to the injury
annum is imposed on the P335,000.00, on the damages
suffered by respondent.
awarded and on the attorneys fees to be computed from the
time of the extra-judicial demand on 3 March 1998 up to the
Article 2232 of the Civil Code states that in a quasi-contract, finality of this Decision; and (4) an interest of 12% per annum
such as solutio indebiti, exemplary damages may be imposed is also imposed from the finality of this Decision up to its
if the defendant acted in an oppressive manner. Petitioner satisfaction. Costs against petitioner.
acted oppressively when he pestered respondent to pay
interest and threatened to block her transactions with the PNO
G.R. No. 116285 October 19, 2001
if she would not pay interest. This forced respondent to pay
interest despite lack of agreement thereto. Thus, the award of
exemplary damages is appropriate. The amount of P50,000.00 ANTONIO TAN, petitioner,
imposed as exemplary damages by the RTC and the Court is vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE
fitting so as to deter petitioner and other lenders from
PHILIPPINES, respondents.
committing similar and other serious wrongdoings.41

Before us is a petition for review of the Decision 1 dated August


Jurisprudence instructs that in awarding attorneys fees, the 31, 1993 and Resolution2 dated July 13, 1994 of the Court of
trial court must state the factual, legal or equitable Appeals affirming the Decision 3 dated May 8, 1991 of the
justification for awarding the same.42 In the case under Regional Trial Court (RTC) of Manila, Branch 27.
consideration, the RTC stated in its Decision that the award of
attorneys fees equivalent to 25% of the amount paid as The facts are as follows:
interest by respondent to petitioner is reasonable and
moderate considering the extent of work rendered by On May 14, 1978 and July 6, 1978, petitioner Antonio Tan
respondents lawyer in the instant case and the fact that it obtained two (2) loans each in the principal amount of Two
dragged on for several years.43 Further, respondent testified Million Pesos (P2,000,000.00), or in the total principal amount

44 | L O A N C r e d i t T r a n s
of Four Million Pesos (P4,000,000.00) from respondent Cultural Wilson Lucmen for the reason that the defense propounded
Center of the Philippines (CCP, for brevity) evidenced by two was not credible in itself. Second, assuming, arguendo, that
(2) promissory notes with maturity dates on May 14, 1979 and the petitioner did not personally benefit from the said loan, he
July 6, 1979, respectively. Petitioner defaulted but after a few should have filed a third party complaint against Wilson
partial payments he had the loans restructured by respondent Lucmen, the alleged accommodated party but he did not.
CCP, and petitioner accordingly executed a promissory note Third, for three (3) times the petitioner offered to settle his
(Exhibit "A") on August 31, 1979 in the amount of Three loan obligation with respondent CCP. Fourth, petitioner may
Million Four Hundred Eleven Thousand Four Hundred Twenty- not avoid his liability to pay his obligation under the
One Pesos and Thirty-Two Centavos (P3,411,421.32) payable promissory note (Exh. "A") which he must comply with in good
in five (5) installments. Petitioner Tan failed to pay any faith pursuant to Article 1159 of the New Civil Code. Fifth,
installment on the said restructured loan of Three Million Four petitioner is estopped from denying his liability or loan
Hundred Eleven Thousand Four Hundred Twenty-One Pesos obligation to the private respondent.
and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January
The petitioner appealed the decision of the trial court to the
26, 1982, petitioner requested and proposed to respondent
Court of Appeals insofar as it charged interest, surcharges,
CCP a mode of paying the restructured loan, i.e., (a) twenty
attorneys fees and exemplary damages against the
percent (20%) of the principal amount of the loan upon the
petitioner. In his appeal, the petitioner asked for the reduction
respondent giving its conformity to his proposal; and (b) the
of the penalties and charges on his loan obligation. He
balance on the principal obligation payable in thirty-six (36)
abandoned his alleged defense in the trial court that he
equal monthly installments until fully paid. On October 20,
merely accommodated his friend, Wilson Lucmen, in obtaining
1983, petitioner again sent a letter to respondent CCP
the loan, and instead admitted the validity of the same. On
requesting for a moratorium on his loan obligation until the
August 31, 1993, the appellate court rendered a decision, the
following year allegedly due to a substantial deduction in the
dispositive portion of which reads:
volume of his business and on account of the peso
devaluation. No favorable response was made to said letters.
Instead, respondent CCP, through counsel, wrote a letter WHEREFORE, with the foregoing modification, the
dated May 30, 1984 to the petitioner demanding full payment, judgment appealed from is hereby AFFIRMED.
within ten (10) days from receipt of said letter, of the
petitioners restructured loan which as of April 30, 1984
SO ORDERED.5
amounted to Six Million Eighty-Eight Thousand Seven Hundred
Thirty-Five Pesos and Three Centavos (P6,088,735.03).
In affirming the decision of the trial court imposing surcharges
and interest, the appellate court held that:
On August 29, 1984, respondent CCP filed in the RTC of Manila
a complaint for collection of a sum of money, docketed as
Civil Case No. 84-26363, against the petitioner after the latter We are unable to accept appellants (petitioners)
failed to settle his said restructured loan obligation. The claim for modification on the basis of alleged partial
petitioner interposed the defense that he merely or irregular performance, there being none.
accommodated a friend, Wilson Lucmen, who allegedly asked Appellants offer or tender of payment cannot be
for his help to obtain a loan from respondent CCP. Petitioner deemed as a partial or irregular performance of the
claimed that he has not been able to locate Wilson Lucmen. contract, not a single centavo appears to have been
While the case was pending in the trial court, the petitioner paid by the defendant.
filed a Manifestation wherein he proposed to settle his
indebtedness to respondent CCP by proposing to make a down
However, the appellate court modified the decision of the trial
payment of One Hundred Forty Thousand Pesos (P140,000.00)
court by deleting the award for exemplary damages and
and to issue twelve (12) checks every beginning of the year to
reducing the amount of awarded attorneys fees to five
cover installment payments for one year, and every year
percent (5%), by ratiocinating as follows:
thereafter until the balance is fully paid. However, respondent
CCP did not agree to the petitioners proposals and so the trial
of the case ensued. Given the circumstances of the case, plus the fact
that plaintiff was represented by a government
lawyer, We believe the award of 25% as attorneys
On May 8, 1991, the trial court rendered a decision, the
fees and P500,000.00 as exemplary damages is out
dispositive portion of which reads:
of proportion to the actual damage caused by the
non-performance of the contract and is excessive,
WHEREFORE, judgment is hereby rendered in favor of unconscionable and iniquitous.
plaintiff and against defendant, ordering defendant
to pay plaintiff, the amount of P7,996,314.67,
In a Resolution dated July 13, 1994, the appellate court denied
representing defendants outstanding account as of
the petitioners motion for reconsideration of the said
August 28, 1986, with the corresponding stipulated
decision.
interest and charges thereof, until fully paid, plus
attorneys fees in an amount equivalent to 25% of
said outstanding account, plus P50,000.00, as Hence, this petition anchored on the following assigned errors:
exemplary damages, plus costs.
I
Defendants counterclaims are ordered dismissed, for
lack of merit.
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE
IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL
SO ORDERED.4 COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.

The trial court gave five (5) reasons in ruling in favor of II


respondent CCP. First, it gave little weight to the petitioners
contention that the loan was merely for the accommodation of
45 | L O A N C r e d i t T r a n s
THE HONORABLE COURT OF APPEALS ERRED IN NOT With interest at the rate of FOURTEEN per cent (14%)
SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF per annum from the date hereof until paid. PLUS
TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST THREE PERCENT (3%) SERVICE CHARGE.
PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH
THE COMMISSION ON AUDIT AND THE OFFICE OF THE
In case of non-payment of this note at maturity/on
PRESIDENT.
demand or upon default of payment of any portion of
it when due, I/We jointly and severally agree to
III pay additional penalty charges at the rate of TWO
per cent (2%) per month on the total amount due
until paid, payable and computed monthly. Default of
THE HONORABLE COURT OF APPEALS ERRED IN NOT
payment of this note or any portion thereof when due
DELETING AWARD OF ATTORNEYS FEES AND IN REDUCING
shall render all other installments and all existing
PENALTIES.
promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately
Significantly, the petitioner does not question his liability for due and demandable. (Underscoring supplied)
his restructured loan under the promissory note marked
Exhibit "A". The first question to be resolved in the case at bar
xxx xxx xxx
is whether there are contractual and legal bases for the
imposition of the penalty, interest on the penalty and
attorneys fees. The stipulated fourteen percent (14%) per annum interest
charge until full payment of the loan constitutes the monetary
interest on the note and is allowed under Article 1956 of the
The petitioner imputes error on the part of the appellate court
New Civil Code.7 On the other hand, the stipulated two
in not totally eliminating the award of attorneys fees and in
percent (2%) per month penalty is in the form of penalty
not reducing the penalties considering that the petitioner,
charge which is separate and distinct from the monetary
contrary to the appellate courts findings, has allegedly made
interest on the principal of the loan.
partial payments on the loan. And if penalty is to be awarded,
the petitioner is asking for the non-imposition of interest on
the surcharges inasmuch as the compounding of interest on Penalty on delinquent loans may take different forms.
surcharges is not provided in the promissory note marked In Government Service Insurance System v. Court of
Exhibit "A". The petitioner takes exception to the computation Appeals,8 this Court has ruled that the New Civil Code permits
of the private respondent whereby the interest, surcharge and an agreement upon a penalty apart from the monetary
the principal were added together and that on the total sum interest. If the parties stipulate this kind of agreement, the
interest was imposed. Petitioner also claims that there is no penalty does not include the monetary interest, and as such
basis in law for the charging of interest on the surcharges for the two are different and distinct from each other and may be
the reason that the New Civil Code is devoid of any provision demanded separately. Quoting Equitable Banking Corp. v.
allowing the imposition of interest on surcharges. Liwanag,9 the GSIS case went on to state that such a
stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned
We find no merit in the petitioners contention. Article 1226 of
by law, more particularly under Article 2209 of the New Civil
the New Civil Code provides that:
Code which provides that:

In obligations with a penal clause, the penalty shall


If the obligation consists in the payment of a sum of
substitute the indemnity for damages and the
money, and the debtor incurs in delay, the indemnity
payment of interests in case of non-compliance, if
for damages, there being no stipulation to the
there is no stipulation to the contrary. Nevertheless,
contrary, shall be the payment of the interest agreed
damages shall be paid if the obligor refuses to pay
upon, and in the absence of stipulation, the legal
the penalty or is guilty of fraud in the fulfillment of
interest, which is six per cent per annum.
the obligation.

The penalty charge of two percent (2%) per month in the case
The penalty may be enforced only when it is
at bar began to accrue from the time of default by the
demandable in accordance with the provisions of this
petitioner. There is no doubt that the petitioner is liable for
Code.
both the stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also called penalty or
In the case at bar, the promissory note (Exhibit "A") expressly compensatory interest. Having clarified the same, the next
provides for the imposition of both interest and penalties in issue to be resolved is whether interest may accrue on the
case of default on the part of the petitioner in the payment of penalty or compensatory interest without violating the
the subject restructured loan. The pertinent6 portion of the provisions of Article 1959 of the New Civil Code, which
promissory note (Exhibit "A") imposing interest and penalties provides that:
provides that:
Without prejudice to the provisions of Article 2212,
For value received, I/We jointly and severally promise to pay interest due and unpaid shall not earn interest.
to the CULTURAL CENTER OF THE PHILIPPINES at its office in However, the contracting parties may by stipulation
Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN capitalize the interest due and unpaid, which as
THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) added principal, shall earn new interest.
Philippine Currency, xxx.
According to the petitioner, there is no legal basis for the
xxx xxx xxx imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty. He claims
that since there is no law that allows imposition of interest on
penalties, the penalties should not earn interest. But as we
46 | L O A N C r e d i t T r a n s
have already explained, penalty clauses can be in the form of The said statement of account also shows that the above
penalty or compensatory interest. Thus, the compounding of amounts stated therein are net of the partial payments
the penalty or compensatory interest is sanctioned by and amounting to a total of Four Hundred Fifty-Two Thousand Five
allowed pursuant to the above-quoted provision of Article Hundred Sixty-One Pesos and Forty-Three Centavos
1959 of the New Civil Code considering that: (P452,561.43) which were made during the period from May
13, 1983 to September 30, 1983.14 The petitioner now seeks
the reduction of the penalty due to the said partial payments.
First, there is an express stipulation in the promissory note
The principal amount of the promissory note (Exhibit "A") was
(Exhibit "A") permitting the compounding of interest. The fifth
Three Million Four Hundred Eleven Thousand Four Hundred
paragraph of the said promissory note provides that: "Any
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32)
interest which may be due if not paid shall be added to the
when the loan was restructured on August 31, 1979. As of
total amount when due and shall become part thereof, the
August 28, 1986, the principal amount of the said restructured
whole amount to bear interest at the maximum rate allowed
loan has been reduced to Two Million Eight Hundred Thirty-
by law."10 Therefore, any penalty interest not paid, when due,
Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight
shall earn the legal interest of twelve percent (12%) per
Centavos (P2,838,454.68). Thus, petitioner contends that
annum,11 in the absence of express stipulation on the specific
reduction of the penalty is justifiable pursuant to Article 1229
rate of interest, as in the case at bar.
of the New Civil Code which provides that: "The judge shall
equitably reduce the penalty when the principal obligation
Second, Article 2212 of the New Civil Code provides that has been partly or irregularly complied with by the debtor.
"Interest due shall earn legal interest from the time it is Even if there has been no performance, the penalty may also
judicially demanded, although the obligation may be silent be reduced by the courts if it is iniquitous or unconscionable."
upon this point." In the instant case, interest likewise began to Petitioner insists that the penalty should be reduced to ten
run on the penalty interest upon the filing of the complaint in percent (10%) of the unpaid debt in accordance
court by respondent CCP on August 29, 1984. Hence, the with Bachrach Motor Company v. Espiritu.15
courts a quo did not err in ruling that the petitioner is bound
to pay the interest on the total amount of the principal, the
There appears to be a justification for a reduction of the
monetary interest and the penalty interest.
penalty charge but not necessarily to ten percent (10%) of the
unpaid balance of the loan as suggested by petitioner.
The petitioner seeks the elimination of the compounded Inasmuch as petitioner has made partial payments which
interest imposed on the total amount based allegedly on the showed his good faith, a reduction of the penalty charge from
case of National Power Corporation v. National Merchandising two percent (2%) per month on the total amount due,
Corporation,12 wherein we ruled that the imposition of interest compounded monthly, until paid can indeed be justified under
on the damages from the filing of the complaint is unjust the said provision of Article 1229 of the New Civil Code.
where the litigation was prolonged for twenty-five (25) years
through no fault of the defendant. However, the ruling in the
In other words, we find the continued monthly accrual of the
said National Power Corporation (NPC) case is not applicable
two percent (2%) penalty charge on the total amount due to
to the case at bar inasmuch as our ruling on the issue of
be unconscionable inasmuch as the same appeared to have
interest in that NPC case was based on equitable
been compounded monthly.
considerations and on the fact that the said case lasted for
twenty-five (25) years "through no fault of the defendant." In
the case at bar, however, equity cannot be considered Considering petitioners several partial payments and the fact
inasmuch as there is a contractual stipulation in the he is liable under the note for the two percent (2%) penalty
promissory note whereby the petitioner expressly agreed to charge per month on the total amount due, compounded
the compounding of interest in case of failure on his part to monthly, for twenty-one (21) years since his default in 1980,
pay the loan at maturity. Inasmuch as the said stipulation on we find it fair and equitable to reduce the penalty charge to a
the compounding of interest has the force of law between the straight twelve percent (12%) per annum on the total amount
parties and does not appear to be inequitable or unjust, the due starting August 28, 1986, the date of the last Statement
said written stipulation should be respected. of Account (Exhibits "C" to "C-2"). We also took into
consideration the offers of the petitioner to enter into a
compromise for the settlement of his debt by presenting
The private respondents Statement of Account (marked
proposed payment schemes to respondent CCP. The said
Exhibits "C" to "C-2")13 shows the following breakdown of the
offers at compromise also showed his good faith despite
petitioners indebtedness as of August 28, 1986:
difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the
respondents long overdue deprivation of the use of its money
collectible from the petitioner.
Principal P2,838,454.68

The petitioner also imputes error on the part of the appellate


court for not declaring the suspension of the running of the
interest during that period when the respondent allegedly
Interest P 576,167.89 failed to assist the petitioner in applying for relief from
liability. In this connection, the petitioner referred to the
private respondents letter16 dated September 28, 1988
addressed to petitioner which partially reads:
Surcharge P4,581,692.10
Dear Mr. Tan:

xxx xxx xxx


P7,996,314.67

With reference to your appeal for condonation of


interest and surcharge, we wish to inform you that

47 | L O A N C r e d i t T r a n s
the center will assist you in applying for relief of SPOUSES DAVID B. CARPO & and RECHILDA S.
liability through the Commission on Audit and Office CARPO, Petitioners,
of the President xxx. vs.
ELEANOR CHUA and ELMA DY NG, Respondent.
While your application is being processed and
awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of Before this Court are two consolidated petitions for review.
P160,000.00 and monthly remittances of P60,000.00 The first, docketed as G.R. No. 150773, assails the Decision1 of
xxx. the Regional Trial Court (RTC), Branch 26 of Naga City dated
26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon
xxx xxx xxx B. Montenegro dismissed the complaint2 for annulment of real
estate mortgage and consequent foreclosure proceedings filed
by the spouses David B. Carpo and Rechilda S. Carpo
The petitioner alleges that his obligation to pay the interest
and surcharge should have been suspended because the (petitioners).
obligation to pay such interest and surcharge has become
conditional, that is dependent on a future and uncertain event The second, docketed as G.R. No. 153599, seeks to annul the
which consists of whether the petitioners request for
Court of Appeals Decision3 dated 30 April 2002 in CA-G.R. SP
condonation of interest and surcharge would be
recommended by the Commission on Audit and the Office of No. 57297. The Court of Appeals Third Division annulled and
the President to the House of Representatives for approval as set aside the orders of Judge Corazon A. Tordilla to suspend
required under Section 36 of Presidential Decree No. 1445. the sheriffs enforcement of the writ of possession.
Since the condition has not happened allegedly due to the
private respondents reneging on its promise, his liability to
The cases stemmed from a loan contracted by petitioners. On
pay the interest and surcharge on the loan has not arisen.
This is the petitioners contention. 18 July 1995, they borrowed from Eleanor Chua and Elma Dy
Ng (respondents) the amount of One Hundred Seventy-Five
Thousand Pesos (P175,000.00), payable within six (6) months
It is our view, however, that the running of the interest and
surcharge was not suspended by the private respondents with an interest rate of six percent (6%) per month. To secure
promise to assist the petitioners in applying for relief the payment of the loan, petitioners mortgaged their
therefrom through the Commission on Audit and the Office of residential house and lot situated at San Francisco, Magarao,
the President. Camarines Sur, which lot is covered by Transfer Certificate of
Title (TCT) No. 23180. Petitioners failed to pay the loan upon
First, the letter dated September 28, 1988 alleged to have demand. Consequently, the real estate mortgage was
been sent by the respondent CCP to the petitioner is not part extrajudicially foreclosed and the mortgaged property sold at
of the formally offered documentary evidence of either party a public auction on 8 July 1996. The house and lot was
in the trial court. That letter cannot be considered evidence awarded to respondents, who were the only bidders, for the
pursuant to Rule 132, Section 34 of the Rules of Court which
amount of Three Hundred Sixty-Seven Thousand Four Hundred
provides that: "The court shall consider no evidence which has
not been formally offered xxx." Besides, the said letter does Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
not contain any categorical agreement on the part of
respondent CCP that the payment of the interest and Upon failure of petitioners to exercise their right of
surcharge on the loan is deemed suspended while his appeal
redemption, a certificate of sale was issued on 5 September
for condonation of the interest and surcharge was being
processed. 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was
cancelled and in its stead, TCT No. 29338 was issued in the
name of respondents.
Second, the private respondent correctly asserted that it was
the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his Despite the issuance of the TCT, petitioners continued to
application for condonation of interest and surcharge. It was occupy the said house and lot, prompting respondents to file a
incumbent upon the petitioner to bring his administrative petition for writ of possession with the RTC docketed as
appeal for condonation of interest and penalty charges to the
Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC
attention of the said government offices.
Judge Ernesto A. Miguel issued an Order4 for the issuance of a
writ of possession.
On the issue of attorneys fees, the appellate court ruled
correctly and justly in reducing the trial courts award of
twenty-five percent (25%) attorneys fees to five percent (5%) On 23 July 1999, petitioners filed a complaint for annulment of
of the total amount due. real estate mortgage and the consequent foreclosure
proceedings, docketed as Civil Case No. 99-4376 of the RTC.
WHEREFORE, the assailed Decision of the Court of Appeals is Petitioners consigned the amount of Two Hundred Fifty-Seven
hereby AFFIRMED with MODIFICATION in that the penalty Thousand One Hundred Ninety-Seven Pesos and Twenty-Six
charge of two percent (2%) per month on the total amount Centavos (P257,197.26) with the RTC.
due, compounded monthly, is hereby reduced to a straight
twelve percent (12%) per annum starting from August 28,
1986. With costs against the petitioner. Meanwhile, in SP No. 98-1665, a temporary restraining order
was issued upon motion on 3 August 1999, enjoining the
G.R. Nos. 150773 & 153599 September 30, 2005 enforcement of the writ of possession. In an Order5 dated 6
January 2000, the RTC suspended the enforcement of the writ
of possession pending the final disposition of Civil Case No.
99-4376. Against this Order, respondents filed a petition for

48 | L O A N C r e d i t T r a n s
certiorari and mandamus before the Court of Appeals, Nevertheless, we find the interest at 5.5% per month, or 66%
docketed as CA-G.R. SP No. 57297. per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to
During the pendency of the case before the Court of Appeals, morals ("contra bonos mores"), if not against the law. The
RTC Judge Filemon B. Montenegro dismissed the complaint in stipulation is void. The Court shall reduce equitably liquidated
Civil Case No. 99-4376 on the ground that it was filed out of damages, whether intended as an indemnity or a penalty if
time and barred by laches. The RTC proceeded from the they are iniquitous or unconscionable.9
premise that the complaint was one for annulment of a
voidable contract and thus barred by the four-year In a long line of cases, this Court has invalidated similar
prescriptive period. Hence, the first petition for review now stipulations on interest rates for being excessive, iniquitous,
under consideration was filed with this Court, assailing the unconscionable and exorbitant. In Solangon v. Salazar,10 we
dismissal of the complaint. annulled the stipulation of 6% per month or 72% per annum
interest on a P60,000.00 loan. In Imperial v. Jaucian,11 we
The second petition for review was filed with the Court after reduced the interest rate from 16% to 1.167% per month or
the Court of Appeals on 30 April 2002 annulled and set aside 14% per annum. In Ruiz v. Court of Appeals,12 we equitably
the RTC orders in SP No. 98-1665 on the ground that it was reduced the agreed 3% per month or 36% per annum interest
the ministerial duty of the lower court to issue the writ of to 1% per month or 12% per annum interest. The 10% and 8%
possession when title over the mortgaged property had been interest rates per month on a P1,000,000.00 loan were
consolidated in the mortgagee. reduced to 12% per annum in Cuaton v. Salud.13 Recently, this
Court, in Arrofo v. Quino,14 reduced the 7% interest per month
on a P15,000.00 loan amounting to 84% interest per annum to
This Court ordered the consolidation of the two cases, on
18% per annum.
motion of petitioners.

There is no need to unsettle the principle affirmed


In G.R. No. 150773, petitioners claim that following the Courts
in Medel and like cases. From that perspective, it is apparent
ruling in Medel v. Court of Appeals 6 the rate of interest
that the stipulated interest in the subject loan is excessive,
stipulated in the principal loan agreement is clearly null and
iniquitous, unconscionable and exorbitant. Pursuant to the
void. Consequently, they also argue that the nullity of the
freedom of contract principle embodied in Article 1306 of the
agreed interest rate affects the validity of the real estate
Civil Code, contracting parties may establish such stipulations,
mortgage. Notably, while petitioners were silent in their
clauses, terms and conditions as they may deem convenient,
petition on the issues of prescription and laches on which the
provided they are not contrary to law, morals, good customs,
RTC grounded the dismissal of the complaint, they belatedly
public order, or public policy. In the ordinary course, the codal
raised the matters in their Memorandum. Nonetheless, these
provision may be invoked to annul the excessive stipulated
points warrant brief comment.
interest.

On the other hand, petitioners argue in G.R. No. 153599 that


In the case at bar, the stipulated interest rate is 6% per
the RTC did not commit any grave abuse of discretion when it
month, or 72% per annum. By the standards set in the above-
issued the orders dated 3 August 1999 and 6 January 2000,
cited cases, this stipulation is similarly invalid. However, the
and that these orders could not have been "the proper
RTC refused to apply the principle cited and employed
subjects of a petition for certiorari and mandamus". More
in Medel on the ground that Medel did not pertain to the
accurately, the justiciable issues before us are whether the
annulment of a real estate mortgage,15 as it was a case for
Court of Appeals could properly entertain the petition for
annulment of the loan contract itself. The question thus
certiorari from the timeliness aspect, and whether the
sensibly arises whether the invalidity of the stipulation on
appellate court correctly concluded that the writ of possession
interest carries with it the invalidity of the principal obligation.
could no longer be stayed.

The question is crucial to the present petition even if the


We first resolve the petition in G.R. No. 150773.
subject thereof is not the annulment of the loan contract but
that of the mortgage contract. The consideration of the
Petitioners contend that the agreed rate of interest of 6% per mortgage contract is the same as that of the principal
month or 72% per annum is so excessive, iniquitous, contract from which it receives life, and without which it
unconscionable and exorbitant that it should have been cannot exist as an independent contract. Being a mere
declared null and void. Instead of dismissing their complaint, accessory contract, the validity of the mortgage contract
they aver that the lower court should have declared them would depend on the validity of the loan secured by it.16
liable to respondents for the original amount of the loan plus
12% interest per annum and 1% monthly penalty charge as
Notably in Medel, the Court did not invalidate the entire loan
liquidated damages,7 in view of the ruling in Medel v. Court of
obligation despite the inequitability of the stipulated interest,
Appeals.8
but instead reduced the rate of interest to the more
reasonable rate of 12% per annum. The same remedial
In Medel, the Court found that the interest stipulated at 5.5% approach to the wrongful interest rates involved was
per month or 66% per annum was so iniquitous or employed or affirmed by the Court
unconscionable as to render the stipulation void. in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

49 | L O A N C r e d i t T r a n s
The Courts ultimate affirmation in the cases cited of the ". . . .
validity of the principal loan obligation side by side with the
invalidation of the interest rates thereupon is congruent with Appealing directly to Us, defendants raise two questions of
the rule that a usurious loan transaction is not a complete law: (1) In a loan with usurious interest, may the creditor
nullity but defective only with respect to the agreed interest. recover the principal of the loan? (2) Should attorney's fees be
awarded in plaintiff's favor?"
We are aware that the Court of Appeals, on certain occasions,
had ruled that a usurious loan is wholly null and void both as Great reliance is made by appellants on Art. 1411 of the New
to the loan and as to the usurious interest. 17 However, this Civil Code . . . .
Court adopted the contrary rule,

Since, according to the appellants, a usurious loan is void due


as comprehensively discussed in Briones v. Cammayo:18 to illegality of cause or object, the rule of pari delicto
expressed in Article 1411, supra, applies, so that neither party
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court can bring action against each other. Said rule, however,
likewise declared that, in any event, the debtor in a usurious appellants add, is modified as to the borrower, by express
contract of loan should pay the creditor the amount which he provision of the law (Art. 1413, New Civil Code), allowing the
justly owes him, citing in support of this ruling its previous borrower to recover interest paid in excess of the interest
decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 allowed by the Usury Law. As to the lender, no exception is
Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739. made to the rule; hence, he cannot recover on the contract.
So they continue the New Civil Code provisions must be
.... upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of
the New Civil Code, that: "Usurious contracts shall be
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249,
governed by the Usury Law and other special laws, so far as
We also held that the standing jurisprudence of this Court on
they are not inconsistent with this Code."
the question under consideration was clearly to the effect that
the Usury Law, by its letter and spirit, did not deprive the
lender of his right to recover from the borrower the money We do not agree with such reasoning. Article 1411 of the New
actually loaned to and enjoyed by the latter. This Court went Civil Code is not new; it is the same as Article 1305 of the Old
further to say that the Usury Law did not provide for the Civil Code. Therefore, said provision is no warrant for
forfeiture of the capital in favor of the debtor in usurious departing from previous interpretation that, as provided in the
contracts, and that while the forfeiture might appear to be Usury Law (Act No. 2655, as amended), a loan with usurious
convenient as a drastic measure to eradicate the evil of usury, interest is not totally void only as to the interest.
the legal question involved should not be resolved on the
basis of convenience. . . . [a]ppellants fail to consider that a contract of loan
with usurious interest consists of principal and
Other cases upholding the same principle are Palileo vs. Cosio, accessory stipulations; the principal one is to pay the
97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, debt; the accessory stipulation is to pay interest
10 SCRA 199, 200-202. In the latter We expressly held that thereon.
when a contract is found to be tainted with usury "the only
right of the respondent (creditor) . . . was merely to collect the And said two stipulations are divisible in the sense
amount of the loan, plus interest due thereon." that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The
The view has been expressed, however, that the ruling thus renunciation of the principal debt shall extinguish the
consistently adhered to should now be abandoned because accessory obligations; but the waiver of the latter shall
Article 1957 of the new Civil Code a subsequent law leave the former in force."
provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against The question therefore to resolve is whether the illegal
usury, shall be void, and that in such cases "the borrower may terms as to payment of interest likewise renders a
recover in accordance with the laws on usury." From this the nullity the legal terms as to payments of the principal
conclusion is drawn that the whole contract is void and that, debt. Article 1420 of the New Civil Code provides in
therefore, the creditor has no right to recover not even his this regard: "In case of a divisible contract, if the
capital. illegal terms can be separated from the legal ones, the
latter may be enforced."
The meaning and scope of our ruling in the cases mentioned
heretofore is clearly stated, and the view referred to in the In simple loan with stipulation of usurious interest, the
preceding paragraph is adequately answered, in Angel Jose, prestation of the debtor to pay the principal debt,
etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On which is the cause of the contract (Article 1350, Civil
the question of whether a creditor in a usurious contract may Code), is not illegal. The illegality lies only as to the
or may not recover the principal of the loan, and, in the prestation to pay the stipulated interest; hence, being
affirmative, whether or not he may also recover interest separable, the latter only should be deemed void, since
thereon at the legal rate, We said the following: it is the only one that is illegal.

50 | L O A N C r e d i t T r a n s
.... While petitioners were allegedly financially distressed, it must
be proven that there is deprivation of their free agency. In
The principal debt remaining without stipulation for payment other words, for undue influence to be present, the influence
of interest can thus be recovered by judicial action. And in exerted must have so overpowered or subjugated the mind of
case of such demand, and the debtor incurs in delay, the debt a contracting party as to destroy his free agency, making him
earns interest from the date of the demand (in this case from express the will of another rather than his own. 21 The alleged
the filing of the complaint). Such interest is not due to lingering financial woes of petitioners per se cannot be
stipulation, for there was none, the same being void. Rather, it equated with the presence of undue influence.
is due to the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay The RTC had likewise concluded that petitioners were barred
interest by way of damages (Art. 2209, Civil Code). The court by laches from assailing the validity of the real estate
a quo therefore, did not err in ordering defendants to pay the mortgage. We wholeheartedly agree. If indeed petitioners
principal debt with interest thereon at the legal rate, from the unwillingly gave their consent to the agreement, they should
date of filing of the complaint." 19 have raised this issue as early as in the foreclosure
proceedings. It was only when the writ of possession was
The Courts wholehearted affirmation of the rule that the issued did petitioners challenge the stipulations in the loan
principal obligation subsists despite the nullity of the contract in their action for annulment of mortgage. Evidently,
stipulated interest is evinced by its subsequent rulings, cited petitioners slept on their rights. The Court of Appeals
above, in all of which the main obligation was upheld and the succinctly made the following observations:
offending interest rate merely corrected. Hence, it is clear and
settled that the principal loan obligation still stands and In all these proceedings starting from the foreclosure, followed
remains valid. By the same token, since the mortgage by the issuance of a provisional certificate of sale; then the
contract derives its vitality from the validity of the principal definite certificate of sale; then the issuance of TCT No. 29338
obligation, the invalid stipulation on interest rate is similarly in favor of the defendants and finally the petition for the
insufficient to render void the ancillary mortgage contract. issuance of the writ of possession in favor of the defendants,
there is no showing that plaintiffs questioned the validity of
It should be noted that had the Court declared the loan and these proceedings. It was only after the issuance of the writ of
mortgage agreements void for being contrary to public policy, possession in favor of the defendants, that plaintiffs allegedly
no prescriptive period could have run.20 Such benefit is tendered to the defendants the amount of P260,000.00 which
obviously not available to petitioners. the defendants refused. In all these proceedings, why did
plaintiffs sleep on their rights?22

Yet the RTC pronounced that the complaint was barred by the
four-year prescriptive period provided in Article 1391 of the Clearly then, with the absence of undue influence, petitioners
Civil Code, which governs voidable contracts. This conclusion have no cause of action. Even assuming undue influence
was derived from the allegation in the complaint that the vitiated their consent to the loan contract, their action would
consent of petitioners was vitiated through undue influence. already be barred by prescription when they filed it. Moreover,
While the RTC correctly acknowledged the rule of prescription petitioners had clearly slept on their rights as they failed to
for voidable contracts, it erred in applying the rule in this timely assail the validity of the mortgage agreement. The
case. We are hard put to conclude in this case that there was denial of the petition in G.R. No. 150773 is warranted.
any undue influence in the first place.
We now resolve the petition in G.R. No. 153599.
There is ultimately no showing that petitioners consent to the
loan and mortgage agreements was vitiated by undue Petitioners claim that the assailed RTC orders dated 3 August
influence. The financial condition of petitioners may have 1999 and 6 January 2000 could no longer be questioned in a
motivated them to contract with respondents, but undue special civil action for certiorari and mandamus as the
influence cannot be attributed to respondents simply because reglementary period for such action had already elapsed.
they had lent money. Article 1391, in relation to Article 1390
of the Civil Code, grants the aggrieved party the right to It must be noted that the Order dated 3 August 1999
obtain the annulment of contract on account of factors which suspending the enforcement of the writ of possession had a
vitiate consent. Article 1337 defines the concept of undue period of effectivity of only twenty (20) days from 3 August
influence, as follows: 1999, or until 23 August 1999. Thus, upon the expiration of
the twenty (20)-day period, the said Order became functus
There is undue influence when a person takes improper officio. Thus, there is really no sense in assailing the validity of
advantage of his power over the will of another, depriving the this Order, mooted as it was. For the same reason, the validity
latter of a reasonable freedom of choice. The following of the order need not have been assailed by respondents in
circumstances shall be considered: the confidential, family, their special civil action before the Court of Appeals.
spiritual and other relations between the parties or the fact
that the person alleged to have been unduly influenced was On the other hand, the Order dated 6 January 2000 is in the
suffering from mental weakness, or was ignorant or in nature of a writ of injunction whose period of efficacy is
financial distress. indefinite. It may be properly assailed by way of the special
civil action for certiorari, as it is interlocutory in nature.

51 | L O A N C r e d i t T r a n s
As a rule, the special civil action for certiorari under Rule 65 the principal loan obligation subsists, and along with it the
must be filed not later than sixty (60) days from notice of the mortgage that serves as collateral security for it.
judgment or order.23 Petitioners argue that the 3 August
1999 Order could no longer be assailed by respondents in a WHEREFORE, in view of all the foregoing, the petitions are
special civil action for certiorari before the Court of Appeals, DENIED. Costs against petitioners.
as the petition was filed beyond sixty (60) days following
respondents receipt of the Order. Considering that the 3
G.R. No. 160545 March 9, 2010
August 1999 Order had become functus officio in the first
place, this argument deserves scant consideration.
PRISMA CONSTRUCTION & DEVELOPMENT
CORPORATION and ROGELIO S. PANTALEON, Petitioners,
Petitioners further claim that the 6 January 2000 Order could vs.
not have likewise been the subject of a special civil action for ARTHUR F. MENCHAVEZ, Respondent.
certiorari, as it is according to them a final order, as opposed
to an interlocutory order. That the 6 January 2000 Order is We resolve in this Decision the petition for review on
interlocutory in nature should be beyond doubt. An order is certiorari1 filed by petitioners Prisma Construction &
interlocutory if its effects would only be provisional in Development Corporation (PRISMA) and Rogelio S. Pantaleon
character and would still leave substantial proceedings to be (Pantaleon) (collectively, petitioners) who seek to reverse and
further had by the issuing court in order to put the set aside the Decision2 dated May 5, 2003 and the
Resolution3 dated October 22, 2003 of the Former Ninth
controversy to rest.24 The injunctive relief granted by the order
Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627.
is definitely final, but merely provisional, its effectivity hinging The assailed CA Decision affirmed the Decision of the Regional
on the ultimate outcome of the then pending action for Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-
annulment of real estate mortgage. Indeed, an interlocutory 4552 that held the petitioners liable for payment
order hardly puts to a close, or disposes of, a case or a of P3,526,117.00 to respondent Arthur F. Menchavez
disputed issue leaving nothing else to be done by the court in (respondent), but modified the interest rate from 4% per
respect thereto, as is characteristic of a final order. month to 12% per annum, computed from the filing of the
complaint to full payment. The assailed CA Resolution denied
the petitioners Motion for Reconsideration.
Since the 6 January 2000 Order is not a final order, but rather
interlocutory in nature, we cannot agree with petitioners who FACTUAL BACKGROUND
insist that it may be assailed only through an appeal perfected
within fifteen (15) days from receipt thereof by respondents. It
The facts of the case, gathered from the records, are briefly
is axiomatic that an interlocutory order cannot be challenged summarized below.
by an appeal,

On December 8, 1993, Pantaleon, the President and Chairman


but is susceptible to review only through the special civil of the Board of PRISMA, obtained a P1,000,000.004 loan from
action of certiorari.25 The sixty (60)-day reglementary period the respondent, with a monthly interest of P40,000.00 payable
for special civil actions under Rule 65 applies, and for six months, or a total obligation of P1,240,000.00 to be
respondents petition was filed with the Court of Appeals well paid within six (6) months, 5 under the following schedule of
payments:
within the period.

Accordingly, no error can be attributed to the Court of Appeals January 8, 1994 . P40,000.00
in granting the petition for certiorari and mandamus. As February 8, 1994 ... P40,000.00
pointed out by respondents, the remedy of mandamus lies to
compel the performance of a ministerial duty. The issuance of March 8, 1994 ... P40,000.00
a writ of possession to a purchaser in an extrajudicial
April 8, 1994 . P40,000.00
foreclosure is merely a ministerial function.26
May 8, 1994 .. P40,000.00
Thus, we also affirm the Court of Appeals ruling to set aside June 8, 1994 P1,040,000.006
the RTC orders enjoining the enforcement of the writ of
possession.27 The purchaser in a foreclosure sale is entitled as Total P1,240,000.00
a matter of right to a writ of possession, regardless of whether
or not there is a pending suit for annulment of the mortgage
To secure the payment of the loan, Pantaleon issued a
or the foreclosure proceedings. An injunction to prohibit the promissory note7 that states:
issuance or enforcement of the writ is entirely out of place.28
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of
One final note. The issue on the validity of the stipulated ONE MILLION TWO HUNDRED FORTY THOUSAND PESOS
interest rates, regrettably for petitioners, was not raised at the (P1,240,000), Philippine Currency, from Mr. Arthur F.
earliest possible opportunity. It should be pointed out though Menchavez, representing a six-month loan payable according
to the following schedule:
that since an excessive stipulated interest rate may be void
for being contrary to public policy, an action to annul said
interest rate does not prescribe. Such indeed is the remedy; it January 8, 1994 . P40,000.00
is not the action for annulment of the ancillary real estate
mortgage. Despite the nullity of the stipulated interest rate, February 8, 1994 ... P40,000.00

52 | L O A N C r e d i t T r a n s
March 8, 1994 ... P40,000.00 The CA decided the appeal on May 5, 2003. The CA found that
the parties agreed to a 4% monthly interest principally based
April 8, 1994 . P40,000.00 on the board resolution that authorized Pantaleon to transact
a loan with an approved interest of not more than 4% per
May 8, 1994 .. P40,000.00 month. The appellate court, however, noted that the interest
of 4% per month, or 48% per annum, was unreasonable and
June 8, 1994 P1,040,000.00 should be reduced to 12% per annum. The CA affirmed the
RTCs finding that PRISMA was a mere instrumentality of
Pantaleon that justified the piercing of the veil of corporate
The checks corresponding to the above amounts are hereby fiction. Thus, the CA modified the RTC Decision by imposing a
acknowledged.8 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from
and six (6) postdated checks corresponding to the schedule of finality until fully paid.17
payments. Pantaleon signed the promissory note in his
personal capacity,9 and as duly authorized by the Board of After the CA's denial18 of their motion for
Directors of PRISMA.10 The petitioners failed to completely pay 19
reconsideration, the petitioners filed the present petition for
the loan within the stipulated six (6)-month period. review on certiorari under Rule 45 of the Rules of Court.

From September 8, 1994 to January 4, 1997, the petitioners THE PETITION


paid the following amounts to the respondent:

The petitioners submit that the CA mistakenly relied on their


September 8, 1994 P320,000.00 board resolution to conclude that the parties agreed to a 4%
monthly interest because the board resolution was not an
October 8, 1995. P600,000.00 evidence of a loan or forbearance of money, but merely an
authorization for Pantaleon to perform certain acts, including
November 8, 1995. P158,772.00 the power to enter into a contract of loan. The expressed
mandate of Article 1956 of the Civil Code is that interest due
January 4, 1997 . P30,000.0011
should be stipulated in writing, and no such stipulation exists.
Even assuming that the loan is subject to 4% monthly
As of January 4, 1997, the petitioners had already paid a total interest, the interest covers the six (6)-month period only and
of P1,108,772.00. However, the respondent found that the cannot be interpreted to apply beyond it. The petitioners also
petitioners still had an outstanding balance of P1,364,151.00 point out the glaring inconsistency in the CA Decision, which
as of January 4, 1997, to which it applied a 4% monthly reduced the interest from 4% per month or 48% per annum to
interest.12 Thus, on August 28, 1997, the respondent filed a 12% per annum, but failed to consider that the amount
complaint for sum of money with the RTC to enforce the of P3,526,117.00 that the RTC ordered them to pay includes
unpaid balance, plus 4% monthly interest, P30,000.00 in the compounded 4% monthly interest.
attorneys fees, P1,000.00 per court appearance and costs of
suit.13 THE CASE FOR THE RESPONDENT

In their Answer dated October 6, 1998, the petitioners The respondent counters that the CA correctly ruled that the
admitted the loan of P1,240,000.00, but denied the stipulation loan is subject to a 4% monthly interest because the board
on the 4% monthly interest, arguing that the interest was not resolution is attached to, and an integral part of, the
provided in the promissory note. Pantaleon also denied that promissory note based on which the petitioners obtained the
he made himself personally liable and that he made loan. The respondent further contends that the petitioners are
representations that the loan would be repaid within six (6) estopped from assailing the 4% monthly interest, since they
months.14 agreed to pay the 4% monthly interest on the principal
amount under the promissory note and the board resolution.
THE RTC RULING
THE ISSUE
The RTC rendered a Decision on October 27, 2000 finding that
the respondent issued a check for P1,000,000.00 in favor of The core issue boils down to whether the parties agreed to the
the petitioners for a loan that would earn an interest of 4% 4% monthly interest on the loan. If so, does the rate of
or P40,000.00 per month, or a total of P240,000.00 for a 6- interest apply to the 6-month payment period only or until full
month period. It noted that the petitioners made several payment of the loan?
payments amounting to P1,228,772.00, but they were still
indebted to the respondent for P3,526,117.00 as of
February 11,15 1999 after considering the 4% monthly OUR RULING
interest. The RTC observed that PRISMA was a one-man
corporation of Pantaleon and used this circumstance to justify We find the petition meritorious.
the piercing of the veil of corporate fiction. Thus, the RTC
ordered the petitioners to jointly and severally pay the
Interest due should be stipulated in writing; otherwise, 12%
respondent the amount of P3,526,117.00 plus 4% per month
interest from February 11, 1999 until fully paid.16 per annum

Obligations arising from contracts have the force of law


The petitioners elevated the case to the CA via an ordinary
appeal under Rule 41 of the Rules of Court, insisting that there between the contracting parties and should be complied with
in good faith.20 When the terms of a contract are clear and
was no express stipulation on the 4% monthly interest.
leave no doubt as to the intention of the contracting parties,
the literal meaning of its stipulations governs. 21 In such cases,
THE CA RULING courts have no authority to alter the contract by construction

53 | L O A N C r e d i t T r a n s
or to make a new contract for the parties; a court's duty is In Medel, the debtors in a P500,000.00 loan were required to
confined to the interpretation of the contract the parties made pay an interest of 5.5% per month, a service charge of 2% per
for themselves without regard to its wisdom or folly, as the annum, and a penalty charge of 1% per month, plus
court cannot supply material stipulations or read into the attorneys fee equivalent to 25% of the amount due, until the
contract words the contract does not contain. 22 It is only when loan is fully paid. Taken in conjunction with the stipulated
the contract is vague and ambiguous that courts are service charge and penalty, we found the interest rate of 5.5%
permitted to resort to the interpretation of its terms to to be excessive, iniquitous, unconscionable, exorbitant and
determine the parties intent. hence, contrary to morals, thereby rendering the stipulation
null and void.
In the present case, the respondent issued a check
for P1,000,000.00.23 In turn, Pantaleon, in his personal Applying Medel, we invalidated and reduced the stipulated
capacity and as authorized by the Board, executed the interest in Spouses Solangon v. Salazar 35 of 6% per month or
promissory note quoted above. Thus, the P1,000,000.00 loan 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court
shall be payable within six (6) months, or from January 8, of Appeals,36 of 3% per month or 36% per annum interest on
1994 up to June 8, 1994. During this period, the loan shall a P3,000,000.00 loan; in Imperial v. Jaucian, 37 of 16% per
earn an interest of P40,000.00 per month, for a total month or 192% per annum interest on a P320,000.00 loan;
obligation of P1,240,000.00 for the six-month period. We in Arrofo v. Quio,38 of 7% interest per month or 84% per
note that this agreed sum can be computed at 4% annum interest on a P15,000.00 loan; in Bulos, Jr. v.
interest per month, but no such rate of interest was Yasuma,39 of 4% per month or 48% per annum interest on
stipulated in the promissory note; rather a fixed sum a P2,500,000.00 loan; and in Chua v. Timan,40 of 7% and 5%
equivalent to this rate was agreed upon. per month for loans totalling P964,000.00. We note that in all
these cases, the terms of the loans were open-ended; the
stipulated interest rates were applied for an indefinite period.
Article 1956 of the Civil Code specifically mandates that "no
interest shall be due unless it has been expressly stipulated in
writing." Under this provision, the payment of interest in loans Medel finds no application in the present case where no other
or forbearance of money is allowed only if: (1) there was an stipulation exists for the payment of any extra amount except
express stipulation for the payment of interest; and (2) the a specific sum of P40,000.00 per month on the principal
agreement for the payment of interest was reduced in writing. of a loan payable within six months. Additionally, no issue on
The concurrence of the two conditions is required for the the excessiveness of the stipulated amount of P40,000.00 per
payment of interest at a stipulated rate. Thus, we held in Tan month was ever put in issue by the petitioners; 41 they only
v. Valdehueza24 and Ching v. Nicdao25 that collection of assailed the application of a 4% interest rate, since it was not
interest without any stipulation in writing is prohibited by agreed upon.
law.1avvphi1
It is a familiar doctrine in obligations and contracts that the
Applying this provision, we find that the interest of P40,000.00 parties are bound by the stipulations, clauses, terms and
per month corresponds only to the six (6)-month period of the conditions they have agreed to, which is the law between
loan, or from January 8, 1994 to June 8, 1994, as agreed upon them, the only limitation being that these stipulations,
by the parties in the promissory note. Thereafter, the interest clauses, terms and conditions are not contrary to law, morals,
on the loan should be at the legal interest rate of public order or public policy. 42 The payment of the specific
12% per annum, consistent with our ruling in Eastern sum of money of P40,000.00 per month was voluntarily
Shipping Lines, Inc. v. Court of Appeals:26 agreed upon by the petitioners and the respondent. There is
nothing from the records and, in fact, there is no allegation
showing that petitioners were victims of fraud when they
When the obligation is breached, and it consists in the
entered into the agreement with the respondent.
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself Therefore, as agreed by the parties, the loan of P1,000,000.00
earn legal interest from the time it is judicially demanded. In shall earn P40,000.00 per month for a period of six (6)
the absence of stipulation, the rate of interest shall be months, or from December 8, 1993 to June 8, 1994, for a total
12% per annum to be computed from default, i.e., from principal and interest amount of P1,240,000.00. Thereafter,
judicial or extrajudicial demand under and subject to the interest at the rate of 12% per annum shall apply. The
provisions of Article 1169 of the Civil Code." (Emphasis amounts already paid by the petitioners during the pendency
supplied) of the suit, amounting to P1,228,772.00 as of February 12,
1999,43 should be deducted from the total amount due,
computed as indicated above. We remand the case to the trial
We reiterated this ruling in Security Bank and Trust Co. v. RTC-
court for the actual computation of the total amount due.
Makati, Br. 61,27 Sulit v. Court of Appeals,28Crismina Garments,
Inc. v. Court of Appeals, 29 Eastern Assurance and Surety
Corporation v. Court of Appeals, 30 Sps. Catungal v. Doctrine of Estoppel not applicable
Hao, 31 Yong v. Tiu,32 and Sps. Barrera v. Sps. Lorenzo.33 Thus,
the RTC and the CA misappreciated the facts of the case; they
The respondent submits that the petitioners are estopped
erred in finding that the parties agreed to a 4% interest,
from disputing the 4% monthly interest beyond the six-month
compounded by the application of this interest beyond the
stipulated period, since they agreed to pay this interest on the
promissory notes six (6)-month period. The facts show that
principal amount under the promissory note and the board
the parties agreed to the payment of a specific sum of
resolution.
money of P40,000.00 per month for six months, not to a 4%
rate of interest payable within a six (6)-month period.
We disagree with the respondents contention.
Medel v. Court of Appeals not applicable
We cannot apply the doctrine of estoppel in the present case
since the facts and circumstances, as established by the
The CA misapplied Medel v. Court of Appeals 34 in finding that a
record, negate its application. Under the promissory
4% interest per month was unconscionable.
note,44 what the petitioners agreed to was the payment of
54 | L O A N C r e d i t T r a n s
a specific sum of P40,000.00 per month for six months In loan agreements, it cannot be denied that the rate of
not a 4% rate of interest per month for six (6) months interest is a principal condition, if not the most important
on a loan whose principal is P1,000,000.00, for the component. Thus, any modification thereof must be mutually
total amount of P1,240,000.00. Thus, no reason exists to agreed upon; otherwise, it has no binding effect. Moreover,
place the petitioners in estoppel, barring them from raising the Court cannot consider a stipulation granting a party the
their present defenses against a 4% per month interest after option to prepay the loan if said party is not agreeable to the
the six-month period of the agreement. The board arbitrary interest rates imposed. Premium may not be placed
resolution,45 on the other hand, simply authorizes Pantaleon to upon a stipulation in a contract which grants one party the
contract for a loan with a monthly interest of not more than right to choose whether to continue with or withdraw from the
4%. This resolution merely embodies the extent of Pantaleons agreement if it discovers that what the other party has been
authority to contract and does not create any right or doing all along is improper or illegal.
obligation except as between Pantaleon and the board. Again,
no cause exists to place the petitioners in estoppel.
This Petition for Review on Certiorari1 questions the May 8,
2007 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No.
Piercing the corporate veil unfounded 79650, which affirmed with modifications the February 28,
2003 Decision3 and the June 4, 2003 Order 4 of the Regional
Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No.
We find it unfounded and unwarranted for the lower courts to
5975.
pierce the corporate veil of PRISMA.

Factual Antecedents
The doctrine of piercing the corporate veil applies only in
three (3) basic instances, namely: a) when the separate and
distinct corporate personality defeats public convenience, as Spouses Eduardo and Lydia Silos (petitioners) have been in
when the corporate fiction is used as a vehicle for the evasion business for about two decades of operating a department
of an existing obligation; b) in fraud cases, or when the store and buying and selling of ready-to-wear apparel.
corporate entity is used to justify a wrong, protect a fraud, or Respondent Philippine National Bank (PNB) is a banking
defend a crime; or c) is used in alter ego cases, i.e., where a corporation organized and existing under Philippine laws.
corporation is essentially a farce, since it is a mere alter ego
or business conduit of a person, or where the corporation is so
To secure a one-year revolving credit line of P150,000.00
organized and controlled and its affairs so conducted as to
obtained from PNB, petitioners constituted in August 1987 a
make it merely an instrumentality, agency, conduit or adjunct
Real Estate Mortgage5 over a 370-square meter lot in Kalibo,
of another corporation.46 In the absence of malice, bad faith,
Aklan covered by Transfer Certificate of Title No. (TCT) T-
or a specific provision of law making a corporate officer liable,
14250. In July 1988,the credit line was increased to P1.8
such corporate officer cannot be made personally liable for
million and the mortgage was correspondingly increased
corporate liabilities.47
to P1.8 million.6

In the present case, we see no competent and convincing


And in July 1989, a Supplement to the Existing Real Estate
evidence of any wrongful, fraudulent or unlawful act on the
Mortgage7 was executed to cover the same credit line, which
part of PRISMA to justify piercing its corporate veil. While
was increased to P2.5 million, and additional security was
Pantaleon denied personal liability in his Answer, he made
given in the form of a 134-square meter lot covered by TCT T-
himself accountable in the promissory note "in his personal
16208. In addition, petitioners issued eight Promissory
capacity and as authorized by the Board Resolution" of
Notes8 and signed a Credit Agreement. 9This July 1989 Credit
PRISMA.48 With this statement of personal liability and in the
Agreement contained a stipulation on interest which provides
absence of any representation on the part of PRISMA that the
as follows:
obligation is all its own because of its separate corporate
identity, we see no occasion to consider piercing the
corporate veil as material to the case. 1.03. Interest. (a) The Loan shall be subject to interest at the
rate of 19.5% per annum. Interest shall be payable in advance
every one hundred twenty days at the rate prevailing at the
WHEREFORE, in light of all the foregoing, we
time of the renewal.
hereby REVERSE and SET ASIDE the Decision dated May 5,
2003 of the Court of Appeals in CA-G.R. CV No. 69627. The
petitioners loan of P1,000,000.00 shall bear interest (b) The Borrower agrees that the Bank may modify the
of P40,000.00 per month for six (6) months from December 8, interest rate in the Loan depending on whatever policy the
1993 as indicated in the promissory note. Any portion of this Bank may adopt in the future, including without limitation, the
loan, unpaid as of the end of the six-month payment period, shifting from the floating interest rate system to the fixed
shall thereafter bear interest at 12% per annum. The total interest rate system, or vice versa. Where the Bank has
amount due and unpaid, including accrued interests, shall imposed on the Loan interest at a rate per annum, which is
bear interest at 12% per annum from the finality of this equal to the Banks spread over the current floating interest
Decision. Let this case be REMANDED to the Regional Trial rate, the Borrower hereby agrees that the Bank may, without
Court, Branch 73, Antipolo City for the proper computation of need of notice to the Borrower, increase or decrease its
the amount due as herein directed, with due regard to the spread over the floating interest rate at any time depending
payments the petitioners have already remitted. Costs against on whatever policy it may adopt in the future. 10 (Emphases
the respondent. supplied)

G.R. No. 181045 July 2, 2014 The eight Promissory Notes, on the other hand, contained a
stipulation granting PNB the right to increase or reduce
interest rates "within the limits allowed by law or by the
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
Monetary Board."11
vs.
PHILIPPINE NATIONAL BANK, Respondent.

55 | L O A N C r e d i t T r a n s
The Real Estate Mortgage agreement provided the same right 9. 17th Promissory Note dated July 13, 1994 21%;
to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future."12
10. 18th Promissory Note dated November 16, 1994
16%;
Petitioners religiously paid interest on the notes at the
following rates:
11. 19th Promissory Note dated April 10, 1995 21%;

1. 1st Promissory Note dated July 24, 1989 19.5%;


12. 20th Promissory Note dated July 19, 1995
18.5%;
2. 2nd Promissory Note dated November 22, 1989
23%;
13. 21st Promissory Note dated December 18, 1995
18.75%;
3. 3rd Promissory Note dated March 21, 1990 22%;
14. 22nd Promissory Note dated April 22, 1996
4. 4th Promissory Note dated July 19, 1990 24%; 18.5%;

5. 5th Promissory Note dated December 17, 1990 15. 23rd Promissory Note dated July 22, 1996
28%; 18.5%;

6. 6th Promissory Note dated February 14, 1991 16. 24th Promissory Note dated November 25, 1996
32%; 18%;

7. 7th Promissory Note dated March 1, 1991 30%; 17. 25th Promissory Note dated May 30, 1997
and 17.5%; and

8. 8th Promissory Note dated July 11, 1991 24%.13 18. 26th Promissory Note (PN 9707237) dated July
30, 1997 25%.16
In August 1991, an Amendment to Credit Agreement 14 was
executed by the parties, with the following stipulation The 9th up to the 17th promissory notes provide for the
regarding interest: payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x x." 17
1.03. Interest on Line Availments. (a) The Borrowers agree to
pay interest on each Availment from date of each Availment On the other hand, the 18th up to the 26th promissory notes
up to but not including the date of full payment thereof at the including PN 9707237, which is the 26th promissory note
rate per annum which is determined by the Bank to be prime carried the following provision:
rate plus applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
x x x For this purpose, I/We agree that the rate of interest
herein stipulated may be increased or decreased for the
Under this Amendment to Credit Agreement, petitioners subsequent Interest Periods, with prior notice to the Borrower
issued in favor of PNB the following 18 Promissory Notes, in the event of changes in interest rate prescribed by law or
which petitioners settled except the last (the note covering the Monetary Board of the Central Bank of the Philippines, or
the principal) at the following interest rates: in the Banks overall cost of funds. I/We hereby agree that in
the event I/we are not agreeable to the interest rate fixed for
any Interest Period, I/we shall have the option top repay the
1. 9th Promissory Note dated November 8, 1991
loan or credit facility without penalty within ten (10) calendar
26%;
days from the Interest Setting Date.18 (Emphasis supplied)

2. 10th Promissory Note dated March 19, 1992


Respondent regularly renewed the line from 1990 up to 1997,
25%;
and petitioners made good on the promissory notes,
religiously paying the interests without objection or fail. But in
3. 11th Promissory Note dated July 11, 1992 23%; 1997, petitioners faltered when the interest rates soared due
to the Asian financial crisis. Petitioners sole outstanding
promissory note for P2.5 million PN 9707237 executed in July
4. 12th Promissory Note dated November 10, 1992
1997 and due 120 days later or on October 28, 1997
21%;
became past due, and despite repeated demands, petitioners
failed to make good on the note.
5. 13th Promissory Note dated March 15, 1993
21%;
Incidentally, PN 9707237 provided for the penalty equivalent
to 24% per annum in case of default, as follows:
6. 14th Promissory Note dated July 12, 1993 17.5%;
Without need for notice or demand, failure to pay this note or
7. 15th Promissory Note dated November 17, 1993 any installment thereon, when due, shall constitute default
21%; and in such cases or in case of garnishment, receivership or
bankruptcy or suit of any kind filed against me/us by the
Bank, the outstanding principal of this note, at the option of
8. 16th Promissory Note dated March 28, 1994
the Bank and without prior notice of demand, shall
21%;
56 | L O A N C r e d i t T r a n s
immediately become due and payable and shall be subject to a) That since 1991 up to 1998, petitioners had paid
a penalty charge of twenty four percent (24%) per annum PNB the total amount of P3,484,287.00;25 and
based on the defaulted principal amount. x x x 19 (Emphasis
supplied)
b) That PNB sent, and petitioners received, a March
10, 2000 demand letter.26
20
PNB prepared a Statement of Account as of October 12,
1998, detailing the amount due and demandable from
During trial, petitioner Lydia Silos (Lydia) testified that the
petitioners in the total amount of P3,620,541.60, broken down
Credit Agreement, the Amendment to Credit Agreement, Real
as follows:
Estate Mortgage and the Supplement thereto were all
prepared by respondent PNB and were presented to her and
Principal P 2,500,000.00 her husband Eduardo only for signature; that she was told by
PNB that the latter alone would determine the interest rate;
Interest 538,874.94 that as to the Amendment to Credit Agreement, she was told
that PNB would fill up the interest rate portion thereof; that at
Penalties 581,666.66 the time the parties executed the said Credit Agreement, she
was not informed about the applicable spread that PNB would
impose on her account; that the interest rate portion of all
Total P 3,620,541.60 Promissory Notes she and Eduardo issued were always left in
blank when they executed them, with respondents mere
assurance that it would be the one to enter or indicate
Despite demand, petitioners failed to pay the foregoing thereon the prevailing interest rate at the time of availment;
amount. Thus, PNB foreclosed on the mortgage, and on and that they agreed to such arrangement. She further
January 14, 1999, TCTs T-14250 and T-16208 were sold to it at testified that the two Real Estate Mortgage agreements she
auction for the amount of P4,324,172.96.21 The sheriffs signed did not stipulate the payment of penalties; that she
certificate of sale was registered on March 11, 1999. and Eduardo consulted with a lawyer, and were told that
PNBs actions were improper, and so on March 20, 2000, they
wrote to the latter seeking a recomputation of their
More than a year later, or on March 24, 2000, petitioners filed outstanding obligation; and when PNB did not oblige, they
Civil Case No. 5975, seeking annulment of the foreclosure sale instituted Civil Case No. 5975.27
and an accounting of the PNB credit. Petitioners theorized that
after the first promissory note where they agreed to pay
19.5% interest, the succeeding stipulations for the payment of On cross-examination, Lydia testified that she has been in
interest in their loan agreements with PNB which allegedly business for 20 years; that she also borrowed from other
left to the latter the sole will to determine the interest rate individuals and another bank; that it was only with banks that
became null and void. Petitioners added that because the she was asked to sign loan documents with no indicated
interest rates were fixed by respondent without their prior interest rate; that she did not bother to read the terms of the
consent or agreement, these rates are void, and as a result, loan documents which she signed; and that she received
petitioners should only be made liable for interest at the legal several PNB statements of account detailing their outstanding
rate of 12%. They claimed further that they overpaid interests obligations, but she did not complain; that she assumed
on the credit, and concluded that due to this overpayment of instead that what was written therein is correct.28
steep interest charges, their debt should now be deemed
paid, and the foreclosure and sale of TCTs T-14250 and T- For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr.
16208 became unnecessary and wrongful. As for the imposed (Aspa), the sole witness for respondent, stated on cross-
penalty of P581,666.66, petitioners alleged that since the Real examination that as a practice, the determination of the prime
Estate Mortgage and the Supplement thereto did not include rates of interest was the responsibility solely of PNBs Treasury
penalties as part of the secured amount, the same should be Department which is based in Manila; that these prime rates
excluded from the foreclosure amount or bid price, even if were simply communicated to all PNB branches for
such penalties are provided for in the final Promissory Note, or implementation; that there are a multitude of considerations
PN 9707237.22 which determine the interest rate, such as the cost of money,
foreign currency values, PNBs spread, bank administrative
In addition, petitioners sought to be reimbursed an alleged costs, profitability, and the practice in the banking industry;
overpayment of P848,285.00 made during the period August that in every repricing of each loan availment, the borrower
21, 1991 to March 5, 1998,resulting from respondents has the right to question the rates, but that this was not done
imposition of the alleged illegal and steep interest rates. They by the petitioners; and that anything that is not found in the
also prayed to be awarded P200,000.00 by way of attorneys Promissory Note may be supplemented by the Credit
fees.23 Agreement.29

In its Answer,24 PNB denied that it unilaterally imposed or Ruling of the Regional Trial Court
fixed interest rates; that petitioners agreed that without prior
notice, PNB may modify interest rates depending on future On February 28, 2003, the trial court rendered judgment
policy adopted by it; and that the imposition of penalties was dismissing Civil Case No. 5975.30
agreed upon in the Credit Agreement. It added that the
imposition of penalties is supported by the all-inclusive clause
in the Real Estate Mortgage agreement which provides that It ruled that:
the mortgage shall stand as security for any and all other
obligations of whatever kind and nature owing to respondent, 1. While the Credit Agreement allows PNB to
which thus includes penalties imposed upon default or non- unilaterally increase its spread over the floating
payment of the principal and interest on due date. interest rate at any time depending on whatever
policy it may adopt in the future, it likewise allows for
On pre-trial, the parties mutually agreed to the following the decrease at any time of the same. Thus, such
material facts, among others: stipulation authorizing both the increase and
decrease of interest rates as may be applicable is
57 | L O A N C r e d i t T r a n s
valid,31 as was held in Consolidated Bank and Trust 1. [T]hat the interest rate to be applied after the
Corporation (SOLIDBANK) v. Court of Appeals;32 expiration of the first 30-day interest period for PN.
No. 9707237 should be 12% per annum;
2. Banks are allowed to stipulate that interest rates
on loans need not be fixed and instead be made 2. [T]hat the attorneys fees of10% is valid and
dependent on prevailing rates upon which to peg binding; and
such variable interest rates;33
3. [T]hat [PNB] is hereby ordered to reimburse
3. The Promissory Note, as the principal contract [petitioners] the excess in the bid price
evidencing petitioners loan, prevails over the Credit of P377,505.99 which is the difference between the
Agreement and the Real Estate Mortgage. total amount due [PNB] and the amount of its bid
price.
As such, the rate of interest, penalties and attorneys
fees stipulated in the Promissory Note prevail over SO ORDERED.41
those mentioned in the Credit Agreement and the
Real Estate Mortgage agreements;34
On the other hand, respondent did not appeal the June 4,2003
Order of the trial court which reduced its award of attorneys
4. Roughly, PNBs computation of the total amount of fees. It simply raised the issue in its appellees brief in the CA,
petitioners obligation is correct; 35 and included a prayer for the reversal of said Order.

5. Because the loan was admittedly due and In effect, the CA limited petitioners appeal to the following
demandable, the foreclosure was regularly made;36 issues:

6. By the admission of petitioners during pre-trial, all 1) Whether x x x the interest rates on petitioners
payments made to PNB were properly applied to the outstanding obligation were unilaterally and
principal, interest and penalties.37 arbitrarily imposed by PNB;

The dispositive portion of the trial courts Decision reads: 2) Whether x x x the penalty charges were secured
by the real estate mortgage; and
IN VIEW OF THE FOREGOING, judgment is hereby rendered in
favor of the respondent and against the petitioners by 3) Whether x x x the extrajudicial foreclosure and
DISMISSING the latters petition. sale are valid.42

Costs against the petitioners. The CA noted that, based on receipts presented by petitioners
during trial, the latter dutifully paid a total of P3,027,324.60 in
interest for the period August 7, 1991 to August 6, 1997, over
SO ORDERED.38
and above the P2.5 million principal obligation. And this is
exclusive of payments for insurance premiums, documentary
Petitioners moved for reconsideration. In an Order 39 dated stamp taxes, and penalty. All the while, petitioners did not
June 4, 2003, the trial court granted only a modification in the complain nor object to the imposition of interest; they in fact
award of attorneys fees, reducing the same from 10% to 1%. paid the same religiously and without fail for seven years. The
Thus, PNB was ordered to refund to petitioner the excess in appellate court ruled that petitioners are thus estopped from
attorneys fees in the amount of P356,589.90, viz: questioning the same.

WHEREFORE, judgment is hereby rendered upholding the The CA nevertheless noted that for the period July 30, 1997 to
validity of the interest rate charged by the respondent as well August 14, 1997, PNB wrongly applied an interest rate of
as the extra-judicial foreclosure proceedings and the 25.72% instead of the agreed 25%; thus it overcharged
Certificate of Sale. However, respondent is directed to refund petitioners, and the latter paid, an excess of P736.56 in
to the petitioner the amount of P356,589.90 representing the interest.
excess interest charged against the latter.
On the issue of penalties, the CA ruled that the express tenor
No pronouncement as to costs. of the Real Estate Mortgage agreements contemplated the
inclusion of the PN 9707237-stipulated 24% penalty in the
amount to be secured by the mortgaged property, thus
SO ORDERED.40

For and in consideration of certain loans, overdrafts and other


Ruling of the Court of Appeals
credit accommodations obtained from the MORTGAGEE and to
secure the payment of the same and those others that the
Petitioners appealed to the CA, which issued the questioned MORTGAGEE may extend to the MORTGAGOR, including
Decision with the following decretal portion: interest and expenses, and other obligations owing by the
MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books
WHEREFORE, in view of the foregoing, the instant appeal is
and records of the MORTGAGEE, the MORTGAGOR does
PARTLY GRANTED. The modified Decision of the Regional Trial
hereby transfer and convey by way of mortgage unto the
Court per Order dated June 4, 2003 is hereby AFFIRMED with
MORTGAGEE x x x43 (Emphasis supplied)
MODIFICATIONS, to wit:

58 | L O A N C r e d i t T r a n s
The CA believes that the 24% penalty is covered by the MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE
phrase "and other obligations owing by the mortgagor to the AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM
mortgagee" and should thus be added to the amount secured [THE] FORECLOSURE AMOUNT.
by the mortgages.44
III
The CA then proceeded to declare valid the foreclosure and
sale of properties covered by TCTs T-14250 and T-16208,
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF
which came as a necessary result of petitioners failure to pay
THE LOWER COURT, WHICH REDUCED THE ATTORNEYS FEES
the outstanding obligation upon demand.45The CA saw fit to
OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X
increase the trial courts award of 1% to 10%, finding the
X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND
latter rate to be reasonable and citing the Real Estate
[AWARDING] 10% ATTORNEYS FEES.48
Mortgage agreement which authorized the collection of the
higher rate.46
Petitioners Arguments
Finally, the CA ruled that petitioners are entitled
to P377,505.09 surplus, which is the difference between PNBs Petitioners insist that the interest rate provision in the Credit
bid price of P4,324,172.96 and petitioners total computed Agreement and the Amendment to Credit Agreement should
obligation as of January 14, 1999, or the date of the auction be declared null and void, for they relegated to PNB the sole
sale, in the amount of P3,946,667.87.47 power to fix interest rates based on arbitrary criteria or
factors such as bank policy, profitability, cost of money,
foreign currency values, and bank administrative costs;
Hence, the present Petition.
spaces for interest rates in the two Credit Agreements and the
promissory notes were left blank for PNB to unilaterally fill,
Issues and their consent or agreement to the interest rates imposed
thereafter was not obtained; the interest rate, which consists
of the prime rate plus the bank spread, is determined not by
The following issues are raised in this Petition:
agreement of the parties but by PNBs Treasury Department in
Manila. Petitioners conclude that by this method of fixing the
I interest rates, the principle of mutuality of contracts is
violated, and public policy as well as Circular 905 49 of the then
Central Bank had been breached.
A. THE COURT OF APPEALS AS WELL AS THE
LOWER COURT ERRED IN NOT NULLIFYING
THE INTEREST RATE PROVISION IN THE Petitioners question the CAs application of the principle of
CREDIT AGREEMENT DATED JULY 24, 1989 X estoppel, saying that no estoppel can proceed from an illegal
X X AND IN THE AMENDMENT TO CREDIT act. Though they failed to timely question the imposition of
AGREEMENT DATEDAUGUST 21, 1991 X X X the alleged illegal interest rates and continued to pay the loan
WHICH LEFT TO THE SOLE UNILATERAL on the basis of these rates, they cannot be deemed to have
DETERMINATION OF THE RESPONDENT PNB acquiesced, and hence could recover what they erroneously
THE ORIGINAL FIXING OF INTEREST RATE paid.50
AND ITS INCREASE, WHICH AGREEMENT IS
CONTRARY TO LAW, ART. 1308 OF THE [NEW
Petitioners argue that if the interest rates were nullified, then
CIVIL CODE], AS ENUNCIATED IN PONCIANO
their obligation to PNB is deemed extinguished as of July
ALMEIDA V. COURT OF APPEALS,G.R. [NO.]
1997; moreover, it would appear that they even made an over
113412, APRIL 17, 1996, AND CONTRARY TO
payment to the bank in the amount of P984,287.00.
PUBLIC POLICY AND PUBLIC INTEREST, AND
IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED Next, petitioners suggest that since the Real Estate Mortgage
COMPLAINT OF PETITIONER[S], AND [THEIR] agreements did not include nor specify, as part of the secured
PAYMENT OF THE INTEREST CHARGED. amount, the penalty of 24% authorized in PN 9707237, such
amount of P581,666.66 could not be made answerable by or
collected from the mortgages covering TCTs T-14250 and T-
B. CONSEQUENTLY, THE COURT OF APPEALS
16208. Claiming support from Philippine Bank of
AND THE LOWER COURT ERRED IN NOT
Communications [PBCom] v. Court of Appeals, 51 petitioners
DECLARING THAT PNB IS NOT AT ALL
insist that the phrase "and other obligations owing by the
ENTITLED TO ANY INTEREST EXCEPT THE
mortgagor to the mortgagee"52 in the mortgage agreements
LEGAL RATE FROM DATE OF DEMAND, AND
cannot embrace the P581,666.66 penalty, because, as held in
IN NOT APPLYING THE EXCESS OVER THE
the PBCom case, "[a] penalty charge does not belong to the
LEGAL RATE OF THE ADMITTED PAYMENTS
species of obligations enumerated in the mortgage, hence,
MADE BY PETITIONER[S] FROM 1991-1998
the said contract cannot be understood to secure the
IN THE ADMITTED TOTAL AMOUNT
penalty";53while the mortgages are the accessory contracts,
OF P3,484,287.00, TO PAYMENT OF THE
what items are secured may only be determined from the
PRINCIPAL OF P2,500,000.[00] LEAVING AN
provisions of the mortgage contracts, and not from the Credit
OVERPAYMENT OFP984,287.00 REFUNDABLE
Agreement or the promissory notes.
BY RESPONDENT TO PETITIONER[S] WITH
INTEREST OF 12% PER ANNUM.
Finally, petitioners submit that the trial courts award of 1%
attorneys fees should be maintained, given that in
II
foreclosures, a lawyers work consists merely in the
preparation and filing of the petition, and involves minimal
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN study.54 To allow the imposition of a staggering P396,211.00
HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED for such work would be contrary to equity. Petitioners state
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES that the purpose of attorneys fees in cases of this nature "is
ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE not to give respondent a larger compensation for the loan
59 | L O A N C r e d i t T r a n s
than the law already allows, but to protect it against any taking into consideration increases or decreases as
future loss or damage by being compelled to retain counsel x provided by law or by the Monetary Board, the banks
x x to institute judicial proceedings for the collection of its overall costs of funds, and upon agreement of the
credit."55 And because the instant case involves a simple parties.60
extrajudicial foreclosure, attorneys fees may be equitably
tempered.
e. That interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary
Respondents Arguments On this score, respondent submits there are various
factors that influence interest rates, from political
events to economic developments, etc.; the cost of
For its part, respondent disputes petitioners claim that
money, profitability and foreign currency transactions
interest rates were unilaterally fixed by it, taking relief in the
may not be discounted.61
CA pronouncement that petitioners are deemed estopped by
their failure to question the imposed rates and their continued
payment thereof without opposition. It adds that because the On the issue of penalties, respondent reiterates the trial
Credit Agreement and promissory notes contained both an courts finding that during pre-trial, petitioners admitted that
escalation clause and a de-escalation clause, it may not be the Statement of Account as of October 12, 1998 which
said that the bank violated the principle of mutuality. Besides, detailed and included penalty charges as part of the total
the increase or decrease in interest rates have been mutually outstanding obligation owing to the bank was correct.
agreed upon by the parties, as shown by petitioners Respondent justifies the imposition and collection of a penalty
continuous payment without protest. Respondent adds that as a normal banking practice, and the standard rate per
the alleged unilateral imposition of interest rates is not a annum for all commercial banks, at the time, was 24%.
proper subject for review by the Court because the issue was
never raised in the lower court.
Respondent adds that the purpose of the penalty or a penal
clause for that matter is to ensure the performance of the
As for petitioners claim that interest rates imposed by it are obligation and substitute for damages and the payment of
null and void for the reasons that 1) the Credit Agreements interest in the event of non-compliance. 62 And the promissory
and the promissory notes were signed in blank; 2) interest note being the principal agreement as opposed to the
rates were at short periods; 3) no interest rates could be mortgage, which is a mere accessory should prevail. This
charged where no agreement on interest rates was made in being the case, its inclusion as part of the secured amount in
writing; 4) PNB fixed interest rates on the basis of arbitrary the mortgage agreements is valid and necessary.
policies and standards left to its choosing; and 5) interest
rates based on prime rate plus applicable spread are
Regarding the foreclosure of the mortgages, respondent
indeterminate and arbitrary PNB counters:
accuses petitioners of pre-empting consolidation of its
ownership over TCTs T-14250 and T-16208; that petitioners
a. That Credit Agreements and promissory notes filed Civil Case No. 5975 ostensibly to question the foreclosure
were signed by petitioner[s] in blank Respondent and sale of properties covered by TCTs T-14250 and T-16208
claims that this issue was never raised in the lower in a desperate move to retain ownership over these
court. Besides, documentary evidence prevails over properties, because they failed to timely redeem them.
testimonial evidence; Lydia Silos testimony in this
regard is self-serving, unsupported and
Respondent directs the attention of the Court to its petition in
uncorroborated, and for being the lone evidence on
G.R. No. 181046,63 where the propriety of the CAs ruling on
this issue. The fact remains that these documents
the following issues is squarely raised:
are in proper form, presumed regular, and endure,
against arbitrary claims by Silos who is an
experienced business person that she signed 1. That the interest rate to be applied after the
questionable loan documents whose provisions for expiration of the first 30-day interest period for PN
interest rates were left blank, and yet she continued 9707237 should be 12% per annum; and
to pay the interests without protest for a number of
years.56
2. That PNB should reimburse petitioners the excess
in the bid price of P377,505.99 which is the
b. That interest rates were at short periods difference between the total amount due to PNB and
Respondent argues that the law which governs and the amount of its bid price.
prohibits changes in interest rates made more than
once every twelve months has been removed 57 with
Our Ruling
the issuance of Presidential Decree No. 858.58

The Court grants the Petition.


c. That no interest rates could be charged where no
agreement on interest rates was made in writing in
violation of Article 1956 of the Civil Code, which Before anything else, it must be said that it is not the function
provides that no interest shall be due unless it has of the Court to re-examine or re-evaluate evidence adduced
been expressly stipulated in writing Respondent by the parties in the proceedings below. The rule admits of
insists that the stipulated 25% per annum as certain well-recognized exceptions, though, as when the lower
embodied in PN 9707237 should be imposed during courts findings are not supported by the evidence on record
the interim, or the period after the loan became due or are based on a misapprehension of facts, or when certain
and while it remains unpaid, and not the legal relevant and undisputed facts were manifestly overlooked
interest of 12% as claimed by petitioners.59 that, if properly considered, would justify a different
conclusion. This case falls within such exceptions.
d. That PNB fixed interest rates on the basis of
arbitrary policies and standards left to its choosing The Court notes that on March 5, 2008, a Resolution was
According to respondent, interest rates were fixed issued by the Courts First Division denying respondents

60 | L O A N C r e d i t T r a n s
petition in G.R. No. 181046, due to late filing, failure to attach The Bank reserves the right to increase the interest rate
the required affidavit of service of the petition on the trial within the limits allowed by law at any time depending on
court and the petitioners, and submission of a defective whatever policy it may adopt in the future and provided, that,
verification and certification of non-forum shopping. On June the interest rate on this accommodation shall be
25, 2008, the Court issued another Resolution denying with correspondingly decreased in the event that the applicable
finality respondents motion for reconsideration of the March maximum interest rate is reduced by law or by the Monetary
5, 2008 Resolution. And on August 15, 2008, entry of Board. In either case, the adjustment in the interest rate
judgment was made. This thus settles the issues, as above- agreed upon shall take effect on the effectivity date of the
stated, covering a) the interest rate or 12% per annum that increase or decrease in maximum interest rate.
applies upon expiration of the first 30 days interest period
provided under PN 9707237, and b)the CAs decree that PNB
This clause is authorized by Section 2 of Presidential Decree
should reimburse petitioner the excess in the bid price
(P.D.) No. 1684 which further amended Act No. 2655 ("The
of P377,505.09.
Usury Law"), as amended, thus:

It appears that respondents practice, more than once


Section 2. The same Act is hereby amended by adding a new
proscribed by the Court, has been carried over once more to
section after Section 7, to read as follows:
the petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or
required of, its borrowers which allow the bank to increase or Sec. 7-a. Parties to an agreement pertaining to a loan or
decrease interest rates "within the limits allowed by law at forbearance of money, goods or credits may stipulate that the
any time depending on whatever policy it may adopt in the rate of interest agreed upon may be increased in the event
future." Thus, in Philippine National Bank v. Court of that the applicable maximum rate of interest is increased
Appeals,64 such stipulation and similar ones were declared in bylaw or by the Monetary Board; Provided, That such
violation of Article 130865 of the Civil Code. In a second case, stipulation shall be valid only if there is also a stipulation in
Philippine National Bank v. Court of Appeals,66 the very same the agreement that the rate of interest agreed upon shall be
stipulations found in the credit agreement and the promissory reduced in the event that the applicable maximum rate of
notes prepared and issued by the respondent were again interest is reduced by law or by the Monetary Board; Provided
invalidated. The Court therein said: 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.
The Credit Agreement provided inter alia, that

Section 1 of P.D. No. 1684 also empowered the Central Banks


(a) The BANK reserves the right to increase the interest rate
Monetary Board to prescribe the maximum rates of interest
within the limits allowed by law at any time depending on
for loans and certain forbearances. Pursuant to such authority,
whatever policy it may adopt in the future; Provided, that the
the Monetary Board issued Central Bank (C.B.) Circular No.
interest rate on this accommodation shall be correspondingly
905, series of 1982, Section 5 of which provides:
decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon shall take Sec. 5. Section 1303 of the Manual of Regulations (for Banks
effect on the effectivity date of the increase or decrease in the and Other Financial Intermediaries) is hereby amended to
maximum interest rate. read as follows:

The Promissory Note, in turn, authorized the PNB to raise the Sec. 1303. Interest and Other Charges.
rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed by
The rate of interest, including commissions, premiums, fees
law."
and other charges, on any loan, or forbearance of any money,
goods or credits, regardless of maturity and whether secured
The Real Estate Mortgage contract likewise provided that or unsecured, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
(k) INCREASE OF INTEREST RATE: The rate of interest charged
on the obligation secured by this mortgage as well as the P.D. No. 1684 and C.B. Circular No. 905 no more than allow
interest on the amount which may have been advanced by contracting parties to stipulate freely regarding any
the MORTGAGEE, in accordance with the provision hereof, subsequent adjustment in the interest rate that shall accrue
shall be subject during the life of this contract to such an on a loan or forbearance of money, goods or credits. In fine,
increase within the rate allowed by law, as the Board of they can agree to adjust, upward or downward, the interest
Directors of the MORTGAGEE may prescribe for its debtors. previously stipulated. However, contrary to the stubborn
insistence of petitioner bank, the said law and circular did not
authorize either party to unilaterally raise the interest rate
xxxx
without the others consent.

In making the unilateral increases in interest rates, petitioner


It is basic that there can be no contract in the true sense in
bank relied on the escalation clause contained in their credit
the absence of the element of agreement, or of mutual assent
agreement which provides, as follows:
of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of


the contracting parties. The minds of all the parties must
meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is
61 | L O A N C r e d i t T r a n s
always a vital component, for it can make or break a capital Indeed, the interest rate which appears to have been agreed
venture. Thus, any change must be mutually agreed upon, upon by the parties to the contract in this case was the 21%
otherwise, it is bereft of any binding effect. 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
We cannot countenance petitioner banks posturing that the
"interest rate agreed upon," in reference to the original 21%
escalation clause at bench gives it unbridled right to
interest rate. x x x
unilaterally upwardly adjust the interest on private
respondents loan. That would completely take away from
private respondents the right to assent to an important xxxx
modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank
Petitioners never agreed in writing to pay the increased
v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we
interest rates demanded by respondent bank in contravention
held
to the tenor of their credit agreement. That an increase in
interest rates from 18% to as much as 68% is excessive and
x x x The unilateral action of the PNB in increasing the interest unconscionable is indisputable. Between 1981 and 1984,
rate on the private respondents loan violated the mutuality of petitioners had paid an amount equivalent to virtually half of
contracts ordained in Article 1308 of the Civil Code: 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;
Art. 1308. The contract must bind both contracting parties; its
respondent bank was demanding P58,377,487.00 over and
validity or compliance cannot be left to the will of one of
above those amounts already previously paid by the spouses.
them.

Escalation clauses are not basically wrong or legally


In order that obligations arising from contracts may have the
objectionable so long as they are not solely potestative but
force of law between the parties, there must be mutuality
based on reasonable and valid grounds. Here, as clearly
between the parties based on their essential equality. A
demonstrated above, not only [are] the increases of the
contract containing a condition which makes its fulfillment
interest rates on the basis of the escalation clause patently
dependent exclusively upon the uncontrolled will of one of the
unreasonable and unconscionable, but also there are no valid
contracting parties, is void . . . . Hence, even assuming that
and reasonable standards upon which the increases are
the . . . loan agreement between the PNB and the private
anchored.
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 xxxx
violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of
In the face of the unequivocal interest rate provisions in the
a contract of adhesion, where the parties do not bargain on
credit agreement and in the law requiring the parties to agree
equal footing, the weaker partys (the debtor) participation
to changes in the interest rate in writing, we hold that the
being reduced to the alternative "to take it or leave it" . . . .
unilateral and progressive increases imposed by respondent
Such a contract is a veritable trap for the weaker party whom
PNB were null and void. Their effect was to increase the total
the courts of justice must protect against abuse and
obligation on an eighteen million peso loan to an amount way
imposition.67 (Emphases supplied)
over three times that which was originally granted to the
borrowers. That these increases, occasioned by crafty
Then again, in a third case, Spouses Almeda v. Court of manipulations in the interest rates is unconscionable and
Appeals,68 the Court invalidated the very same provisions in neutralizes the salutary policies of extending loans to spur
the respondents prepared Credit Agreement, declaring thus: business cannot be disputed.69 (Emphases supplied)

The binding effect of any agreement between parties to a Still, in a fourth case, Philippine National Bank v. Court of
contract is premised on two settled principles: (1) that any Appeals,70 the above doctrine was reiterated:
obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the
The promissory note contained the following stipulation:
parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is void. Any stipulation For value received, I/we, [private respondents] jointly and
regarding the validity or compliance of the contract which is severally promise to pay to the ORDER of the PHILIPPINE
left solely to the will of one of the parties, is likewise, invalid. NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine
Currency, together with interest thereon at the rate of 12%
It is plainly obvious, therefore, from the undisputed facts of
per annum until paid, which interest rate the Bank may at any
the case that respondent bank unilaterally altered the terms
time without notice, raise within the limits allowed by law, and
of its contract with petitioners by increasing the interest rates
I/we also agree to pay jointly and severally ____% per annum
on the loan without the prior assent of the latter. In fact, the
penalty charge, by way of liquidated damages should this
manner of agreement is itself explicitly stipulated by the Civil
note be unpaid or is not renewed on due dated.
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 Payment of this note shall be as follows:
interest rate provision of the credit agreement signed
between the parties is that petitioners were bound merely to
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
pay 21% interest, subject to a possible escalation or de-
escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by On the reverse side of the note the following condition was
law; and 3) upon agreement. stamped:

62 | L O A N C r e d i t T r a n s
All short-term loans to be granted starting January 1, 1978 In order that obligations arising from contracts may have the
shall be made subject to the condition that any and/or all force of law between the parties, there must be mutuality
extensions hereof that will leave any portion of the amount between the parties based on their essential equality. A
still unpaid after 730 days shall automatically convert the contract containing a condition which makes its fulfillment
outstanding balance into a medium or long-term obligation as dependent exclusively upon the uncontrolled will of one of the
the case may be and give the Bank the right to charge the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
interest rates prescribed under its policies from the date the SCRA 555). Hence, even assuming that the P1.8 million loan
account was originally granted. 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,
To secure payment of the loan the parties executed a real
that license would have been null and void for being violative
estate mortgage contract which provided:
of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a
(k) INCREASE OF INTEREST RATE: contract of adhesion, where the parties do not bargain on
equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua
The rate of interest charged on the obligation secured by this
vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
mortgage as well as the interest on the amount which may
contract is a veritable trap for the weaker party whom the
have been advanced by the MORTGAGEE, in accordance with
courts of justice must protect against abuse and imposition.
the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for A similar ruling was made in Philippine National Bank v. Court
its debtors. of Appeals. The credit agreement in that case provided:

xxxx 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
To begin with, PNBs argument rests on a misapprehension of
interest rate on this accommodation shall be correspondingly
the import of the appellate courts ruling. The Court of
decreased in the event that the applicable maximum interest
Appeals nullified the interest rate increases not because the
is reduced by law or by the Monetary Board. . . .
promissory note did not comply with P.D. No. 1684 by
providing for a de-escalation, but because the absence of
such provision made the clause so one-sided as to make it As in the first case, PNB successively increased the stipulated
unreasonable. interest so that what was originally 12% per annum became,
after only two years, 42%. In declaring the increases invalid,
we held:
That ruling is correct. It is in line with our decision in Banco
Filipino Savings & Mortgage Bank v. Navarro that although P.D.
No. 1684 is not to be retroactively applied to loans granted We cannot countenance petitioner banks posturing that the
before its effectivity, there must nevertheless be a de- escalation clause at bench gives it unbridled right to
escalation clause to mitigate the one-sidedness of the unilaterally upwardly adjust the interest on private
escalation clause. Indeed because of concern for the unequal respondents loan. That would completely take away from
status of borrowers vis--vis the banks, our cases after Banco private respondents the right to assent to an important
Filipino have fashioned the rule that any increase in the rate modification in their agreement, and would negate the
of interest made pursuant to an escalation clause must be the element of mutuality in contracts.
result of agreement between the parties.
Only recently we invalidated another round of interest
Thus in Philippine National Bank v. Court of Appeals, two increases decreed by PNB pursuant to a similar agreement it
promissory notes authorized PNB to increase the stipulated had with other borrowers:
interest per annum" within the limits allowed by law at any
time depending on whatever policy [PNB] may adopt in the
[W]hile the Usury Law ceiling on interest rates was lifted by
future; Provided, that the interest rate on this note shall be
C.B. Circular 905, nothing in the said circular could possibly be
correspondingly decreased in the event that the applicable
read as granting respondent bank carte blanche authority to
maximum interest rate is reduced by law or by the Monetary
raise interest rates to levels which would either enslave its
Board." The real estate mortgage likewise provided:
borrowers or lead to a hemorrhaging of their assets.

The rate of interest charged on the obligation secured by this


In this case no attempt was made by PNB to secure the
mortgage as well as the interest on the amount which may
conformity of private respondents to the successive increases
have been advanced by the MORTGAGEE, in accordance with
in the interest rate. Private respondents assent to the
the provisions hereof, shall be subject during the life of this
increases can not be implied from their lack of response to the
contract to such an increase within the rate allowed by law, as
letters sent by PNB, informing them of the increases. For as
the Board of Directors of the MORTGAGEE may prescribe for
stated in one case, no one receiving a proposal to change a
its debtors.
contract is obliged to answer the proposal. 71 (Emphasis
supplied)
Pursuant to these clauses, PNB successively increased the
interest from 18% to 32%, then to 41% and then to 48%. This
We made the same pronouncement in a fifth case, New
Court declared the increases unilaterally imposed by [PNB] to
Sampaguita Builders Construction, Inc. v. Philippine National
be in violation of the principle of mutuality as embodied in
Bank,72 thus
Art.1308 of the Civil Code, which provides that "[t]he contract
must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court Courts have the authority to strike down or to modify
explained: provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and

63 | L O A N C r e d i t T r a n s
other charges at the latters sole discretion and without giving on whatever policy it may adopt in the future. 76 (Emphases
prior notice to and securing the consent of the borrowers. This supplied)
unilateral authority is anathema to the mutuality of contracts
and enable lenders to take undue advantage of borrowers.
while the eight promissory notes issued pursuant thereto
Although the Usury Law has been effectively repealed, courts
granted PNB the right to increase or reduce interest rates
may still reduce iniquitous or unconscionable rates charged
"within the limits allowed by law or the Monetary Board" 77 and
for the use of money. Furthermore, excessive interests,
the Real Estate Mortgage agreement included the same right
penalties and other charges not revealed in disclosure
to increase or reduce interest rates "at any time depending on
statements issued by banks, even if stipulated in the
whatever policy PNB may adopt in the future."78
promissory notes, cannot be given effect under the Truth in
Lending Act.73 (Emphasis supplied)
On the basis of the Credit Agreement, petitioners issued
promissory notes which they signed in blank, and respondent
Yet again, in a sixth disposition, Philippine National Bank v.
later on entered their corresponding interest rates, as follows:
Spouses Rocamora,74 the above pronouncements were
reiterated to debunk PNBs repeated reliance on its
invalidated contract stipulations: 1st Promissory Note dated July 24, 1989 19.5%;

We repeated this rule in the 1994 case of PNB v. CA and 2nd Promissory Note dated November 22, 1989
Jayme Fernandez and the 1996 case of PNB v. CA and Spouses 23%;
Basco. Taking no heed of these rulings, the escalation clause
PNB used in the present case to justify the increased interest
3rd Promissory Note dated March 21, 1990 22%;
rates is no different from the escalation clause assailed in the
1996 PNB case; in both, the interest rates were increased
from the agreed 12% per annum rate to 42%. x x x 4th Promissory Note dated July 19, 1990 24%;

xxxx 5th Promissory Note dated December 17, 1990


28%;
On the strength of this ruling, PNBs argument that the
spouses Rocamoras failure to contest the increased interest 6th Promissory Note dated February 14, 1991 32%;
rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted
7th Promissory Note dated March 1, 1991 30%; and
to their implied acceptance of the increase should likewise
fail.
8th Promissory Note dated July 11, 1991 24%.79
Evidently, PNBs failure to secure the spouses Rocamoras
consent to the increased interest rates prompted the lower On the other hand, the August 1991 Amendment to Credit
courts to declare excessive and illegal the interest rates Agreement contains the following stipulation regarding
imposed. Togo around this lower court finding, PNB alleges interest:
that the P206,297.47 deficiency claim was computed using
only the original 12% per annum interest rate. We find this
1.03. Interest on Line Availments. (a) The Borrowers agree to
unlikely. Our examination of PNBs own ledgers, included in
pay interest on each Availment from date of each Availment
the records of the case, clearly indicates that PNB imposed
up to but not including the date of full payment thereof at the
interest rates higher than the agreed 12% per annum rate.
rate per annum which is determined by the Bank to be prime
This confirmatory finding, albeit based solely on ledgers found
rate plus applicable spread in effect as of the date of each
in the records, reinforces the application in this case of the
Availment.80 (Emphases supplied)
rule that findings of the RTC, when affirmed by the CA, are
binding upon this Court.75 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners
again executed and signed the following promissory notes in
Verily, all these cases, including the present one, involve
blank, for the respondent to later on enter the corresponding
identical or similar provisions found in respondents credit
interest rates, which it did, as follows:
agreements and promissory notes. Thus, the July 1989 Credit
Agreement executed by petitioners and respondent contained
the following stipulation on interest: 9th Promissory Note dated November 8, 1991 26%;

1.03. Interest. (a) The Loan shall be subject to interest at the 10th Promissory Note dated March 19, 1992 25%;
rate of 19.5% [per annum]. Interest shall be payable in
advance every one hundred twenty days at the rate prevailing
11th Promissory Note dated July 11, 1992 23%;
at the time of the renewal.

12th Promissory Note dated November 10, 1992


(b) The Borrower agrees that the Bank may modify the
21%;
interest rate in the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the
shifting from the floating interest rate system to the fixed 13th Promissory Note dated March 15, 1993 21%;
interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum which is
14th Promissory Note dated July 12, 1993 17.5%;
equal to the Banks spread over the current floating interest
rate, the Borrower hereby agrees that the Bank may, without
need of notice to the Borrower, increase or decrease its 15th Promissory Note dated November 17, 1993
spread over the floating interest rate at any time depending 21%;

64 | L O A N C r e d i t T r a n s
16th Promissory Note dated March 28, 1994 21%; opinions, the nature and purpose of his borrowings, the effect
of foreign currency values or fluctuations on his business or
borrowing, etc. these are not factors which influence the
17th Promissory Note dated July 13, 1994 21%;
fixing of interest rates to be imposed on him. Clearly,
respondents method of fixing interest rates based on one-
18th Promissory Note dated November 16, 1994 sided, indeterminate, and subjective criteria such as
16%; profitability, cost of money, bank costs, etc. is arbitrary for
there is no fixed standard or margin above or below these
considerations.
19th Promissory Note dated April 10, 1995 21%;

The stipulation in the promissory notes subjecting the interest


20th Promissory Note dated July 19, 1995 18.5%;
rate to review does not render the imposition by UCPB of
interest rates on the obligations of the spouses Beluso valid.
21st Promissory Note dated December 18, 1995 According to said stipulation:
18.75%;
The interest rate shall be subject to review and may be
22nd Promissory Note dated April 22, 1996 18.5%; increased or decreased by the LENDER considering among
others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial
23rd Promissory Note dated July 22, 1996 18.5%;
institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the
24th Promissory Note dated November 25, 1996 LENDER after due consideration of all dealings with the
18%; BORROWER.

25th Promissory Note dated May 30, 1997 17.5%; It should be pointed out that the authority to review the
and interest rate was given [to] UCPB alone as the lender.
Moreover, UCPB may apply the considerations enumerated in
this provision as it wishes. As worded in the above provision,
26th Promissory Note (PN 9707237) dated July 30,
UCPB may give as much weight as it desires to each of the
1997 25%.81
following considerations: (1) the prevailing financial and
monetary condition;(2) the rate of interest and charges which
The 9th up to the 17th promissory notes provide for the other banks or financial institutions charge or offer to charge
payment of interest at the "rate the Bank may at any time for similar accommodations; and/or(3) the resulting
without notice, raise within the limits allowed by law x x profitability to the LENDER (UCPB) after due consideration of
x."82 On the other hand, the 18th up to the 26th promissory all dealings with the BORROWER (the spouses Beluso). Again,
notes which includes PN 9707237 carried the following as in the case of the interest rate provision, there is no fixed
provision: margin above or below these considerations.

x x x For this purpose, I/We agree that the rate of interest In view of the foregoing, the Separability Clause cannot save
herein stipulated may be increased or decreased for the either of the two options of UCPB as to the interest to be
subsequent Interest Periods, with prior notice to the Borrower imposed, as both options violate the principle of mutuality of
in the event of changes in interest rate prescribed by law or contracts.84 (Emphases supplied)
the Monetary Board of the Central Bank of the Philippines, or
in the Banks overall cost of funds. I/We hereby agree that in
To repeat what has been said in the above-cited cases, any
the event I/we are not agreeable to the interest rate fixed for
modification in the contract, such as the interest rates, must
any Interest Period, I/we shall have the option to prepay the
be made with the consent of the contracting
loan or credit facility without penalty within ten (10) calendar
parties.1wphi1 The minds of all the parties must meet as to
days from the Interest Setting Date.83 (Emphasis supplied)
the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan
These stipulations must be once more invalidated, as was agreements, the rate of interest is a principal condition, if not
done in previous cases. The common denominator in these the most important component. Thus, any modification
cases is the lack of agreement of the parties to the imposed thereof must be mutually agreed upon; otherwise, it has no
interest rates. For this case, this lack of consent by the binding effect.
petitioners has been made obvious by the fact that they
signed the promissory notes in blank for the respondent to fill.
What is even more glaring in the present case is that, the
We find credible the testimony of Lydia in this respect.
stipulations in question no longer provide that the parties
Respondent failed to discredit her; in fact, its witness PNB
shall agree upon the interest rate to be fixed; -instead, they
Kalibo Branch Manager Aspa admitted that interest rates were
are worded in such a way that the borrower shall agree to
fixed solely by its Treasury Department in Manila, which were
whatever interest rate respondent fixes. In credit agreements
then simply communicated to all PNB branches for
covered by the above-cited cases, it is provided that:
implementation. If this were the case, then this would explain
why petitioners had to sign the promissory notes in blank,
since the imposable interest rates have yet to be determined The Bank reserves the right to increase the interest rate
and fixed by respondents Treasury Department in Manila. 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 accommodation shall be correspondingly
Moreover, in Aspas enumeration of the factors that determine
decreased in the event that the applicable maximum interest
the interest rates PNB fixes such as cost of money, foreign
rate is reduced by law or by the Monetary Board. In either
currency values, bank administrative costs, profitability, and
case, the adjustment in the interest rate agreed upon shall
considerations which affect the banking industry it can be
take effect on the effectivity date of the increase or decrease
seen that considerations which affect PNBs borrowers are
in maximum interest rate.85 (Emphasis supplied)
ignored. A borrowers current financial state, his feedback or
65 | L O A N C r e d i t T r a n s
Whereas, in the present credit agreements under scrutiny, it is (4) the charges, individually itemized, which are paid
stated that: or to be paid by such person in connection with the
transaction but which are not incident to the
extension of credit;
IN THE JULY 1989 CREDIT AGREEMENT

(5) the total amount to be financed;


(b) The Borrower agrees that the Bank may modify the
interest rate on the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the (6) the finance charge expressed in terms of pesos
shifting from the floating interest rate system to the fixed and centavos; and
interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is
(7) the percentage that the finance bears to the total
equal to the Banks spread over the current floating interest
amount to be financed expressed as a simple annual
rate, the Borrower hereby agrees that the Bank may, without
rate on the outstanding unpaid balance of the
need of notice to the Borrower, increase or decrease its
obligation.
spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future. 86 (Emphases
supplied) Under Section 4(6), "finance charge" represents the amount
to be paid by the debtor incident to the extension of credit
such as interest or discounts, collection fees, credit
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
investigation fees, attorneys fees, and other service charges.
The total finance charge represents the difference between
1.03. Interest on Line Availments. (a) The Borrowers agree to (1) the aggregate consideration (down payment plus
pay interest on each Availment from date of each Availment installments) on the part of the debtor, and (2) the sum of the
up to but not including the date of full payment thereof at the cash price and non-finance charges.91
rate per annum which is determined by the Bank to be prime
rate plus applicable spread in effect as of the date of each
By requiring the petitioners to sign the credit documents and
Availment.87 (Emphasis supplied)
the promissory notes in blank, and then unilaterally filling
them up later on, respondent violated the Truth in Lending
Plainly, with the present credit agreement, the element of Act, and was remiss in its disclosure obligations. In one case,
consent or agreement by the borrower is now completely which the Court finds applicable here, it was held:
lacking, which makes respondents unlawful act all the more
reprehensible.
UCPB further argues that since the spouses Beluso were duly
given copies of the subject promissory notes after their
Accordingly, petitioners are correct in arguing that estoppel execution, then they were duly notified of the terms thereof,
should not apply to them, for "[e]stoppel cannot be predicated in substantial compliance with the Truth in Lending Act.
on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is
Once more, we disagree. Section 4 of the Truth in Lending Act
against public policy."88
clearly provides that the disclosure statement must be
furnished prior to the consummation of the transaction:
It appears that by its acts, respondent violated the Truth in
Lending Act, or Republic Act No. 3765, which was enacted "to
SEC. 4. Any creditor shall furnish to each person to whom
protect x x x citizens from a lack of awareness of the true cost
credit is extended, prior to the consummation of the
of credit to the user by using a full disclosure of such cost with
transaction, a clear statement in writing setting forth, to the
a view of preventing the uninformed use of credit to the
extent applicable and in accordance with rules and
detriment of the national economy."89 The law "gives a
regulations prescribed by the Board, the following information:
detailed enumeration of the specific information required to
be disclosed, among which are the interest and other charges
incident to the extension of credit." 90 Section 4 thereof (1) the cash price or delivered price of the property
provides that a disclosure statement must be furnished prior or service to be acquired;
to the consummation of the transaction, thus:
(2) the amounts, if any, to be credited as down
SEC. 4. Any creditor shall furnish to each person to whom payment and/or trade-in;
credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to the
(3) the difference between the amounts set forth
extent applicable and in accordance with rules and
under clauses (1) and (2);
regulations prescribed by the Board, the following information:

(4) the charges, individually itemized, which are paid


(1) the cash price or delivered price of the property
or to be paid by such person in connection with the
or service to be acquired;
transaction but which are not incident to the
extension of credit;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(5) the total amount to be financed;

(3) the difference between the amounts set forth


(6) the finance charge expressed in terms of pesos
under clauses (1) and (2);
and centavos; and

(7) the percentage that the finance bears to the total


amount to be financed expressed as a simple annual

66 | L O A N C r e d i t T r a n s
rate on the outstanding unpaid balance of the the questionable practice will continue unchecked, and
obligation. respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view
so perverse. This is exactly what the Court meant in the
The rationale of this provision is to protect users of credit from
immediately preceding cited case when it said that "the
a lack of awareness of the true cost thereof, proceeding from
belated discovery of the true cost of credit does not reverse
the experience that banks are able to conceal such true cost
the ill effects of an already consummated business
by hidden charges, uncertainty of interest rates, deduction of
decision;"95 as to the 99 borrowers who did not or could not
interests from the loaned amount, and the like. The law
complain, the illegal act shall have become a fait accompli to
thereby seeks to protect debtors by permitting them to fully
their detriment, they have already suffered the oppressive
appreciate the true cost of their loan, to enable them to give
rates.
full consent to the contract, and to properly evaluate their
options in arriving at business decisions. Upholding UCPBs
claim of substantial compliance would defeat these purposes Besides, that petitioners are given the right to question the
of the Truth in Lending Act. The belated discovery of the true interest rates imposed is, under the circumstances, irrelevant;
cost of credit will too often not be able to reverse the ill we have a situation where the petitioners do not stand on
effects of an already consummated business decision. equal footing with the respondent. It is doubtful that any
borrower who finds himself in petitioners position would dare
question respondents power to arbitrarily modify interest
In addition, the promissory notes, the copies of which were
rates at any time. In the second place, on what basis could
presented to the spouses Beluso after execution, are not
any borrower question such power, when the criteria or
sufficient notification from UCPB. As earlier discussed, the
standards which are really one-sided, arbitrary and
interest rate provision therein does not sufficiently indicate
subjective for the exercise of such power are precisely lost
with particularity the interest rate to be applied to the loan
on him?
covered by said promissory notes.92(Emphases supplied)

For the same reasons, the Court cannot validly consider that,
However, the one-year period within which an action for
as stipulated in the 18th up to the 26th promissory notes,
violation of the Truth in Lending Act may be filed evidently
petitioners are granted the option to prepay the loan or credit
prescribed long ago, or sometime in 2001, one year after
facility without penalty within 10 calendar days from the
petitioners received the March 2000 demand letter which
Interest Setting Date if they are not agreeable to the interest
contained the illegal charges.
rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time
The fact that petitioners later received several statements of petitioners learn of the interest rate, they are already bound
account detailing its outstanding obligations does not cure to pay it because they have already pre-signed the note
respondents breach. To repeat, the belated discovery of the where the rate is subsequently entered.
true cost of credit does not reverse the ill effects of an already
consummated business decision.93
Besides, premium may not be placed upon a stipulation in a
contract which grants one party the right to choose whether
Neither may the statements be considered proposals sent to to continue with or withdraw from the agreement if it
secure the petitioners conformity; they were sent after the discovers that what the other party has been doing all along is
imposition and application of the interest rate, and not before. improper or illegal.
And even if it were to be presumed that these are proposals or
offers, there was no acceptance by petitioners. "No one
Thus said, respondents arguments relative to the credit
receiving a proposal to modify a loan contract, especially
documents that documentary evidence prevails over
regarding interest, is obliged to answer the proposal." 94
testimonial evidence; that the credit documents are in proper
form, presumed regular, and endure, against arbitrary claims
Loan and credit arrangements may be made enticing by, or by petitioners, experienced business persons that they are,
"sweetened" with, offers of low initial interest rates, but they signed questionable loan documents whose provisions
actually accompanied by provisions written in fine print that for interest rates were left blank, and yet they continued to
allow lenders to later on increase or decrease interest rates pay the interests without protest for a number of years
unilaterally, without the consent of the borrower, and deserve no consideration.
depending on complex and subjective factors. Because they
have been lured into these contracts by initially low interest
With regard to interest, the Court finds that since the
rates, borrowers get caught and stuck in the web of
escalation clause is annulled, the principal amount of the loan
subsequent steep rates and penalties, surcharges and the
is subject to the original or stipulated rate of interest, and
like. Being ordinary individuals or entities, they naturally
upon maturity, the amount due shall be subject to legal
dread legal complications and cannot afford court litigation;
interest at the rate of 12% per annum. This is the uniform
they succumb to whatever charges the lenders impose. At the
ruling adopted in previous cases, including those cited
very least, borrowers should be charged rightly; but then
here.96 The interests paid by petitioners should be applied first
again this is not possible in a one-sided credit system where
to the payment of the stipulated or legal and unpaid interest,
the temptation to abuse is strong and the willingness to
as the case may be, and later, to the capital or
rectify is made weak by the eternal desire for profit.
principal.97 Respondent should then refund the excess amount
of interest that it has illegally imposed upon petitioners; "[t]he
Given the above supposition, the Court cannot subscribe to amount to be refunded refers to that paid by petitioners when
respondents argument that in every repricing of petitioners they had no obligation to do so." 98 Thus, the parties original
loan availment, they are given the right to question the agreement stipulated the payment of 19.5% interest;
interest rates imposed. The import of respondents line of however, this rate was intended to apply only to the first
reasoning cannot be other than that if one out of every promissory note which expired on November 21, 1989 and
hundred borrowers questions respondents practice of was paid by petitioners; it was not intended to apply to the
unilaterally fixing interest rates, then only the loan whole duration of the loan. Subsequent higher interest rates
arrangement with that lone complaining borrower will enjoy have been declared illegal; but because only the rates are
the benefit of review or re-negotiation; as to the 99 others, found to be improper, the obligation to pay interest subsists,

67 | L O A N C r e d i t T r a n s
the same to be fixed at the legal rate of 12% per annum. For the fixing of the proper amounts due and owing to the
However, the 12% interest shall apply only until June 30, parties to the respondent as creditor and to the petitioners
2013. Starting July1, 2013, the prevailing rate of interest shall who are entitled to a refund as a consequence of
be 6% per annum pursuant to our ruling in Nacar v. Gallery overpayment considering that they paid more by way of
Frames99 and Bangko Sentral ng Pilipinas-Monetary Board interest charges than the 12% per annum103 herein allowed
Circular No. 799. the case should be remanded to the lower court for proper
accounting and computation, applying the following
procedure:
Now to the issue of penalty. PN 9707237 provides that failure
to pay it or any installment thereon, when due, shall
constitute default, and a penalty charge of 24% per annum 1. The 1st Promissory Note with the 19.5% interest
based on the defaulted principal amount shall be imposed. rate is deemed proper and paid;
Petitioners claim that this penalty should be excluded from
the foreclosure amount or bid price because the Real Estate
2. All subsequent promissory notes (from the 2nd to
Mortgage and the Supplement thereto did not specifically
the 26th promissory notes) shall carry an interest
include it as part of the secured amount. Respondent justifies
rate of only 12% per annum. 104 Thus, interest
its inclusion in the secured amount, saying that the purpose of
payment made in excess of 12% on the 2nd
the penalty or a penal clause is to ensure the performance of
promissory note shall immediately be applied to the
the obligation and substitute for damages and the payment of
principal, and the principal shall be accordingly
interest in the event of non-compliance. 100 Respondent adds
reduced. The reduced principal shall then be
that the imposition and collection of a penalty is a normal
subjected to the 12%105 interest on the 3rd
banking practice, and the standard rate per annum for all
promissory note, and the excess over 12% interest
commercial banks, at the time, was 24%. Its inclusion as part
payment on the 3rd promissory note shall again be
of the secured amount in the mortgage agreements is thus
applied to the principal, which shall again be reduced
valid and necessary.
accordingly. The reduced principal shall then be
subjected to the 12% interest on the 4th promissory
The Court sustains petitioners view that the penalty may not note, and the excess over12% interest payment on
be included as part of the secured amount. Having found the the 4th promissory note shall again be applied to the
credit agreements and promissory notes to be tainted, we principal, which shall again be reduced accordingly.
must accord the same treatment to the mortgages. After all, And so on and so forth;
"[a] mortgage and a note secured by it are deemed parts of
one transaction and are construed together." 101 Being so
3. After the above procedure is carried out, the trial
tainted and having the attributes of a contract of adhesion as
court shall be able to conclude if petitioners a) still
the principal credit documents, we must construe the
have an OUTSTANDING BALANCE/OBLIGATION or b)
mortgage contracts strictly, and against the party who drafted
MADE PAYMENTS OVER AND ABOVE THEIR TOTAL
it. An examination of the mortgage agreements reveals that
OBLIGATION (principal and interest);
nowhere is it stated that penalties are to be included in the
secured amount. Construing this silence strictly against the
respondent, the Court can only conclude that the parties did 4. Such outstanding balance/obligation, if there be
not intend to include the penalty allowed under PN 9707237 any, shall then be subjected to a 12% per annum
as part of the secured amount. Given its resources, interest from October 28, 1997 until January 14,
respondent could have if it truly wanted to conveniently 1999, which is the date of the auction sale;
prepared and executed an amended mortgage agreement
with the petitioners, thereby including penalties in the amount
5. Such outstanding balance/obligation shall also be
to be secured by the encumbered properties. Yet it did not.
charged a 24% per annum penalty from August 14,
1997 until January 14, 1999. But from this total
With regard to attorneys fees, it was plain error for the CA to penalty, the petitioners previous payment of
have passed upon the issue since it was not raised by the penalties in the amount of P202,000.00made on
petitioners in their appeal; it was the respondent that January 27, 1998106 shall be DEDUCTED;
improperly brought it up in its appellees brief, when it should
have interposed an appeal, since the trial courts Decision on
6. To this outstanding balance (3.), the interest (4.),
this issue is adverse to it. It is an elementary principle in the
penalties (5.), and the final and executory award of
subject of appeals that an appellee who does not himself
1% attorneys fees shall be ADDED;
appeal cannot obtain from the appellate court any affirmative
relief other than those granted in the decision of the court
below. 7. The sum total of the outstanding balance (3.),
interest (4.) and 1% attorneys fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96. The
x x x [A]n appellee, who is at the same time not an appellant,
penalties (5.) are not included because they are not
may on appeal be permitted to make counter assignments of
included in the secured amount;
error in ordinary actions, when the purpose is merely to
defend himself against an appeal in which errors are alleged
to have been committed by the trial court both in the 8. The difference in (7.) [P4,324,172.96 LESS sum
appreciation of facts and in the interpretation of the law, in total of the outstanding balance (3.), interest (4.),
order to sustain the judgment in his favor but not when his and 1% attorneys fees (6.)] shall be DELIVERED TO
purpose is to seek modification or reversal of the judgment, in THE PETITIONERS;
which case it is necessary for him to have excepted to and
appealed from the judgment.102
9. Respondent may then proceed to consolidate its
title to TCTs T-14250 and T-16208;
Since petitioners did not raise the issue of reduction of
attorneys fees, the CA possessed no authority to pass upon it
10. ON THE OTHER HAND, if after performing the
at the instance of respondent. The ruling of the trial court in
procedure in (2.), it turns out that petitioners made
this respect should remain undisturbed.
an OVERPAYMENT, the interest (4.), penalties (5.),
68 | L O A N C r e d i t T r a n s
and the award of 1% attorneys fees (6.) shall be 3. The trial courts award of one per cent (1%)
DEDUCTED from the overpayment. There is no attorneys fees is REINSTATED;
outstanding balance/obligation precisely because
petitioners have paid beyond the amount of the
4. The case is ordered REMANDED to the Regional
principal and interest;
Trial Court, Branch 6 of Kalibo, Aklan for the
computation of overpayments made by petitioners
11. If the overpayment exceeds the sum total of the spouses Eduardo and Lydia Silos to respondent
interest (4.), penalties (5.), and award of 1% Philippine National Bank, taking into consideration
attorneys fees (6.), the excess shall be RETURNED to the foregoing dispositions, and applying the
the petitioners, with legal interest, under the procedure hereinabove set forth;
principle of solutio indebiti;107
5. Thereafter, the trial court is ORDERED to make a
12. Likewise, if the overpayment exceeds the total determination as to the validity of the extrajudicial
amount of interest (4.) and award of 1% attorneys foreclosure and sale, declaring the same null and
fees (6.), the trial court shall INVALIDATE THE void in case of overpayment and ordering the release
EXTRAJUDICIAL FORECLOSURE AND SALE; and return of Transfer Certificates of Title Nos. T-
14250 and TCT T-16208 to petitioners, or ordering
the delivery to the petitioners of the difference
13. HOWEVER, if the total amount of interest (4.) and
between the bid price and the total remaining
award of 1% attorneys fees (6.) exceed petitioners
obligation of petitioners, if any;
overpayment, then the excess shall be DEDUCTED
from the bid price of P4,324,172.96;
6. In the meantime, the respondent Philippine
National Bank is ENJOINED from consolidating title to
14. The difference in (13.) [P4,324,172.96 LESS sum
Transfer Certificates of Title Nos. T-14250 and T-
total of the interest (4.) and 1% attorneys fees (6.)]
16208 until all the steps in the procedure above set
shall be DELIVERED TO THE PETITIONERS;
forth have been taken and applied;

15. Respondent may then proceed to consolidate its


7. The reimbursement of the excess in the bid price
title to TCTs T-14250 and T-16208. The outstanding
of P377,505.99, which respondent Philippine National
penalties, if any, shall be collected by other means.
Bank is ordered to reimburse petitioners, should be
HELD IN ABEYANCE until the true amount owing to or
From the above, it will be seen that if, after proper owed by the parties as against each other is
accounting, it turns out that the petitioners made determined;
payments exceeding what they actually owe by way
of principal, interest, and attorneys fees, then the
8. Considering that this case has been pending for
mortgaged properties need not answer for any
such a long time and that further proceedings, albeit
outstanding secured amount, because there is not
uncomplicated, are required, the trial court is
any; quite the contrary, respondent must refund the
ORDERED to proceed with dispatch.
excess to petitioners.1wphi1 In such case, the
extrajudicial foreclosure and sale of the properties
shall be declared null and void for obvious lack of G.R. No. 195166
basis, the case being one of solutio indebiti instead.
If, on the other hand, it turns out that petitioners
overpayments in interests do not exceed their total SPOUSES SALVADOR ABELLA AND ALMA
obligation, then the respondent may consolidate its ABELLA, Petitioners,
ownership over the properties, since the period for vs.
redemption has expired. Its only obligation will be to SPOUSES ROMEO ABELLA AND ANNIE
return the difference between its bid price ABELLA, Respondents.
(P4,324,172.96) and petitioners total obligation
outstanding except penalties after applying the
latters overpayments. This resolves a Petition for Review on Certiorari under Rule 45
of the Rules of Court praying that judgment be rendered
WHEREFORE, premises considered, the Petition is GRANTED. reversing and setting aside the September 30, 2010
The May 8, 2007 Decision of the Court of Appeals in CA-G.R. Decision1 and the January 4, 2011 Resolution 2 of the Court of
CV No. 79650 is ANNULLED and SET ASIDE. Judgment is Appeals Nineteenth Division in CA-G.R. CV No. 01388. The
hereby rendered as follows: Petition also prays that respondents Spouses Romeo and
Annie Abella be ordered to pay petitioners Spouses Salvador
1. The interest rates imposed and indicated in the and Alma Abella 2.5% monthly interest plus the remaining
2nd up to the 26th Promissory Notes are DECLARED balance of the amount loaned.
NULL AND VOID, and such notes shall instead be
subject to interest at the rate of twelve percent
(12%) per annum up to June 30, 2013, and starting The assailed September 30, 2010 Decision of the Court of
July 1, 2013, six percent (6%) per annum until full Appeals reversed and set aside the December 28, 2005
satisfaction; Decision3 of the Regional Trial Court, Branch 8, Kalibo, Aklan
in Civil Case No. 6627. It directed petitioners to pay
2. The penalty charge imposed in Promissory Note respondents P148,500.00 (plus interest), which was the
No. 9707237 shall be EXCLUDED from the amounts amount respondents supposedly overpaid. The assailed
secured by the real estate mortgages; January 4, 2011 Resolution of the Court of Appeals denied
petitioners Motion for Reconsideration.

69 | L O A N C r e d i t T r a n s
The Regional Trial Courts December 28, 2005 Decision interest at the rate of 30% per annum from the time
ordered respondents to pay petitioners the supposedly unpaid the complaint was filed on July 31, 2002 until fully
loan balance of P300,000.00 plus the allegedly stipulated paid;
interest rate of 30% per annum, as well as litigation expenses
and attorneys fees.4 2. Ordering the defendants to pay the plaintiffs the
sum of P2,227.50 as reimbursement for litigation
On July 31, 2002, petitioners Spouses Salvador and Alma expenses, and another sum of P5,000.00 as
Abella filed a Complaint5 for sum of money and damages with attorneys fees.
prayer for preliminary attachment against respondents
Spouses Romeo and Annie Abella before the Regional Trial For lack of legal basis, plaintiffs claim for moral and
Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil exemplary damages has to be denied, and for lack of merit
Case No. 6627.6 the counter-claim is ordered dismissed.14

In their Complaint, petitioners alleged that respondents In the Order dated March 13, 2006, 15 the Regional Trial Court
obtained a loan from them in the amount of P500,000.00. The denied respondents Motion for Reconsideration.
loan was evidenced by an acknowledgment receipt dated
March 22, 1999 and was payable within one (1) year.
On respondents appeal, the Court of Appeals ruled that while
Petitioners added that respondents were able to pay a total of
respondents had indeed entered into a simple loan with
P200,000.00 P100,000.00 paid on two separate occasions
petitioners, respondents were no longer liable to pay the
leaving an unpaid balance of P300,000.00.7
outstanding amount of P300,000.00.16

In their Answer8 (with counterclaim and motion to dismiss),


The Court of Appeals reasoned that the loan could not have
respondents alleged that the amount involved did not pertain
earned interest, whether as contractually stipulated interest
to a loan they obtained from petitioners but was part of the
or as interest in the concept of actual or compensatory
capital for a joint venture involving the lending of money. 9
damages. As to the loans not having earned stipulated
interest, the Court of Appeals anchored its ruling on Article
Specifically, respondents claimed that they were approached 1956 of the Civil Code, which requires interest to be stipulated
by petitioners, who proposed that if respondents were to in writing for it to be due. 17 The Court of Appeals noted that
"undertake the management of whatever money [petitioners] while the acknowledgement receipt showed that interest was
would give them, [petitioners] would get 2.5% a month with a to be charged, no particular interest rate was
2.5% service fee to [respondents]." 10 The 2.5% that each specified.18 Thus, at the time respondents were making
party would be receiving represented their sharing of the 5% interest payments of 2.5% per month, these interest
interest that the joint venture was supposedly going to charge payments were invalid for not being properly stipulated by the
against its debtors. Respondents further alleged that the one parties. As to the loans not having earned interest in the
year averred by petitioners was not a deadline for payment concept of actual or compensatory damages, the Court of
but the term within which they were to return the money Appeals, citing Eusebio-Calderon v. People,19 noted that
placed by petitioners should the joint venture prove to be not interest in the concept of actual or compensatory damages
lucrative. Moreover, they claimed that the entire amount of accrues only from the time that demand (whether judicial or
P500,000.00 was disposed of in accordance with their agreed extrajudicial) is made. It reasoned that since respondents
terms and conditions and that petitioners terminated the joint received petitioners demand letter only on July 12, 2002, any
venture, prompting them to collect from the joint ventures interest in the concept of actual or compensatory damages
borrowers. They were, however, able to collect only to the due should be reckoned only from then. Thus, the payments
extent of P200,000.00; hence, the P300,000.00 balance for the 2.5% monthly interest made after the perfection of the
remained unpaid.11 loan in 1999 but before the demand was made in 2002 were
invalid.20
In the Decision12 dated December 28, 2005, the Regional Trial
Court ruled in favor of petitioners. It noted that the terms of Since petitioners charging of interest was invalid, the Court of
the acknowledgment receipt executed by respondents clearly Appeals reasoned that all payments respondents made by
showed that: (a) respondents were indebted to the extent of way of interest should be deemed payments for the principal
P500,000.00; (b) this indebtedness was to be paid within one amount of P500,000.00.21
(1) year; and (c) the indebtedness was subject to interest.
Thus, the trial court concluded that respondents obtained a
The Court of Appeals further noted that respondents made a
simple loan, although they later invested its proceeds in a
total payment of P648,500.00, which, as against the principal
lending enterprise.13 The Regional Trial Court adjudged
amount of P500,000.00, entailed an overpayment of
respondents solidarily liable to petitioners. The dispositive
P148,500.00. Applying the principle of solutio indebiti, the
portion of its Decision reads:
Court of Appeals concluded that petitioners were liable to
reimburse respondents for the overpaid amount of
WHEREFORE, premises considered, judgment is hereby P148,500.00.22 The dispositive portion of the assailed Court of
rendered: Appeals Decision reads:

1. Ordering the defendants jointly and severally to WHEREFORE, the Decision of the Regional Trial Court is
pay the plaintiffs the sum of P300,000.00 with hereby REVERSED and SET ASIDE, and a new one issued,
70 | L O A N C r e d i t T r a n s
finding that the Spouses Salvador and Alma Abella of the contracting parties, the literal meaning of its
are DIRECTED to jointly and severally pay Spouses Romeo stipulations shall control."32
and Annie Abella the amount of P148,500.00, with interest of
6% interest (sic) per annum to be computed upon receipt of Articles 1933 and 1953 of the Civil Code provide the
this decision, until full satisfaction thereof. Upon finality of this guideposts that determine if a contractual relation is one of
judgment, an interest as the rate of 12% per annum, instead simple loan or mutuum:
of 6%, shall be imposed on the amount due, until full payment
thereof.23
Art. 1933. By the contract of loan, one of the parties delivers
to another, either something not consumable so that the
In the Resolution24 dated January 4, 2011, the Court of latter may use the same for a certain time and return it, in
Appeals denied petitioners Motion for Reconsideration. which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same
Aggrieved, petitioners filed the present appeal 25 where they amount of the same kind and quality shall be paid, in which
claim that the Court of Appeals erred in completely striking off case the contract is simply called a loan or mutuum.
interest despite the parties written agreement stipulating it,
as well as in ordering them to reimburse and pay interest to Commodatum is essentially gratuitous.
respondents.

Simple loan may be gratuitous or with a stipulation to pay


In support of their contentions, petitioners cite Article 1371 of interest.
the Civil Code,26 which calls for the consideration of the
contracting parties contemporaneous and subsequent acts in
In commodatum the bailor retains the ownership of the thing
determining their true intention. Petitioners insist that
loaned, while in simple loan, ownership passes to the
respondents consistent payment of interest in the year
borrower.
following the perfection of the loan showed that interest at
2.5% per month was properly agreed upon despite its not
having been expressly stated in the acknowledgment receipt. ....
They add that during the proceedings before the Regional Trial
Court, respondents admitted that interest was due on the Art. 1953. A person who receives a loan of money or any other
loan.27 fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and
In their Comment,28 respondents reiterate the Court of quality. (Emphasis supplied)
Appeals findings that no interest rate was ever stipulated by
the parties and that interest was not due and demandable at On March 22, 1999, respondents executed an
the time they were making interest payments.29 acknowledgment receipt to petitioners, which states:

In their Reply,30 petitioners argue that even though no interest Batan, Aklan
rate was stipulated in the acknowledgment receipt, the case
fell under the exception to the Parol Evidence Rule. They also
March 22, 1999
argue that there exists convincing and sufficiently credible
evidence to supplement the imperfection of the
acknowledgment receipt.31 This is to acknowledge receipt of the Amount of Five Hundred
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella,
payable within one (1) year from date hereof with interest.
For resolution are the following issues:

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33 (Emphasis


First, whether interest accrued on respondents loan from
supplied)
petitioners. If so, at what rate?

The text of the acknowledgment receipt is uncomplicated and


Second, whether petitioners are liable to reimburse
straightforward. It attests to: first, respondents receipt of the
respondents for the latters supposed excess payments and
sum of P500,000.00 from petitioner Alma Abella; second,
for interest.
respondents duty to pay back this amount within one (1) year
from March 22, 1999; and third, respondents duty to pay
I interest. Consistent with what typifies a simple loan,
petitioners delivered to respondents with the corresponding
As noted by the Court of Appeals and the Regional Trial Court, condition that respondents shall pay the same amount to
respondents entered into a simple loan or mutuum, rather petitioners within one (1) year.
than a joint venture, with petitioners.
II
Respondents claims, as articulated in their testimonies before
the trial court, cannot prevail over the clear terms of the Although we have settled the nature of the contractual
document attesting to the relation of the parties. "If the terms relation between petitioners and respondents, controversy
of a contract are clear and leave no doubt upon the intention

71 | L O A N C r e d i t T r a n s
persists over respondents duty to pay conventional interest, Recently, however, the Bangko Sentral ng Pilipinas Monetary
i.e., interest as the cost of borrowing money. 34 Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013,
approved the amendment of Section 2 of Circular No. 905,
Article 1956 of the Civil Code spells out the basic rule that Series of 1982 and, accordingly, issued Circular No. 799,
"[n]o interest shall be due unless it has been expressly Series of 2013, effective July 1, 2013, the pertinent portion of
stipulated in writing." which reads:

On the matter of interest, the text of the acknowledgment The Monetary Board, in its Resolution No. 796 dated 16 May
receipt is simple, plain, and unequivocal. It attests to the 2013, approved the following revisions governing the rate of
contracting parties intent to subject to interest the loan interest in the absence of stipulation in loan contracts,
extended by petitioners to respondents. The controversy, thereby amending Section 2 of Circular No. 905, Series of
however, stems from the acknowledgment receipts failure to 1982:
state the exact rate of interest.
Section 1. The rate of interest for the loan or forbearance of
Jurisprudence is clear about the applicable interest rate if a any money, goods or credits and the rate allowed in
written instrument fails to specify a rate. In Spouses Toring v. judgments, in the absence of an express contract as to such
Spouses Olan,35 this court clarified the effect of Article 1956 of rate of interest, shall be six percent (6%) per annum.
the Civil Code and noted that the legal rate of interest (then at
12%) is to apply: "In a loan or forbearance of money, Section 2. In view of the above, Subsection X305.1 of the
according to the Civil Code, the interest due should be that Manual of Regulations for Banks and Sections 4305Q.1,
stipulated in writing, and in the absence thereof, the 4305S.3 and 4303P.1 of the Manual of Regulations for
rate shall be 12% per annum."36
Non-Bank Financial Institutions are hereby amended
Spouses Toring cites and restates (practically verbatim) what accordingly.
this court settled in Security Bank and Trust Company v.
Regional Trial Court of Makati, Branch 61: "In a loan or This Circular shall take effect on 1 July 2013.
forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the
Thus, from the foregoing, in the absence of an express
rate shall be 12% per annum."37
stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of
Security Bank also refers to Eastern Shipping Lines, Inc. v. any money, goods or credits and the rate allowed in
Court of Appeals, which, in turn, stated:38 judgments shall no longer be twelve percent (12%) per
annum as reflected in the case of Eastern Shipping Lines
1. When the obligation is breached, and it consists in the and Subsection X305.1 of the Manual of Regulations for Banks
payment of a sum of money, i.e., a loan or forbearance of and Sections 4305Q.1,= 4305S.3 and 4303P.1 of the Manual
money, the interest due should be that which may have been of Regulations for Non- Bank Financial Institutions, before its
stipulated in writing. Furthermore, the interest due shall itself amendment by BSP-MB Circular No. 799 but will now be six
earn legal interest from the time it is judicially demanded. In percent (6%) per annum effective July 1, 2013. It should be
the absence of stipulation, the rate of interest shall be 12% noted, nonetheless, that the new rate could only be applied
per annum to be computed from default, i.e., from judicial or prospectively and not retroactively. Consequently, the twelve
extrajudicial demand under and subject to the provisions of percent (12%) per annum legal interest shall apply only until
Article 1169 of the Civil Code.39 (Emphasis supplied) June 30, 2013. Come July 1, 2013 the new rate of six percent
(6%) per annum shall be the prevailing rate of interest when
The rule is not only definite; it is cast in mandatory language. applicable.42 (Emphasis supplied, citations omitted)
From Eastern Shipping to Security Bank to Spouses
Toring, jurisprudence has repeatedly used the word "shall," a Nevertheless, both Bangko Sentral ng Pilipinas Circular No.
term that has long been settled to denote something 799, Series of 2013 and Nacar retain the definite and
imperative or operating to impose a duty. 40 Thus, the rule mandatory framing of the rule articulated in Eastern
leaves no room for alternatives or otherwise does not allow for Shipping, Security Bank, and Spouses Toring. Nacar even
discretion. It requires the application of the legal rate of restates Eastern Shipping:
interest.
To recapitulate and for future guidance, the guidelines laid
Our intervening Decision in Nacar v. Gallery down in the case of Eastern Shipping Lines are accordingly
Frames41 recognized that the legal rate of interest has been modified to embody BSP-MB Circular No. 799, as follows:
reduced to 6% per annum:
....

1. When the obligation is breached, and it consists in the


payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself

72 | L O A N C r e d i t T r a n s
earn legal interest from the time it is judicially demanded. In Contrary to petitioners assertions, there is no room for
the absence of stipulation, the rate of interest shall be 6% entertaining extraneous (or parol) evidence. In Spouses
per annum to be computed from default, i.e., from judicial or Bonifacio and Lucia Paras v. Kimwa Construction and
extrajudicial demand under and subject to the provisions of Development Corporation,47 we spelled out the requisites for
Article 1169 of the Civil Code. 43 (Emphasis supplied, citations the admission of parol evidence:
omitted)
In sum, two (2) things must be established for parol evidence
Thus, it remains that where interest was stipulated in writing to be admitted: first, that the existence of any of the four (4)
by the debtor and creditor in a simple loan or mutuum, but no exceptions has been put in issue in a partys pleading or has
exact interest rate was mentioned, the legal rate of interest not been objected to by the adverse party; and second, that
shall apply. At present, this is 6% per annum, subject the parol evidence sought to be presented serves to form the
to Nacars qualification on prospective application. basis of the conclusion proposed by the presenting party. 48

Applying this, the loan obtained by respondents from The issue of admitting parol evidence is a matter that is
petitioners is deemed subjected to conventional interest at proper to the trial, not the appellate, stage of a case.
the rate of 12% per annum, the legal rate of interest at the Petitioners raised the issue of applying the exceptions to the
time the parties executed their agreement. Moreover, should Parol Evidence Rule only in the Reply they filed before this
conventional interest still be due as of July 1, 2013, the rate of court. This is the last pleading that either of the parties has
12% per annum shall persist as the rate of conventional filed in the entire string of proceedings culminating in this
interest. Decision. It is, therefore, too late for petitioners to harp on this
rule. In any case, what is at issue is not admission of evidence
This is so because interest in this respect is used as a per se, but the appreciation given to the evidence adduced by
surrogate for the parties intent, as expressed as of the time the parties. In the Petition they filed before this court,
of the execution of their contract. In this sense, the legal rate petitioners themselves acknowledged that checks supposedly
of interest is an affirmation of the contracting parties intent; attesting to payment of monthly interest at the rate of 2.5%
that is, by their contracts silence on a specific rate, the then were admitted by the trial court (and marked as Exhibits "2,"
prevailing legal rate of interest shall be the cost of borrowing "3," "4," "5," "6," "7," and "8").49 What petitioners have an
money. This rate, which by their contract the parties have issue with is not the admission of these pieces of evidence but
settled on, is deemed to persist regardless of shifts in the how these have not been appreciated in a manner consistent
legal rate of interest. Stated otherwise, the legal rate of with the conclusions they advance.
interest, when applied as conventional interest, shall always
be the legal rate at the time the agreement was executed and Even if it can be shown that the parties have agreed to
shall not be susceptible to shifts in rate. monthly interest at the rate of 2.5%, this is unconscionable.
As emphasized in Castro v. Tan,50 the willingness of the parties
Petitioners, however, insist on conventional interest at the to enter into a relation involving an unconscionable interest
rate of 2.5% per month or 30% per annum. They argue that rate is inconsequential to the validity of the stipulated rate:
the acknowledgment receipt fails to show the complete and
accurate intention of the contracting parties. They rely on The imposition of an unconscionable rate of interest on a
Article 1371 of the Civil Code, which provides that the money debt, even if knowingly and voluntarily assumed, is
contemporaneous and subsequent acts of the contracting immoral and unjust. It is tantamount to a repugnant spoliation
parties shall be considered should there be a need to and an iniquitous deprivation of property, repulsive to the
ascertain their intent.44 In addition, they claim that this case common sense of man. It has no support in law, in principles
falls under the exceptions to the Parol Evidence Rule, as of justice, or in the human conscience nor is there any reason
spelled out in Rule 130, Section 9 of the Revised Rules on whatsoever which may justify such imposition as righteous
Evidence.45 and as one that may be sustained within the sphere of public
or private morals.51
It is a basic precept in legal interpretation and construction
that a rule or provision that treats a subject with specificity The imposition of an unconscionable interest rate is void ab
prevails over a rule or provision that treats a subject in initio for being "contrary to morals, and the law."52
general terms.46

The rule spelled out in Security Bank and Spouses Toring is


anchored on Article 1956 of the Civil Code and specifically
governs simple loans or mutuum. Mutuum is a type of
nominate contract that is specifically recognized by the Civil
Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article
1371 is among the Civil Code provisions generally dealing
with contracts. As this case particularly involves a simple loan,
the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.

73 | L O A N C r e d i t T r a n s
In determining whether the rate of interest is unconscionable, So, too, Nacar states that "the interest due shall itself earn
the mechanical application of pre-established floors would be legal interest from the time it is judicially demanded."53
wanting. The lowest rates that have previously been
considered unconscionable need not be an impenetrable Consistent with Nacar, as well as with our ruling in Rivera v.
minimum. What is more crucial is a consideration of the Spouses Chua,54 the interest due on conventional interest
parties contexts. Moreover, interest rates must be shall be at the rate of 12% per annum from July 31, 2002 to
appreciated in light of the fundamental nature of interest as June 30, 2013. Thereafter, or starting July 1, 2013, this shall
compensation to the creditor for money lent to another, which be at the rate of 6% per annum.
he or she could otherwise have used for his or her own
purposes at the time it was lent. It is not the default vehicle
IV
for predatory gain. As such, interest need only be reasonable.
It ought not be a supine mechanism for the creditors unjust
enrichment at the expense of another. Proceeding from these premises, we find that respondents
made an overpayment in the amount of P3,379.17.
Petitioners here insist upon the imposition of 2.5% monthly or
30% annual interest. Compounded at this rate, respondents As acknowledged by petitioner Salvador Abella, respondents
obligation would have more than doubledincreased to paid a total of P200,000.00, which was charged against the
219.7% of the principalby the end of the third year after principal amount of P500,000.00. The first payment of
which the loan was contracted if the entire principal remained P100,000.00 was made on June 30, 2001,55while the second
unpaid. By the end of the ninth year, it would have multiplied payment of P100,000.00 was made on December 30, 2001.56
more than tenfold (or increased to 1,060.45%). In 2015, this
would have multiplied by more than 66 times (or increased to The Court of Appeals September 30, 2010 Decision stated
6,654.17%). Thus, from an initial loan of only P500,000.00, that respondents paid P6,000.00 in March 1999.57
respondents would be obliged to pay more than P33 million.
This is grossly unfair, especially since up to the fourth year
The Pre-Trial Order dated December 2, 2002,58 stated that the
from when the loan was obtained, respondents had been
parties admitted that "from the time the principal sum of
assiduously delivering payment. This reduces their best
P500,000.00 was borrowed from [petitioners], [respondents]
efforts to satisfy their obligation into a protracted servicing of
ha[d] been religiously paying"59 what was supposedly interest
a rapacious loan.
"at the rate of 2.5% per month." 60

The legal rate of interest is the presumptive reasonable


From March 22, 1999 (after the loan was perfected) to June
compensation for borrowed money. While parties are free to
22, 2001 (before respondents payment of P100,000.00 on
deviate from this, any deviation must be reasonable and fair.
June 30, 2001, which was deducted from the principal amount
Any deviation that is far-removed is suspect. Thus, in cases
of P500,000.00), the 2.5% monthly "interest" was pegged to
where stipulated interest is more than twice the prevailing
the principal amount of P500,000.00. These monthly interests,
legal rate of interest, it is for the creditor to prove that this
thus, amounted to P12,500.00 per month. Considering that
rate is required by prevailing market conditions. Here,
the period from March 1999 to June 2001 spanned twenty
petitioners have articulated no such justification.
seven (27) months, respondents paid a total of P337,500.00.61

In sum, Article 1956 of the Civil Code, read in light of


From June 22, 2001 up to December 22, 2001 (before
established jurisprudence, prevents the application of any
respondents payment of another P100,000.00 on December
interest rate other than that specifically provided for by the
30, 2001, which was deducted from the remaining principal
parties in their loan document or, in lieu of it, the legal rate.
amount of P400,000.00), the 2.5% monthly "interest" was
Here, as the contracting parties failed to make a specific
pegged to the remaining principal amount of P400,000.00.
stipulation, the legal rate must apply. Moreover, the rate that
These monthly interests, thus, amounted to P10,000.00 per
petitioners adverted to is unconscionable. The conventional
month. Considering that this period spanned six (6) months,
interest due on the principal amount loaned by respondents
respondents paid a total of P60,000.00.62
from petitioners is held to be 12% per annum.

From after December 22, 2001 up to June 2002 (when


III
petitioners filed their Complaint), the 2.5% monthly "interest"
was pegged to the remaining principal amount of
Apart from respondents liability for conventional interest at P300,000.00. These monthly interests, thus, amounted to
the rate of 12% per annum, outstanding conventional interest P7,500.00 per month. Considering that this period spanned six
if any is due from respondentsshall itself earn legal (6) months, respondents paid a total of P45,000.00. 63
interest from the time judicial demand was made by
petitioners, i.e., on July 31, 2002, when they filed their
Applying these facts and the properly applicable interest rate
Complaint. This is consistent with Article 2212 of the Civil
(for conventional interest, 12% per annum; for interest on
Code, which provides:
conventional interest, 12% per annum from July 31, 2002 up
to June 30, 2013 and 6% per annum henceforth), the following
Art. 2212. Interest due shall earn legal interest from the time conclusions may be drawn:
it is judicially demanded, although the obligation may be
silent upon this point.

74 | L O A N C r e d i t T r a n s
By the end of the first year following the perfection of the of P400,000.00. Thus, during this period, they paid a
loan, or as of March 21, 2000, P560,000.00 was due from total of six (6) monthly payments totaling
respondents. This consisted of the principal of P500,000.00 P60,000.00.
and conventional interest of P60,000.00.
(d) On December 30, 2001, respondents paid
Within this first year, respondents made twelve (12) monthly P100,000.00, which, like the June 30, 2001 payment,
payments totalling P150,000.00 (P12,500.00 each from April was charged against the principal.
1999 to March 2000). This was in addition to their initial
payment of P6,000.00 in March 1999. (e) From the end of December 2002 to the end of
February 2002, respondents delivered monthly
Application of payments must be in accordance with Article payments of P7,500.00 each. At this point, the
1253 of the Civil Code, which reads: supposed monthly interest payments were now
pegged to the supposedly remaining principal of
Art. 1253. If the debt produces interest, payment of the P300,000.00. Thus, during this period, they delivered
principal shall not be deemed to have been made until the three (3) monthly payments totaling P22,500.00.
interests have been covered.
Consistent with Article 1253 of the Civil Code, as respondents
Thus, the payments respondents made must first be reckoned paid a total of P320,000.00 within the third year, the
as interest payments. Thereafter, any excess payments shall conventional interest of P36,927.50 must be deemed fully
be charged against the principal. As respondents paid a total paid and the remaining amount that respondents paid (i.e.,
of P156,000.00 within the first year, the conventional interest P283,702.40) is to be charged against the principal. This
of P60,000.00 must be deemed fully paid and the remaining yields a balance of P18,777.60.
amount that respondents paid (i.e., P96,000.00) is to be
charged against the principal. This yields a balance of By the end of the fourth year following the perfection of the
P404,000.00. By the end of the second year following the loan, or as of March 21, 2003, P21,203.51 would have been
perfection of the loan, or as of March 21, 2001, P452,480.00 due from respondents. This consists of: (a) the outstanding
was due from respondents. This consisted of the outstanding principal of P18,777.60, (b) conventional interest of
principal of P404,000.00 and conventional interest of P2,253.31, and (c) interest due on conventional interest
P48,480.00. starting from July 31, 2002, the date of judicial demand, in the
amount of P172.60. The last (i.e., interest on interest) must be
Within this second year, respondents completed another pro-rated. There were only 233 days from July 31, 2002 (the
round of twelve (12) monthly payments totaling P150,000.00. date of judicial demand) to March 21, 2003 (the end of the
fourth year); this left 63.83% of the fourth year, within which
interest on interest might have accrued. Thus, the full annual
Consistent with Article 1253 of the Civil Code, as respondents
interest on interest of 12% per annum could not have been
paid a total of P156,000.00 within the second year, the
completed, and only the proportional amount of 7.66% per
conventional interest of P48,480.00 must be deemed fully
annum may be properly imposed for the remainder of the
paid and the remaining amount that respondents paid (i.e.,
fourth year.
P101,520.00) is to be charged against the principal. This
yields a balance of P302,480.00.
From the end of March 2002 to June 2002, respondents
delivered three (3) more monthly payments of P7,500.00
By the end of the third year following the perfection of the
each. Thus, during this period, they delivered three (3)
loan, or as of March 21, 2002, P338,777.60 was due from
monthly payments totalling P22,500.00.
respondents. This consists of the outstanding principal of
P302,480.00 and conventional interest of P36,297.60.
At this rate, however, payment would have been completed
by respondents even before the end of the fourth year. Thus,
Within this third year, respondents paid a total of
for precision, it is more appropriate to reckon the
P320,000.00, as follows:
amounts due as against payments made on a monthly,
rather than an annual, basis.
(a) Between March 22, 2001 and June 30, 2001,
respondents completed three (3) monthly payments
By April 21, 2002, _18,965.38 (i.e., remaining principal of
of P12,500.00 each, totaling P37,500.00.
P18,777.60 plus pro-rated monthly conventional interest at
1%, amounting to P187.78) would have been due from
(b) On June 30, 2001, respondents paid P100,000.00, respondents. Deducting the monthly payment of P7,500.00 for
which was charged as principal payment. the preceding month in a manner consistent with Article 1253
of the Civil Code would yield a balance of P11,465.38.
(c) Between June 30, 2001 and December 30, 2001,
respondents delivered monthly payments of By May 21, 2002, _11,580.03 (i.e., remaining principal of
P10,000.00 each. At this point, the monthly P11,465.38 plus pro-rated monthly conventional interest at
payments no longer amounted to P12,500.00 each 1%, amounting to P114.65) would have been due from
because the supposed monthly interest payments respondents. Deducting the monthly payment of P7,500.00 for
were pegged to the supposedly remaining principal

75 | L O A N C r e d i t T r a n s
the preceding month in a manner consistent with Article 1253 amount of damages awarded may be imposed at the
of the Civil Code would yield a balance of P4,080.03. discretion of the court at the rate of 6% per annum." 67 This
applies to obligations arising from quasi-contracts such
By June 21, 2002, P4,120.83 (i.e., remaining principal of as solutio indebiti.
P4,080.03 plus pro-rated monthly conventional interest at 1%,
amounting to P40.80) would have been due from respondents. Further, Article 2159 of the Civil Code provides:
Deducting the monthly payment of P7,500.00 for the
preceding month in a manner consistent with Article 1253 of Art. 2159. Whoever in bad faith accepts an undue payment,
the Civil Code would yield a negative balance of P3,379.17. shall pay legal interest if a sum of money is involved, or shall
be liable for fruits received or which should have been
Thus, by June 21, 2002, respondents had not only fully paid received if the thing produces fruits.
the principal and all the conventional interest that had
accrued on their loan. By this date, they also overpaid He shall furthermore be answerable for any loss or
P3,379.17. Moreover, while hypothetically, interest on impairment of the thing from any cause, and for damages to
conventional interest would not have run from July 31, 2002, the person who delivered the thing, until it is recovered.
no such interest accrued since there was no longer any
conventional interest due from respondents by then.
Consistent however, with our finding that the excess payment
made by respondents were borne out of a mere mistake that
V it was due, we find it in the better interest of equity to no
longer hold petitioners liable for interest arising from their
As respondents made an overpayment, the principle of solutio quasi-contractual obligation.
indebiti as provided by Article 2154 of the Civil Code 64 applies.
Article 2154 reads: Nevertheless, Nacar also provides:

Article 2154. If something is received when there is no right to 3. When the judgment of the court awarding a sum of money
demand it, and it was unduly delivered through mistake, the becomes final and executory, the rate of legal interest,
obligation to return it arises. whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
In Moreno-Lentfer v. Wolff,65 this court explained the satisfaction, this interim period being deemed to be by then
application of solutio indebiti: an equivalent to a forbearance of credit.68

The quasi-contract of solutio indebiti harks back to the ancient Thus, interest at the rate of 6% per annum may be properly
principle that no one shall enrich himself unjustly at the imposed on the total judgment award. This shall be reckoned
expense of another. It applies where (1) a payment is made from the finality of this Decision until its full satisfaction.
when there exists no binding relation between the payor, who
has no duty to pay, and the person who received the WHEREFORE, the assailed September 30, 2010 Decision and
payment, and (2) the payment is made through mistake, and the January 4, 2011 Resolution of the Court of Appeals
not through liberality or some other cause.66 Nineteenth Division in CA-G.R. CV No. 01388 are SET
ASIDE. Petitioners Spouses Salvador and Alma Abella
As respondents had already fully paid the principal and all are DIRECTED to jointly and severally reimburse respondents
conventional interest that had accrued, they were no longer Spouses Romeo and Annie Abella the amount of P3,379.17,
obliged to make further payments.1awp++i1 Any further which respondents have overpaid.
payment they made was only because of a mistaken
impression that they were still due. Accordingly, petitioners A legal interest of 6% per annum shall likewise be imposed on
are now bound by a quasi-contractual obligation to return any the total judgment award from the finality of this Decision
and all excess payments delivered by respondents. until its full satisfaction.

Nacar provides that "[w]hen an obligation, not constituting a


loan or forbearance of money, is breached, an interest on the

76 | L O A N C r e d i t T r a n s

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