G.R. No. L-16106 December 30, 1961 Section 1.
Section 1. "Unclaimed balances" within the meaning of this Act shall include
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.
Office of the Solicitor General for plaintiff-appellant.
Picazo, Lichauco and Agcaoili for defendant-appellee.
BAUTISTA ANGELO, J.:
The Republic of the Philippines filed on September 25, 1957 before the Court of First
Instance of Manila a complaint for escheat of certain unclaimed bank deposits
balances under the provisions of Act No. 3936 against several banks, among them
the First National City Bank of New York. It is alleged that pursuant to Section 2 of
said Act defendant banks forwarded to the Treasurer of the Philippines a statement
under oath of their respective managing officials of all the credits and deposits held by
them in favor of persons known to be dead or who have not made further deposits or
withdrawals during the period of 10 years or more. Wherefore, it is prayed that said
credits and deposits be escheated to the Republic of the Philippines by ordering
defendant banks to deposit them to its credit with the Treasurer of the Philippines.
In its answer the First National City Bank of New York claims that, while it admits that
various savings deposits, pre-war inactive accounts, and sundry accounts contained
in its report submitted to the Treasurer of the Philippines pursuant to Act No. 3936,
totalling more than P100,000.00, which remained dormant for 10 years or more, are
subject to escheat however, it has inadvertently included in said report certain items
amounting to P18,589.89 which, properly speaking, are not credits or deposits within
the contemplation of Act No. 3936. Hence, it prayed that said items be not included in
the claim of plaintiff.
After hearing the court a quo rendered judgment holding that cashier's is or
manager's checks and demand drafts as those which defendant wants excluded from
the complaint come within the purview of Act No. 3936, but not the telegraphic
transfer payment which orders are of different category. Consequently, the complaint
was dismissed with regard to the latter. But, after a motion to reconsider was filed by
defendant, the court a quo changed its view and held that even said demand drafts do
not come within the purview of said Act and so amended its decision accordingly.
Plaintiff has appealed.lawphil.net
Section 1, Act No. 3936, provides:
credits or deposits of money, bullion, security or other evidence of
indebtedness of any kind, and interest thereon with banks, as hereinafter
defined, in favor of any person unheard from for a period of ten years or
more. Such unclaimed balances, together with the increase and proceeds
thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may
direct.
It would appear that the term "unclaimed balances" that are subject to escheat include
credits or deposits money, or other evidence of indebtedness of any kind with banks,
in favor of any person unheard from for a period of 10 years or more. And as correctly
stated by the trial court, the term "credit" in its usual meaning is a sum credited on the
books of a company to a person who appears to be entitled to it. It presupposes a
creditor-debtor relationship, and may be said to imply ability, by reason of property or
estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a
distinguished from that which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824,
825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See also Libby vs. Hopkins, 104 U.S. 303, 309;
Prudential Insurance Co. of America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs.
Treat, 7 Mass. 271, 274). The same is true with the term "deposits" in banks where
the relationship created between the depositor and the bank is that of creditor and
debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco
Grocery, et al. vs. Pacific Coast Biscuit Co., et al., 65 Phil. 443).
The questions that now arise are: Do demand draft and telegraphic orders come
within the meaning of the term "credits" or "deposits" employed in the law? Can their
import be considered as a sum credited on the books of the bank to a person who
appears to be entitled to it? Do they create a creditor-debtor relationship between
drawee and the payee?
The answers to these questions require a digression the legal meaning of said
banking terminologies.
To begin with, we may say that a demand draft is a bill of exchange payable on
demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102
N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as
a bill of exchange, a draft is said to be, like the former, an open letter of request from,
and an order by, one person on another to pay a sum of money therein mentioned to
a third person, on demand or at a future time therein specified (13 Words and
Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common
term, for all bills of exchange. And the words "draft" and "bill of exchange" are used
indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs.
Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our Negotiable
Instruments Law (Act No. 2031) does not operate as an assignment of funds in the
hands of the drawee who is not liable on the instrument until he accepts it. This is the
clear import of Section 127. It says: "A bill of exchange of itself does not operate as
an assignment of the funds in the hands of the drawee available for the payment
thereon and the drawee is not liable on the bill unless and until he accepts the same."
In other words, in order that a drawee may be liable on the draft and then become
obligated to the payee it is necessary that he first accepts the same. In fact, our law
requires that with regard to drafts or bills of exchange there is need that they be
presented either for acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereof as the case may be (Section 71, Act
2031). Failure to make such presentment will discharge the drawer from liability or to
the extent of the loss caused by the delay (Section 186, Ibid.)
Since it is admitted that the demand drafts herein involved have not been presented
either for acceptance or for payment, the inevitable consequence is that the appellee
bank never had any chance of accepting or rejecting them. Verily, appellee bank
never became a debtor of the payee concerned and as such the aforesaid drafts
cannot be considered as credits subject to escheat within the meaning of the law.
But a demand draft is very different from a cashier's or manager's cheek, contrary to
appellant's pretense, for it has been held that the latter is a primary obligation of the
bank which issues it and constitutes its written promise to pay upon demand. Thus, a
cashier's check has been clearly characterized in In Re Bank of the United States,
277 N.Y.S. 96. 100, as follows:
A cashier's check issued by a bank, however, is not an ordinary draft. The
latter is a bill of exchange payable demand. It is an order upon a third party
purporting to drawn upon a deposit of funds. Drinkall v. Movious State Bank,
11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler
County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A
cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776)
and constitutes its written promise to pay upon demand (Steinmetz v.
Schultz, 59 S.D. 603, 241 N.W. 734)....lawphil.net
The following definitions cited by appellant also confirm this view:
A cashier's check is a check of the bank's cashier on his or another bank. It
is in effect a bill of exchange drawn by a bank on itself and accepted in
advance by the act of issuance (10 C.J.S. 409).
A cashier's check issued on request of a depositor is the substantial
equivalent of a certified check and the deposit represented by the check
passes to the credit of the checkholder, who is thereafter a depositor to that
amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).
A cashier's check, being merely a bill of exchange drawn by a bank on itself,
and accepted in advance by the act of issuance, is not subject to
countermand by the payee after indorsement, and has the same legal effects
as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715,
201 Ala. 189).
A demand draft is not therefore of the same category as a cashier's check which
should come within the purview of the law.
The case, however, is different with regard to telegraphic payment order. It is said that
as the transaction is for the establishment of a telegraphic or cable transfer the
agreement to remit creates a contractual obligation a has been termed a purchase
and sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon
making payment completes the transaction insofar as he is concerned, though insofar
as the remitting bank is concerned the contract is executory until the credit is
established (Ibid.) We agree with the following comment the Solicitor General: "This is
so because the drawer bank was already paid the value of the telegraphic transfer
payment order. In the particular cases under consideration it appears in the books of
the defendant bank that the amounts represented by the telegraphic payment orders
appear in the names of the respective payees. If the latter choose to demand
payment of their telegraphic transfers at the time the same was (were) received by
the defendant bank, there could be no question that this bank would have to pay
them. Now, the question is, if the payees decide to have their money remain for
sometime in the defendant bank, can the latter maintain that the ownership of said
telegraphic payment orders is now with the drawer bank? The latter was already paid
the value of the telegraphic payment orders otherwise it would not have transmitted
the same to the defendant bank. Hence, it is absurd to say that the drawer banks are
still the owners of said telegraphic payment orders."
WHEREFORE, the decision of the trial court is hereby modified in the sense that the
items specifically referred to and listed under paragraph 3 of appellee bank's answer
representing telegraphic transfer payment orders should be escheated in favor of the
Republic of the Philippines. No costs.

G.R. No. L-19190 November 29, 1922
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the Aparri branch of the
Philippine National Bank, Venancio Concepcion, President of the Philippine National
Bank, between April 10, 1919, and May 7, 1919, authorized an extension of credit in
favor of "Puno y Concepcion, S. en C." in the amount of P300,000. This special
authorization was essential in view of the memorandum order of President
Concepcion dated May 17, 1918, limiting the discretional power of the local manager
at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000,
which, in certain cases, could be increased to P10,000. Pursuant to this authorization,
credit aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en C.,"
the only security required consisting of six demand notes. The notes, together with
the interest, were taken up and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto
Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S.
Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada
con Gral. Venancio Concepcion," P50,000. Member Miguel S. Concepcion was the
administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the Philippine National
Bank and as member of the board of directors of this bank, was charged in the Court
of First Instance of Cagayan with a violation of section 35 of Act No. 2747. He was
found guilty by the Honorable Enrique V. Filamor, Judge of First Instance, and was
sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with
subsidiary imprisonment in case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which
reference must hereafter repeatedly be made, reads as follows: "The National Bank
shall not, directly or indirectly, grant loans to any of the members of the board of
directors of the bank nor to agents of the branch banks." Section 49 of the same Act
provides: "Any person who shall violate any of the provisions of this Act shall be
punished by a fine not to exceed ten thousand pesos, or by imprisonment not to
exceed five years, or by both such fine and imprisonment." These two sections were
in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act
No. 2938, approved on January 30, 1921.
Counsel for the defense assign ten errors as having been committed by the trial court.
These errors they have argued adroitly and exhaustively in their printed brief, and
again in oral argument. Attorney-General Villa-Real, in an exceptionally accurate and
comprehensive brief, answers the proposition of appellant one by one.
The question presented are reduced to their simplest elements in the opinion which
follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion,
S. en C." by Venancio Concepcion, President of the Philippine National Bank, a "loan"
within the meaning of section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that authority to make a
loan was given, but only show the concession of a credit. In this statement of fact,
counsel is correct, for the exhibits in question speak of a "credito" (credit) and not of a
" prestamo" (loan).
The "credit" of an individual means his ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay what he may promise.
(Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A "loan" means the
delivery by one party and the receipt by the other party of a given sum of money,
upon an agreement, express or implied, to repay the sum loaned, with or without
interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the amount fixed in the
"credit,"
II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion,
S. en C.," by Venancio Concepcion, President of the Philippine National Bank, a
"loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan,"
it does not prohibit what is commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank,
inquired of the Insular Auditor whether section 37 of Act No. 2612 was intended to
apply to discounts as well as to loans. The ruling of the Acting Insular Auditor, dated
August 11, 1916, was to the effect that said section referred to loans alone, and
placed no restriction upon discount transactions. It becomes material, therefore, to
discover the distinction between a "loan" and a "discount," and to ascertain if the
instant transaction comes under the first or the latter denomination.
Discounts are favored by bankers because of their liquid nature, growing, as they do,
out of an actual, live, transaction. But in its last analysis, to discount a paper is only a
mode of loaning money, with, however, these distinctions: (1) In a discount, interest is
deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2)
a discount is always on double-name paper; a loan is generally on single-name
paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers
loans and not discounts, yet the conclusion is inevitable that the demand notes signed
by the firm "Puno y Concepcion, S. en C." were not discount paper but were mere
evidences of indebtedness, because (1) interest was not deducted from the face of
the notes, but was paid when the notes fell due; and (2) they were single-name and
not double-name paper.
The facts of the instant case having relation to this phase of the argument are not
essentially different from the facts in the Binalbagan Estate case. Just as there it was
declared that the operations constituted a loan and not a discount, so should we here
lay down the same ruling.
III. Was the granting of a credit of P300,000 to the copartnership, "Puno y
Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National
Bank, an "indirect loan" within the meaning of section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not
an "indirect loan." In this connection, it should be recalled that the wife of the
defendant held one-half of the capital of this partnership.
In the interpretation and construction of statutes, the primary rule is to ascertain and
give effect to the intention of the Legislature. In this instance, the purpose of the
Legislature is plainly to erect a wall of safety against temptation for a director of the
bank. The prohibition against indirect loans is a recognition of the familiar maxim that
no man may serve two masters — that where personal interest clashes with fidelity to
duty the latter almost always suffers. If, therefore, it is shown that the husband is
financially interested in the success or failure of his wife's business venture, a loan to
partnership of which the wife of a director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar relationship called a
conjugal partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be
specially noted.) A loan, therefore, to a partnership of which the wife of a director of a
bank is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly such an occurrence is
shown by the acknowledged fact that in this instance the defendant was tempted to
mingle his personal and family affairs with his official duties, and to permit the loan
P300,000 to a partnership of no established reputation and without asking for
collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep.,
211), the Supreme Court of Maryland said:
What then was the purpose of the law when it declared that no director or
officer should borrow of the bank, and "if any director," etc., "shall be
convicted," etc., "of directly or indirectly violating this section he shall be
punished by fine and imprisonment?" We say to protect the stockholders,
depositors and creditors of the bank, against the temptation to which the
directors and officers might be exposed, and the power which as such they
must necessarily possess in the control and management of the bank, and
the legislature unwilling to rely upon the implied understanding that in
assuming this relation they would not acquire any interest hostile or adverse
to the most exact and faithful discharge of duty, declared in express terms
that they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the
Binalbagan Estate decision, it was said:
We are of opinion the statute forbade the loan to his copartnership firm as
well as to himself directly. The loan was made indirectly to him through his
firm.
IV. Could Venancio Concepcion, President of the Philippine National Bank, be
convicted of a violation of section 35 of Act No. 2747 in relation with section 49 of the
same Act, when these portions of Act No. 2747 were repealed by Act No. 2938, prior
to the finding of the information and the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in
relation to section 35 of the same Act, provides a punishment for any person who
shall violate any of the provisions of the Act. It is contended, however, by the
appellant, that the repeal of these sections of Act No. 2747 by Act No. 2938 has
served to take away the basis for criminal prosecution.
This same question has been previously submitted and has received an answer
adverse to such contention in the cases of United Stated vs. Cuna ([1908], 12 Phil.,
241); People vs. Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and
Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil., 1046). In other words,
it has been the holding, and it must again be the holding, that where an Act of the
Legislature which penalizes an offense, such repeals a former Act which penalized
the same offense, such repeal does not have the effect of thereafter depriving the
courts of jurisdiction to try, convict, and sentenced offenders charged with violations
of the old law.
V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion,
S. en C." by Venancio Concepcion, President of the Philippine National Bank, in
violation of section 35 of Act No. 2747, penalized by this law?
Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on
the bank, and since section 49 of said Act provides a punishment not on the bank
when it violates any provisions of the law, but on a personviolating any provisions of
the same, and imposing imprisonment as a part of the penalty, the prohibition
contained in said section 35 is without penal sanction.lawph!l.net
On a review of the evidence of record, with reference to the decision of the trial court,
and the errors assigned by the appellant, and with reference to previous decisions of
this court on the same subject, we are irresistibly led to the conclusion that no
reversible error was committed in the trial of this case, and that the defendant has
been proved guilty beyond a reasonable doubt of the crime charged in the
information. The penalty imposed by the trial judge falls within the limits of the punitive
provisions of the law.
Judgment is affirmed, with the costs of this instance against the appellant. So
ordered.

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

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

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

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

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

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

JUDGMENT

G.R. No. L-14027 November 8, 1918
LA COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, petitioner,
vs.
C. H. FRENCH, as Auditor of the Philippine Islands, and C. E. UNSON, as Acting
Purchasing Agent of the Philippine Islands, respondents.
Charles C. Cohn for petitioner.
Office of the Solicitor-General Paredes for respondents.
FISHER, J.:
This is a petition for a writ of mandamus filed in this Court by the Compañia General
de Tabacos de Filipinas to compel the Purchasing Agent to draw a warrant in favor of
the petitioner for the sum of P322.93 and to compel the Insular Auditor to approve
and countersign the same. The Solicitor-General has appeared in behalf of the
respondents and interposed a demurrer, based chiefly on the ground that the
petitioner has not exhausted his administrative remedy by appealing to the Governor-
General from the adverse decision of the Insular Auditor. The case now comes before
us upon this demurrer.
The origin of the claim appears to be this: The petitioner is a common carrier engaged
in the transportation of passengers and merchandise in the Philippine coastwise
trade, and during the months of January, February, and March of the current year the
petitioner rendered services as a common carrier in transporting goods and
merchandise for the Government of the Philippine Islands, at the request of the
Purchasing Agent, as chief of the Bureau of Supply. For the services so rendered said
Bureau became indebted to the petitioner in the sum of P322.93, which indebtedness
has been fully liquidated, audited and allowed by the Government.
It further appears that on or about January 18, 1918, the petitioner received at Manila
upon one of its ships twenty cases of gasoline, to be transported to Laoag, in the
Province of Ilocos Norte. Upon the arrival of the plaintiff's ship at the port of
destination the twenty cases of gasoline were delivered to the consignee, and it was
then discovered that approximately half of the contents of two cans of a total value
P5.92, had escaped by leakage. The consignee of the gasoline thereupon made an
annotation upon the bill of lading to the effect that two cases were received in a
leaking condition and that the shipment was five gallons short.
The petition alleges that said leakage was due to causes unknown to the petitioner
and to the respondents, and was not due to any negligence or want of due diligence
on the part of the petitioner, its agents or servants. Nevertheless, the petition goes on
to state, the Purchasing Agent claims that the value of the gasoline so lost should be
deducted from the indebtedness admittedly due from the Bureau of Supply to the
petitioner, and this contention has been sustained by the Insular Auditor, who has
adjudged that the petitioner is liable to the Government for the value of the gasoline
so lost.
Acting upon this resolution the respondents have declined to issue to the petitioner a
warrant for the full sum of P322.93 and have tendered to it, in satisfaction of the entire
indebtedness, a warrant for the sum of P317.01 only which the petitioner has refused
to accept. It is claimed by the petitioner that in adjudging it to be responsible for the
loss aforesaid and in allowing the set-off for the value of the gasoline lost by leakage,
the Insular Auditor has acted arbitrarily and in excess of his powers, and that if his
action is permitted to go into effect, the petitioner will be deprived of property without
due process of law.
It is averred in the complaint that the bill of lading, upon which the shipment of
gasoline in question was accepted for transportation, provided, in accordance with the
requirements prescribed by the Insular Collector of Customs, that all cargo which from
its nature must be stored on deck, will be transported wholly at the risk of the shipper;
and it is alleged in the petition that gasoline constitutes cargo of this character, and
that the shipment in question was consequently so carried on deck. The bill of lading
also, upon which the gasoline was carried, contained a provision that the
merchandise was received and would be carried subject to the conditions prescribed
in the shipping regulations aforesaid. It is apparent, therefore, that the questions
squarely presented are (1) if the Purchasing Agent and the Insular Auditor may offset
against a specific, liquidated, and undisputed debt of the Government an unliquidated
claim for damages in favor of the Government against the creditor, and (2) assuming
that such set-off is improper, if they may be compelled by mandamus to issue a
warrant to the creditor for the amount of his credit without deducting what they deem
to be due from him upon the claim for damages.
The question here presented is, therefore, very clearly of greater importance than
would appear to be indicated in the petty sum in dispute; and the proper solution of
the problem requires a somewhat broader range of discussion than is disclosed in the
issue presented by the demurrer. In what is here to be said we propose to consider
the extent of the power confided to the Insular Auditor with respect to the audit and
settlement of claims due from or owing to the government and the nature of the
remedy or remedies which may be available to a person aggrieved by his decision.
The fundamental statute from which the power and authority of the Insular Auditor is
derived is the Act of Congress of August 29, 1916, generally known as the Jones
Law, in sections 24 and 25 of which the office is created and the duties and power of
the incumbent defined as follows:
SEC. 24. That there shall be appointed by the President an Auditor who shall
examine, audit, and settle all accounts pertaining to the revenues and
receipts, from whatever source, of the Philippine Government an the
provincial and municipal governments of the Philippines, including trust
funds and funds derived from bond issues; and audit, in accordance with law
and administrative regulations, all expenditures of funds or property
pertaining to or held in trust by the Government or the provinces or
municipalities thereof. He shall perform a like duty with respect to all
government branches.
He shall keep the general accounts of the Government and preserve the
vouchers pertaining thereto.
It shall be the duty of the Auditor to bring to the attention of the proper
administrative officer expenditures of funds or property which, in his opinion,
are irregular, unnecessary, excessive, or extravagant.
There shall be a Deputy Auditor appointed in the same manner as the
Auditor. The Deputy Auditor shall sign such official papers as the Auditor
may designate and perform such other duties as the Auditor may prescribe,
and in case of the death, resignation, sickness, or other absence of the
Auditor from his office, from any cause, the Deputy Auditor shall have charge
of such office. In case of the absence from duty, from any cause, of both the
Auditor and the Deputy Auditor, the Governor General may designate an
assistant, who shall have charge of the office.
The administrative jurisdiction of the Auditor over accounts, whether of funds
or property, and all vouchers and records pertaining thereto, shall be
exclusive. With the approval of the Governor-General he shall from time to
time make an promulgate general or special rules and regulations, not
inconsistent with law, covering the method of accounting for public funds and
property, and funds and property held in trust by the Government or any of
its branches: Provided, That any officer accountable for public funds or
property may require such additional reports or returns from his subordinates
or others as he may deem necessary for his own information and protection.
The decisions of the Auditor shall be final and conclusive upon the Executive
Branches of the Government, except that appeal therefrom may be taken by
the party aggrieved or the Head of the Department concerned within one
year, in the manner hereinafter provided, have like authority as that
conferred by law upon the several auditors of the United States and the
Comptroller of the United States Treasury and is authorized to communicate
directly with any person having claims before him for settlement, or with any
department, officer, or person having official relations with his office.
As soon after the close of each fiscal year as the accounts of said year may
be examined and adjusted, the Auditor shall submit to the Governor-General
and the Secretary of War an annual report of the fiscal concerns of the
Government, showing the receipts and disbursements of the various
Departments and Bureaus of the Government and of the various provinces
and municipalities, and make such other reports as may be required of him
by the Governor-General or the Secretary of War.
In the execution of their duties the Auditor and the Deputy Auditor are
authorized to summon witnesses, administer oaths, and to take evidence,
and, in the pursuance of these provisions may issue subpoenas and enforce
the attendance of witnesses, as now provided by law.
The office of the Auditor shall be under the general supervision of the
Governor-General and shall consist of the Auditor and Deputy Auditor and
such necessary assistants as may be prescribed by law.
SEC. 25. That any person aggrieved by the action or decision of the Auditor
in the settlement of his account or claim may, within one year, take an
appeal in writing to the Governor-General, which appeal shall specifically set
forth the particular action of the Auditor to which exception is taken, with the
reason and authorities relied on for reversing such decision.
If the Governor-General shall confirm the action of the Auditor, he shall so
indorse the appeal and transmit it to the Auditor, and the action shall
thereupon be final and conclusive. Should the Governor-General fail to
sustain the action of the Auditor, he shall forthwith transmit his grounds of
disapproval to the Secretary of War, together with the appeal and the papers
necessary to a proper understanding of the matter. The decision of the
Secretary of War in such case shall be final and conclusive.
The local statutory provisions relating to the organization and administration of the
Bureau of Audits are chiefly contained in the Accounting Law, which constitutes
chapter 26 (secs. 581-658) of the Administrative Code (1917). The original source of
these provisions is found in Act No. 1792 of the Philippine Commission.
The most important of the section of the Accounting Law for the purposes of this
inquiry are those defining the general jurisdiction of the Bureau of Audits (sec. 584,
Administrative Code, 1917) and authorizing set-offs (sec. 624, Administrative Code,
1917) as follows:
 SEC. 584. General jurisdiction of Bureau of Audits. — The authority and
powers of the Bureau of Audits extend to and comprehend all matters
relating to accounting procedure, including the keeping of the accounts of
the Government, the preservation of vouchers, the methods of accounting,
the examination and inspection of the books, records, and papers relating to
such accounts, and to the audit and settlement of the accounts of all persons
respecting funs or property received or held by them in an accountable
capacity, as well as to the examination and audit of all debts and claims of
any sort due from or owing to the Government of the Philippine Islands in
any of its branches.
SEC. 624. Retention of salary for satisfaction of indebtedness to
Government. — When any person is indebted of the Unite States, the Insular
Auditor may direct the proper officer to withhold the payment of any money
due him or his estate, the same to be applied in satisfaction of such
indebtedness.
The Bureau of Audits, under the cited statutes, constitutes the accounting branch of
the governmental service. Its competency extends to two different subjects, namely
(1) Accounting procedure, and (2) the examination, audit, and settlement of all debts
and claims due from or owing to the Government. Under the latter head, it will be
noted that the authority and powers of the Bureau extend not only to the audit and
settlement of the accounts of Government officers and employees, but also to the
examination and audit of "all debts and claims of any sort due from or owing to the
Government of the Philippine Islands in any of its branches."
It would hardly be possible to frame a statement concerning the power of the Bureau
with reference to public finance in more inclusive terms; and if the power of
"examination and audit" of "all claims . . . owing to the Government" should be found
to include the power conclusively to adjudicate the existence, validity, and amount of
disputed unliquidated claims which the executive officers of the Government may
deem to exist and in its favor and to offset such claims against conceded debts of the
Government, the contention of respondents must prevail.
The first and most important branch of our inquiry involves an inquiry into the power of
the Auditor with respect to such unliquidated claims in favor of the Government, as
regards the effect of his decisions concerning them, (1) upon the executive branch of
the Government and (2) upon the alleged debtor and the courts.
So far as the executive branches of the Government are concerned the decisions of
the Auditor within the scope of his authority are conclusive (sec. 655, Administrative
Code of 1917), unless appealed from (section 653, Administrative Code, 1917) to the
higher executive authorities. If in the instant case the petitioner had acquiesced in the
findings and conclusions of the Auditor, his decision that the amount of the loss
arising from the allege leakage was P5.92 would, in the absence of an appeal under
section 653, supra, be conclusive upon the Bureau of Supply, the officer to whom the
goods were consigned, and all other officials of the Government who might be
concerned, and would subject to the provisions of section 657 of the Administrative
Code of 1917, protect the petitioner herein against any future contention on the part of
any other government official that the actual loss was greater. Furthermore, the
acquiescence of the claimant as to the amount of the counterclaim would convert it
into a liquidated debt and make it properly subject to set-off.
But as the petitioner denies the allege liability and refuses to consent to its liquidation
by the Auditor, we must determine (1) if the auditor may lawfully proceed to liquidate
and set-off the demand, regardless of such protest and objection, and (2) if his action
is conclusive upon the courts.
Section 584 of the Administrative Code of 1917 is very similar in its terms to section
236 of the Revised Statutes of the United States, which reads as follows:
All claims and demands whatever by the United States and against them,
and all accounts whatever in which the United States are concerned, either
as debtors or as creditors, shall be settled and adjusted in the Department of
the Treasury.
Nevertheless, the words "all claims and demands whatever . . . against" the United
States as used in this statute have been held repeatedly not to authorize the officers
of the Treasury Department to entertain unliquidated claims against the United States
for damages. In the case of Power vs. United States (18 C. Cls. R., 275), Judge
Davis, writing the opinion of the court, said:
An account is something which may be adjusted and liquidated by an
arithmetical process . . . . But no law authorizes Treasury officials to allow
and pass in accounts a number not the result of numerical computation upon
a subject within the operation of a mutual part of a contract. Claims for
unliquidated damages require for their settlement the application of the
qualities of judgment and discretion. They are frequently, perhaps generally
sustained by extraneous proof, having no relation to the subjects to the
contract, which are common to both parties . . . . The results to be reached in
such cases can in no just sense be called an account, and are not
committed by law to the control and decision of Treasury accounting officers.
Upon the same subject it was said by Judge it was said by Judge Richardson in
McKee's Case (12 C. Cls. R., 555) that this construction must properly exclude ". . .
claims for unliquidated damages, founded on neglect or breach of obligations, or
otherwise, and so, by the well defined and accepted meaning of the word "account"
and the sense in which the same and the words "accounting" and "accounting
officers" appear to be used in the numerous sections of the numerous acts of
Congress wherein they occur, it would seem that the accounting officers have no
jurisdiction of such claims except in special and exceptional cases, in which it has
been expressly conferred upon them by special or private acts. And such has been
opinion of five Attorneys-General — all who have officially advised the executive
officers on the subject: Attorney-General Taney in 1832, whose opinion is referred to
by his successors in office; Attorney-General Nelson in 1844 (4 Opins., 327);
Attorney-General Clifford in 1847 (4 Opins., 627); Attorney- General Cushing in 1854
(6 Opins., 524) and Attorney-General Williams in 1872 (14 Opins., 24). And the same
views were expressed by this court in 1866 (Carmack vs. the United States, 2 C. Cls.
R., 126. 140.)"
Attorney-General Cushing in the opinion cited by Judge Richardson (6 Op. Attys.
Gen., 523) says:
To audit is to examine an adjust an account. There is an indissoluble
connection between account and auditor, the functions of the one indicating
the nature of the other. Yet no definition of the
terms audit and auditor implies the adjudication of damages or other
determination of controversy.
In the case of McClure vs. United States (19 C. Cls. R., 173) referred to the Court of
Claims by the Secretary of the Treasury under the Bowman Act, it was said:
It is further insisted by the government that this is a claim "for unliquidated damages
for the breach of a contract which the department have not and never have had,
jurisdiction to examine and settle." In a very broad sense every suit founded on
contract may be regarded as a suit for damages; but where in any proceeding the
damages do not depend upon discretion or the exercise of judicial judgment they are
not unliquidated, but certain and specific."
Again, it was said by Chief Justice Richardson, in the case of Dennis vs. United
States (20 Ct. Cls. R., 119):
Technically, all claims for money due on contracts, where the exact amount
payable is not thereby fixed, as in the case of goods purchase or work done
without an agreed price, are claims for unliquidated damages. But . . . their
settlement rarely requires anything more than the ordinary processes of
accounting, the prices being readily determined by the vouchers and reports
of the public officers incurring the expense, or by other means within reach
of the accounting officers, who very properly take jurisdiction and pass upon
such claims . . . . But claims for unliquidated damages founded on neglect or
breach of obligations contrary to the terms of a contract, and
not necessarily arising therefrom, are of quite a different class. They must be
sustained by extraneous proof, often involving a broad field of investigation
and requiring the application of judgment an discretion upon the measure of
damages and the weight of conflicting evidence. As was said in Power's
Case (18 Ct. Cls. R., 275), "The results to be reached in such cases can in
no sense be called an account, and are not committee by law to the control
and decision of Treasury accounting officers."
The principle under consideration was the basis of the decision in the very recent and
important case of Smith vs.Jackson, decided by the Supreme Court of the United
States, April 5, 1918 (Advance Sheets, 1918, p. 476). The plaintiff in that proceeding
was the judge of the district court of the Panama Canal Zone, and was entitled, by
statute, to an annual salary $6,000, payable at the rate of $500 a month. A dispute
arose between Judge Jackson and H. A. Smith, the auditor of the Canal Zone, arising
from the fact that the judge had occupied a house belonging to the government for
which, in the opinion of the auditor, he should have paid rent. The Auditor was also of
the opinion that the judge had overstayed his leave of absence by several days, and
that he should be deprived of his salary for the corresponding period. The judge
denied the liability. The auditor thereupon proceeded to liquidate the alleged claim of
the government against the judge, and to enforce his decision by offsetting the
supposed debt against the judge's salary. The judge declined to acquiesce in this
ruling and filed suit in the district court of the Cana Zone for a mandamus against the
auditor to compel him to pay the salary without any deductions whatsoever. The
Honorable Henry D. Clayton, district judge of the middle and northern districts of
Alabama, was designated by the President to hear the case. In a carefully prepared
opinion, based upon an exhaustive citation of authorities, Judge Clayton held that the
writ should issue, and that the auditor was without authority to set-off against
the liquidated debt of the government to the petitioner the unliquidated claim which he
conceived to exist in favor of the government.lawphil.net
From the decision the auditor appealed to the United States Court of Appeals for the
Fifth Circuit. That court adopted in its entirely (241 Fed., 747) the reasoning of the
opinion of Judge Clayton and affirmed his judgment. The respondent thereupon sued
out a writ of error to the Supreme Court of the United States, where the judgment was
again affirmed in a brief but emphatic opinion in which the Chief Justice, speaking for
the court, said that the decision of Judge Clayton made "perfectly manifest the error
of the action of the auditor," and that the prosecution of the writ of error "constituted a
plain abuse by the auditor of his administrative functions."
The doctrine stated in the elaborate opinion of Judge Clayton in the cited case,
supported as it is by the persuasive force of its logical reasoning, and the unanimous
approval of the judges of the Circuit Court of Appeals and of the Justices of the
Supreme Court of the United States, is, in our judgment, directly applicable to the
instant case. The principle underlying that case is that while an auditor may and
should offset a liquidated debt in favor of the government against a liquidated debt
due from it, he has no authority conclusively to
adjudicate unliquidated and contested claims against creditors of the government as
such a course would be, in effect, the assumption of judicial power. Upon this point
Judge Clayton said:
Mr. Attorney-General Gregory was correct in saying that if the authorities in
the Canal Zone believe that the relator in the present case owed any
amounts of money whatsoever to Panama Canal, it was "a question for
judicial rather than administrative determination," and that the claim now
urged by the respondent in this case 'could only be enforced through
proceedings in the courts." That is a sententious and felicitous statement of
this case.
Judge Jackson has never had his day in court. He has been deprived of his
salary, or the sum of $1,131.76. without due process of law. It has been
withheld from him by the refusal of the auditor in this case to issue his
voucher upon which the salary is paid. He denies it upon the grounds that
there was no law or regulation under which the indebtedness was or could
have been created. He denies that the respondent has authority to withhold
any part of his pay in the collection of an alleged but disputed indebtedness.
And yet the executive officer has sat as a court and without evidence or
hearing, except what he considered evidence, and except what he
considered a hearing, decided a controversy that he created by his own
action. He has passed upon a disputed claim which is a disputed claim
merely because he has created the dispute in refusing to make payment
where it was his plain duty to make such payment. His conduct, however
good his intention may have been, hardly falls short of being shocking to the
judicial sense of justice, proper and orderly procedure, in a matter that is
clearly justiciable. Perhaps it is not to be doubted that if, after he had made a
careful examination, the Attorney-General had found Judge Jackson was
indebted, owed the items amounting to the salary which has been withheld
by the Auditor, the account would have been settled without court
proceedings. Or, if not so settled, then appropriate court action would have
been had for its collection. In any event Judge Jackson was entitled to his
day in court. But the auditor here held that, having the money for Judge
Jackson under his control and subject to his disbursement, he had the right
to determine the claim against Judge Jackson one disputed in law and in
fact, and now insists that his summary way of determining an issue of law
and an issue of fact, and the collection by deduction from the Judge's salary
of a disputed indebtedness, cannot be reviewed or questioned by the court.
Notwithstanding that view I think the Attorney-General was right in saying
that the matter "was one for judicial rather than administrative
determination," and that whatever demand or offset that the Government
may have "could only bee enforced through proceedings in the Courts."
In some of the opinions of former Attorneys-General of the United States cited by
Judge Clayton reference is made to the Act of Congress of March 3, 1875, (2 Fe.
Stat. Ann., 18) wherein it is provided, "That when any final judgment recovered
against the United States or other claim duly allowed by legal authority shall be
presented to the Secretary of the Treasury for payment and the plaintiff or claimant
therein shall be indebted to the United States in any manner, whether as principal or
surety, it shall be the duty of the Secretary to withhold payment of an amount of such
judgment or claim equal to the debt thus due to the United States; and if such plaintiff
or claimant assents to such set-off and discharges his judgment or an amount thereof
equal to said debt or claim, the Secretary shall execute a discharge of the debt due
from the plaintiff to the United States. But if such plaintiff or claimant denies his
indebtedness to the United States or refuses to consent to the set-off, then the
Secretary shall withhold payment of such further amount of such judgment or claim as
in his opinion will be sufficient to cover all legal charges and costs in prosecuting the
debt of the United States to final judgment. And if such debt is not already in suit, it
shall be the duty of the Secretary to cause legal proceedings to be immediately
commenced to enforce the same and to cause the same to be prosecuted to final
judgment with all reasonable dispatch. And if in such action judgment shall be
rendered against the United States or the amount recovered for debt an costs shall be
less than the amount so withheld, as before provided, the balance shall then be paid
over to such plaintiff by such Secretary with six per cent interest thereon for the time it
has been withheld from the plaintiff."
This Act of Congress is of great importance and is, we believe, of controlling authority
in this case. It has been noted that section 24 of the Jones Law confers upon the
Insular Auditor "like authority as that conferred by law upon the several auditors of the
United States and the Comptroller of the United States Treasury," except as
otherwise expressly provided in that Act. This grant of authority is, we believe, to be
construed as limiting as well as conferring authority, and that unless the authority now
asserted by the Insular Auditor has been conferred upon similar officials of the United
States, it has not been conferred upon him by the Jones Law.
An examination of the quoted section of the Act of March 3, 1875, will show that the
duty of acting upon contested unliquidated claims in favor of the United
States against persons holing by being reduced to judgment or "duly allowed by legal
authority" is made to devolve upon the Secretary of the Treasury, not upon the
auditors and the comptroller. Certainly, it could hardly be contended, in the light of the
fact that the statutes defining the duties of the auditors an the Comptroller of the
Treasury of the United States do not in terms confer upon them the power
conclusively to allow or disallow contested unliquidated claims for damages as set-
offs against audited debts of the Government, that they can exercise that power,
which has been expressly denied to the Secretary of the Treasury, to whom they are
subordinate. It follows, therefore, that the grant to the Insular Auditor by the quoted
section of the Jones Law of "like authority" to that conferred upon the auditors of the
United States and the comptroller of the United States Treasury did not carry with it
the power conclusively and finally to adjudicate and set-off unliquidated claims, as
such power is not possessed by those officers.
It is important to note, as an aid to the construction of our own statutes and as
indicative of the practice and policy of our Government in such matters, that the Act of
March 3, 1875 (18 Sta. at L., sec. 481) did not attempt to confer upon the Secretary of
the Treasury the power to adjudicate disputed claims of the United States for the
purpose of offsetting them. If the claimant "assents to such set-off" the deduction is
made forthwith, but if he "denies his indebtedness to the United States or refuses to
consent to the set-off," the Secretary is authorized only to retain a sufficient amount of
the claim to cover the offset, and thereupon "to cause legal proceedings to
be immediately commenced to enforce the same and to cause the same to be
prosecuted to final judgment with all reasonable dispatch."
That is to say, in no event is one who is admittedly a creditor of the United States to
be deprived of his credit by set-off against an unliquidated and disputed claim of
damages, whether arising from tort or breach of contract, without having his day in
court if he demands it. After that has been done, if it be found that the claimant is
indeed also a debtor of the government in a settle and definite sum, then both credits
being liquidated, compensation is effected by operation of law.
We conclude, therefore, that no power to adjudicate and offset disputed unliquidated
claims for damages is conferred upon Insular Auditor by the cited provisions of the
Jones Law or by the general grant of jurisdiction to examine and audit claims owing to
the Government contained in section 584 of the Administrative Code. It now remains
for us to determine if that authority is conferred by section 624 of that statute.
Section 624 of the Administrative Code of 1917 is as follows:
When any person is indebted to the Government of the Philippine Islands or
Government of the United States, the Insular Auditor may direct the proper
officer to withhold the payment of any money due him or his estate, the
same to be applied in satisfaction of such indebtedness.
This section, beyond a doubt, authorizes the Insular Auditor, when it appears that a
creditor of the Government is also "indebted to the Government" "to offset" one "debt"
against another. Does it, however, confer upon the Auditor the exclusive power to
determine whether such indebtedness exists if the supposed debtor denies it? We
think not. Certainly it is not lightly to be assumed that such an authority, to be
exercised with none of the safeguards which surround a judicial inquiry into such
matters, has been conferred.
It is important, in construing section 624 of the Administrative Code, to ascertain the
meaning of the term "indebted" as there used. To be indebted is to owe a debt. The
word "debt," in legal parlance, is of more restricted meaning than the terms
"obligation" or "liability." "A debt" says Sir John Cross, in Ex parte Thompson (Mon. &
B., 219), "is a demand for a sum certain." A debt is an amount actually ascertained.
That there must be an ascertained debt and not a mere unliquidated demand or
liability, "is sustained by all the case, legal and equitable." (In re Adams [N.Y.], 12
Daly, 454.) In Bacon's Abridgement the term "debt" is defined as limited to cases in
which the certainty of the sum is made to appear and that therefore "the plaintiff is to
recover the same in numero and not to be repaired in damages by the jury as in those
actions sounding the damage." (Watson vs. McNairy, 4 Ky., 356.)
"A debt is properly opposed to unliquidated damages . . . ." (Commercial National
Bank vs. Taylor 19 N.Y. Supp., 533.) It seems to us, therefore, quite clear that the
authority conferred upon the Auditor by section 624 of the Administrative Code of
1917 to set-off "debts" to the Government against "money due" the debtor does not
extend to unliquidated, disputed claims arising from tort or breach of contract.
The Act of Congres of March 3, 1807, which allows set-offs against claims by the
Government, has been most liberally construed by the Supreme Court of the United
States (U.S. vs. Ripley, 7 Peters, 18); but no claims based upon unliquidated
damages have ever been permitted as a set-off. (U.S. vs. Robeson, 9 Peters, 319.) It
is reasonable that this should be so, for the theory of set-off, like the compensatio of
the Civil Law, is that one of the debts extinguishes the other by operation of law. As
stated by Comptroller Lawrence, in the Kansas Case (Lawrence, First Comptroller's
Decisions, vol. 2, p. 315):
The object of compensatio, as in set-off, was the prevention of unnecessary
suits and payments.
Compensation and set-off are, therefore, forms of payment by the mutual extinction,
by operation of law, of concurring debts. In our Civil Code the subject is dealt with
under the general heading "The Extinction of Obligations;" and it is provided in article
1196 that in order for compensation to take place (1) both debts must "consist of a
sum of money
. . .;" (2) that both debts be due an demandable; and (3) that both been liquidated.
The Code in this respect is merely declaratory of the earlier law, for in its decision of
April 6, 1889, cited by Manresa (vol. 8, p. 3768) the supreme court of Spain had ruled
that "compensation can only take place between certain and liquidated debts, and in
no event can it include the unliquidated claims of one of the parties for alleged
damages or for untaxed court costs."
It is, of course, obvious, that in normal times, no one, is under legal duty to extend
credit to the Government, whether it be for the sale of merchandise or for its
transportation. Had the petitioner in this case demanded that it be paid in advance
before accepting Government cargo for transportation, its demand would have been
wholly justifiable, just as would be a like demand for cash by a merchant asked to sell
to the Government the goods on his shelf.
The manifest unfairness of taking advantage of the fact that a citizen has voluntarily
permitted the Government to become his debtor in order to extinguish by
administrative fiat a contested claim for unliquidated damages, which the Government
would otherwise have to submit to the courts, requires no comment.
An examination of the local statutes will show that the Legislature has provided a
method by which the Insular Auditor may have unliquidated claims in favor of the
Government reduced to judgment, if the liability legally exists. Section 650 of the
Administrative Code of 1917 reads as follows:
The Insular Auditor shall, through the proper channels, supervise and
procedure the collection and enforcement of all debts and claims, and the
restitution of all funds and property, found to be due the Government in his
settlement and adjustment of accounts: and if any legal proceeding is
necessary to such end, he shall request the Governor- General to authorize
and direct the institution of the same.
All money demands in favor of the Government shall bear interest at six per
centum per annum from the date of the Auditor's written demand.
This section grants to the Insular Auditor and the Governor-General, jointly, the same
power vested in the Secretary of the Federal Treasury by the Act of Congress of
March 3, 1875. It is ample for the protection of the interests of the Government and
secures to the citizen the right to a full hearing before an unbiased tribunal before he
is deprived of his property. The contention which may be advanced, that it will work a
hardship upon the Government to require it to submit such controversies to the
courts, may be answered by saying that it is not to be presumed that just claims,
particularly for small amounts, will always be resisted; and, further, should they be,
the unsuccessful litigant may be made to pay the costs of the suit, in addition to
incurring the expense of employing counsel. These considerations, in the vast
majority of cases, prevent unreasonable resistance to just demands as between
private individuals and there is no reason for assuming that they would not be equally
efficacious in protecting the Government. On the other hand, it is to be remembered
that while in the United States a large class of claims against the Federal Government
arising from contract may be presented to the Court of Claims (Judicial Code, sec.
145) or to the District Courts (Judicial Code, section 24) for adjudication an that
similar provisions are to be found in the laws of several of the States, the Philippine
Government has not as yet made provision for the submission of such claims to
judicial investigations at the instance of its creditors.
The power which the Insular Auditor claims is, if it exists, clearly judicial in its nature.
It implies the hearing of evidence, the making of findings of fact, the application of the
law to such findings, and the pronouncement of a decision — all acts essentially
judicial in their character. As was said by Attorney-General Black (Vol. 9, Ops. Atty.
Gen., 198) in a similar case:
No such jurisdiction is given to the Secretary of the Treasury by any law, and if the
Constitution is not a dead letter Congress cannot confer it. The Fifth Amendment
declares that "no person shall be deprived of his life, liberty or property, without due
process of law." This means, and has always been held to mean, that the right of a
citizen to his property, as well as his life or liberty, could be taken away only upon an
open, public, and fair trial before a judicial tribunal, according to the forms prescribed
by the law of the land for the investigation of such subjects. If an executive officer can
make an order that the widow and children of Reside shall be deprived of twenty- four
thousand dollars without a trial, then the same officer may, with equal propriety, issue
a warrant to hang them, since the Constitution puts life and property on the same
footing."
As the asserted authority is judicial in character, if section 624 of the Administrative
Code must be construed as conferring it upon the Insular Auditor, the very grave
question would be presented whether such power could validly be delegated to him.
The judicial power, both by the Philippine Bill and the Jones Law, is vested in the
established courts, and Congress has reserved to itself the power of divesting it.
(Barrameda vs. Moir, 25 Phil. Rep., 44.)
Certainly, no interpretation of a statute which will bring it into conflict with the
fundamental law will be adopted if avoidable. To avoid that conflict section 624 of the
Administrative Code must bee construed, in conjunction with section 650 of the same
code, as requiring the Auditor, when his contention regarding the propriety of
offsetting unliquidated claims is disputed, to submit the controversy to the courts, and
as authorizing him, during the pendency of the litigation, to withhold payment of a
sufficient amount of the admitted indebtedness of the Government to the claimant to
offset it should the Government's contention be upheld by the court, and the
unliquidated claim converted into a liquidated debt. (Civil Code, art. 1196.)
But it is argued that the decisions of the Auditor upon all matters connected with the
accounting service are conclusive an binding upon all other branches of the
Government. That they are conclusively binding upon the executive branches of the
Government may, as we have seen, be conceded; but that conclusion does not of
necessity imply that this decisions are equally binding upon the courts. This we think,
will be apparent from a consideration of the wording of the present statutes and their
legislative antecedents.
Section 6 of the original Accounting Act contains the following language:
 The decisions of the Auditor shall be final and conclusive upon the executive
branches of the Government, except that appeal therefrom may be taken by
the party aggrieved or the head of the Department concerned, within one
year, in the manner hereinafter prescribed.
This provision was carried into the Administrative Code of 1916 (Act No. 2657) by the
codifiers in the following form [sec. 687]:
A decision of the Insular Auditor or of a district auditor upon any matter
within their respective powers shall be conclusive, subject to appeal or
review as hereinafter provided.
It will be observed that the significant words "upon the executive branches of the
Government," immediately following the word "conclusive," are omitted from the
provision as it appeared in the Administrative Code of 1916. However, very shortly
after this Code went into effect, the Congress of the United States passed the Act of
August 29, 1916, commonly known as the Jones Law; an in the sixth paragraph of
section 24 of this Act (supra) is found a reenactment of the language which we have
quoted above from section 6 of Act No. 1792. A few months later the Philippine
Legislature adopted a revision of the Administrative Code which is contained in Act
No. 2711; and it is noteworthy that in this last edition of said Code, the Legislature,
doubtless in obedience to the will of the Congress of the United States as expressed
in the Jones Law, restored the words which had been omitted from section 687 of the
Administrative Code of 1916, so that the provision as it now stands in the law reads
as follows [sec. 655]:
A decision of the Insular Auditor or of a district auditor upon any matter
within their respective powers shall be conclusive upon the executive
branches of the Government, subject to appeal or review as hereinafter
provided. (Administrative Code of 1917, section 655.)
Reflection upon the meaning of the language contained in this provision, as well as a
consideration of the import of the legislative changes by which that provision acquired
its present form, leads us to believe that, in the end and after all is said and done, the
action of the Insular Auditor in passing upon the propriety and validity of any debt or
claim which comes before him for audit is purely and solely an administrative act and
has no binding force except as it affords a conclusive rule for the guidance and
control of the executive branches of the Government. This idea comports with the
principle accepted in the United States with respect to the functions of auditors; an it
is further indicated in another provision found in section 24 (supra) of the Jones Law,
which is in these words:
The administrative jurisdiction of the auditor over accounts, whether of funds
or property, and all vouchers and records pertaining thereto, shall be
exclusive.
As the same provision appears in section 6 of the earlier Act No. 1792, the word
"administrative" before "jurisdiction" is wanting. Its insertion in the later Act would
seem to indicate a recognition of the fact that the acts of the Auditor are of a purely
administrative character.
The truth is that the embarrassment to which any individual is subject in his financial
relations with the Government does not arise so much from the conclusiveness of the
Insular Auditor's action upon his claim as it does from the rule that the Government is
not subject to be sued in its own courts without its consent. If a party having a
justiciable claim against the Government could go into court and maintain an action
against it, as against any other defendant, no one would ever have supposed that the
rejection of the claim by an auditor would have the effect of a conclusive adjudication
on the right. Manifestly it can have no such effect; an when the statute says that the
Insular Auditor's decision shall be conclusive on the executive branches of the
Government, it is as much as to say that it is not conclusive on the judicial branch.
This was the conclusion expressed by the Court of Claims in the case of
McKnight vs. United States (13 C. Cls. R., 307), construing a similar statute, in which
it was said:
. . . in 1868 an act was passed, which is now incorporated into the Revised
Statutes as section 191, which provides that the balances certified by the
comptrollers "shall be conclusive upon the executive branch of the
Government . . . ." But this conclusiveness is probably intended to be . . .
conclusive upon the executive branch of the Government but not upon
Congress or the courts.
But it is argued that the action cannot be maintained because it does not appear from
the petition that the petitioner has appealed from the action of the Insular Auditor to
the Governor-General. In section 653 of the Administrative Code (1917) it is declared
that any person aggrieved by a decision of the Insular Auditor may, within one year,
appeal to the Governor-General. In section 656 it is declared that the action of the
Governor-General affirming the Auditor's decision shall be final; but if he reverses the
Auditor, the matter goes to the Secretary of War whose decision shall be conclusive.
Provisions to the same effect are found in the Jones Law, sections 24, 25. It is our
opinion that the word "final" as used in section 656 of the Administrative Code in
speaking of the action of the Secretary of War, has reference to the finality and
conclusiveness of the proceedings in an administrative sense — that is, final and
conclusive upon the executive branches of the Government. In other words, section
656 follows the tenor of section 655 where it is said that the decision of the Insular
Auditor shall be conclusive, subject to appeal or review as in section 656 provided. It
results that the proceedings under sections 653 to 656, inclusive, of the
Administrative Code (1917) are at no stag binding upon the courts, whether an
administrative appeal is taken or not. The circumstance that no appeal to the
Governor-General was taken by the petitioner in the instant case is, therefore,
immaterial so far as the judicial solution of the controversy is concerned. By its
election not to take the matter before the Governor- General, the petitioner left the
decision of the Insular Auditor, in effect, considered as an administrative decision, and
section 653, as we have already seen defines the effect to be given to it. The
petitioner, of course, was bound to await action by the Insular Auditor because, until
this officer acted, it could not be known that the petitioner's claim was questioned.
The failure to appeal from the Auditor's decision does not affect petitioner's right of
redress in the courts.
It having been shown that an adjudication made by the Insular Auditor is not binding
on the courts, it remains to consider what remedy, if any, the law affords to a person
who considers himself aggrieved by the Auditor's action and the conditions under
which such remedy may be exerted. That no action can be brought directly by the
creditor against the Government, in the absence of an enabling statute, to recover
from it upon any supposed liability goes without saying. In the United States, as we
have stated, a judicial determination of the validity of a great variety of claims of
private individuals against the Federal Government may be submitted to judicial
investigation, and administrative courts are common in the countries of continental
Europe; but the Philippine Government, however, has not as yet made provision for
such action, although in several instances special statutes have opened the doors of
the courts to individual claimants.
In considering the case before us, it is important to bear in mind that the Government
is admittedly indebted to the petitioner in the definite and certain sum of P322.93. No
action, either administrative or judicial, is therefore necessary to fix this liability upon
the Government. In so far as legal liability can result from governmental activities,
liability exists and upon the demurrer is admitted. Furthermore, said liability is such
that it should be absolved by a warrant drawn by the Purchasing Agent and
countersigned by the Insular Auditor. The law makes provision for the payment of the
money in this way, and it cannot otherwise be gotten out of the Insular Treasury.
The legal remedy here indicate as proper is the writ of mandamus to compel the
Purchasing Agent and the Insular Auditor to issue, countersign, and deliver the proper
warrant to the petitioner. (Hoey vs. Baldwin, 1 Phil., Rep., 551.)
The liability of these officers to the coercive process of mandamus arises from the fact
that a valid claim exists for the payment of which provision has been made, that these
officers are the appointed agents for making the payment, and that under these
circumstances the execution and delivery to the creditor of the warrant are
merely ministerial functions involving no discretionary action whatever.
It is, of course, beyond dispute that the courts will not attempt to control
the discretion of executive officers; but to require of them the performance of merely
ministerial acts does not infringe upon that discretion. The decision of the Supreme
Court of the United States in the Jackson case (supra) is in itself sufficient authority,
directly in point, to uphold us in our conclusion that the execution and delivery of a
warrant for the payment of an admitted indebtedness involves the exercise of no
discretion whatever. If further justification be required we find it in the decision of the
Supreme Court of the United States in the case of Roberts vs. Valentine (176 U.S.,
221) wherein it was said:
Unless the writ of mandamus is to become practically valueless, and is to be refused
even where a public officer is commanded to do a particular act by virtue of a
particular statute, this writ should be granted. Every statute to some extent requires
construction by the public officer whose duties may be defined therein. Such officer
must read the law, and he must therefore, in a certain sense, construe it, in order to
form a judgment from its language of what duty he is directed by the statute to
perform. But that does not necessarily and in all cases make the duty of the officer
anything other than a purely ministerial one. If the law directs him to perform an act in
regard to which no discretion is committed to him, and which, upon the facts existing
he is bound to perform, then that act is ministerial, although depending upon a statute
which requires, in some degree, a construction of its language by the officer. Unless
this be so, the value of this writ is very greatly impaired. Every executive officer whose
duty is plainly devolved upon him by statute might refuse to perform it, and when his
refusal is brought before the court he might successfully plead that the performance
of the duty involved the construction of a statute by him, and therefore it was not
ministerial, and the court would on that account be powerless to give relief. Such a
limitation of the powers of the court, we think, would be most unfortunate, as it would
relieve from judicial supervision all executive officers in the performance of their
duties, whenever they should plead that the duty required of them arose upon the
construction of a statute, no matter how plain its language, nor how plainly they
violated their duty in refusing to perform the act required."
As it is averred in the complaint and admitted by the demurrer that the respondents
are not withholding the warrant to enable them, with all due diligence, to submit the
disputed claim to the courts, but that the Auditor has assumed to pass definite and
final judgment upon the validity and amount of the alleged offset, contrary to the
expressed wishes of petitioner, we are of the opinion that the petition states a cause
of action, that the demurrer is not well taken, and it, therefore, must be and is
overruled. Respondents may answer the petition within five days from the receipt of
notice of this ruling and order.
 Branch 58 against respondent, seeking to collect the sums of US$100,000, with interest
CAROLYN M. GARCIA, G.R. No. 154878 thereon at 3% a month from October 26, 1995 and P500,000, with interest thereon at
Petitioner, 4% a month from November 5, 1995, plus attorneys fees and actual damages. [12]
Present:
Petitioner alleged that on February 24, 1995, respondent borrowed from her
PUNO, C.J., Chairperson, the amount of US$100,000 with interest thereon at the rate of 3% per month, which
SANDOVAL-GUTIERREZ, loan would mature on October 26, 1995.[13] The amount of this loan was covered by the
- v e r s u s - CORONA, first check. On June 29, 1995, respondent again borrowed the amount of P500,000 at
AZCUNA and an agreed monthly interest of 4%, the maturity date of which was on November 5,
GARCIA, JJ. 1995.[14] The amount of this loan was covered by the second check. For both loans, no
promissory note was executed since petitioner and respondent were close friends at
RICA MARIE S. THIO, the time.[15] Respondent paid the stipulated monthly interest for both loans but on their
Respondent. Promulgated: maturity dates, she failed to pay the principal amounts despite repeated demands.[16]

March 16, 2007 Respondent denied that she contracted the two loans with petitioner and
countered that it was Marilou Santiago to whom petitioner lent the money. She claimed
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x she was merely asked by petitioner to give the crossed checks to Santiago.[17] She
issued the checks for P76,000 and P20,000 not as payment of interest but to
accommodate petitioners request that respondent use her own checks instead of
DECISION Santiagos.[18]

CORONA, J.: In a decision dated February 28, 1997, the RTC ruled in favor of
petitioner.[19] It found that respondent borrowed from petitioner the amounts of
US$100,000 with monthly interest of 3% and P500,000 at a monthly interest of 4%:[20]
Assailed in this petition for review on certiorari [1] are the June 19,
2002 decision[2] and August 20, 2002resolution[3] of the Court of Appeals (CA) in CA- WHEREFORE, finding preponderance of evidence to
G.R. CV No. 56577 which set aside the February 28, 1997decision of the Regional Trial sustain the instant complaint, judgment is hereby rendered in favor
Court (RTC) of Makati City, Branch 58. of [petitioner], sentencing [respondent] to pay the former the amount
Sometime in February 1995, respondent Rica Marie S. Thio received from of:
petitioner Carolyn M. Garcia a crossed check [4] dated February 24, 1995 in the amount
of US$100,000 payable to the order of a certain Marilou Santiago. [5] Thereafter, 1. [US$100,000.00] or its peso
petitioner received from respondent every month (specifically, on March 24, April 26, equivalent with interest thereon at 3% per month from October 26,
June 26 and July 26, all in 1995) the amount of US$3,000 [6] and P76,500[7] on July 1995 until fully paid;
26,[8] August 26, September 26 and October 26, 1995.
2. P500,000.00 with interest
In June 1995, respondent received from petitioner another crossed thereon at 4% per month from November 5, 1995 until fully paid.
check[9] dated June 29, 1995 in the amount of P500,000, also payable to the order of
Marilou Santiago.[10] Consequently, petitioner received from respondent the amount 3. P100,000.00 as and for
of P20,000 every month on August 5, September 5, October 5 and November 5, attorneys fees; and
1995.[11] 4. P50,000.00 as and for actual
damages.

According to petitioner, respondent failed to pay the principal amounts of the For lack of merit, [respondents] counterclaim is perforce
loans (US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996, dismissed.
petitioner filed a complaint for sum of money and damages in the RTC of Makati City,
 With costs against [respondent].
IT IS SO ORDERED.[21]
On appeal, the CA reversed the decision of the RTC and ruled that there was
no contract of loan between the parties:
A perusal of the record of the case shows that [petitioner]
failed to substantiate her claim that [respondent] indeed borrowed
money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is
the fact that [respondent] received a MetroBank [crossed] check
dated February 24, 1995 in the sum of US$100,000.00, payable to
the order of Marilou Santiago and a CityTrust [crossed] check dated
June 29, 1995 in the amount of P500,000.00, again payable to the
order of Marilou Santiago, both of which were issued by
[petitioner]. The checks received by [respondent], being
crossed, may not be encashed but only deposited in the bank
by the payee thereof, that is, by Marilou Santiago herself.
It must be noted that crossing a check has the following
effects: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only onceto one who has an
account with the bank; (c) and the act of crossing the check serves
as warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant
to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by
[respondent] is not the issuance and delivery to the payee in
contemplation of law since the latter is not the person who could take
the checks as a holder, i.e., as a payee or indorsee thereof, with
intent to transfer title thereto. Neither could she be deemed as an
agent of Marilou Santiago with respect to the checks because she
was merely facilitating the transactions between the former and
[petitioner].
With the foregoing circumstances, it may be fairly inferred
that there were really no contracts of loan that existed between the
parties. x x x (emphasis supplied)[22]
Hence this petition.[23]
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. However, this case falls under one of the
exceptions, i.e., when the factual findings of the CA (which held that there
were no contracts of loan between petitioner and respondent) and the RTC (which held
that there were contracts of loan) are contradictory.[24]
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon
the delivery of the object of the contract.[25] This is evident in Art. 1934 of the Civil Code
which provides:
An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.(Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by
the debtor when the checks were encashed) the debtor acquires ownership of such
money or loan proceeds and is bound to pay the creditor an equal amount. [26]
It is undisputed that the checks were delivered to respondent. However, these
checks were crossed and payable not to the order of respondent but to the order of a
certain Marilou Santiago. Thus the main question to be answered is: who borrowed
money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks
were made payable to Santiago.[27] She maintains that it was also upon respondents
instruction that both checks were delivered to her (respondent) so that she could, in
turn, deliver the same to Santiago.[28] Furthermore, she argues that once respondent
received the checks, the latter had possession and control of them such that she had
the choice to either forward them to Santiago (who was already her debtor), to retain
them or to return them to petitioner.[29]
We agree with petitioner. Delivery is the act by which the res or substance
thereof is placed within the actual or constructive possession or control of
another.[30] Although respondent did not physically receive the proceeds of the checks,
these instruments were placed in her control and possession under an arrangement
whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally
know Santiago.[31] It was highly improbable that petitioner would grant two loans to a
complete stranger without requiring as much as promissory notes or any written
acknowledgment of the debt considering that the amounts involved were quite big.
Respondent, on the other hand, already had transactions with Santiago at that time.[32]
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose
name appeared in both parties list of witnesses) testified that respondents plan was for
petitioner to lend her money at a monthly interest rate of 3%, after which respondent
would lend the same amount to Santiago at 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 why Ruiz testimony should not be
believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks
in the amount of P76,000 each (peso equivalent of US$3,000) for eight months to cover
the monthly interest. For the P500,000 loan, she also issued her own checks in the
amount of P20,000 each for four months.[34] According to respondent, she merely
accommodated petitioners request for her to issue her own checks to cover the interest
payments since petitioner was not personally acquainted with Santiago. [35] She
claimed, however, that Santiago would replace the checks with cash. [36] Her
explanation is simply incredible. It is difficult to believe that respondent would put
herself in a position where she would be compelled to pay interest, from her own funds,
for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is
guided by the rule that for evidence to be believed, it must not only
proceed from the mouth of a credible witness, but must be credible
in itself such as the common experience of mankind can approve as
probable under the circumstances. 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, and is outside of juridical cognizance. [37]
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was
respondent, not petitioner, who was listed as one of her (Santiagos) creditors. [38]
Last, respondent inexplicably never presented Santiago as a witness to
corroborate her story.[39] The presumption is that evidence willfully suppressed would
be adverse if produced.[40] Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent
did not borrow the amounts of US$100,000 and P500,000 from petitioner. We instead
agree with the ruling of the RTC making respondent liable for the principal amounts of
the loans.
We do not, however, agree that respondent is liable for the 3% and 4%
monthly interest for the US$100,000 and P500,000 loans respectively. There was no
written proof of the interest payable except for the verbal agreement that the loans
would earn 3% and 4% interest per month. Article 1956 of the Civil Code provides that
[n]o interest shall be due unless it has been expressly stipulated in writing.
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.[41]
Hence, respondent is liable for the payment of legal interest per annum to be
computed from November 21, 1995, the date when she received petitioners demand
letter.[42] From the finality of the decision until it is fully paid, the amount due shall earn
interest at 12% per annum, the interim period being deemed equivalent to a
forbearance of credit.[43]
The award of actual damages in the amount of P50,000 and P100,000
attorneys fees is deleted since the RTC decision did not explain the factual bases for
these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002
decision and August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No.
56577 are REVERSED and SET ASIDE. The February 28, 1997 decision of the
Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATIONthat respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until
the finality of the decision. The total amount due as of the date of finality will earn
interest of 12% per annum until fully paid. The award of actual damages and attorneys
fees is deleted.

Be that as it may, while there can be no stipulated interest, there can be legal
interest pursuant to Article 2209 of the Civil Code. It is well-settled that:

G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-
appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import
and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from
the date the complaint was filed and attorney's fees in the amount of P5,000.00. The
present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to
pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential
Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its
release without first paying the draft, Saura, Inc. executed a trust receipt in favor of
the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application
for P500,000.00, to be secured by a first mortgage on the factory building to be
constructed, the land site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and
Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly
with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance
Corporation, subject to availability of funds, and as the construction of the factory
buildings progresses, to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote
a letter to RFC, requesting a modification of the terms laid down by it, namely: that in
lieu of having China Engineers, Ltd. (which was willing to assume liability only to the
extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be substituted
for Inocencia Arellano as one of the other co-makers, having acquired the latter's
shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in
the resolution, "to reexamine all the aspects of this approved loan ... with special
reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon
at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the necessary documents be
prepared in accordance with the terms and conditions specified in Resolution No.
145. In connection with the reexamination of the project to be financed with the loan
applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the
observation that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already) entered into," referring to
its acceptance of the terms and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the
RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of
Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc.
under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd.
Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the
loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the
purpose of financing the manufacture of jute sacks in Davao, with special reference
as to the advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E. Saura and
after extensive discussion on the subject the Board, upon recommendation of the
Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be
REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in actual
operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other RFC that
his company no longer to of the loan and therefore considered the same as cancelled
as far as it was concerned. A follow-up letter dated July 2 requested RFC that the
registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00
be granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a
notification ... from the China Engineers Ltd., expressing their desire to consider the
loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as
co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the
following proviso:
That in view of observations made of the shortage and high cost of
imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide
adequately for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the Department
of Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of
its brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf."
The explanatory note on page 1 of the same brochure states that, the venture "is the
first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in theIsland of Mindanao where
the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of
local raw materials to provide adequately for the requirements of the factory. Saura,
Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or probably even next year;"
(2) requesting "assurances (from RFC) that my company and associates will be able
to bring in sufficient jute materials as may be necessary for the full operation of the
jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
 Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21,
1955, regarding the release of your loan under
consideration of P500,000. As stated in our letter
of December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to
time, subject to availability of funds towards the
end that the sack factory shall be placed in actual
operating status. We shall be able to act on your
request for revised purpose and manner of
releases upon re-appraisal of the securities
offered for the loan.
With respect to our requirement that the
Department of Agriculture and Natural Resources
certify that the raw materials needed are
available in the immediate vicinity and that there
is prospect of increased production thereof to
provide adequately the requirements of the
factory, we wish to reiterate that the basis of the
original approval is to develop the manufacture of
sacks on the basis of the locally available raw
materials. Your statement that you will have to
rely on the importation of jute and your request
that we give you assurance that your company
will be able to bring in sufficient jute materials as
may be necessary for the operation of your
factory, would not be in line with our principle in
approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so,
on June 17, 1955 RFC executed the corresponding deed of cancellation and
delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of
the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled
at the request of Saura, Inc., the latter commenced the present suit for damages,
alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there
was no perfected contract; and (3) that assuming there was, the plaintiff itself did not
comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perferted until the
delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But this fact alone falls short
of resolving the basic claim that the defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages.
and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages.All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual desistance — and that on
the initiative of the plaintiff-appellee itself.

It should be noted that RFC entertained the loan application of Saura, Inc. on the With this view we take of the case, we find it unnecessary to consider and resolve the
assumption that the factory to be constructed would utilize locally grown raw other issues raised in the respective briefs of the parties.
materials, principally kenaf. There is no serious dispute about this. It was in line with
such assumption that when RFC, by Resolution No. 9083 approved on December 17, WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
1954, restored the loan to the original amount of P500,000.00. it imposed two with costs against the plaintiff-appellee.
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is
prospect of increased production thereof to provide adequately for the requirements
of the factory." The imposition of those conditions was by no means a deviation from
the terms of the agreement, but rather a step in its implementation. There was nothing
in said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely — "that the proceeds of the loan shall be
utilized exclusively for the following purposes: for construction of factory building —
P250,000.00; for payment of the balance of purchase price of machinery and
equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc.
realized that it could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be able in sufficient quantity this
year or probably next year," and asking that out of the loan agreed upon the sum of
P67,586.09 be released "for raw materials and labor." This was a deviation from the
terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than
those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations
which had been going on for the implementation of the agreement reached an
impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature cf mutual desistance — what
Manresa terms "mutuo disenso"1 — which is a mode of extinguishing obligations. It is
a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment. 2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's
stand was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's
non-compliance. In 1962 it even applied with DBP for another loan to finance a rice

[G.R. No. 133632. February 15, 2002] BPI INVESTMENT
CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the
Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The
appellate court affirmed the judgment of the Regional Trial Court of Pasig City, Branch
151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI
Investment Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K. Litonjua, [1]consolidated
with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of
preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment
of their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC
was premature and made in bad faith. It awarded private respondents the amount
of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for
attorneys fees and expenses for litigation. It likewise dismissed the foreclosure suit for
being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala
Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC,
for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said
house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They
paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with
AIDC. The latter, however, was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of P500,000 to be applied to Roas
debt and secured by the same property, at an interest rate of 20% per annum and
service fee of 1% per annum on the outstanding principal balance payable within ten
years in equal monthly amortization of P9,996.58 and penalty interest at the rate of
21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed
containing the above stipulations with the provision that payment of the monthly
amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC
the sum of P190,601.35. This reduced Roas principal balance to P457,204.90 which,
in turn, was liquidated when BPIIC applied thereto the proceeds ofprivate respondents
loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87,
purporting to be what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private
respondents on the ground that they failed to pay the mortgage indebtedness which
from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five
Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of
sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC.
They alleged, among others, that they were not in arrears in their payment, but in fact
made an overpayment as of June 30, 1984. They maintained that they should not be
made to pay amortization before the actual release of the P500,000 loan in August and
September 1982. Further, out of the P500,000 loan, only the total amount
of P464,351.77 was released to private respondents. Hence, applying the effects of
legal compensation, the balance of P35,648.23 should be applied to the initial monthly
amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831
and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and
Development Corporation and Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was
only in the principal sum of P464,351.77, with interest at 20% plus service charge of
1% per annum, payable on equal monthly and successive amortizations at P9,283.83
for ten (10) years or one hundred twenty (120) months. The amortization schedule
attached as Annex A to the Deed of Mortgage is correspondingly reformed as
aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when
BPI caused their publication in a newspaper of general circulation as defaulting
debtors, and therefore orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being
premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents
appeal was dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the
dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby
AFFIRMED in toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only
upon the delivery of the object of the contract. The contract of loan between BPIIC and
ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC
released the purported balance of the P500,000 loan after deducting therefrom the
value of Roas indebtedness. Thus, payment of the monthly amortization should
commence only a month after the said date, as can be inferred from the stipulations in
the contract. This, despite the express agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to June 1984, the total amortization
due was only P194,960.43. Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents
delinquency in the payment of their loan. This fact constituted sufficient ground for
moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied,
hence this petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL
CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE
VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF
IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN INSOCIAL SECURITY SYSTEM VS. COURT OF
APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that
because a simple loan is perfected upon the delivery of the object of the contract, the
loan contract in this case was perfected only on September 13, 1982.Petitioner claims
that a contract of loan is a consensual contract, and a loan contract is perfected at the
time the contract of mortgage is executed conformably with our ruling in Bonnevie v.
Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected
on March 31, 1981, the date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was
released only on August 1982, the loan was actually released on March 31, 1981, when
BPIIC issued a cancellation of mortgage of Frank Roas loan. This finds support in the
registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor
of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage
Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan
should be attributed to private respondents. As BPIIC only agreed to extend
a P500,000 loan, private respondents were required to reduce Frank Roas loan below
said amount. According to petitioner, private respondents were only able to do so in
August 1982.
In their comment, private respondents assert that based on Article 1934 of the
Civil Code,[4] a simple loan is perfected upon the delivery of the object of the contract,
hence a real contract. In this case, even though the loan contract was signed on March
31, 1981, it was perfected only on September 13, 1982, when the full loan was released
to private respondents. They submit that petitioner misread Bonnevie. To give meaning
to Article 1934, according to private respondents, Bonnevie must be construed to mean
that the contract to extend the loan was perfected on March 31, 1981but the contract
of loan itself was only perfected upon the delivery of the full loan to private respondents
on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan
contract was perfected on March 31, 1981, and their payment did not start a month
thereafter, still no default took place. According to private respondents, a perfected loan
agreement imposes reciprocal obligations, where the obligation or promise of each
party is the consideration of the other party. In this case, the consideration for BPIIC in
entering into the loan contract is the promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Therefore, private
respondents conclude, they did not incur in delay when they did not commence paying
the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when
petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract
but a real contract. It is perfected only upon the delivery of the object of the
contract.[5] Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this
Court as a perfected consensual contract falls under the first clause of Article 1934,
Civil Code. It is an accepted promise to deliver something by way of simple loan.
 In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44
SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter
approved the application through a board resolution. Thereafter, the corresponding
mortgage was executed and registered. However, because of acts attributable to
petitioner, the loan was not released. Later, petitioner instituted an action for damages.
We recognized in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the loan. However,
since the fault was attributable to petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for
damages. However, said contract does not constitute the real contract of loan which
requires the delivery of the object of the contract for its perfection and which gives rise
to obligations only on the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS
and Litonjua, on the other, was perfected only on September 13, 1982, the date of the
second release of the loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the Court of Appeals, private
respondents obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract.[7]
We also agree with private respondents that a contract of loan involves a
reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other.[8] As averred by private respondents, the promise of
BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua
shall pay the monthly amortization commencing on May 1, 1981, one month after the
supposed release of the loan. It is a basic principle in reciprocal obligations that neither
party incurs in delay, if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him.[9] Only when a party has performed his part
of the contract can he demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only demand for the
payment of the monthly amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan contract. Therefore, in computing
the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the
date of actual release of the loan and whether private respondents were the cause of
the delay in the release of the loan, are factual. Since petitioner has not shown that the
instant case is one of the exceptions to the basic rule that only questions of law can be
raised in a petition for review under Rule 45 of the Rules of Court, [10] factual matters
need not tarry us now. On these points we are bound by the findings of the appellate
and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral
and exemplary damages for it did not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the mortgage contract because private
respondents were irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by
the Court of Appeals the negligence of the appellant is not so gross as to warrant
moral and temperate damages, except that, said Court reduced those damages by
only P5,000.00 instead of eliminating them. Neither can we agree with the findings of
both the Trial Court and respondent Court that the SSS had acted maliciously or in
bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its
right under the mortgage contract in the face of irregular payments made by private
respondents and placed reliance on the automatic acceleration clause in the contract.
The filing alone of the foreclosure application should not be a ground for an award of
moral damages in the same way that a clearly unfounded civil action is not among the
grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable
for said damages because it insisted on the payment of amortization on the loan even
before it was released. Further, it did not make the corresponding deduction in the
monthly amortization to conform to the actual amount of loan released, and it
immediately initiated foreclosure proceedings when private respondents failed to make
timely payment.
But as admitted by private respondents themselves, they were irregular in their
payment of monthly amortization.Conformably with our ruling in SSS, we can not
properly declare BPIIC in bad faith. Consequently, we should rule out the award of
moral and exemplary damages.[11]
However, in our view, BPIIC was negligent in relying merely on the entries found
in the deed of mortgage, without checking and correspondingly adjusting its records on
the amount actually released to private respondents and the date when it was
released. Such negligence resulted in damage to private respondents, for which an
award of nominal damages should be given in recognition of their rights which were
violated by BPIIC.[12] For this purpose, the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents
were compelled to litigate, we sustain the award of P50,000 in favor of private
respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals
and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to
the award of damages. The award of moral and exemplary damages in favor of private
respondents is DELETED, but the award to them of attorneys fees in the amount
of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
respondents P25,000 as nominal damages. Costs against petitioner.
SO ORDERED.

POLO S. PANTALEON, G.R. No. 174269
Petitioner,
Promulgated:
August 25, 2010
- versus -
AMERICAN EXPRESS INTERNATIONAL, INC.,
Respondent.
x----------------------------------------------------------------------------------------x
RESOLUTION
BRION, J.:
We resolve the motion for reconsideration filed by respondent American Express
International, Inc. (AMEX) dated June 8, 2009,[1] seeking to reverse our Decision
dated May 8, 2009 where we ruled that AMEX was guilty of culpable delay in fulfilling
its obligation to its cardholder petitioner Polo Pantaleon. Based on this conclusion, we
held AMEX liable for moral and exemplary damages, as well as attorneys fees and
costs of litigation.[2]
FACTUAL ANTECEDENTS
The established antecedents of the case are narrated below.
AMEX is a resident foreign corporation engaged in the business of providing credit
services through the operation of a charge card system. Pantaleon has been an AMEX
cardholder since 1980.[3]
In October 1991, Pantaleon, together with his wife (Julialinda), daughter
(Regina), and son (Adrian Roberto), went on a guided European tour. On October 25,
1991, the tour group arrived in Amsterdam. Due to their late arrival, they postponed the
tour of the city for the following day.[4]
The next day, the group began their sightseeing at around 8:50 a.m. with a
trip to the Coster Diamond House (Coster). To have enough time for take a guided city
tour of Amsterdam before their departure scheduled on that day, the tour group
planned to leave Coster by 9:30 a.m. at the latest.
While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces
worth a total of US$13,826.00. Pantaleon presented his American Express credit card
to the sales clerk to pay for this purchase. He did this at around 9:15 a.m. The sales
clerk swiped the credit card and asked Pantaleon to sign the charge slip, which was
then electronically referred to AMEXs Amsterdam office at 9:20 a.m.[5]
At around 9:40 a.m., Coster had not received approval from AMEX for the purchase so
Pantaleon asked the store clerk to cancel the sale. The store manager, however,
convinced Pantaleon to wait a few more minutes. Subsequently, the store manager
informed Pantaleon that AMEX was asking for bank references; Pantaleon responded
by giving the names of his Philippine depository banks.
At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still
had not approved the purchase. Since the city tour could not begin until the Pantaleons
were onboard the tour bus, Coster decided to release at around 10:05 a.m. the
purchased items to Pantaleon even without AMEXs approval.
When the Pantaleons finally returned to the tour bus, they found their travel
companions visibly irritated.This irritation intensified when the tour guide announced
that they would 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 London.[6]
From the records, it appears that after Pantaleons purchase was transmitted for
approval to AMEXs Amsterdamoffice at 9:20 a.m.; was referred to
AMEXs Manila office at 9:33 a.m.; and was approved by the Manila office at 10:19
a.m. At 10:38 a.m., AMEXs Manila office finally transmitted the Approval Code to
AMEXs Amsterdamoffice. In all, it took AMEX a total of 78 minutes to approve
Pantaleons purchase and to transmit the approval to the jewelry store.[7]
After the trip to Europe, the Pantaleon family proceeded to the United States. Again,
Pantaleon experienced delay in securing approval for purchases using his American
Express credit card on two separate occasions. He experienced the first delay 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 October 30, 1991. Another delay occurred when he wanted
to purchase childrens shoes worth US$87.00 at the Quiency Market
in Boston on November 3, 1991.
Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for the
humiliation and inconvenience he and his family experienced due to the delays in
obtaining approval for his credit card purchases. AMEX responded by explaining that
the delay in Amsterdam was due to the amount involved the charged purchase of
US$13,826.00 deviated from Pantaleons established charge purchase
pattern. Dissatisfied with this explanation, Pantaleon filed an action for damages
against the credit card company with the Makati City Regional Trial Court (RTC).
On August 5, 1996, the RTC found AMEX guilty of delay, and awarded
Pantaleon P500,000.00 as moral damages, P300,000.00 as exemplary
damages, P100,000.00 as attorneys fees, and P85,233.01 as litigation expenses.
 On appeal, the CA reversed the awards.[8] While the CA recognized that delay
in the nature of mora accipiendi or creditors default attended AMEXs approval of
Pantaleons purchases, it disagreed with the RTCs finding that AMEX had breached its
contract, noting that the delay was not attended by bad faith, malice or gross
negligence. The appellate court found that AMEX exercised diligent efforts to effect the
approval of Pantaleons purchases; the purchase at Coster posed particularly a problem
because it was at variance with Pantaleons established charge pattern. As there was
no proof that AMEX breached its contract, or that it acted in a wanton, fraudulent or
malevolent manner, the appellate court ruled that AMEX could not be held liable for any
form of damages.
Pantaleon questioned this decision via a petition for review on certiorari with
this Court.
In our May 8, 2009 decision, we reversed the appellate courts decision and
held that AMEX was guilty ofmora solvendi, or debtors default. AMEX, as debtor, had
an obligation as the credit provider to act on Pantaleons purchase requests, whether to
approve or disapprove them, with timely dispatch. Based on the evidence on record,
we found that AMEX failed to timely act on Pantaleons purchases.
Based on the testimony of AMEXs credit authorizer Edgardo Jaurique, the
approval time for credit card charges would be three to four seconds under regular
circumstances. In Pantaleons case, it took AMEX 78 minutes to approve
the Amsterdam purchase. We attributed this delay to AMEXs Manila credit authorizer,
Edgardo Jaurique, who had to go over Pantaleons past credit history, his payment
record and his credit and bank references before he approved the purchase. Finding
this delay unwarranted, we reinstated the RTC decision and awarded Pantaleon moral
and exemplary damages, as well as attorneys fees and costs of litigation.
THE MOTION FOR RECONSIDERATION
In its motion for reconsideration, AMEX argues that this Court erred when it found
AMEX guilty of culpable delay in complying with its obligation to act with timely dispatch
on Pantaleons purchases. While AMEX admits that it normally takes seconds to
approve charge purchases, it emphasizes that Pantaleon experienced delay
in Amsterdambecause his transaction was not a normal one. To recall, Pantaleon
sought to charge in a single transaction jewelry items purchased from Coster in the
total amount of US$13,826.00 or P383,746.16. While the total amount of Pantaleons
previous purchases using his AMEX credit card did exceed US$13,826.00, AMEX
points out that these purchases were made in a span of more than 10 years, not in a
single transaction.
Because this was the biggest single transaction that Pantaleon ever made
using his AMEX credit card, AMEX argues that the transaction necessarily required the
credit authorizer to carefully review Pantaleons credit history and bank
references. AMEX maintains that it did this not only to ensure Pantaleons protection (to
minimize the possibility that a third party was fraudulently using his credit card), but
also to protect itself from the risk that Pantaleon might not be able to pay for his
purchases on credit. This careful review, according to AMEX, is also in keeping with
the extraordinary degree of diligence required of banks in handling its
transactions. AMEX concluded that in these lights, the thorough review of Pantaleons
credit record was motivated by legitimate concerns and could not be evidence of any ill
will, fraud, or negligence by AMEX.
AMEX further points out that the proximate cause of Pantaleons humiliation
and embarrassment was his own decision to proceed with the purchase despite his
awareness that the tour group was waiting for him and his wife. Pantaleon could have
prevented the humiliation had he cancelled the sale when he noticed that the credit
approval for the Coster purchase was unusually delayed.
In his Comment dated February 24, 2010, Pantaleon maintains that AMEX
was guilty of mora solvendi, or delay on the part of the debtor, in complying with its
obligation to him. Based on jurisprudence, a just cause for delay does not relieve the
debtor in delay from the consequences of delay; thus, even if 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.
In response to AMEXs assertion that the delay was in keeping with its duty to
perform its obligation with extraordinary diligence, Pantaleon claims that this duty
includes the timely or prompt performance of its obligation.
As to AMEXs contention that moral or exemplary damages cannot be awarded
absent a finding of malice, Pantaleon argues that evil motive or design is not always
necessary to support a finding of bad faith; gross negligence or wanton disregard of
contractual obligations is sufficient basis for the award of moral and exemplary
damages.
OUR RULING
We GRANT the motion for reconsideration.
Brief historical background
A credit card is defined as any card, plate, coupon book, or other credit device
existing for the purpose of obtaining money, goods, property, labor or services or
anything of value on credit.[9] It traces its roots to the charge card first introduced by the
Diners Club in New York City in 1950.[10] American Express followed suit by introducing
its own charge card to the American market in 1958.[11]
 In the Philippines, the now defunct Pacific Bank was responsible for bringing
the first credit card into the country in the 1970s.[12] However, it was only in the early
2000s that credit card use gained wide acceptance in the country, as evidenced by the
surge in the number of credit card holders then.[13]
Nature of Credit Card Transactions
To better understand the dynamics involved in credit card transactions, we
turn to the United States case of Harris Trust & Savings Bank v. McCray[14] which
explains:
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 account on behalf of
the person to whom the card is issued, and the two parties enter into
an agreement which governs their relationship. This agreement
provides that the bank will pay for cardholders account the amount
of merchandise or services purchased through the use of the credit
card and will also make cash loans available to the cardholder. It also
states that the cardholder shall be liable to the bank for advances
and payments made by the bank and that the cardholders obligation
to pay the bank shall not be affected or impaired by any dispute,
claim, or demand by the cardholder with respect to any merchandise
or service purchased.
The merchants participating in the system agree to honor
the banks credit cards. The bank irrevocably agrees to honor and pay
the sales slips presented by the merchant if the merchant performs
his undertakings such as checking the list of revoked cards before
accepting the card. x x x.
These slips are forwarded to the member bank which
originally issued the card. The cardholder receives a statement from
the bank periodically and may then decide whether to make payment
to the bank in full within a specified period, free of interest, or to defer
payment and ultimately incur an interest charge.
We adopted a similar view in CIR v. American Express International, Inc.
(Philippine branch),[15] where we also recognized that credit card issuers are not limited
to banks. We said:
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 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-credit arrangement
that exists between the issuer and the holder of the credit card
enables the latter to procure goods or services on a continuing basis
as long as the outstanding balance does not exceed a specified limit.
The card holder is, therefore, given the power to obtain present
control of goods or service on a promise to pay for them in the future.
Business establishments may extend credit sales through the use of
the credit card facilities of a non-bank credit card company to avoid
the risk of uncollectible accounts from their customers. Under this
system, the establishments do not deposit in their bank accounts the
credit card drafts that arise from the credit sales. Instead, they
merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to
these business establishments, but it does not redeem the drafts at
full price. The agreement between them usually provides for
discounts to be taken by the company upon its redemption of the
drafts. At the end of each month, it then 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.
Simply put, every credit card transaction involves three contracts, namely: (a)
the sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card; (b) the loan agreement between the
credit card issuer and the credit card holder; and lastly, (c) the promise to pay between
the credit card issuer and the merchant or business establishment. [16]
Credit card issuer cardholder
relationship
When a credit card company gives the holder the privilege of charging items
at establishments associated with the issuer,[17] a necessary question in a legal
analysis is when does this relationship begin? There are two diverging views on the
matter. In City Stores Co. v. Henderson,[18] another U.S. decision, held that:
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
consideration. The offer may be withdrawn at any time, without prior
notice, for any reason or, indeed, for no reason at all, and its
 withdrawal breaches no duty for there is no duty to continue it and
violates no rights.
Thus, under this view, each credit card transaction is considered a separate offer and
acceptance.
Novack v. Cities Service Oil Co.[19] echoed this view, with the court ruling that
the mere issuance of a credit card did not create a contractual relationship with the
cardholder.
On the other end of the spectrum is Gray v. American Express Company[20] which
recognized the card membership agreement itself as a binding contract between the
credit card issuer and the card holder. Unlike in the Novack and the City Stores cases,
however, the cardholder in Gray paid an annual fee for the privilege of being an
American Express cardholder.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship
between the credit card issuer and the credit card holder as a contractual one that is
governed by the terms and conditions found in the card membership
agreement.[21] This contract provides the rights and liabilities of a credit card company
to its cardholders and vice versa.
We note that a card membership agreement is a contract of adhesion as
its terms are prepared solely by the credit card issuer, with the cardholder merely
affixing his signature signifying his adhesion to these terms. [22] This circumstance,
however, does not render the agreement void; we have uniformly held that contracts
of adhesion are as binding as ordinary contracts, the reason being that the party
who adheres to the contract is free to reject it entirely. [23] The only effect is that the
terms of the contract are construed strictly against the party who drafted it.[24]
On AMEXs obligations to Pantaleon
We begin by identifying the two privileges that Pantaleon assumes he is entitled to with
the issuance of his AMEX credit card, and on which he anchors his claims. First,
Pantaleon presumes that since his credit card has no pre-set spending limit, AMEX has
the obligation to approve all his charge requests. Conversely, even if AMEX has no
such obligation, at the very least it is obliged to act on his charge requests within a
specific period of time.
i. Use of credit card a mere offer to enter into loan agreements
Although we recognize the existence of a relationship between the credit
card issuer and the credit card holder upon the acceptance by the cardholder of the
terms of the card membership agreement (customarily signified by the act of the
cardholder in signing the back of the credit card), we have to distinguish this
contractual relationship from the creditor-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 facility to the
cardholder. The latter involves the actual credit on loan agreement involving three
contracts, namely: the sales contract between the credit card holder and the
merchant or the business establishment which accepted the credit card; the loan
agreement between the credit card issuer and the credit card holder; and
the promise to paybetween the credit card issuer and the merchant or business
establishment.
From the loan agreement perspective, the contractual relationship begins to
exist only upon the meeting of the offer[25] and acceptance of the parties involved. In
more concrete terms, when cardholders use their credit cards to pay for their
purchases, they merely offer to enter into loan agreements with the credit card
company. Only after the latter approves the purchase requests that the parties enter
into binding loan contracts, in keeping with Article 1319 of the Civil Code, which
provides:
Article 1319. Consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.
This view finds support in the reservation found in the card membership agreement
itself, particularly paragraph 10, which clearly states that AMEX reserve[s] the right
to deny authorization for any requested Charge. By so providing, AMEX made its
position clear that it has no obligation to approve any and all charge requests made by
its card holders.
ii. AMEX not guilty of culpable delay
Since AMEX has no obligation to approve the purchase requests of its credit
cardholders, Pantaleon cannot claim that AMEX defaulted in its obligation. Article 1169
of the Civil Code, which provides the requisites to hold a debtor guilty of culpable delay,
states:
Article 1169. Those obliged to deliver or to do something
incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation. x x x.
 The three requisites for a finding of default are: (a) that the obligation is
demandable and liquidated; (b) the debtor delays performance; and (c) the creditor
judicially or extrajudicially requires the debtors performance.[26]
Based on the above, the first requisite is no longer met because AMEX, by the
express terms of the credit card agreement, is not obligated to approve Pantaleons
purchase request. Without a demandable obligation, there can be no finding of default.
Apart from the lack of any demandable obligation, we also find that Pantaleon
failed to make the demand required by Article 1169 of the Civil Code.
As previously established, the use of a credit card to pay for a purchase is only
an offer to the credit card company to enter a loan agreement with the credit card
holder. Before the credit card issuer accepts this offer, no obligation relating to
the loan agreement exists between them. On the other hand, a demand is defined
as the assertion of a legal right; xxx an asking with authority, claiming or challenging as
due.[27] A demand presupposes the existence of an obligation between the
parties.
Thus, every time that Pantaleon used his AMEX credit card to pay for his
purchases, what the stores transmitted to AMEX were his offers to execute loan
contracts. These obviously could not be classified as the demand required by law to
make the debtor in default, given that no obligation could arise on the part of AMEX
until after AMEX transmitted its acceptance of Pantaleons offers. Pantaleons act of
insisting on and waiting for the charge purchases to be approved by AMEX[28] is not the
demand contemplated by Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169, Pantaleons charge that
AMEX is guilty of culpable delay in approving his purchase requests must fail.
iii. On AMEXs obligation to act on the offer within a specific period of time
Even assuming that AMEX had the right to review his credit card history before
it approved his purchase requests, 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 the existence of this obligation by
emphasizing two points: (a) his card has no pre-set spending limit; and (b) in his twelve
years of using his AMEX card, AMEX had always approved his charges in a matter of
seconds.
Pantaleons assertions fail to convince us.
We originally held that AMEX was in culpable delay when it acted on the
Coster transaction, as well as the two other transactions in the United States which took
AMEX approximately 15 to 20 minutes to approve. This conclusion appears valid and
reasonable at first glance, comparing the time it took to finally get the Coster purchase
approved (a total of 78 minutes), to AMEXs normal approval time of 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 factual
and legal circumstances of the case.
AMEXs credit authorizer, Edgardo Jaurigue, explained that 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,
payment patterns, and personal resources.[29] Nevertheless, every time Pantaleon
charges a purchase on his credit card, the credit card company still has to
determine whether it will allow this charge, based on his past credit history. This
right to review a card holders credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEXs right to deny
authorization for any requested charge.
As for Pantaleons previous experiences with AMEX (i.e., that in the past 12
years, AMEX has always approved his charge requests in three or four seconds), this
record does not establish that Pantaleon had a legally enforceable obligation to expect
AMEX to act on his charge requests within a matter of seconds. For one, Pantaleon
failed to present any evidence to support his assertion that AMEX acted on purchase
requests in a matter of three or four seconds as an established practice. More
importantly, even if Pantaleon did prove that AMEX, as a matter of practice or custom,
acted on its customers purchase requests in a matter of seconds, this would still not be
enough to establish a legally demandable right; as a general rule, a practice or custom
is not a source of a legally demandable or enforceable right.[30]
We next examine the credit card membership agreement, the contract that
primarily governs the relationship between AMEX and Pantaleon. Significantly, there
is no provision in this agreement that obligates AMEX to act on all cardholder
purchase requests within a specifically defined period of time. Thus, regardless of
whether the obligation is worded was to act in a matter of seconds or to act in timely
dispatch, the fact remains that no obligation 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 AMEXs approval of his charge
requests within a matter of minutes.[31]
Nor can Pantaleon look to the law or government issuances as the source of
AMEXs alleged obligation to act upon his credit card purchases within a matter of
seconds. As the following survey of Philippine law on credit card transactions
demonstrates, the State does not require credit card companies to act upon its
cardholders purchase requests within a specific period of time.
Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of
1998, approved on February 11, 1998, is the controlling legislation
that regulates the issuance and use of access devices, [32] including credit cards. The
more salient portions of this law include the imposition of the obligation on a credit card
company to disclose certain important financial information[33] to credit card applicants,
as well as a definition of the acts that constitute access device fraud.
As financial institutions engaged in the business of providing credit, credit card
companies fall under the supervisory powers of the Bangko Sentral ng Pilipinas
(BSP).[34] BSP Circular No. 398 dated August 21, 2003embodies the BSPs policy when
it comes to credit cards
The Bangko Sentral ng Pilipinas (BSP) shall foster the
development of consumer credit through innovative products such as
credit cards under conditions of fair and sound consumer credit
practices. The BSP likewise encourages competition and
transparency to ensure more efficient delivery of services and fair
dealings with customers. (Emphasis supplied)
Based on this Circular, x x x [b]efore issuing credit cards, banks and/or their
subsidiary credit card companies must exercise proper diligence by ascertaining that
applicants possess good credit standing and are financially capable of fulfilling their
credit commitments.[35] As the above-quoted policy expressly states, the general intent
is to foster fair and sound consumer credit practices.
Other than BSP Circular No. 398, a related circular is BSP Circular No. 454,
issued on September 24, 2004, but this circular merely enumerates the unfair collection
practices of credit card companies a matter not relevant to the issue at hand.
In light of the foregoing, we find and so hold that AMEX is neither contractually
bound nor legally obligated to act on its cardholders purchase requests within any
specific period of time, much less a period of a matter of seconds that Pantaleon uses
as his standard. The standard therefore is implicit and, as in all contracts, must be
based on fairness and reasonableness, read in relation to the Civil Code provisions on
human relations, as will be discussed below.
AMEX acted with good faith
Thus far, we have already established that: (a) AMEX had neither a
contractual nor a legal obligation to act upon Pantaleons purchases within a specific
period of time; and (b) AMEX has a right to review a cardholders credit card history. Our
recognition of these entitlements, however, does not give AMEX an unlimited
right to put off action on cardholders purchase requests for indefinite periods of
time. In acting on cardholders purchase requests, AMEX must take care not to abuse
its rights and cause injury to its clients and/or third persons. We cite in this regard Article
19, in conjunction with Article 21, of the Civil Code, which provide:
Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due and
observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another
in a manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage.
Article 19 pervades the entire legal system and ensures that a person suffering
damage in the course of anothers exercise of 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 exercise of rights and the
performance of obligations, must: (a) act with justice, (b) give everyone his due, and (c)
observe honesty and good faith. It is not because a person invokes his rights that he
can do anything, even to the prejudice and disadvantage of another.[37]
While Article 19 enumerates the standards of conduct, Article 21 provides the
remedy for the person injured by the willful act, an action for damages. We explained
how these two provisions correlate with each other in GF Equity, Inc. v. Valenzona:[38]
[Article 19], known to contain what is commonly referred to
as the principle of abuse of rights, sets certain standards which must
be observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are 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 exercise, the norms of human conduct set
forth in Article 19 must be observed. A right, though by itself legal
because recognized or granted by law as such, may
nevertheless become the source of some illegality. When a right
is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another,
a legal wrong is thereby committed for which the wrongdoer
must be held responsible. But while Article 19 lays down a rule of
conduct for the government of human relations and for the
maintenance of social order, it does not provide a remedy for its
violation. Generally, an action for damages under either Article 20 or
Article 21 would be proper.
In the context of a credit card relationship, although there is neither a contractual
stipulation nor a specific law requiring the credit card issuer to act on the credit card
holders offer within a definite period of time, these principles provide the standard by
which to judge AMEXs actions.
According to Pantaleon, even if AMEX did have a right to review his charge purchases,
it abused this right when it unreasonably delayed the processing of the Coster charge
purchase, as well as his purchase requests at the Richard Metz Golf Studio and Kids
Unlimited Store; AMEX should have known that its failure to act immediately on charge
referrals would entail inconvenience and result in humiliation, embarrassment, anxiety
and distress to its cardholders who would be required to wait before closing their
transactions.[39]
It is an elementary rule in our jurisdiction that good faith is presumed and that
the burden of proving bad faith rests upon the party alleging it. [40] Although it took AMEX
some time before it approved Pantaleons three charge requests, we find no evidence
to suggest that it acted with deliberate intent to cause Pantaleon any loss or injury, or
acted in a manner that 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 and to prevent the possibility that the credit card was
being fraudulently used by a third person.
Pantaleon countered that this review procedure is primarily intended to protect
AMEXs interests, to make sure that the cardholder making the purchase has enough
means to pay for the credit extended. Even if this were the case, however, we do not
find any taint of bad faith in such motive. It is but 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 charity, and it would simply be
ludicrous to suggest that it would not want to earn profit for its services. Thus, so long
as AMEX exercises its rights, performs its obligations, and generally acts with good
faith, with no intent to cause harm, even if it may occasionally inconvenience others, it
cannot be held liable for damages.
We also cannot turn a blind eye to the circumstances surrounding the Coster
transaction which, in our opinion, justified the wait. In Edgardo Jaurigues own words:
Q 21: With reference to the transaction at the Coster Diamond House
covered by Exhibit H, also Exhibit 4 for the defendant, the approval
came at 2:19 a.m. after the request was relayed at 1:33 a.m., can
you explain why the approval came after about 46 minutes, more or
less?
A21: Because we have to make certain considerations and
evaluations of [Pantaleons] past spending pattern with [AMEX] at
that time before approving plaintiffs request because [Pantaleon]
was at that time making his very first single charge purchase of
US$13,826 [this is below the US$16,112.58 actually billed and paid
for by the plaintiff because the difference was already automatically
approved by [AMEX] office in Netherland[s] and the record of
[Pantaleons] past spending with [AMEX] at that time does not
favorably support his ability to pay for such purchase. In fact, if
the foregoing internal policy of [AMEX] had been strictly followed, the
transaction would not have been approved at all considering that the
past spending pattern of the plaintiff with [AMEX] at that time does
not support his ability to pay for such purchase.[41]
xxxx
Q: Why did it take so long?
A: It took time to review the account on credit, so, if there is any
delinquencies [sic] of the cardmember. There are factors on deciding
the charge itself which are standard measures in approving the
authorization. Now in the case of Mr. Pantaleon although his account
is single charge purchase of US$13,826. [sic] this is below the
US$16,000. plus actually billed x x x we would have already declined
the charge outright and asked him his bank account to support his
charge. But due to the length of his membership as cardholder we
had to make a decision on hand.[42]
As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for
AMEXs approval was because he had to go over Pantaleons credit card history for the
past twelve months.[43] It would certainly be unjust for us to penalize AMEX for merely
exercising its right to review Pantaleons credit history meticulously.
Finally, we said in Garciano v. Court of Appeals that the right to recover [moral
damages] under Article 21 is based on equity, and he who comes to court to demand
equity, must come with clean hands. Article 21 should be construed as granting the
right to recover damages to injured persons who are not themselves at fault.[44] As will
be discussed below, Pantaleon is not a blameless party in all this.
Pantaleons action was the
proximate cause for his injury
Pantaleon mainly anchors his claim for moral and exemplary damages on the
embarrassment and humiliation that he felt when the European tour group had to wait
for him and his wife for approximately 35 minutes, and eventually had to cancel
the Amsterdam city tour. After thoroughly reviewing the records of this case, we have
come to the conclusion that Pantaleon is the proximate cause for this embarrassment
and humiliation.
As borne by the records, Pantaleon knew even before entering Coster that the
tour group would have to leave the store by 9:30 a.m. to have enough time to take the
city tour of Amsterdam before they left the country. After 9:30 a.m., Pantaleons son,
who had boarded the bus ahead of his family, returned to the store to inform his family
that they were the only ones not on the bus and that the entire tour group was waiting
for them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because he
did not want to cause any inconvenience to the tour group. However, when
Costers sale manager asked him to wait a few more minutes for the credit card
approval, he agreed, despite the knowledge that he had already caused a 10-minute
delay and that the city tour could not start without him.
In Nikko Hotel Manila Garden v. Reyes,[45] we ruled that a person who
knowingly and voluntarily exposes himself to danger cannot claim damages for the
resulting injury:
The doctrine of volenti non fit injuria (to which a person assents is
not esteemed in law as injury) refers to self-inflicted injury or to the
consent to injury which precludes the recovery of damages by one
who has knowingly and voluntarily exposed himself to danger, even
if he is not negligent in doing so.
This doctrine, in our view, is wholly applicable to this case. Pantaleon himself
testified that the most basic rule when travelling in a tour group is that you must never
be a cause of any delay because the schedule is very strict.[46] When Pantaleon made
up his mind to push through with his purchase, he must have known that the group
would become annoyed and irritated with him. This was the natural, foreseeable
consequence of his decision to make them all wait.
We do not discount the fact that Pantaleon and his family did feel humiliated
and embarrassed when they had to wait for AMEX to approve the Coster purchase
in Amsterdam. We have to acknowledge, however, that Pantaleon was not a helpless
victim in this scenario at any time, he could have cancelled the sale so that the group
could go on with the city tour. But he did not.
More importantly, AMEX did not violate any legal duty to Pantaleon under the
circumstances under the principle of damnum absque injuria, or damages without legal
wrong, loss without injury.[47] As we held in BPI Express Card v. CA:[48]
We do not dispute the findings of the lower court that private
respondent suffered damages as a result of the cancellation of
his credit card. However, there is a material distinction between
damages and injury. Injury is the illegal invasion of a legal right;
damage is the loss, hurt, or harm which results from the injury; and
damages are the recompense or compensation awarded for the
damage suffered. Thus, there can be damage without injury in
those instances in which the loss or harm was not the result of
a violation of a legal duty. In such cases, the consequences
must be borne by the injured person alone, the law affords no
remedy for damages resulting from an act which does not amount to
a legal injury or wrong. These situations are often called damnum
absque injuria.
In other words, in order that a plaintiff may maintain an
action for the injuries of which he complains, he must establish that
such injuries resulted from a breach of duty which the defendant
owed to the plaintiff - a concurrence of injury to the plaintiff and legal
responsibility by the person causing it. The underlying basis for the
award of tort damages is the premise that an individual was
injured in contemplation of law. Thus, there must first be a breach
of some duty and the imposition of liability for that breach before
damages may be awarded; and the breach of such duty should be
the proximate cause of the injury.
Pantaleon is not entitled to damages
Because AMEX neither breached its contract with Pantaleon, nor acted with
culpable delay or the willful intent to cause harm, we find the award of moral damages
to Pantaleon unwarranted.
Similarly, we find no basis to award exemplary damages. In contracts,
exemplary damages can only be awarded if a defendant acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner. [49] The plaintiff must also show that he is
entitled to moral, temperate, or compensatory damages before the court may consider
the question of whether or not exemplary damages should be awarded. [50]
As previously discussed, it took AMEX some time to approve Pantaleons
purchase requests because it had legitimate concerns on the amount being charged;
no malicious intent was ever established here. In the absence of any other damages,
the award of exemplary damages clearly lacks legal basis.
Neither do we find any basis for the award of attorneys fees and costs of
litigation. No premium should be placed on the right to litigate and not every winning
party is entitled to an automatic grant of attorney's fees. [51] To be entitled to attorneys
fees and litigation costs, a party must show that he falls under one of the instances
enumerated in Article 2208 of the Civil Code.[52] This, Pantaleon failed to do. Since we
eliminated the award of moral and exemplary damages, so must we delete the award
for attorney's fees and litigation expenses.
Lastly, although we affirm the result of the CA decision, we do so for the reasons stated
in this Resolution and not for those found in the CA decision.
WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision
and GRANT the present motion for reconsideration. The Court of Appeals Decision dated August
18, 2006 is hereby AFFIRMED. No costs. SO ORDERED.

G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK,
in his capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of
the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying
the decision dated February 15, 1972 of the Court of First Instance of Agusan, which
dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific
performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino,
who, as a security for the loan, executed on the same day a real estate mortgage
over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT
No. T-305, and which mortgage was annotated on the said title the next day. The
approved loan application called for a lump sum P80,000.00 loan, repayable in semi-
annual installments for a period of 3 years, with 12% annual interest. It was required
that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital
to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was
made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a
promissory note for P17,000.00 at 12% annual interest, payable within 3 years from
the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64,
rec.). An advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this
pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after
being informed by the Bank that there was no fund yet available for the release of the
P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer,
promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island
Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which
provides:
In view of the chronic reserve deficiencies of the Island Savings
Bank against its deposit liabilities, the Board, by unanimous vote,
decided as follows:
1) To prohibit the bank from making new loans and investments
[except investments in government securities] excluding extensions
or renewals of already approved loans, provided that such
extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may
be necessary to insure correction of the bank's deficiency as soon
as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to
put up the required capital to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the Philippines and instructed
the Acting Superintendent of Banks to take charge of the assets of Island Savings
Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00
covered by the promissory note, filed an application for the extra-judicial foreclosure
of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino;
and the sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First
Instance of Agusan for injunction, specific performance or rescission and damages
with preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by
ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot be delivered, to rescind the
real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond,
issued a temporary restraining order enjoining the Island Savings Bank from
continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for
the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the
restraining order, filed by the Central Bank and by the Acting Superintendent of Banks
(pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision,
finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island
Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino,
modified the Court of First Instance decision by affirming the dismissal of Sulpicio M.
Tolentino's petition for specific performance, but it ruled that Island Savings Bank can
neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31.
rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance
prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt
covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists,
can his real estate mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of the
other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA
1 [1969]); and when one party has performed or is ready and willing to perform his
part of the contract, the other party who has not performed or is not ready and willing
to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island
Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power
of the Monetary Board to take over insolvent banks for the protection of the public is
recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default
of Island Savings Bank in complying with its obligation of releasing the P63,000.00
balance because said resolution merely prohibited the Bank from making new loans
and investments, and nowhere did it prohibit island Savings Bank from releasing the
balance of loan agreements previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the obligation of the contract, nor
does it constitute any defense to a decree of specific performance (Gutierrez Repide
vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a
debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken
as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-
deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering
a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months
on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out
of the P80,000.00 loan was released. A person cannot be legally charged interest for
a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted
interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan
collateral cannot exempt it from complying with its reciprocal obligation to furnish the
entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees
are expected to exercise caution and prudence in the discharge of their functions
(Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of
the bank's officials and employees that before they approve the loan application of
their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank
loans turn out to be non-existent or grossly over-valued underscore the importance of
this responsibility. The mere reliance by bank officials and employees on their
customer's representation regarding the loan collateral being offered as loan security
is a patent non-performance of this responsibility. If ever bank officials and employees
totally reIy on the representation of their customers as to the valuation of the loan
collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to
conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio
M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in their pleadings (pp. 198-199,
t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court,
Section 2, Rule 9, which states that "defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot
raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under
their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may
choose between specific performance or rescission with damages in either case. But
since Island Savings Bank is now prohibited from doing further business by Monetary
Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio
M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is
only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in
default only insofar as such amount is concerned, as there is no doubt that the bank
failed to give the P63,000.00. As far as the partial release of P17,000.00, which
Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank
was deemed to have complied with its reciprocal obligation to furnish a P17,000.00
loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue
amortizations under the promissory note made him a party in default, hence not
entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the
promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish
the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be equitably
tempered by the courts. WE rule that the liability of Island Savings Bank for damages
in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00
debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should
account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be
entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as
that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For
the debtor, the consideration of his obligation to pay is the existence of a debt. Thus,
in the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt
(Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island
Savings Bank had not made any release on the loan, does not make the real estate
mortgage void for lack of consideration. It is not necessary that any consideration
should pass at the time of the execution of the contract of real mortgage (Bonnevie
vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But
when the consideration is subsequent to the mortgage, the mortgage can take effect
only when the debt secured by it is created as a binding contract to pay (Parks vs,
Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-
6). And, when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82,
cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the
holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs.
Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real
estate mortgage covering 100 hectares is unenforceable to the extent of 78.75
hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the
Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be
divided among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can
not ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of
other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY

11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF

HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00
REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM
MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL
AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE

MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN
FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

[G.R. No. 115324. February 19, 2003] PRODUCERS BANK OF THE PHILIPPINES
(now FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS
AND FRANKLIN VIVES, respondents.
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals
dated June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution[2] dated May 5,
1994, denying the motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor
and friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and Services (Sterela for
brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain
amount of money in the bank account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money from said account within
a months time. Private respondent asked Sanchez to bring Doronilla to their house so
that they could discuss Sanchezs request.[3]
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronillas private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela.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 of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an
account for Sterela Marketing Services in the amount of P200,000.00. In opening the
account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A
passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives.[4]
Subsequently, private respondent learned that Sterela was no longer holding
office in the address previously given to him. Alarmed, he and his wife went to the Bank
to verify if their money was still intact. The bank manager referred them to Mr. Rufo
Atienza, the assistant manager, who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some postdated checks issued by
Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account
No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized
the Bank to debit Savings Account No. 10-1567 for the amounts necessary to cover
overdrawings 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, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in
Savings Account No. 10-1567 because he was the sole proprietor of Sterela.[5]
Private respondent tried to get in touch with Doronilla through Sanchez. On June
29, 1979, he received a letter from Doronilla, assuring him that his money was intact
and would be returned to him. On August 13, 1979, Doronilla issued a postdated check
for Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private
respondent. However, upon presentment thereof by private respondent to the drawee
bank, the check was dishonored. Doronilla requested private respondent to present the
same check on September 15, 1979 but when the latter presented the check, it was
again dishonored.[6]
Private respondent referred the matter to a lawyer, who made 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 dishonored for
insufficiency of funds.[7]
Private respondent instituted an action for recovery of sum of 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
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case
No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants
Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay
plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the
legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary
damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.[8]
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision
dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC.[9] It
likewise denied with finality petitioners motion for reconsideration in its Resolution
dated May 5, 1994.[10]
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT
VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT
PETITIONERS BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE
OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE
RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE
HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING 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 MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE
CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING
THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS
APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION
OF THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND
SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF
P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00
FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
FOR ATTORNEYS FEES AND THE COSTS OF SUIT.[11]
Private respondent filed his Comment on September 23, 1994. 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, 1997,
due to petitioners delay in furnishing private respondent with copy of the reply [12] and
several substitutions of counsel on the part of private respondent.[13] On January 17,
2001, the Court resolved to give due course to the petition and required the parties to
submit their respective memoranda.[14] Petitioner filed its memorandum on April 16,
2001 while private respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla
is a simple loan (mutuum) since all the elements of a mutuum are present: first, what
was delivered by private respondent to Doronilla was money, a 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, or P12,000
more than what private respondent deposited in Sterelas bank account. [15] Moreover,
the fact that private respondent sued his good friend Sanchez for his failure to recover
his money from Doronilla shows that the transaction was not merely gratuitous but had
a business angle to it.Hence, petitioner argues that it cannot be held liable for the return
of private respondents P200,000.00 because it is not privy to the transaction between
the latter and Doronilla.[16]
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not
be faulted for allowing Doronilla to withdraw from the savings account of Sterela since
the latter was the sole proprietor of said company. Petitioner asserts that Doronillas
May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open
a savings account for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had
legal title to the savings account.[17] Petitioner points out that no evidence other than
the testimonies of private respondent and Mrs. Vives was presented during trial to prove
that private respondent deposited his P200,000.00 in Sterelas account for purposes of
its incorporation.[18] Hence, petitioner should not be held liable for allowing Doronilla to
withdraw from Sterelas savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts
decision since the findings of fact therein were not accord with the evidence presented
by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to
withdraw from Sterelas savings account.[19]
 Finally, petitioner claims that since there is no wrongful act or omission on its part,
it is not liable for the actual damages suffered by private respondent, and neither may
it be held liable for moral and exemplary damages as well as attorneys fees. [20]
Private respondent, on the other hand, argues that the transaction between him
and Doronilla is not a mutuum but an accommodation,[21] since he did not actually part
with the ownership of his P200,000.00 and in fact asked his wife to deposit said amount
in the account of Sterela so that a certification can be issued to the effect that Sterela
had sufficient funds for purposes of its incorporation but at the same time, he retained
some degree of control over his money through his wife who was made a signatory to
the savings account and in whose possession the savings account passbook was
given.[22]
He likewise asserts that the trial court did not err in finding 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 respondent since it
was Atienza who facilitated the opening of Sterelas current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for said company,
as well as the approval of the authority to debit Sterelas savings account to cover any
overdrawings in its current account.[23]
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in
a petition for review filed with this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence presented by the parties
during trial.[24] The Courts jurisdiction is in principle limited to reviewing errors of law
that might have been committed by the Court of Appeals.[25] Moreover, factual findings
of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on
record.[26]There is no showing of any misapprehension of facts on the part of the Court
of Appeals in the case at bar that would require this Court to review and overturn the
factual findings of that court, especially since the conclusions of fact of the Court of
Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction
between private respondent and Doronilla was a commodatum and not a mutuum. A
circumspect examination of the records reveals that the transaction between them was
a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of
loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in
which case the contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there
are some instances where a commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract
is not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when
the intention of the parties is to lend consumable goods and to have the very same
goods returned at the end of the period agreed upon, the loan is a commodatum and
not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract.[27] In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such
determination.[28]
As correctly pointed out by both the Court of Appeals and the trial court, the
evidence shows that private respondent agreed to deposit his money in the savings
account of Sterela specifically for the purpose of making it appear that said firm had
sufficient capitalization for incorporation, with the promise that the amount shall be
returned within thirty (30) days.[29] Private respondent merely accommodated Doronilla
by lending his money without consideration, as a favor to his good friend Sanchez. It
was however clear to the parties to the transaction that the money would not be
removed from Sterelas savings account and would be returned to private respondent
after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00
which the latter deposited in Sterelas account together with an additional P12,000.00,
allegedly representing interest on the mutuum, did not convert the transaction from
a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of
the P200,000.00. Article 1935 of the Civil Code expressly states that [t]he bailee
in commodatum acquires the use of the thing loaned but not its fruits. Hence, it was
only proper for Doronilla to remit to private respondent the interest accruing to the
latters money deposited with petitioner.
 Neither does the Court agree with petitioners contention that it is not solidarily
liable for the return of private respondents money because it was not privy to the
transaction between Doronilla and private respondent. The nature of said transaction,
that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioners liability for the return of private respondents money because the factual
circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondents money and is liable
for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives
on behalf of Sterela for Savings Account No. 10-1567 expressly states that
2. Deposits and withdrawals must be made by the depositor personally or upon his
written authority duly authenticated, and neither a deposit nor a withdrawal will be
permitted except upon the production of the depositor savings bank book in
which will be entered by the Bank the amount deposited or withdrawn. [30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza,
the Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw
therefrom even without presenting the passbook (which Atienza very well knew was in
the possession of Mrs. Vives), not just once, but several times. Both the Court of
Appeals and the trial court found that Atienza allowed said withdrawals because he was
party to Doronillas scheme of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge,
help and cooperation of Rufo Atienza, assistant manager and cashier of the Makati
(Buendia) branch of the defendant bank. Indeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he likewise helped in devising
the means by which it can be done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely
because Atienza was a key officer therein. The records show that plaintiff had
suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch
in Makati for it will be easier for them to get a certification. In fact before he was
introduced to plaintiff, Doronilla had already prepared a letter addressed to the
Buendia branch manager authorizing Angeles B. Sanchez and company to open a
savings account for Sterela in the amount of P200,000.00, as per coordination with
Mr. Rufo Atienza, Assistant Manager of the Bank x x x (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with Atienza from
the inception of the scheme. Significantly, there were testimonies and admission that
Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business
associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of the coordination
between Doronilla and Atienza, the latter knew before hand that the money deposited
did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was
explicitly told by Inocencia Vives that the money belonged to her and her husband
and the deposit was merely to accommodate Doronilla. Atienza even declared that
the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose
that the only ones empowered to withdraw the same were Inocencia Vives and
Angeles B. Sanchez. In the signature card pertaining to this account (Exh. J), the
authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated
that it is the usual banking procedure that withdrawals of savings deposits could only
be made by persons whose authorized signatures are in the signature cards on file
with the bank. He, however, said that this procedure was not followed here because
Sterela was owned by Doronilla. He explained that Doronilla had the full authority to
withdraw by virtue of such ownership. The Court 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 were only
accommodating Doronilla so that a certification can be issued to the effect that
Sterela had a deposit of so much amount to be sued in the incorporation of the
firm. In the second place, the signature of Doronilla was not authorized in so far as
that account is concerned inasmuch as he had not signed the signature card provided
by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor
Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been
presented. It is an accepted practice that whenever a withdrawal is made in a savings
deposit, the bank requires the presentation of the passbook. In this case, such
recognized practice was dispensed with. The transfer from the savings account to the
current account was without the submission of the passbook which Atienza had given
to Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella
Dumagpi that a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly
had a hand in the execution of this certification, was aware that the contents of the
same are not true. He knew that the passbook was in the hands of Mrs. Vives for he
was the one who gave it to her.Besides, as assistant manager of the branch and the
bank official servicing the savings and current accounts in question, he also was
aware that the original passbook was never surrendered. He was also cognizant that
Estrella Dumagpi was not among those authorized to withdraw so her certification had
no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate WHEREFORE, the petition is hereby DENIED. The assailed Decision and
that Atienzas active participation in the perpetration of the fraud and deception that Resolution of the Court of Appeals are AFFIRMED.SO ORDERED.
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 disclaimer, the Court believes
that Atienza was mindful and posted regarding the opening of the current account
considering that Doronilla was all the while in coordination with him. That it was he
who facilitated the approval of the authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of
this case. x x x.[31]

Under Article 2180 of the Civil Code, employers shall be held primarily and
solidarily liable for damages caused by their employees acting within the scope of their
assigned tasks. To hold the employer liable under this provision, it must be shown that
an employer-employee relationship exists, and that the employee was acting within the
scope of his assigned task when the act complained of was committed. [32] Case law in
the United States of America has it that a corporation that entrusts a general duty to its
employee is responsible to the injured party for damages flowing from the employees
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]

There is no dispute that Atienza was an employee of petitioner. Furthermore,

petitioner did not deny that Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in withdrawing 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 Account
with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioners interests [34] even though in the process,
Atienza violated some of petitioners rules such as those stipulated in its savings
account passbook.[35] It was established that the transfer of funds from Sterelas savings
account to its current account could not have been accomplished by Doronilla without
the invaluable assistance of Atienza, and that it was their connivance which was the
cause of private respondents loss.

The foregoing shows that the Court of Appeals correctly held that under Article
2180 of the Civil Code, petitioner is liable for private respondents loss and is solidarily
liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear that
petitioner failed to prove that it exercised due diligence to prevent the unauthorized
withdrawals from Sterelas savings account, and that it was not negligent in the selection
and supervision of Atienza. Accordingly, no error was committed by the appellate court
in the award of actual, moral and exemplary damages, attorneys fees and costs of suit
to private respondent.

[G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE
GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14
December 2000 Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The
Court of Appeals set aside the 11 November 1996 decision [3] of the Regional Trial Court
of Quezon City, Branch 81,[4] affirming the 15 December 1995 decision[5] of the
Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro
Perez for the rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo
then constructed a house made of light materials on the lot. Pajuyo and his family lived
in the house from 1979 to 7 December 1985.
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 house for free provided Guevarra would maintain the cleanliness
and orderliness of the house. Guevarra promised that he would voluntarily vacate the
premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and
demanded that Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court
of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of
possession over the lot where the house stands because the lot is within the 150
hectares set aside by Proclamation No. 137 for socialized housing. Guevarra pointed
out that from December 1985 to September 1994, Pajuyo did not show up or
communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to
the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The
dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff
and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person
or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00)
monthly as reasonable compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch
81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive
portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the
decision appealed from, being in accord with the law and evidence presented, and the
same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only
until 14 December 1996 to file his appeal with the Court of Appeals. Instead of filing his
appeal with the Court of Appeals, Guevarra filed with the Supreme Court a 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
Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.
 On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a
Resolution[9] referring the motion for extension to the Court of Appeals which has
concurrent jurisdiction over the case. The case presented no special and important
matter for the Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution[10] granting the motion for extension conditioned on the timeliness of the
filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on
Guevaras petition for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC
decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil
Case No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that
the Court of Appeals should have 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-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos
motion for reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No
costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra
is the house and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra
to use the house only by tolerance. Thus, Guevarras refusal to vacate the house on
Pajuyos demand made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant
relationship between Pajuyo and Guevarra. The terms of the Kasunduan bound
Guevarra to return possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137,
the Revised National Government Center Housing Project Code of Policies and other
pertinent laws. In an ejectment suit, the RTC has no power to decide Guevarras rights
under these laws. The RTC declared that in an ejectment case, the only issue for
resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo
and Guevarra illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a
squatter. Perez had no right or title over the lot because it is public land. The
assignment of rights between Perez and Pajuyo, and the Kasunduan between Pajuyo
and Guevarra, did not have any legal effect. Pajuyo and Guevarra are in pari delicto or
in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a
landlord and tenant relationship. The Court of Appeals ruled that the Kasunduan is not
a lease contract but a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the
appellate court held that Guevarra has a better right over the property under
Proclamation No. 137. President Corazon C. Aquino (President Aquino) issued
Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code of Policies Beneficiary
Selection and Disposition of Homelots and Structures in the National Housing Project
(the Code), the actual occupant or caretaker of the lot shall have first priority as
beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked
Pajuyos claim that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before
the Supreme Court was stamped 13 December 1996 at 4:09 PM by the Supreme
Courts Receiving Clerk. The Court of Appeals concluded that the motion for extension
bore a date, contrary to Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14
December 1996. Thus, the motion for extension properly complied with the condition
imposed by 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 compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should
have dismissed the petition for review because it was Guevarras counsel and not
Guevarra who signed the certification against forum-shopping. The Court of Appeals
pointed out that Pajuyo did not raise this issue in his Comment. The Court of Appeals
held that Pajuyo could not now seek the dismissal of the case after he had extensively
argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents
Motion for an Extension of thirty days to file petition for review
at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final
and executory.
2) in giving due course, instead of dismissing, private
respondents Petition for Review even though the certification
against forum-shopping was signed only by counsel instead
of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the
parties was in fact a commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial Court and in holding
that the ejectment case filed against defendant-appellant is
without legal and factual basis.
4) in reversing and setting aside the Decision of the Regional
Trial Court in Civil Case No. Q-96-26943 and in holding that
the parties are in pari delicto being both squatters, therefore,
illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called
Code of Policies of the National Government Center Housing
Project instead of deciding the same under the Kasunduan
voluntarily executed by the parties, the terms and conditions
of which are the laws between themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in
the substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright
Guevarras petition for review because the RTC decision had already become final and
executory when the appellate court acted on Guevarras motion for extension to file the
petition. Pajuyo points out that Guevarra had only one day before the expiry of his
period to appeal the RTC decision. Instead of filing the petition for review with the Court
of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days
to file a petition for review. This Court merely referred the motion to the Court of
Appeals.Pajuyo believes that the filing of the motion for extension with this Court did
not toll the running of the period to perfect the appeal. Hence, when the Court of
Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction
are appealable to the Court of Appeals 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 directly to this Court by petition
for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of the
1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of
law. Guevarra thus filed his motion for extension to file petition for review before this
Court on 14 December 1996. On 3 January 1997, Guevarra then filed his petition for
review with this Court. A perusal of Guevarras petition for review gives the impression
that the issues he raised were pure questions of law. There is a question of law when
the doubt or difference is on what the law is on a certain state of facts. [16] There is a
question of fact when the doubt or difference is on the truth or falsity of the facts
alleged.[17]
 In his petition for review before this Court, Guevarra no longer disputed the
facts. Guevarras petition for review raised these questions: (1) Do ejectment cases
pertain only to possession of a structure, and not the lot on which the structure stands?
(2) Does a suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot on which a
squatters structure stands be considered in an ejectment suit filed by the owner of the
structure?
These questions call for the evaluation of the rights of the parties under the law
on ejectment and the Presidential Proclamation. At first glance, the questions Guevarra
raised appeared purely legal. However, some factual questions still have to be resolved
because they have a bearing on the legal questions raised in the petition for
review. These factual matters refer to the metes and bounds of the disputed property
and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition
for review. In Lacsamana v. Second Special Cases Division of the Intermediate
Appellate Court,[18] we declared that the Court of Appeals could grant extension of
time in appeals by petition for review. In Liboro v. Court of Appeals,[19] we clarified
that the prohibition against granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of appeal.The prohibition does not apply
in a petition for review where the pleading needs verification. A petition for review,
unlike an ordinary appeal, requires preparation and research to present a persuasive
position.[20] The drafting of the petition for review entails more time and effort than filing
a notice of appeal.[21] Hence, the Court of Appeals may allow an extension of time to
file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of
Appeals,[22] we held that Liboros clarification of Lacsamana is consistent with the
Revised Internal Rules of the Court of Appeals and 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 save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment
becomes a fact on the lapse of the reglementary period to appeal if no appeal is
perfected.[23] The RTC decision could not have gained finality because the Court of
Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved
Guevarras motion for extension. The Court of Appeals gave due course to the motion
for extension because it complied with the condition set by the appellate court in its
resolution dated 28 January 1997. The resolution stated that the Court of Appeals
would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the
motion for extension are (1) the date of receipt of the judgment or final order or
resolution subject of the petition, and (2) the date of filing of the motion for
extension.[24] It is the date of the filing of the motion or pleading, and not the date of
execution, that determines the timeliness of the filing of that motion or pleading. Thus,
even if the motion for extension bears no date, the date of filing stamped on it is the
reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC
decision. Guevarra filed his motion for extension before this Court on 13 December
1996, the date stamped by this Courts Receiving Clerk on the motion for extension.
Clearly, Guevarra filed the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on
technical grounds, Pajuyo did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the earliest opportunity.Instead, Pajuyo
vigorously discussed the merits of the case. It was only when the Court of Appeals ruled
in Guevarras favor that Pajuyo raised the procedural issues against Guevarras petition
for review.
A party who, after voluntarily submitting a dispute for resolution, receives an
adverse decision on the merits, is estopped from attacking the jurisdiction of the
court.[25] Estoppel sets in not because the judgment of the court is a valid and
conclusive adjudication, but because the practice of attacking the courts jurisdiction
after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss
Guevarras failure to sign the certification against forum shopping. Instead, Pajuyo
harped on Guevarras counsel signing the verification, claiming that the counsels
verification is insufficient since it is based only on mere information.
A partys failure to sign the certification against forum shopping is different from
the partys failure to sign personally the verification. The certificate of non-forum
shopping must be signed by the party, and not by counsel.[27] The certification of
counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and
not a jurisdictional requisite.[29] It is intended simply to secure an assurance that what
are alleged in the pleading are true and correct and not the product of the imagination
or a matter of speculation, and that the pleading is filed in good faith. [30] The party need
not sign the verification. A partys representative, lawyer or any person who personally
knows the truth of the facts alleged in the pleading may sign the verification. [31]
We agree with the Court of Appeals that the issue on the certificate against forum
shopping was merely an afterthought. Pajuyo did not call the Court of Appeals attention
to this defect at the early stage of the proceedings. Pajuyo raised this procedural issue
too late in the proceedings.
 Absence of Title over the Disputed Property will not Divest the Courts of
Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property
will not divest the inferior court of its jurisdiction over the ejectment case. [32] Even if the
pleadings 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 adjudication on the issue of ownership is only provisional and
will not bar an action between the same parties involving title to the land. [34] This
doctrine is a necessary consequence of the nature of the two summary actions of
ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is
the physical or material possession over the real property. [35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are
not the owners of the contested property and that they are mere squatters. Will the
defense that the parties to the ejectment case are not the owners of the disputed lot
allow the courts to renounce their jurisdiction over the case? The Court of Appeals
believed so and held that it would just leave the parties where they are since they are
in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an
action for recovery of possession. The parties cannot present evidence to prove
ownership or right to legal possession except to prove the nature of the possession
when necessary to resolve the issue of physical possession.[36] The same is true when
the defendant asserts the absence of title over the property. The absence of title over
the contested lot is not a ground for the courts to withhold relief from the parties in an
ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who
is entitled to the physical possession of the premises, that is, to the possession de
facto and not to the possession de jure.[37] It does not even matter if a partys title to the
property is questionable,[38] or when both parties intruded into public land and their
applications to own the land have yet to be approved by the proper government
agency.[39] Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or
terror.[40] Neither is the unlawful withholding of property allowed. Courts will always
uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even
against the owner himself.[41]Whatever may be the character of his possession, if he
has in his favor prior possession in time, he has the security that entitles him to remain
on the property until a person with a better right lawfully ejects him. [42] To repeat, the
only issue that the court has to settle in an ejectment suit is the right to physical
possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The
government did not authorize either the plaintiff or the defendant in the case of forcible
entry case to occupy 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 when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The
government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of
possession because while the application of the plaintiff was still pending, title remained
with the government, and the Bureau of Public Lands had jurisdiction over the case. We
disagreed with the defendant. We ruled that courts have jurisdiction to entertain
ejectment suits even before the resolution of the application. The plaintiff, by 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
legal protection against other private claimants because only a court can take away
such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as
squatters, strictly speaking, their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without the owners permission.Title to
the land remained with the government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff and the defendant were in
effect squatting on government property. Yet, we upheld the courts jurisdiction to
resolve the issue of possession even if the plaintiff and the defendant in the ejectment
case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical
possession because of the public need to preserve the basic policy behind the
summary actions of forcible entry and unlawful detainer. The underlying philosophy
behind ejectment suits is to prevent breach of the peace and criminal disorder and to
compel the party out of possession to respect and resort to the law alone to obtain what
he claims is his.[45] The party deprived of possession must not take the law into his own
hands.[46] Ejectment proceedings are summary in nature so the authorities can settle
speedily actions to recover possession because of the overriding need to quell social
disturbances.[47]
We further explained in Pitargue the greater interest that is at stake in actions for
recovery of possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take
cognizance of possessory actions involving these public lands before final award is
made by the Lands Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public lands everywhere and
there are thousands of settlers, especially in newly opened regions. It also involves a
matter of policy, as it requires the determination of the respective authorities and
functions of two coordinate branches of the Government in connection with public
land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old,
which was in force in this country before the American occupation, or in the new, we
have a possessory action, the aim and purpose of which is the recovery of the
physical possession of real property, irrespective of the question as to who has the
title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman
Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1,
1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of forcible entry (section
80 of Act No. 190), the object of which has been stated by this Court to be to prevent
breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the court to assert their
claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry was
already available in the courts of the country. So the question to be resolved is, Did
the Legislature intend, when it vested the power and authority to alienate and dispose
of the public lands in the Lands Department, to exclude the courts from entertaining
the possessory action of forcible entry between rival claimants or occupants of any
land before award thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from the jurisdiction of the
judicial Branch of the Government, so that any troubles arising therefrom, or any
breaches of the peace or disorders caused by rival claimants, could be inquired into
only by the Lands Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have the means to
police public lands; neither does it have the means to prevent disorders arising
therefrom, or contain breaches of the peace among settlers; or to pass promptly upon
conflicts of possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in
the court herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the
peace. The power to dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the
corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the
Government of the exercise of the respective functions or powers thereon,
such as the authority to stop disorders and quell breaches of the peace by the
police, the authority on the part of the courts to take jurisdiction over
possessory actions arising therefrom not involving, directly or indirectly,
alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the
effect that courts have no jurisdiction to determine the rights of claimants to public
lands, and that until the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle.
The determination of the respective rights of rival claimants to public lands is different
from the determination of who has the actual physical possession or occupation with
a view to protecting the same and preventing disorder and breaches of the peace. A
judgment of the court ordering restitution of the possession of a parcel of land to the
actual occupant, who has been deprived thereof by another through the use of force
or in any other illegal manner, can never be prejudicial interference with the
disposition or alienation of public lands. On the other hand, if courts were deprived
of jurisdiction of cases involving conflicts of possession, that threat of judicial
action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice,
would rule.
It must be borne in mind that the action that would be used to solve conflicts of
possession between rivals or conflicting applicants or claimants would be no other
than that of forcible entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and
quiet possession may recover the possession of which he has been deprived by a
stronger hand, by violence or terror; its ultimate object being to prevent breach of the
peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312,
314.) The basis of the remedy is mere possession as a fact, of physical possession,
not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the possession.
(Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the use of the remedy in
the courts of justice would constitute an interference with the alienation, disposition,
and control of public lands. To limit ourselves to the case at bar can it be pretended at
all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for
the question of priority of possession having been decided in a final manner by the
courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)
 The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto.
We explained the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur
actio and in pari delicto potior est conditio defedentis. The law will not aid either party
to an illegal agreement. It leaves the parties where it finds them. [49]
The application of the pari delicto principle is not absolute, as there are exceptions
to its application. One of these exceptions is where the application of the pari
delicto rule would violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary
actions of forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable
quiet possession shall not be turned out by strong hand, violence or terror. In
affording this remedy of restitution the object of the statute is to prevent breaches of
the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage
must accrue to those persons who, believing themselves entitled to the possession of
property, resort to force to gain possession rather than to some appropriate action in
the courts to assert their claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is his. [52]
Clearly, the application of the principle of pari delicto to a case of ejectment
between squatters is fraught with danger.To shut out relief to squatters on the ground
of pari delicto would openly invite mayhem and lawlessness. A squatter would oust
another squatter from possession of the lot that the latter had illegally occupied,
emboldened by the knowledge that the courts would leave them where they are.
Nothing would then stand in the way of the ousted squatter from re-claiming his prior
possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or
actions for recovery of possession seek to prevent. [53] Even the owner who has title
over the disputed property cannot take the law into his own hands to regain possession
of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment
suit are squatters. The determination of priority and superiority of possession is a
serious and urgent matter that cannot be left to the squatters to decide. To do so 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 applied by the Court of Appeals would give squatters free rein to dispossess
fellow squatters or violently retake possession of properties usurped from them. Courts
should not leave squatters to their own devices in cases involving recovery of
possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of
ejectment. The Court of Appeals refused to rule on the issue of physical possession.
Nevertheless, the appellate court held that the pivotal issue in this case is who between
Pajuyo and Guevarra has the priority right as beneficiary of the contested land under
Proclamation No. 137.[54]According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares
that the actual occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of
a relocation site under Proclamation No. 137. Proclamation No. 137 laid down the
metes and bounds of the land that it declared open for disposition to bona
fide residents.
The records do not show that the contested lot is within the land specified by
Proclamation No. 137. Guevarra had the burden to prove that the disputed lot is within
the coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras
unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra
merely alleged that in the survey the project administrator conducted, he and not Pajuyo
appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation
No. 137. Pajuyo allowed Guevarra to occupy the disputed property in 1985. President
Aquino signed Proclamation No. 137 into law on 11 March 1986. Pajuyo made his
earliest demand for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that
Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never applied
as beneficiary of Proclamation No. 137. Even when Guevarra already knew that Pajuyo
was reclaiming possession of the property, Guevarra did not take any step to comply
with the requirements of Proclamation No. 137.
 Third. Even assuming that the disputed lot is within the coverage of Proclamation
No. 137 and Guevarra has a pending application over the lot, courts should still assume
jurisdiction and resolve the issue of possession. However, the jurisdiction of the courts
would be limited to the issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions
involving public land to determine the issue of physical possession. The determination
of the respective rights of rival claimants to public land is, however, distinct from the
determination of who has the actual physical possession or who has a better right of
physical possession.[56] The administrative disposition and alienation of public lands
should be threshed out in the proper government agency. [57]
The Court of Appeals determination of Pajuyo and Guevarras rights under
Proclamation No. 137 was premature.Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not preempt the decision of the
administrative agency mandated by law to determine the qualifications of applicants for
the acquisition of public lands.Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace. [58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of
the house built on it. Guevarra expressly admitted the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay
nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa
nasabing bahay at lote ng walang bayad. Kaugnay nito, kailangang panatilihin nila
ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang
reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and
lot free of rent, but Guevarra was under obligation to maintain the premises in good
condition. Guevarra promised to vacate the premises on Pajuyos demand but Guevarra
broke his promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of real property to which the
latter is entitled after the expiration or termination of the formers right to hold
possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without
any contract, the defendant is necessarily bound by an implied promise that he will
vacate on demand, failing which, an action for unlawful detainer will lie. [60] The
defendants refusal to comply with the demand makes his continued possession of the
property unlawful.[61] The status of the defendant in such a case is similar to that of a
lessee or tenant whose term of lease has expired but whose occupancy continues by
tolerance of the owner.[62]
This principle should apply with greater force in cases where a contract embodies
the permission or tolerance to use the property. The Kasunduan expressly articulated
Pajuyos forbearance. Pajuyo did not require Guevarra to pay any rent but only to
maintain the house and lot in good condition. Guevarra expressly vowed in
the Kasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of the
property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one
of commodatum.
In a contract of commodatum, one of the parties delivers to another something
not consumable so that the latter may use the same for a certain time and return
it.[63] An essential feature of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for a certain
period.[64] Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted.[65] If the bailor should have urgent need of the thing,
he may demand its return for temporary use.[66] If the use of the thing is merely tolerated
by the bailor, he can demand the return of the thing at will, in which case the contractual
relation is called a precarium.[67] Under the Civil Code, precarium is a kind
of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay
rent, it obligated him to maintain the property in good condition. The imposition of this
obligation makes the Kasunduan a contract different from a commodatum. The
effects of the Kasunduanare also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as one that is akin to a landlord-
tenant relationship where the withdrawal of permission would result in the termination
of the lease.[69] The tenants withholding of the property would then be unlawful. This is
settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one
of commodatum, Guevarra as bailee would still have the duty to turn over possession
of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing
received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.[70]These contracts certainly involve the obligation to
deliver or return the thing received.[71]
 Guevarra turned his back on the Kasunduan on the sole ground that like him, subject to the action of ones will.[78] Actual or physical occupation is not always
Pajuyo is also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract necessary.[79]
involving the land they illegally occupy. Guevarra insists that the contract is void.

Guevarra should know that there must be honor even between

squatters. Guevarra freely entered into the Kasunduan.Guevarra cannot now impugn Ruling on Possession Does not Bind Title to the Land in Dispute
the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and We are aware of our pronouncement in cases where we declared that squatters
Guevarra has a right to physical possession of the contested and intruders who clandestinely enter into titled government property cannot, by such
property. The Kasunduan is the undeniable evidence of Guevarras recognition of act, acquire any legal right to said property. [80] We made this declaration because the
Pajuyos better right of physical possession. Guevarra is clearly a possessor in bad person who had title or who had the right to legal possession over the disputed property
faith. The absence of a contract would not yield a different result, as there would still was a party in the ejectment suit and that party instituted the case against squatters or
be an implied promise to vacate. usurpers.

Guevarra contends that there is a pernicious evil that is sought to be avoided, and In this case, the owner of the land, which is the government, is not a party to the
that is allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal ejectment case. This case is between squatters. Had the government participated in
act.[72] Guevarra bases his argument on the preferential right given to the actual this case, the courts could have evicted the contending squatters, Pajuyo and
occupant or caretaker under Proclamation No. 137 on socialized housing. Guevarra.

We are not convinced. Since the party that has title or a better right over the property is not impleaded in
this case, we cannot evict on our own the parties. Such a ruling would discourage
Pajuyo did not profit from his arrangement with Guevarra because Guevarra
squatters from seeking the aid of the courts in settling the issue of physical
stayed in the property without paying any rent. There is also no proof that Pajuyo is a
possession. Stripping both the plaintiff and the defendant of possession just because
professional squatter who rents out usurped properties to other squatters.Moreover, it
they are squatters would have the same dangerous implications as the application of
is for the proper government agency to decide who between Pajuyo and Guevarra
the principle of pari delicto. Squatters would then rather settle the issue of physical
qualifies for socialized housing. The only issue that we are addressing is physical
possession among themselves than seek relief from the courts if the plaintiff and
possession.
defendant in the ejectment case would both stand to lose possession of the disputed
Prior possession is not always a condition sine qua non in ejectment.[73] This is property. This would subvert the policy underlying actions for recovery of possession.
one of the distinctions between forcible entry and unlawful detainer.[74] In forcible entry,
Since Pajuyo has in his favor priority in time in holding the property, he is entitled
the plaintiff is deprived of physical possession of his land or building by means of force,
to remain on the property until a person who has title or a better right lawfully ejects
intimidation, threat, strategy or stealth. Thus, he must allege and prove prior
him. Guevarra is certainly not that person. The ruling in this case, however, does not
possession.[75] But in unlawful detainer, the defendant unlawfully withholds possession
preclude Pajuyo and Guevarra from introducing evidence and presenting arguments
after the expiration or termination of his right to possess under any contract, express or
before the proper administrative agency to establish any right to which they may be
implied. In such a case, prior physical possession is not required. [76]
entitled under the law.[81]
Pajuyos withdrawal of his permission to Guevarra terminated
In no way should our ruling in this case be interpreted to condone squatting. The
the Kasunduan. Guevarras transient right to possess the property ended as
ruling on the issue of physical possession does not affect title to the property nor
well. Moreover, it was Pajuyo who was in actual possession of the property because
constitute a binding and conclusive adjudication on the merits on the issue of
Guevarra had to seek Pajuyos permission to temporarily hold the property and
ownership.[82] The owner can still go to court to recover lawfully the property from the
Guevarra had to follow the conditions set by Pajuyo in theKasunduan. Control over the
person who holds the property without legal title. Our ruling here does not diminish the
property still rested with Pajuyo and this is evidence of actual possession.
power of government agencies, including local governments, to condemn, abate,
Pajuyos absence did not affect his actual possession of the disputed property. remove or demolish illegal or unauthorized structures in accordance with existing laws.
Possession in the eyes of the law does not 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
acquire possession not only by physical occupation, but also by the fact that a thing is Attorneys Fees and Rentals
 The MTC and RTC failed to justify the award of P3,000 attorneys fees to
Pajuyo. Attorneys fees as part of damages are awarded only in the instances
enumerated in Article 2208 of the Civil Code.[83] Thus, the award of attorneys fees is
the exception rather than the rule.[84] Attorneys fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on the right
to litigate.[85] We therefore delete the attorneys fees awarded to Pajuyo.

We sustain the P300 monthly rentals the MTC and RTC assessed against
Guevarra. Guevarra did not dispute this factual finding of the two courts. We find the
amount reasonable compensation to Pajuyo. The P300 monthly rental is counted from
the last demand to vacate, which was on 16 February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and
Resolution dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129
are SET ASIDE. The Decision dated 11 November 1996 of the Regional Trial Court of
Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming the Decision dated 15
December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case
No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees is
deleted. No costs.

SO ORDERED.
 [G.R. No. L-17474. October 25, 1962.]
REPUBLIC OF THE PHILIPPINES, Plaintiff-Appellee, v. JOSE V.
BAGTAS, Defendant. FELICIDAD M. BAGTAS, Administratrix of the Intestate
Estate left by the late Jose V. Bagtas, Petitioner-Appellant.
D. T. Reyes, Luison & Associates for Petitioner-Appellant.
Solicitor General for Plaintiff-Appellee.
SYLLABUS
1. CONTRACTS; LOAN OF BULLS FOR BREEDING PURPOSES; NATURE OF
CONTRACT AFFECTED BY PAYMENT OF FEE. — The loan by the Bureau of
Animal Industry to the defendant of three bulls for breeding purposes for a period of
one year, later on renewed for another as regards one bull, was subject to the
payment by the borrower of breeding fee of 10% of the book value of the bulls. If the
breeding fee be considered a compensation, the contract would be a lease of the
bulls; it could not be a contract of commodatum, because that contract is essential
gratuitous.
2. JUDGMENTS; PROCEEDINGS FOR ADMINISTRATIONS AND SETTLEMENT
OF ESTATE OF THE DECEASED; ENFORCEMENT OF MONEY JUDGMENT. —
Where special proceedings for the administration and settlement of the estate of the
deceased have been instituted, the money judgment rendered in favor of a party
cannot be enforced by means of a writ of execution, but must be presented to the
probate court for payment by the administrator appointed by the court.
DECISION
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law
are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through
the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of
P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government
charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7
May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the
Director of Animal Industry that he would pay the value of the three bulls. On 17
October 1950 he reiterated his desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor General. On 19 October 1950 the
Director of Animal Industry advised him that the book value of the three bulls could
not be reduced and that they either be returned or their book value paid not later than
31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that he be
ordered to return the three bulls loaned to him or to pay their book value in the total
sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62, both with
interests, and costs; and that other just and equitable relief be granted it (civil No.
12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to deduct from the book value of
the bulls corresponding yearly depreciation of 8% from the date of acquisition, to
which depreciation the Auditor General did not object, he could not return the animals
nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court rendered judgment —
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of
the three bulls plus the breeding fees in the amount of P626.17 with interest on both
sums of (at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court
granted on 18 October and issued on 11 November 1958. On 2 December 1958 it
granted an ex-parte motion filed by the plaintiff on 28 November 1958 for the
appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas, the surviving
spouse of the defendant Jose V. Bagtas who died on 23 October 1951 and as
administratrix of his estate, was notified. On 7 January 1959 she filed a motion
alleging that on 26 June 1952 the two bulls, Sindhi and Bhagnari, were returned to the
Bureau of Animal Industry and that sometime in November 1953 the third bull, the
Sahiniwal, died from gunshot wounds inflicted during a Huks raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February,
the Court denied her motion. Hence, this appeal certified by the Court of Appeals to
this Court, as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late
defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent
of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as
evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its
objection of 31 January 1959 to the appellant’s motion to quash the writ of execution
the appellee prays "that another writ of execution in the sum of P859.5.3 be issued
against the estate of defendant deceased José V. Bagtas." She cannot be held liable
for the two bulls which already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by
the Huks in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal,
Baggao, Cagayan, where the animal was kept, and that as such death was due to
force majeure she is relieved from the duty of the returning the bull or paying its value
to the appellee. The contention is without merit. The loan by the appellee to the late
defendant José V. Bagtas of the three bulls for breeding purposes for a period of one
year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards
one bull, was subject to the payment by the borrower of breeding fee of 10% of the
book value of the bulls. The appellant contends that the contract was commodatum
and that, for that reason, as the appellee retained ownership or title to the bull it
should suffer its loss due to force majeure A contract of commodatum is essentially
gratuitous. 1 If the breeding fee be considered a compensation, then the contract
would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be
subject to the responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article 1942 of the Civil Code
provides that a bailee in a contract of commodatum —
. . . is liable for loss of the thing, even if it should be through a fortuitous
event:chanrob1es virtual 1aw library
(2) If he keeps it longer than the period stipulated. . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous
event:chanrob1es virtual 1aw library
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one
bull was renewed for another period of one year to end on 8 May 1950. But the
appellant kept and used the bull until November 1953 when during a Huk raid it was
killed by stray bullets. Furthermore, when lent and delivered to the deceased husband
of the appellant the bulls had each an appraised book value, to wit: the Sindhi, at
P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It was not
stipulated that in case of loss of the bull due to fortuitous event the late husband of
the appellant would be exempt from liability.
The appellant’s contention that the demand or prayer by the appellee for the return of
the bull or the payment of its value being a money claim should be presented or filed
in the intestate proceedings of the defendant who died on 23 October 1951, is not
altogether without merit. However, the claim that his civil personality having ceased to
exist the trial court lost jurisdiction over the case against him, is untenable, because
section 17 of Rule 3 of the Rules of Court provides that —
After a party dies and the claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased to appear and to be
substituted for the deceased, within a period of thirty (30) days, or within such time as
may be granted . . . .
and after the defendant’s death on 23 October 1951 his counsel failed to comply with
section 16 of Rule 3 which provides that —
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to
inform the court promptly of such death . . . and to give the name and residence of the
executor or administrator, guardian, or other legal representative of the deceased . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad
M. Bagtas had been issued letters of administration of the estate of the late José V.
Bagtas and that "all persons having claims for money against the deceased José V.
Bagtas, arising from contract, express or implied, whether the same be due, not due,
or contingent, for funeral expenses and expenses of the last sickness of the said
decedent, and judgment for money against him, to file said claims with the Clerk of
this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from
the date of the first publication of this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the
said deceased," is not a notice to the court and the appellee who were to be notified
of the defendant’s death in accordance with the abovequoted rule, and there was no
reason for such failure to notify, because the attorney who appeared for the defendant
was the same who represented the administratrix in the special proceedings instituted
for the administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of the
administration proceedings of his estate instituted in another court, if the attorney for
the deceased defendant did not notify the plaintiff or its attorney of such death as
required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the
late defendant is only liable for the sum of P859.63, the value of the bull which has
not been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant
for the quashing of the writ of execution.

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

ACCORDINGLY, the writ of execution appealed from is set aside, without

pronouncement as to costs.

G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent
Court of Appeals in the present two cases between petitioner and two private
respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the
Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case
No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for
Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T.
Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the
defendant, Catholic Vicar Apostolic of the Mountain Province to
return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.).
For lack or insufficiency of evidence, the plaintiffs' claim or
damages is hereby denied. Said defendant is ordered to pay costs.
(p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in
CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on
the ownership of lots 2 and 3 in question; that the two lots were possessed by the
predecessors-in-interest of private respondents under claim of ownership in good faith
from 1906 to 1951; that petitioner had been in possession of the same lots as bailee
in commodatum up to 1951, when petitioner repudiated the trust and when it applied
for registration in 1962; that petitioner had just been in possession as owner for
eleven years, hence there is no possibility of acquisitive prescription which requires
10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening
of these questions of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in
the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
—
... The documents and records presented reveal
that the whole controversy started when the
defendant Catholic Vicar Apostolic of the
Mountain Province (VICAR for brevity) filed with
the Court of First Instance of Baguio Benguet on
September 5, 1962 an application for registration
of title over Lots 1, 2, 3, and 4 in Psu-194357,
situated at Poblacion Central, La Trinidad,
Benguet, docketed as LRC N-91, said Lots being
the sites of the Catholic Church building,
convents, high school building, school
gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of
Juan Valdez and the Heirs of Egmidio Octaviano
filed their Answer/Opposition on Lots Nos. 2 and
3, respectively, asserting ownership and title
thereto. After trial on the merits, the land
registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable
title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein
Civil Case No. 3655) and the Heirs of Egmidio
Octaviano (plaintiffs in the herein Civil Case No.
3607) appealed the decision of the land
registration court to the then Court of Appeals,
docketed as CA-G.R. No. 38830-R. The Court of
Appeals rendered its decision, dated May 9,
1977, reversing the decision of the land
registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by
the two sets of oppositors in the land registration
case (and two sets of plaintiffs in the two cases
now at bar), the first lot being presently occupied
by the convent and the second by the women's
dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a
motion for reconsideration praying the Court of
Appeals to order the registration of Lot 3 in the
names of the Heirs of Egmidio Octaviano, and on
May 17, 1977, the Heirs of Juan Valdez and
Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be
ordered registered in the names of the Heirs of
Juan Valdez and Pacita Valdez. On August
12,1977, the Court of Appeals denied the motion
for reconsideration filed by the Heirs of Juan
Valdez on the ground that there was "no
sufficient merit to justify reconsideration one way
or the other ...," and likewise denied that of the
Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme
Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his
(its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled 'Catholic
Vicar Apostolic of the Mountain Province vs.
Court of Appeals and Heirs of Egmidio
Octaviano.'
From the denial by the Court of Appeals of their
motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8,
1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872,
entitled, Heirs of Juan Valdez and Pacita Valdez
vs. Court of Appeals, Vicar, Heirs of Egmidio
Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied
in a minute resolution both petitions (of VICAR on
the one hand and the Heirs of Juan Valdez and
Pacita Valdez on the other) for lack of merit.
Upon the finality of both Supreme Court
resolutions in G.R. No. L-46832 and G.R. No. L-
46872, the Heirs of Octaviano filed with the then
Court of First Instance of Baguio, Branch II, a
Motion For Execution of Judgment praying that
the Heirs of Octaviano be placed in possession of
Lot 3. The Court, presided over by Hon. Salvador
J. Valdez, on December 7, 1978, denied the
motion on the ground that the Court of Appeals
decision in CA-G.R. No. 38870 did not grant the
Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed
with the Court of Appeals a petitioner for certiorari
and mandamus, docketed as CA-G.R. No.
08890-R, entitled Heirs of Egmidio Octaviano vs.
Hon. Salvador J. Valdez, Jr. and Vicar. In its
decision dated May 16, 1979, the Court of
Appeals dismissed the petition.
It was at that stage that the instant cases were
filed. The Heirs of Egmidio Octaviano filed Civil
Case No. 3607 (419) on July 24, 1979, for
recovery of possession of Lot 3; and the Heirs of
Juan Valdez filed Civil Case No. 3655 (429) on
September 24, 1979, likewise for recovery of
possession of Lot 2 (Decision, pp. 199-201, Orig.
Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez,
who testified on the alleged ownership of the land in question (Lot
3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his
written demand (Exh. B—B-4 ) to defendant Vicar for the return of
the land to them; and the reasonable rentals for the use of the land
at P10,000.00 per month. On the other hand, defendant Vicar
presented the Register of Deeds for the Province of Benguet, Atty.
Nicanor Sison, who testified that the land in question is not covered
by any title in the name of Egmidio Octaviano or any of the plaintiffs
(Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the witness
if called to the witness stand, would testify that defendant Vicar has
been in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts
are not in dispute, submitted the case on the sole issue of whether
or not the decisions of the Court of Appeals and the Supreme Court
 touching on the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is
barred from setting up the defense of ownership and/or long and
continuous possession of the two lots in question since this is
barred by prior judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs contend that
the question of possession and ownership have already been
determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No.
038830-R) and affirmed by the Supreme Court (Exh. 1, Minute
Resolution of the Supreme Court). On his part, defendant Vicar
maintains that the principle of res judicata would not prevent them
from litigating the issues of long possession and ownership
because the dispositive portion of the prior judgment in CA-G.R.
No. 038830-R merely dismissed their application for registration
and titling of lots 2 and 3. Defendant Vicar contends that only the
dispositive portion of the decision, and not its body, is the
controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner
are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3
WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE
PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND
3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE
FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST
FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN
1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN
RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE
PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA
G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED
ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND
THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A
CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS
2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN
GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS
BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA
G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148
and 05149, when it clearly held that it was in agreement with the findings of the trial
court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No.
38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of
Appeals Decision CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners
of the land, but it held that the predecessors of private respondents were possessors
of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When petitioner
applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept
of owner only for eleven years. Ordinary acquisitive prescription requires possession
for ten years, but always with just title. Extraordinary acquisitive prescription requires
30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in
respondent appellate court's ruling that said findings are res judicatabetween the
parties. They can no longer be altered by presentation of evidence because those
issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination
of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question under its
ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of
the absence of just title. The appellate court did not believe the findings of the trial
court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
Vicar was only a bailee in commodatum; and that the adverse claim and repudiation
of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-
G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined
to review said decision, thereby in effect, affirming it. It has become final and
executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave
abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R.
No. 38830-R is governing, under the principle of res judicata, hence the rule, in the
present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported
by evidence established in that decision may no longer be altered.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
since 1906. The predecessors of private respondents, not petitioner Vicar, were in respondent Court of Appeals is AFFIRMED, with costs against petitioner.
possession of the questioned lots since 1906.
SO ORDERED.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in
question, but not Lots 2 and 3, because the buildings standing thereon were only
constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for
taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the
Bishop but said Bishop was appointed only in 1947, the church was constructed only
in 1951 and the new convent only 2 years before the trial in 1963.

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

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

The Court of Appeals found that the predecessors-in-interest and private respondents
were possessors under claim of ownership in good faith from 1906; that petitioner

G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture
which she lent him for his use. She appealed from the judgment of the Court of First
Instance of Manila which ordered that the defendant return to her the three has
heaters and the four electric lamps found in the possession of the Sheriff of said city,
that she call for the other furniture from the said sheriff of Manila at her own expense,
and that the fees which the Sheriff may charge for the deposit of the furniture be
paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on
M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the
contract of lease between the plaintiff and the defendant, the former gratuitously
granted to the latter the use of the furniture described in the third paragraph of the
stipulation of facts, subject to the condition that the defendant would return them to
the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez
and Rosario Lopez and on September 14, 1936, these three notified the defendant of
the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to
return all the furniture transferred to him for them in the house where they were found.
On November 5, 1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in the ground floor of the house.
On the 7th of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four electric
lamps because he would use them until the 15th of the same month when the lease in
due to expire. The plaintiff refused to get the furniture in view of the fact that the
defendant had declined to make delivery of all of them. On November 15th,
before vacating the house, the defendant deposited with the Sheriff all the furniture
belonging to the plaintiff and they are now on deposit in the warehouse situated at No.
1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly
applied the law: in holding that they violated the contract by not calling for all the
furniture on November 5, 1936, when the defendant placed them at their disposal; in
not ordering the defendant to pay them the value of the furniture in case they are not
delivered; in holding that they should get all the furniture from the Sheriff at their
expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal
expenses or the costs; and in denying pay their respective legal expenses or the
costs; and in denying the motions for reconsideration and new trial. To dispose of the
case, it is only necessary to decide whether the defendant complied with his
obligation to return the furniture upon the plaintiff's demand; whether the latter is
bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under
it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving
for herself the ownership thereof; by this contract the defendant bound himself to
return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract,
Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's
residence or house. The defendant did not comply with this obligation when he merely
placed them at the disposal of the plaintiff, retaining for his benefit the three gas
heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code
cited by counsel for the parties are not squarely applicable. The trial court, therefore,
erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff,
upon the latter's demand, the Court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the defendant's behest. The latter, as
bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a
duty to accept the offer to return the furniture, because the defendant wanted to retain
the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the
payment thereof by the defendant in case of his inability to return some of the
furniture because under paragraph 6 of the stipulation of facts, the defendant has
neither agreed to nor admitted the correctness of the said value. Should the
defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to
present.
The costs in both instances should be borne by the defendant because the plaintiff is
the prevailing party (section 487 of the Code of Civil Procedure). The defendant was
the one who breached the contract of commodatum, and without any reason he
refused to return and deliver all the furniture upon the plaintiff's demand. In these
circumstances, it is just and equitable that he pay the legal expenses and other
judicial costs which the plaintiff would not have otherwise defrayed.

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