G.R. No.

103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN
CITY, respondents.

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of
private respondent Producers Bank of the Philippines. The mortgage stood by way of security for
petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof, then
this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as a

renewal of the former note, as an extension thereof, or as a new loan, or is given any
other kind of accommodations such as overdrafts, letters of credit, acceptances and bills
of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall
also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage
shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These
borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra
judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City,
prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a
writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081).
Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January
1992.
The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the
petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to
dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so
reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of
sound judicial discretion. The circulars of the Court prescribing technical and other procedural
requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules, however, are intended
to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may
thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for
the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to
give way to and uphold the paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debt or is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage,
by the execution of a public instrument encumbering the real property covered thereby; and in antichresis,
by a written instrument granting to the creditor the right to receive the fruits of an immovable property with
the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his
credit — upon the essential condition that if the obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of the obligation, 7 but that should the obligation
be duly paid, then the contract is automatically extinguished proceeding from the accessory character 8 of
the agreement. As the law so puts it, once the obligation is complied with, then the contract of security
becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations
so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage
Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of the borrower of the financing agreement whereon
the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time
of constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is
an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the
agreement, the chattel mortgage would still be valid between the parties (not against third
persons acting in good faith 12), the fact, however, that the statute has provided that the parties to
the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud. 13
 makes it obvious that the debt referred to in the law is a current, not an obligation that is yet
merely contemplated. In the chattel mortgage here involved, the only obligation specified in the
chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid.
By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically
rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs.
Magallanes Press, Inc., et al., 14 the Court
said —

. . . A mortgage that contains a stipulation in regard to future advances in the credit will
take effect only from the date the same are made and not from the date of the
mortgage. 15

The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan, 16 there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action
taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely
asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of
Appeals, 19 we have said:

Moral damages are granted in recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses; therefore,
it cannot experience physical suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows from real ills, sorrows, and
griefs of life — all of which cannot be suffered by respondent bank as an artificial
person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely
been so named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead
turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent
Court of Appeals should be required to justify its decision which completely disregarded
the basic laws on obligations and contracts, as well as the clear provisions of the Chattel
Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event
that its explanation is wholly unacceptable, this Honorable Court should impose
appropriate sanctions on the erring justices. This is one positive step in ridding our courts
of law of incompetent and dishonest magistrates especially members of a superior court
of appellate jurisdiction. 21 (Emphasis supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor; 22 thus:

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect
due to the courts of justice and judicial officers and . . . (to) insist on similar conduct by
others." This respectful attitude towards the court is to be observed, "not for the sake of
 the temporary incumbent of the judicial office, but for the maintenance of its supreme
importance." And it is through a scrupulous preference for respectful language that a
lawyer best demonstrates his observance of the respect due to the courts and judicial
officers . . . 23

The virtues of humility and of respect and concern for others must still live on even in an age of
materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private respondent as may still be warranted as an
unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.

SO ORDERED.

Kapunan and Hermosisima, Jr., JJ., concur.

Padilla, J., took no part.

Bellosillo, J., ic on leave.

G.R. No. 59255 December 29, 1995

OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,

vs.
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO DOMDOMA, respondents.

BELLOSILLO, J.:

Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of
Appeals1 which "modified" the order of the trial court dismissing the complaint for lack of cause of action.
The appellate court remanded the case to the court a quo for private respondents to file their responsive
pleading and for trial on the merits.

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action against
petitioners for collection of various sums of money based on loans obtained by the latter. On 3 January
1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint stated no cause
of action and that plaintiffs had no capacity to sue.

After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the trial
court dismissed the case. A motion to reconsider the dismissal was denied.

On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December 1980
modified the order of dismissal "by returning the records of this case for trial on the merits, upon filing of
an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the first cause of
action. The other causes of action should be tried on the merits subject to the defenses the defendants
may allege in their answer."

The instant petition alleges that respondent court erred: (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the order
of dismissal for lack of cause of action; and, (c) in holding that private respondents have a cause of action
under the second to the sixth causes of action of the complaint.2

We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction of
the Court of Appeals after receiving an adverse judgment therefrom. 3 Having participated actively in the
proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within which
petitioners should pay their obligations; that instead of stating that petitioners failed to discharge their
obligations upon maturity private respondents sought to collect on the checks which were issued to them
merely as security for the loans; and, that private respondents failed to make a formal demand on
petitioners to satisfy their obligations before filing the action.

For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:

Allegations Common To All Causes of Actions

xxx xxx xxx

3. That sometime in . . . February, 1977, when the Reycard Duet was in Manila, plaintiff
Teresita got acquainted with defendant Olivia in the jewelry business, the former selling
the jewelries of the latter; that to the Reycard Duet alone, plaintiff Teresita sold jewelries
worth no less than ONE HUNDRED TWENTY THOUSAND (P120,000.00) PESOS in no
less than twenty (20) transactions; that even when the Reycards have already left, their
association continued, and up to the month of August, 1977, plaintiff Teresita sold for
defendant Olivia jewelries worth no less than TWENTY THOUSAND (P20,000.00)
PESOS, in ten (10) transactions more or less;

xxx xxx xxx

5. That sometime in the month of June and July of 1977, defendant Olivia, on two
occasions, asked for a loan from plaintiff Teresita, for the purpose of investing the same
in the purchase of jewelries, which loan were secured by personal checks of the former;
that in connection with these loans, defendant promised plaintiff a participation in an
amount equivalent to one half (1/2) of the profit to be realized; that on these loans,
plaintiff was given a share in the amount of P1,200.00 in the first transaction, and in the
second transaction, the sum of P950.00;

First Cause of Action

6. That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond
ring, one and one half (1-1/2) karats, heart shape, valued in the amount of Fifteen
thousand (P15,000.00) Pesos; that as a security for the said ring, Olivia issued a
Philippine Commercial and Industrial Bank Check, San Sebastian Branch, dated August
15, 1977, No. 13894, copy of which is hereto attached and made a part hereof as Annex
"A";

7. That the condition of the issuance of the check was — if the ring is not returned within
fifteen (15) days from August 15, 1977, the ring is considered sold; that after fifteen days,
plaintiff Teresita asked defendant Olivia if she could deposit the check, and the answer of
defendant Olivia was — hold it for sometime, until I tell you to deposit the same; that the
check was held until the month of November, 1977, and when deposited, it was
dishonored for lack of sufficient funds; that for the reason that the aforementioned check
was not honored when deposited, defendant Olivia should be held liable for interest at
the rate of one percent a month, from date of issue, until the same is fully paid;

Second Cause of Action

8. That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant
Olivia in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No. 14307, dated
Sept. 25, 1977, photo copy of which is hereto attached and made a part hereof as Annex
"B";

9. That this loan was extended upon representation of defendant Olivia that she needed
money to pay for jewelries which she can resell for a big profit; that having established
her goodwill, by reason of the transaction mentioned in par. "5" hereof, the loan was
extended by plaintiff;

10. That this check, Annex "B", when deposited was dishonored; that for the reason that
the check was dishonored when deposited, defendant Olivia should be held liable for
interest at the rate of one percent (1%) per month, from the date of issue until fully paid;

Third Cause of Action

11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the amount
of FIVE THOUSAND PESOS (P5,000.00), secured by a Philippine Commercial &
Industrial Bank check, PCIBANK Singalong Branch, No. 14308, dated Sept. 27, 1977,
photo copy of which is hereto attached and made a part hereof as Annex "C";

12. That this loan was extended on the same representation made by defendant Olivia,
stated in par. "9", under the terms and conditions stated in par. "5" hereof;

13. That the check Annex "C", has not as yet been paid up to now, hence, defendant
Olivia should be held liable for interest at the rate of one percent (1%) monthly, from date
of issue, until fully paid;

Fourth Cause of Action

14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant
Olivia, in the amount of Five Thousand (P5,000.00) Pesos, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No. 14311, dated
Sept. 30, 1977, photo copy of which is hereto attached and made a part hereof as Annex
"D";

15. That this loan was extended on the same representation made by defendant Olivia,
as stated in par. "9" hereof, under the terms and conditions stated in par. "5" hereof;

16. That this check, Annex "D" has not as yet been paid up to now, hence, she should be
held liable for interest thereon at the rate of one percent (1%) per month, from date of
issue, until fully paid;

Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant Olivia,
in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine
Commercial & Industrial Bank check, PCIBANK Singalong Branch, No. 14320, dated
October 15, 1977, photo copy of which is hereto attached and made a part hereof as
Annex "E";

18. That this loan was given on the same representation made by defendant Olivia,
stated on par. "9" hereof, and under the terms and conditions stated in par. "5" hereof;

19. That this check Annex "E" when deposited was dishonored; that for the reason that
the check was dishonored when deposited, defendant Olivia should be held liable for
interest at the rate of one percent (1%) monthly, from date of issue, until fully paid;

Sixth Cause of Action

20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in the
amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial
& Industrial Bank check, No. 14325, dated October 27, 1977, photo copy of which is
hereto attached and made a part hereof as Annex "F";

21. That this loan was given on the same representation made by defendant Olivia,
stated in par. "9" hereof, and under the terms and conditions stated in par. "5" hereof;
 22. That this check, Annex F, when deposited was dishonored; that for the reason that
the check was dishonored when deposited, defendant Olivia should be held liable for
interest thereon, at the rate of one percent (1%) monthly, from date of issue, until fully
paid;

Seventh Cause of Action

23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust and
confidence on defendant Olivia, however, by virtue of these trust and confidence, she
availed of the same in securing the loans aforementioned by misrepresentations, and as
a direct consequence thereof, the loans have not as yet been settled up to now, for which
plaintiff Teresita suffered sleepless nights, mental torture and wounded feelings, for the
reason that the money used in said transactions do all belong to her; that this situation is
further aggravated by the malicious act of defendant Olivia, by having filed a complaint
with the Manila Police, to the effect that she (Teresita) stole the checks involved in this
case; that as a consequence thereof, she was investigated and she suffered besmirched
reputation, social humiliation, wounded feelings, moral shock and similar injuries, for
which defendant Olivia should be held liable, as and by way of moral damages in the
amount of EIGHTY THOUSAND (P80,000.00) PESOS;

Eight Cause of Action

24. That as and by way of exemplary or corrective damages, to serve as an example or

correction for the public good, defendant Olivia should be held liable to pay to the herein
plaintiff Teresita, the amount of Ten Thousand Pesos, as exemplary damages;

Ninth Cause of Action

25. That plaintiff, in order to protect her rights and interests, engaged the services of the
undersigned, and she committed herself to pay the following:

a. The amount of P200.00 for every appearance in the trial of this case.

b. The amount of P2,000.00 as retainers fees.

c. An amount equivalent to ten percent of any recover from defendant.

On the basis of the allegations under the heading Allegations Common to all Causes of Action above
stated as well as those found under the First Cause of Action to the Ninth Cause of Action, should the
complaint be dismissed for want of cause of action?

A cause of action is the fact or combination of facts which affords a party a right to judicial interference in
his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created, (b) an obligation on the part of the defendant to respect
and not to violate such right; and, (c) an act or omission on the part of the defendant constituting a
violation of the plaintiff's right or breach of the obligation of the defendant to the plaintiff.4 Briefly stated, it
is the reason why the litigation has come about; it is the act or omission of defendant resulting in the
violation of someone's right.5

In determining the existence of a cause of action, only the statements in the complaint may properly be
considered. Lack of cause of action must appear on the face of the complaint and its existence may be
determined only by the allegations of the complaint, consideration of other facts being proscribed and any
attempt to prove extraneous circumstances not being allowed.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material facts
well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in a
complaint furnish sufficient basis by which the complaint can be maintained, the same should not be
dismissed regardless of the defense that may be assessed by the defendants. 6

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that petitioner
Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security therefor a check
for the same amount dated 15 August 1977 with the condition that if the ring was not returned within
fifteen (15) days the ring would be considered sold; and, after the lapse of the period, private respondent
Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa requested the former not to
deposit it in the meantime; that when Teresita Domdoma deposited the check after holding it for
sometime the same was dishonored for lack of funds. Private respondent Teresita Domdoma sought to
collect the amount of P15,000.00 plus interest from 15 August 1977 until fully paid.

From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August 1977
and despite the sale the latter failed to pay the price therefor even as the former was given ample time to
pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's right under the
agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed. That when these checks were deposited on their due dates they were all dishonored by the
bank. As a consequence, private respondents prayed that petitioners be ordered to pay the amounts of
the loans granted to them plus one percent interest monthly from the dates the checks were dishonored
until fully paid.

Culled from the above, the right of private respondents to recover the amounts loaned to petitioners is
clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed. The
question now is whether Petitioners committed an act or omission constituting a violation of the right of
private respondents.

All the loans granted to petitioners are secured by corresponding checks dated a month after each loan
was obtained. In this regard, the term security is defined as a means of ensuring the enforcement of an
obligation or of protecting some interest in property. It may be personal, as when an individual becomes a
surety or a guarantor; or a property security, as when a mortgage, pledge, charge, lien, or other device is
used to have property held, out of which the person to be made secure can be compensated for
loss.7 Security is something to answer for as a promissory note.8 That is why a secured creditor is one
who holds a security from his debtor for payment of a debt.9 From the allegations in the complaint there is
no other fair inference than that the loans were payable one month after they were contracted and the
checks issued by petitioners were drawn to answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations. Hence,
private respondents filed the action with the trial court precisely to compel petitioners to pay their due and
demandable obligations. Art. 1169 of the Civil Code is explicit — 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. The continuing refusal of petitioners to heed the demand of private
respondents stated in their complaint unmistakably shows the existence of a cause of action on the part
of the latter against the former.
Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in remanding the case to the trial court for the filing of
an answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED. The judgment of the Court of Appeals dated 11 December 1980
remanding the case to the trial court for the filing of petitioners' answer and thereafter for trial on the
merits is AFFIRMED. Costs against petitioners.

SO ORDERED.

Padilla, Davide, Jr., Kapunan and Hermosisima, Jr., JJ., concur.

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.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved
on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation
are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to
provide adequately for the requirements of the factory." The imposition of those conditions was by no
means a deviation from the terms of the agreement, but rather a step in its implementation. There was
nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on
January 7, 1954, namely — "that the proceeds of the loan shall be 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
and corn project, which application was disapproved. It was only in 1964, nine years after the loan
agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All
these circumstances demonstrate beyond doubt that the said agreement had been extinguished by
mutual desistance — and that on the initiative of the plaintiff-appellee itself.

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

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

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.

Makasiar, J., took no part.

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

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

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

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance
of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage
dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M.
Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It
alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was
executed by one who was not the owner of the mortgaged property. It further alleged that the property in
question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with the
condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.

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

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion for
intervention. The intervention was premised on the Deed of Assignment executed by petitioner Honesto
Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of petitioner Honesto
Bonnevie over the subject property. The intervention was ultimately granted in order that all issues be
resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered

dismissing the complaint with costs against the plaintiff and the intervenor.

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

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

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

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

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

5. The lower court erred in dismissing the complaint.

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

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

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of
the property which they mortgaged on December 6, 1966, to secure the payment of the
loan in the principal amount of P75,000.00 they were about to obtain from defendant-
appellee Philippine Bank of Commerce; that on December 8, 1966, executed in favor of
plaintiff-appellant the Deed of Sale with Mortgage ,, for and in consideration of the sum of
P100,000.00, P25,000.00 of which amount being payable to the Lozano spouses upon
the execution of the document, and the balance of P75,000.00 being payable to
defendant- appellee; that on December 6, 1966, when the mortgage was executed by the
Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet
received them, as it was on December 12, 1966 when they and their co-maker Alfonso
Lim signed the promissory note for that amount; that from April 28, 1967 to July 12, 1968,
plaintiff-appellant made payments to defendant-appellee on the mortgage in the total
amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights
under the Deed of Sale with Assumption of Mortgage to his brother, intervenor Raoul
Bonnevie; that on June 10, 1968, defendant-appellee applied for the foreclosure of the
mortgage, and notice of sale was published in the Luzon Weekly Courier on June 30,
July 7, and July 14, 1968; that auction sale was conducted on August 19, 1968, and the
property was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-
appellant to repurchase the property failed, and on October 9, 1969, he caused an
adverse claim to be annotated on the title of the property. (Decision of the Court of
Appeals, p. 5).

Presented for resolution in this review are the following issues:

 I

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

II

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

III

Whether petitioners had a right to redeem the foreclosed property.

IV

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

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

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

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

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

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

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

a) petitioners were never notified of the foreclosure sale.

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

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

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

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

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

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

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

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

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

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

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

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

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

On the question of whether or not the petitioners had a right to redeem the property, We hold that the
Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured
from respondent Bank to the sale with assumption of mortgage by petitioners, the latter were not validly
substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged
with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting
that as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right to
redeem the property, petitioners failed to exercise said right within the period granted by law. Thru
certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption
period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto
Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September 29, 1969,
Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie.

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

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

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

SO ORDERED.

Aquino, J., concur.

Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.

Concepcion J J., took no part.

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

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

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

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

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

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

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual
interest, payable within 3 years from the date of execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that
there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its
vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).

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

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

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

xxx xxx xxx

(p. 46, rec.).

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

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

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

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

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

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

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

Hence, this instant petition by the central Bank.

The issues are:

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

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

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

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April
28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of
each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de
Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to
perform his part of the contract, the other party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.
Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a
period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14,
1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power
of the Monetary Board to take over insolvent banks for the protection of the public is recognized by
Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.

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

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

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it
from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected to exercise caution and prudence in the discharge
of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the
bank's officials and employees that before they approve the loan application of their customers, they must
investigate the existence and evaluation of the properties being offered as a loan security. The recent
rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued
underscore the importance of this responsibility. The mere reliance by bank officials and employees on
their customer's representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in
case the collateral turn out to be over-valued. The representation made by the customer is immaterial to
the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of'
Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation
because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower
court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and
objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners,
thus, cannot raise the same issue before the Supreme Court.

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

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

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

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. W E 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.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of
Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the pretrial
conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc.,
(later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased
to the latter a portion of his property for a period of twenty (20) years from said date, subject inter alia to
the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and
are to be expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693
sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable
yearly in advance within the 1st twenty days of each year; provided, a financial aid in the sum of
P15,000 to clear the leased premises of existing improvements thereon is paid in this manner;
P10,000 upon execution of this lease and P5,000 upon delivery of leased premises free and clear
of improvements thereon within 30 days from the date of execution of this agreement. The portion
on the side of the leased premises with an area of 365 sqrm. more or less, will be occupied by
LESSEE without rental during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is
paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per
annum or a total net amount of P130,288.47 before registration of lease. Leased premises shall
be delivered within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the
amount it computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in
computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with
interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also prayed
for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the factual
allegations of the complaint but argued that the amount deducted was not usurious interest but a given to
it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was rendered for the
defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
computation of the interest collected out of the rentals paid for the first eight years; that such interest was
excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the defendant-
appellant's computation of the total amount to be deducted for the eight years advance rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was excessive
and beyond that allowable by law, because the total interest on the said amount is only
P33,755.90 at P4,219.4880 per yearly rental; and considering that the interest should be
computed excluding the first year rental because at the time the amount of P281, 199.20 was
paid it was already due under the lease contract hence no interest should be collected from the
rental for the first year, the amount of P29,536.42 only as the total interest should have been
deducted by defendant from the sum of P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not
excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be
construed as a repayment of a loan because there was no grant or forbearance of money as to constitute
an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its
obligation in advance by paying the eight years rentals, and it was for this advance payment that it was
getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties
may establish such stipulations, clauses, terms and condition as they may want to include; and as long as
such agreements are not contrary to law, morals, good customs, public policy or public order, they shall
have the force of law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight years. The discount was in
effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by
any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on
usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted
for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt
intent to take more than the legal rate for the use of money loaned. Unless these four things concur in
every transaction, it is safe to affirm that no case of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:
 As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay
the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted
at 12% interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20
multiplied by 12 months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by
12%). So, therefore, the total interest for the first eight (8) years should be only P33,755.90
(P4,129.4880 multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most

seriously misleading. He just computed the annual discount to be at P4,129.4880 and then simply
multiplied it by eight (8) years. He did not take into consideration the naked fact that the rentals
due on the eight year were paid in advance by seven (7) years, the rentals due on the seventh
year were paid in advance by six (6) years, those due on the sixth year by five (5) years, those
due on the fifth year by four (4) years, those due on the fourth year by three (3) years, those due
on the third year by two (2) years, and those due on the second year by one (1) year, so much so
that the total number of years by which the annual rental of P4,129.4880 was paid in advance is
twenty-eight (28), resulting in a total amount of P118,145.44 (P4,129.48 multiplied by 28 years)
as the discount. However, defendant was most fair to plaintiff. It did not simply multiply the annual
rental discount by 28 years. It computed the total discount with the principal diminishing month to
month as shown by Annex 'A' of its memorandum. This is why the total discount amount to only P
8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is
erroneous. Also after making its own computations and after examining closely defendant's
Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount on the
rentals due for the first year so much so that the computation conforms with the provision of the
Lease Agreement to the effect that the rentals shall be 'payable yearly in advance within the 1st
20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not
have been the intention of the parties to the transaction. Had it been so, then it should have been clearly
stipulated in the contract. Contracts should be interpreted according to their literal meaning and should
not be interpreted beyond their obvious intendment. 13

The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no showing
that the intricate computation applied by the trial court was explained to him by the defendant-appellee or
that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had
actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is
not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals when
all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at the time
they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is
how the lessor understood the arrangement. In fact, the Court will reject his subsequent modification that
the interest should be limited to only seven years because the first year rental was not being paid in
advance. The agreement was for a uniform deduction for the advance rentals for each of the eight years,
and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the
total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a
difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will leave
a balance of P65,114.35 still due the plaintiff-appellant.
The above computation is based on the more reasonable interpretation of the contract as a whole rather
on the single stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil
Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred
Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus
Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.