nterest: Commodatum v.
Mutuum Vives filed an action for recovery of sum of money
PRODUCERS BANK OF THE PHILIPPINES v. CA and VIVES
G.R. No. 115324; February 19, 2003; SECOND DIVISION
(Callejo, Sr. J.)
FACTS:
Franklin Vives was asked by Angeles Sanchez to help
Arturo Doronilla, by depositing a certain amount of
money in a bank account to incorporate the latter’s
business, Sterela Marketing and Services. Sanchez
assured Vives that he could withdraw his money within
a month. Relying on the assurances of Sanchez and
Doronilla, Vives issued a check in the amount of
P200,000.00 in favor of Sterela. He instructed his wife,
Inocencia, to accompany Doronilla and Sanchez in
opening a savings account in the name of Sterela in the
Makati Branch of Producers Bank. However, only
Inocencia, Sanchez, and Estrella Dumagpi, Doronilla’s
secretary, went to the bank. They had with them an
authorization letter from Doronilla, authorizing them in
coordination with Assistant Manager Rufo Atienza to
open an account for Sterela. The authorized signatories
were Sanchez and Inocencia. Thereafter, the passbook
was issued to Inocencia.
Subsequently, Vives learned that Sterela was no longer
holding office in the address given to him. He and his
wife immediately went to the bank to verify if their
money was still intact. They were informed by Atienza
that only P90,000.00 remained therein and they could
not withdraw said amount as it had to answer for the
postdated checks issued by Doronilla. The spouses
found out that Doronilla opened a current account
therein and authorized the bank to debit the savings
account. Vives tried to contact Doronilla and the latter
assured him that his money was still intact. He also
issued a postdated check amounting to P212,000.00 in
favor of Vives. However, the check was dishonored.
before the RTC against Doronilla, Sanchez, Dumagpi,
and Producers Bank. The RTC ordered the defendants to
pay Vives. On appeal, the CA affirmed in toto the
decision of the RTC.
Producers Bank contends that the transaction between
Vives and Doronilla is a simple loan since the money is a
consumable thing and it is an onerous transaction due
to the P12,000.00 interest. As such, it argues that it
cannot be held liable because it is not privy to the
transaction.
ISSUE:
Is the transaction between Doronilla and Vives a
mutuum?
HELD:
No. The transaction is a commodatum and not a
mutuum. Vives merely accommodated Doronilla by
lending his money without consideration. It was clear to
the parties that the money would only be used to make
it appear that Sterela had sufficient capitalization for
incorporation. The money, a consumable thing, was
loaned only for purposes of exhibition and would be
returned to Vives after a month. The P12,000.00 did not
convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties.
Moreover, the additional P12,000.00 corresponds to
the fruits of the money deposited in the bank.
On the other hand, the Court held that the nature of
the transaction has no bearing on the liability of
Producers Bank. The evidence indicates that its
employee, Atienza, had helped Doronilla in committing
the wrongful acts that had resulted to the loss of the
money. Atienza was aware that the owner of the money
was Vives and that Doronilla was not authorized to
withdraw the same. Also, the withdrawal of the money
was made without the passbook having been
presented. Clearly, the transfer of funds could not have
been accomplished without the assistance of Atienza.
Therefore, as the employer, Producers Bank shall be
held primarily and solidarily liable for the damages
caused by its employee.
Sps. Andal Vs. PNB G.R. No. 194201, November 27, 2013
(Interest Rate)
FACTS: Petitioners obtained a loan from
respondent bank (P21.8M) for which 12 pro forma
promissory notes were executed, with an agreed upon
varying interest rates of 17.5-27%. Petitioners also
executed a real estate mortgage in favor of the
respondent bank over five parcels of lands, including all
improvements thereon. Respondent bank advised
petitioners to pay their loan, otherwise they would
declare it due and demandable. Petitioners paid P14.8M
to avoid foreclosure. Respondent bank executed a
release of real estate mortgage over two of the parcels
of land. Despite payment, respondent foreclosed the
remaining real estate mortgage over the remaining
three parcels of land. A public auction sale resulted in
respondent bank as the winning bidder. This prompted
petitioners to file a complaint alleging that they tried to
religiously pay their loan obligation but due to
exorbitant rate on interest unilaterally determined and
imposed by respondent it prevented them from doing
so. RTC ruled in favor of petitioners finding the interest
void for being potestative and ordered that the rate of
interest be reduced to 6% in accordance with Art. 2209
of the NCC and declaring all the foreclosure sales as
void. PNB filed an appeal alleging that the lower court
erred in reducing the interest rate. CA affirmed the
ruling of the RTC with modification that the interest rate
be 12% per annum instead of 6%. Petitioners alleged
that no interest is due on their principal loan obligation
since the potestive interest rate stipulation is already
declared null and void by the court. CA denied their
contention. Hence, this recourse.
ISSUE:
Whether or not the interest should be imposed
on the loan?
RULING:
Yes, it is clear from the contract of loan
between petitioners-spouses and respondent bank that
petitioners-spouses, as borrowers, agreed to the
payment of interest on their loan obligation. That the
rate of interest was subsequently declared illegal and
unconscionable does not entitle petitioners-spouses to
stop payment of interest. It should be emphasized that
only the rate of interest was declared void. The
stipulation requiring petitioners-spouses to pay interest
on their loan remains valid and binding. They are,
therefore, liable to pay interest from the time they
defaulted in payment until their loan is fully paid. (To
prevent UNJUST ENRICHMENT). In addition, pursuant to
Circular No. 799, series of 2013, issued by the Office of
the Governor of the Bangko Sentral ng Pilipinas on 21
June 2013, and in accordance with the ruling of the
Supreme Court in the recent case of Dario Nacar v.
Gallery Frames and/or Felipe Bordey, Jr., effective 1 July
2013, the rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per
annum. Accordingly, the rate of interest of 12% per
annum on petitioners-spouses' obligation shall apply
from May 20, 2011 (the date of default) until June 30,
2013 only. Moreover, from July 1, 2013 until fully paid,
the legal rate of 6% per annum shall be applied to
petitioners-spouses' unpaid obligation.
 S.C. MEGAWORLD CONSTRUCTION AND DEV.
CORPORATION VS PARADA (G.R.NO. 183804)
(Interest Rate)
FACTS:
- Petitioner S.C. Megaworld Construction
and Development Corporation bought electrical lighting
materials from Genlite Industries, a sole proprietorship
owned by Engineer Luis U. Parada (respondent), for its
Read-Rite project in Canlubang, Laguna.
- Petitioner failed to pay said purchase on
due date, but blamed it on its failure to collect under its
sub-contract with the EnviroKleen Technologies, Inc.
(EnviroKleen).
- It was however able to persuade
EnviroKleen to agree to settle its above purchase, but
after paying the respondent P250,000.00 on June 2,
1999, EnviroKleen stopped making further payments,
leaving an outstanding balance of P816,627.00. It also
ignored the various demands of the respondent, who
then filed a suit in the RTC.
- Petitioner denied liability and claimed
that it was released from its indebtedness to the
respondent by reason of the novation of their contract,
which, it reasoned, took place when the latter accepted
the partial payment of EnviroKleen in its behalf, and
thereby acquiesced to the substitution of EnviroKleen as
the new debtor in the petitioner’s place.
RTC - Ruled in favor of respondent. As follows:
WHEREFORE, judgment is hereby rendered for
the [respondent].
[The petitioner] is hereby ordered to pay the
[respondent] the following:
1. A. the sum of [P]816,627.00
representing the principal obligation due;
2. B. the sum equivalent to twenty
percent (20%) per month of the principal obligation due
from date of judicial demand until fully paid as and for
interest; and
3. C. the sum equivalent to twenty[-]five
[percent] (25%) of the principal sum due as and for
attorney’s fees and other costs of suits.
The compulsory counterclaim interposed by the
[petitioner] is hereby ordered dismissed for lack of
merit.
CA – Concurred with RTC decision. CA noted
that there is nothing in the two (2) letters of the
respondent to EnviroKleen, dated April 14, 1999 and
June 16, 1999, which would imply that he consented to
the alleged novation, and, particularly, that he intended
to release the petitioner from its primary obligation to
pay him for its purchase of lighting materials. The
appellate court cited the RTC’s finding9 that the
respondent informed EnviroKleen in his first letter that
he had served notice to the petitioner that he would
take legal action against it for its overdue account, and
that he retained his option to pull out the lighting
materials and charge the petitioner for any damage
they might sustain during the pull-out.
ISSUE:
Whether or not the interest imposed to be paid
by petitioner is proper
RULING: No.
Pursuant to Article 2209 of the Civil Code,
except as provided under Central Bank Circular No. 905,
and now under BangkoSentral ng Pilipinas Circular No.
799, which took effect on July 1, 2013, the respondent
may be awarded interest of six percent (6%) of the
judgment amount by way of actual and compensatory
damages.
It appears from the recital of facts in the trial
court’s decision that the respondent demanded interest
of two percent (2%) per month upon the balance of the
purchase price of P816,627.00, from judicial demand
until full payment. There is then an obvious clerical
error committed in the fallo of the trial court’s decision,
for it incorrectly ordered the defendant therein to pay
“the sum equivalent to twenty percent (20%) per month
of the principal obligation due from date of judicial
demand until fully paid as and for interest.”virtualaw
library
A clerical mistake is one which is visible to the
eyes or obvious to the understanding; an error made by
a clerk or a transcriber; a mistake in copying or writing.
The Latin maxims Error placitandiaequitatem non tollit
(“A clerical error does not take away equity”), and Error
scribentisnocere non debit (“An error made by a clerk
ought not to injure; a clerical error may be corrected”)
are apt in this case. Viewed against the landmark case
of Medel v. CA, an award of interest of 20% per month
on the amount due is clearly excessive and iniquitous. It
could not have been the intention of the trial court, not
to mention that it is way beyond what the plaintiff had
prayed for below.
It is settled that other than in the case of
judgments which are void ab initio for lack of
jurisdiction, or which are null and void per se, and thus
may be questioned at any time, when a decision is final,
even the court which issued it can no longer alter or
modify it, except to correct clerical errors or
mistakes.virtualaw library
Nowhere stated in the trial court’s decision that
the parties had in fact stipulated an interest on the
amount due to the respondent. Even granting that
there was such an agreement, there is no finding by the
trial court that the parties stipulated that the
outstanding debt of the petitioner would be subject to
two percent (2%) monthly interest. The most that the
decision discloses is that the respondent demanded a
monthly interest of 2% on the amount outstanding.
Article 2209 of the Civil Code provides that “[i]f
the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and
in the absence of stipulation, the legal interest, which is
six percent per annum.” Pursuant to the said provision,
then, since there is no finding of a stipulation by the
parties as to the imposition of interest, only the amount
of 12% per annum47 may be awarded by the court by
way of damages in its discretion, not two percent (2%)
per month, following the guidelines laid down in the
landmark case of Eastern Shipping Lines v. Court of
Appeals,48 to wit:chanrobles virtua1aw 1ibrary
II. With regard particularly to an award of
interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made
(at which time the quantification of damages may be
deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v.
CA,50 a loan or forbearance of money, goods or credit
describes a contractual obligation whereby a lender or
creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or
debt then due and payable.51Thus:chanrobles
virtua1aw 1ibrary
In Reformina v. Tomol, Jr., the Court held that
the legal interest at 12% per annum under Central Bank
(CB) Circular No. 416 shall be adjudged only in cases
involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the
concept of damages arising from default in the
performance of obligations in general and/or for money
judgment not involving a loan or forbearance of money,
goods, or credit, the governing provision is Art. 2209 of
the Civil Code prescribing a yearly 6% interest. Art. 2209
pertinently provides:chanrobles virtua1aw 1ibrary
“Art. 2209. If the obligation consists in the
payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent per annum.”
The term “forbearance,” within the context of
usury law, has been described as a contractual
obligation of a lender or creditor to refrain, during a
given period of time, from requiring the borrower or
debtor to repay the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the
rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate
under CB Circular No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to
judgments involving such loan or forbearance of money,
goods, or credit, while the 6% per annum under Art.
2209 of the Civil Code applies “when the transaction
involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the
performance of obligations in general,” with the
application of both rates reckoned “from the time the
complaint was filed until the [adjudged] amount is fully
paid.” In either instance, the reckoning period for the
commencement of the running of the legal interest shall
be subject to the condition “that the courts are vested
with discretion, depending on the equities of each case,
on the award of interest.”52 (Citations omitted and
emphasis ours)
Pursuant, then, to Central Bank Circular No.
416, issued on July 29, 1974,53 in the absence of a
written stipulation, the interest rate to be imposed in
judgments involving a forbearance of credit shall be
12% per annum, up from 6% under Article 2209 of the
Civil Code. This was reiterated in Central Bank Circular
No. 905, which suspended the effectivity of the Usury
Law from January 1, 1983.54 But if the judgment refers
to payment of interest as damages arising from a
breach or delay in general, the applicable interest rate is
6% per annum, following Article 2209 of the Civil
Code.55 Both interest rates apply from judicial or
extrajudicial demand until finality of the judgment. But
from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered
a forbearance of credit, regardless of whether the
award in fact pertained to one, and therefore during
this period, the interest rate of 12% per annum for
forbearance of money shall apply.56cralaw virtualaw
library
But notice must be taken that in Resolution No.
796 dated May 16, 2013, the Monetary Board of the
BangkoSentral ng Pilipinas approved the revision of the
interest rate to be imposed for the loan or forbearance
of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to
such rate of interest. Thus, under BSP Circular No. 799,
issued on June 21, 2013 and effective on July 1, 2013,
the said rate of interest is now back at six percent (6%),
viz:chan
rBangkoSentral ng Pilipinas
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of
stipulation
The monetary Board, in its Resolution No. 796
dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of
stipulation in loan contracts, thereby amending Section
2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or
forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be six percent
(6%) per annum.
Section 2. In view of the above, Subsection
X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual
of Regulations for Non-Bank Financial Institutions are
hereby amended accordingly.
G.R. No. L-48349 December 29, 1986
FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
(Application of Usury)
FACTS:
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.One of the conditions
in the contract was worded as follows:
“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”
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 P98,828.03 as
discount.
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.
ISSUE:
Was the interest collected out of the rentals
paid for the first eight yearsexcessive and violative of
the Usury Law?
RULING:
No. 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.
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.
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. 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 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.
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.
WHEREFORE, the decision of the trial court is
hereby modified, and the defendant-appelleePetrophil
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.

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.

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.

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.

The deduction shall be for only eight years

because that was plainly what the parties intended at
Unconscionable Interest Rate
MEDEL vs. COURT OF APPEALS
G.R. No. 131622 November 27, 1998
FACTS:
On the 7th and 19th of November 1985,
Servando Franco and Leticia Medel obtained a loan
from Veronica R. Gonzales in the amount of P50,000.00
and P90,000.00, respectively, payable in two months.
Veronica retained payments for advance interest for
one month at 6% per month. Servando and Leticia
executed a promissory note, to evidence the loan
transactions. On maturity of the two promissory notes,
the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured
from Veronica still another loan in the amount of
P300,000.00, maturing in one month, secured by a real
estate mortgage over a property. Servando and Leticia
executed a promissory note in favor of Veronica. Like
the previous loans, Servando and Medel failed to pay
the third loan on maturity.
Servando and Leticia with the latter's husband,
Dr. Rafael Medel, consolidated all their previous unpaid
loans totaling P440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing
their indebtedness to a total of P500,000.00. On
maturity of the loan, the borrowers failed to pay the
indebtedness, plus interests and penalties. A complaint
for collection of the full amount of the loan including
interests and other charges was then filed by Veronica.
Issue: WON the stipulated rates of interest at
5.5% per month on the loan in the sum of P500,00 that
plaintiffs extended to the defendant is usurious?
Held:
No. The Supreme Court cannot consider the
rate "usurious" because it has consistently held that
Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest
ceilings prescribed by the Usury Law and that the Usury
Law is now "legally inexistent". However, the SC agreed
with petitioners that the stipulated rate of interest at
5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant.
In Security Bank and Trust Company vs.
Regional Trial Court of Makati, Branch 61 the Court held
that CB Circular No. 905 "did not repeal nor in anyway
amend the Usury Law but simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank
Circular cannot repeal a law. Only a law can repeal
another law."
Nevertheless, SC find the interest at 5.5% per
month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals ("contra
bonos mores"), if not against the law. The stipulation is
void. The courts shall reduce equitably liquidated
damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.
SPOUSES JOVENAL TORING and CECILIA ESCALONA-
TORINGv. SPOUSES ROSALIE GANZON-OLAN and
GILBERT OLAN, and ROWENA OLAN
(Unconscionable Interest Rate)
Facts:
On September 4, 1998, petitioner JovenalToring
obtained from respondents a loan amounting to
P6,000,000 at 3% interest per month. The loan was
secured by a mortgage on a parcel of land covered by
Transfer Certificate of Title No. T-27418,4 as evidenced
by a Deed of Real Estate Mortgage5 dated September 8,
1998.
On September 23, 1998, the parties executed a
Deed of Absolute Sale6 conveying the mortgaged
property in favor of respondents. Subsequently,
respondents gave petitioners an exclusive option to
repurchase the land for P10,000,000. This was
embodied in a document denominated as an Option to
Buy7 dated September 28, 1998. On this same
document, respondents acknowledged receipt of a total
sum of P10,000,000 as consideration for the purchase
of the land.8 The Option to Buy provided that if the
option is exercised after December 5, 1998, the
purchase price shall increase at the rate of P300,000 or
3% of the purchase price every month until September
5, 1999 and thereafter at the rate of P381,000 or 3.81%
of the purchase price every month, with the fifth of
every month as the cut-off date for said increases.9
On July 28, 2000, petitioners filed a
Complaint10 docketed as Civil Case No. 00-137 for
reformation of instruments, abuse of rights and
damages against respondents.
The Trial court ruled in favor of the Sps. Olan,
ordering Sps. Toring to pay 20 million.
Aggrieved by the decision of the trial court, Sps.
Toring brought the case before the Court of Appeals,
but to the Sps. Toring’s dismay, the former affirmed the
decision of the trial court. Hence, this petition.
Issue:
Should the stipulated interest rates of 3% and
3.18% be considered unconscionable?
Ruling:
Petitioners contend that they are not liable to
pay interest as the stipulated monthly rates of 3% and
3.81%17 are unconscionable. Petitioners further
contend that the reformed instrument, i.e., the Option
to Buy dated September 28, 1998, did not mention any
rate of interest chargeable to the loan but rather, an
escalation18 of the purchase price.
On the other hand, respondents maintain that
petitioners are liable to pay interest based on the Deed
of Absolute Sale and Option to Buy executed by the
parties. Respondents assert that the P300,000 and
P381,000 differences per month as stated in the Option
to Buy represents the 3% or 3.81% interest to be
charged on the loan. Respondents further assert that
the 3% or 3.81% interest is not usurious since Central
Bank Circular No. 905-8219 removed the ceiling on
interest rates on secured and unsecured loans.
While the parties are free to stipulate on the
interest to be imposed on monetary obligations, the
Court will temper interest rates if they are
unconscionable.23 Even if the Usury Law has been
suspended by Central Bank Circular No. 905-82, and
parties to a loan agreement have been given wide
latitude to agree on any interest rate, we have held that
stipulated interest rates are illegal if they are
unconscionable.24 Consequently, in our view, the Court
of Appeals erred in sustaining the trial court's decision
upholding the stipulated interest of 3% and 3.81%.
Thus, we are unanimous now in our ruling to reduce the
above stipulated interest rates to 1% per month, in
conformity with our ruling in Ruiz v. Court of Appeals.25
For as well stressed in that case:
... Nothing in the said circular [CB Circular No.
905, s. 1982] grants lenders carte blanche authority to
raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their
assets.
Restituta M. Imperial vs Alexa Jaucian
G.R. No. 149004
(Unconscionable Interest Rate)
FACTS:
Controversy Arose from a case of collection of
money, filed by Alex A. Jaucian (now respondent)
against Restituta Imperial (now petitioner). The
complaint alleges that defendant now petitioner
obtained from plaintiff now respondent six separate
loans for which the former executed in favour of the
latter 6 separate promissory notes and issued several
checks as guarantee for payment.
Petitioner obtained six (6) separate loans
amounting to P 320,000.00 from the respondent. In the
written agreement, they agreed upon the 16% interest
per month plus penalty charge of 5% per month and the
25% attorney’s fee, failure to pay the said loans on the
stipulated date.
The petitioner was able to pay only P
116,540.00 as found by the RTC. Although she alleged
that she had already paid the amount of P 441,780.00
and the excess of P 121,780.00 is more than the interest
that could be legally charged, the Court affirms the
findings of RTC that petitioner is still indebted to the
respondent.
ISSUES:
Whether or not the stipulated interest
of 16% per month, 5% per month for penalty charge
and 25% attorney’s fee are usurious.
HELD:
YES. The rate must be equitably
reduced for being iniquitous, unconscionable and
exorbitant. While the Usury Law ceiling on interest rates
was lifted by C.B. Circular No. 905, nothing in the said
circular grants lenders carte blanche authority to raise
interests rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
When the agreed rate is iniquitous or
unconscionable, it considered contrary to morals, if not
against the law. Such stipulation is void. Since the
stipulation is void, it is as if there was no express
contract thereon. Hence, courts may reduce the
interest rate as reason and equity demand.
The interest rate of 16% per month was
reduced to 1.167% per month or 14% per annum and
the penalty charge of 5% per month was also reduced
to 1.167% per month or 14% per annum.
The attorney’s fees here are in the nature of
liquidated damages and the stipulation therefor is aptly
called a penal clause. So long as the stipulation does not
contravene the law, morals, public order or public
policy, it is binding upon the obligor. Nevertheless, in
the case at bar, petitioner’s failure to comply fully with
her obligation was not motivated by ill will or malice.
The partial payments she made were manifestations of
her good faith. Hence the attorney’s fees were reduced
to 10% of the total due and payable.
Security Bank and Trust Company vs. R.T.C MAKATI BR.
61 MAGTANGGOL EUSEBIO AND LEILA VENTURA
G.R.No. 113926 23 October1996
(Unconscionable Interest Rate)
FACTS OF THE CASE:
On April 27, 1983, private respondent
Magtanggol Eusebio executed 3 Promissory Notes from
different dates in favor of petitioner Security Bank and
Trust Co. (SBTC) in the amounts of 100,000, 100,000,
and 65,000. Respondent bound himself to pay the said
amounts in six (6) monthly installments plus 23%
interest per annum. On all the abovementioned
promissory notes, private respondent Leila Ventura had
signed as co-maker. Upon maturity there were still
principal balance remaining on the notes. Eusebio
refused to pay the balance payable, so SBTC filed a
collection case against him. The RTC rendered a
judgment in favor of SBTC, although the rate of interest
imposed by the RTC was 12% p.a. instead of the agreed
upon 23% p.a. The court denied the motion filed by
SBTC to apply the 23% p.a. instead of the 12% p.a.
ISSUES OF THE CASE:
Did the RTC err in using 12% instead of the 23%
as agreed upon by the parties?
RULING:
Yes, the rate of interest was agreed upon by the
parties freely. Significantly, respondent did not question
that rate. - P.D. No. 1684 and C.B. Circular No. 905 no
more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest
rate that shall accrue on a loan or forbearance of
money, goods or credits. - It is not for respondent court
a quo to change the stipulations in the contract where it
is not illegal. Furthermore, Article 1306 of the New Civil
Code provides that contracting parties may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public
policy. - The 12% shall be applied for obligations arising
from loans, or forbearance of money in the absence of
express stipulations HELD: IN VIEW OF THE FOREGOING,
the decision of the respondent court a quo, is hereby
AFFIRMED with the MODIFICATION that the rate of
interest that should be imposed be 23% per annum.
Interest: Exception to Medel
JOCELYN TOLDEO v. MARILOU HYDEN
G.R. No. 172139; December 8, 2010; FIRST
DIVISION (Del Castillo, J.)
FACTS:
Jocelyn Toledoobtained five loans of various
amounts fromMarilouHydenamounting to a total of
P290,000.00 with 6% to 7% monthly interests. Said
interests were deducted in advance from the loan
amount given to Jocelyn. She used the money from the
loans to make advance payments for prospective clients
of educational plans. In this way, her sales production
would increase, thereby entitling her to 50% rebate on
her sales.
Jocelyn had been religiously paying Marilou for
almost 5 years and was able to payP778,000.00covering
only the interest.However, the total principal amount of
P290,000.00 remained unpaid. She issued five checks to
Marilou representing renewal payment of her loans. Of
the five checks, Jocelynrecalled one and replaced the
same with six checks. After honoring the three
replacement checks, Jocelyn ordered the stop payment
on the remaining checks despite being sufficiently
funded and filed with the RTC a complaint against
Marilou.
ISSUE:
Is the 6% to 7% monthly interest considered
excessive, iniquitous, unconscionable and exorbitant?
RULING:
 No, the 6% to 7% interest per month paid by Prisma Construction & Development and Pantaleon v.
Jocelyn is not excessive under the circumstances of the Menchavez
case.The Court cannot consider the disputed 6% to 7%
GR NO. 160545 March 9, 2010
monthly interest rate to be iniquitous or
unconscionable vis-à-vis the principle laid down in
Medel. In Medel, the defendant-spouses were never
able to pay their indebtedness from the very beginning (Exception to Medel)
and when their obligations ballooned into a staggering
sum, the creditors filed a collection case against them.
FACTS:

Pantaleon, as the President and chairman of the

In this case, there was no urgency of the need
board of Prisma entered into a contract of loan with
for money on the part of Jocelyn. She used the money
Menchavez in the amount of 1 million pesos to be paid
from the loans to make advance payments for
in 6 months. A promissory note was used to secure the
prospective clients. Her sales production increased,
loan with the condition that it shall yield an interest of
thereby entitling her to 50% rebate on her sales. This is
40,000 for 6 months bringing the total obligation of
the reason why she did not mind the 6% to 7% monthly
Prisma into 1,240,000.00. Annexed with the promissory
interest. A business transaction of this nature between
note was the board resolution authorizing Pantaleon to
Jocelyn and Marilou continued for more than five years.
enter into a contract of loan in behalf of Prisma
Jocelyn religiously paid the agreed amount of interest
whereby the loan’s interest must not be more than 4%
until she ordered for stop payment. The checks were in
per month.
fact sufficiently funded when she ordered the stop
payment. When she availed of said loans, an advance Prisma was not able to pay the loan in the
interest of 6% to 7% was already deducted from the stipulated time period from January to June of 1994.
loan amount, yet she never uttered a word of protest. Their payment only began on September 1994. Their
total payment as of January 1997 was 1,108,772,
however, when Menchavez computed using the 6%
After years of benefiting from the proceeds of monthly interest rate, he found out that Prisma was still
the loans bearing an interest rate of 6% to 7% per indebted to him in the amount pf 1,264,157. He then
month and paying for the same, Jocelyn cannot now go filed a case for collection of sum of money to enforce
to court to have the said interest rate annulled on the the unpaid balance.
ground that it is excessive, iniquitous, unconscionable,
As a defense, Prisma avers that it did not agree
exorbitant, and absolutely revolting to the conscience
with the 4% monthly interest rate or 48% per annum
of man.The Courts have no power to relieve parties
and even if did so, such is only applicable to the 6
from obligations voluntarily assumed, simply because
month payment period as stipulated. The RTC ruled in
their contracts turned out to be disastrous or unwise
favor of Menchavez and stated that Prisma indeed
investments.
agreed with the 4% monthly interest.

The CA agreed with the ruling of the RTC that

Prisma agreed with the 4% monthly interest, however,
the CA ruled that such interest rate is unconscionable
and thus should be reduced into 12% which is the legal
interest rate.
ISSUE:
Did Prisma agree to the 4% monthly interest
rate? If so, does it apply only to the 6 months payment
period or indefinitely?
RULING:
No, Prisma did not agree with the 4% monthly
interest rate.
As seen in the promissory of Prisma, they
agreed to the specific amount of 40,000 and not a 4%
monthly interest rate. Furthermore, such stipulation is
only applicable to the 6-month period from January to
June 1994 and not beyond that.
The court also ruled that the same in not
unconscionable as the interest stipulated was for the
specific amount of 40,000.
As an exception to Medel:
In the Medel case, the 5.5% monthly interest rate was
considered as excessive, iniquitous, unconscionable,
exorbitant, contrary to morals and is therefore null and
void. However, the difference with the Medel case and
this one is that, in the Medel case the interest rate was
open ended in as far as it is applied for an indefinite
period; on this case howeverthere were no other
stipulation for the payment of any extra amount other
than the specific 40,000 for a period of 6 months only.
G.R. No. 109563 July 9, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, MARIA AMOR BASCOS and
MARCIANO BASCOS, respondents.
This is a petition seeking review of the decision dated
August 10, 1992,1 of the Eighth Division of the Court of
Appeals and its resolution dated March 25, 1993,2 both
rendered in CA-G.R. CV No. 27653, which affirmed the
decision of the Regional Trial Court (RTC) of San Jose
City (Branch 38).
The facts are as follows:
On June 4, 1979, private respondent spouses Maria
Amor and Marciano Bascos obtained a loan from the
Philippine National Bank in the amount of P15,000.00
evidenced by a promissory note and secured by a real
estate mortgage.
The promissory note contained the following
stipulation:
For value received, I/we, [private respondents] jointly
and severally promise to pay to the ORDER of the
PHILIPPINE NATIONAL BANK, at its office in San Jose
City, Philippines, the sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency, together with
interest thereon at the rate of 12% per annum until
paid, which interest rate the Bank may at any time
without notice, raise within the limits allowed by law,
and I/we also agree to pay jointly and severally ____ %
per annum penalty charge, by way of liquidated
damages should this note be unpaid or is not renewed
on due date.
Payment of this note shall be as follows:
* THREE HUNDRED SIXTY FIVE DAYS * AFTER DATE
On the reverse side of the note the following condition
was stamped:4
All short-term loans to be granted starting January 1,
1978 shall be made subject to the condition that any
and/or all extensions hereof that will leave any portion
of the amount still unpaid after 730 days shall
automatically convert the outstanding balance into a
medium or long-term obligation as the case may be and
give the Bank the right to charge the interest rates
prescribed under it policies from the date the account
was originally granted.
To secure payment of the loan the parties executed a
real estate mortgage contract which provided:5
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured
by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in
accordance with the provision hereof, shall be subject
during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
On December 12, 1980, PNB extended the period of
payment of the loan to June 5, 1981, thus converting
the loan from a short-term to a medium-term loan, i.e.,
a loan which matured over two to five years.6 PNB also
increased the rate of interest per annum, first to 14%,
effective December 1, 1979; 7 then to 22% effective
February 21, 1983;8 to 22.5% effective June 20, 1983;9
to 23% from November 2, 1983; 10 to 25% effective
March 2, 1984; 11 and finally to 28% from April 10,
1984. 12
Because private respondents defaulted in paying their
obligation, the Provincial Sheriff of Nueva Ecija
scheduled the extrajudicial foreclosure of the mortgage
on June 15, 1984 to pay private respondents'
indebtedness which, according to PNB, had increased
from P15,000.00 to P35,125.84, plus 28% annual
interest. 13
Private respondents brought suit against PNB, its
Branch Manager Jetro Godoy, and the Provincial Sheriff
of Nueva Ecija Numeriano Y. Galang (1) for a declaration
of nullity of C.B. Monetary Board Resolution No. 2126
dated November 29, 1979 (embodied in C.B. Circular
No. 705 dated December 1, 1979), which increased the
ceiling on the interest rate of secured and unsecured
loans to 16% per annum and 14% per annum,
respectively, on the ground that it was contrary to the
Usury Law, good morals, public policy, customs and
traditions, social justice, due process and the equal
protection clause of the Constitution; and (2) for a
declaration that the interest rate increases on their loan
were contrary to Art. 1959 of the Civil Code which
provides that interest due and unpaid shall not earn
interest. Pending final determination of the case,
private respondents asked that the auction sale be
enjoined.
PNB filed an answer with compulsory counterclaim. It
alleged that private respondents had no cause of action
because §1-a of the Usury Law, as amended by P.D. No.
1684, did not limit the number of times the interest
could be increased and that private respondents were
estopped from questioning the increases because they
failed to object to the same. PNB asked that the
complaint be dismissed and that private respondents be
ordered to pay P35,125.84, plus interest from April 10,
1984, until the obligation was fully paid, attorney's fees
and moral damages in such amount as may be
determined by the court.
On June 13, 1984 private respondents deposited with
the clerk of court P8,000.00 14 and on January 15, 1985
P2,000.00, 15 in partial payment of their loan.
On June 15, 1990, the RTC rendered a decision, the
dispositive portion of which reads:

The increase in interest rates based on the escalation
clauses in the Promissory Note and the Real Estate
Mortgage, par. K, being contrary to Sec. 3, P.D. No. 116
are declared null and void, that henceforth, the
defendant PNB is hereby directed to desist from
enforcing the increased rate of interest more than
TWELVE (12%) per cent on plaintiffs' loan;
On the other hand, the plaintiffs can settle their unpaid
obligation with the defendant PNB at the interest rate
of TWELVE (12%) per cent per annum computed from
the inception of the loan until the same is fully paid;
advances made by the PNB for insurance premiums and
penalties added; and the P10,000.00 paid to and
defendant bank to be credited as payment by the
plaintiffs;
The RTC invalidated the stipulations in the promissory
note and the real estate mortgage, which authorized
PNB to increase the interest rate, on the ground that
there was no corresponding stipulation that the interest
rate would be reduced in the event the law reduced the
applicable maximum rate as provided under P.D. No.
1684; that P.D. No. 116, which sets a ceiling of 12%
interest on secured loans, is a "law," which should
prevail over Circular No. 705, used by PNB to increase
the interest; that collection of the increased interest
sanctions unjust enrichment contrary to Art. 22 of the
Civil Code; and that the promissory note and real estate
mortgage were contracts of adhesion which should be
interpreted in favor of private respondents.
PNB appealed. However, the Court of Appeals affirmed
the trial court's decision. The appellate court held that
the escalation clause in the promissory note could not
be given effect because of the absence of a provision
for a de-escalation in the event a reduction of interest
was ordered by law. In addition it held that pursuant to
the escalation clause any increase in interest must be
within "the limits allowed by law" but C.B. circulars, on
the basis of which PNB increased the interest, could not
be considered "laws".
PNB moved for a reconsideration. As its motion was
denied, it filed this petition. PNB's argument is that the
Court of Appeals erred in applying §2 of P.D. No. 1684,
which makes the validity of an escalation clause turn on
the presence of a de-escalation clause, to the
promissory note and real estate mortgage in this case.
PNB contends that the two had been executed on June
4, 1979, before the effectivity of P.D. No. 1684 on
March 17, 1980.
To begin with, PNB's argument rests on a
misapprehension of the import of the appellate court's
ruling. The Court of Appeals nullified the interest rate
increases not because the promissory note did not
comply with P.D. No. 1684 by providing for a de-
escalation, but because the absence of such provision
made the clause so one-sided as to make it
unreasonable.
That ruling is correct. It is in line with our decision in
Banco Filipino Savings & Mortgage Bank v. Navarro 16
that although P.D. No. 1684 is not to be retroactively
applied to loans granted before its effectivity, there
must nevertheless be a de-escalation clause to mitigate
the one-sideness of the escalation clause. Indeed
because of concern for the unequal status of borrowers
vis-a-vis the banks, our cases after Banco Filipino have
fashioned the rule that any increase in the rate of
interest made pursuant to an escalation clause must be
the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, 17
two promissory notes authorized PNB to increase the
stipulated interest per annum "within the limits allowed
by law at any time depending on whatever policy [PNB]
may adopt in the future; Provided, that the interest rate
on this note shall be correspondingly decreased in the
event that the applicable maximum interest rate is
reduced by law or by the Monetary Board." The real
estate mortgage likewise provided:
A similar ruling was made in Philippine National Bank v.
Court of Appeals. 19 The credit agreement in that case
provided:
The rate of interest charged on the obligation secured
by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in
accordance with the provisions hereof, shall be subject The BANK reserves the right to increase the interest
rate within the limits allowed by law at any time
during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this
MORTGAGEE may prescribe for its debtors.
accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is
reduced by law or by the Monetary Boar. . . .
Pursuant to these clauses, PNB successively increased
the interest from 18% to 32%, then to 41% and then to
48%. This Court declared the increases unilaterally
imposed by PNB to be in violation of the principle of As in the first case, PNB successively increased the
stipulated interest so that what was originally 12% per
mutuality as embodied in Art. 1308 of the Civil Code,
which provides that "[t]he contract must bind both annum became, after only two years, 42%. In declaring
the increases invalid, we held: 20
contracting parties; its validity or compliance cannot be
left to the will of one of them." As the Court explained:
18
We cannot countenance petitioner bank's posturing
that the escalation clause at bench gives it unbridled
right to unilaterally upwardly adjust the interest on
In order that obligations arising from contracts may
have the force of law between the parties, there must private respondents' loan. That would completely take
away from private respondents the right to assent to an
be mutuality between the parties based on their
essential equality. A contract containing a condition important modification in their agreement, and would
negate the element of mutuality in contracts.
which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement Only recently we invalidated another round of interest
between the PNB a license (although in fact there was increases decreed by PNB pursuant to a similar
none) to increase the interest rate at will during the agreement it had with other borrowers: 21
term of the loan, that license would have been null and
void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan While the Usury Law ceiling on interest rates was lifted
agreement with the character of a contract of adhesion, by C.B. Circular 905, nothing in the said circular could
where the parties do not bargain on equal footing, possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which
the weaker party's (the debtor) participation being
would either enslave its borrowers or lead to a
reduced to the alternative "to take it or leave it" (Qua
hemorrhaging of their assets.
vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and
imposition.
In this case no attempt was made by PNB to secure the
conformity of private respondents to the successive
increases in the interest rate. Private respondents'
assent to the increase can not be implied from their lack
of response to the letters sent by PNB, informing them
of the increases. For as stated in one case, 22 no one
receiving a proposal to change a contract is obliged to
answer the proposal.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
G.R. No. 176381: December 15, 2010
PCI LEASING AND FINANCE, INC., Petitioner v. TROJAN
METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON,
ELIZABETH DIZON, and JOHN DOE, Respondents.
CARPIO, J.:
(Finance Leasing)
FACTS;
Sometime in 1997, Trojan Metal Industries, Inc. (TMI)
came to PCI Leasing and Finance, Inc. (PCILF) to seek a
loan. Instead of extending a loan, PCILF offered to buy
various equipment TMI owned. Hard-pressed for
money, TMI agreed. PCILF and TMI immediately
executed deeds of sale evidencing TMIs sale to PCILF of
the various equipment.
PCILF and TMI then entered into a lease agreement ,
whereby the latter leased from the former the various
equipment it previously owned. Pursuant to the lease
agreement, TMI issued postdated checks representing
24 monthly installments.
The lease agreement required TMI to give PCILF a
guaranty deposit which would serve as security for the
timely performance of TMIs obligations under the lease
agreement, to be automatically forfeited should TMI
return the leased equipment before the expiration of
the lease agreement. Further, spouses Dizon, as TMIs
President and Vice-President, executed in favor of PCILF
a Continuing Guaranty of Lease Obligations. Under the
continuing guaranty, the Dizon spouses agreed to
immediately pay whatever obligations would be due
PCILF in case TMI failed to meet its obligations under
the lease agreement.
To obtain additional loan from another financing
company, TMI used the leased equipment as temporary
collateral. PCILF considered the second mortgage a
violation of the lease agreement. PCILF sent TMI a
demand letter for the payment of the latters
outstanding obligation. PCILFs demand remained
unheeded.
RTC ruled that the lease agreement must be presumed
valid as the law between the parties even if some of its
provisions constituted unjust enrichment on the part of
PCILF. On appeal, the CA reversed the RTCs decision.
ISSUES:
I. Whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by
chattel mortgage.
II. Whether PCILF should pay TMI, by way of refund TMIs right to the refund accrued from the time PCILF
received the proceeds of the sale of the mortgaged
equipment. However, since TMI never made a
HELD: Petition DENIED. counterclaim or demand for refund due on the resulting
overpayment after offsetting the proceeds of the sale
against the remaining balance on the principal loan plus
applicable interest, no interest applies on the amount of
First issue:
refund due. Nonetheless, in accord with prevailing
jurisprudence, the excess amount PCILF must refund to
TMI is subject to interest at 12% per annum from
Civil Code finality of this Decision until fully paid.

In the present case, since the transaction between PCILF

and TMI involved equipment already owned by TMI, it
cannot be considered as one of financial leasing, as
defined by law, but simply a loan secured by the various
equipment owned by TMI.

Hence, had the true transaction between the parties

been expressed in a proper instrument, it would have
been a simple loan secured by a chattel mortgage,
instead of a simulated financial leasing. Thus, upon TMIs
default, PCILF was entitled to seize the mortgaged
equipment, not as owner but as creditor-mortgagee for
the purpose of foreclosing the chattel mortgage. PCILFs
sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in
the exercise of its right to foreclose the chattel
mortgage as creditor-mortgagee.

Second issue

Section 14 of the Chattel Mortgage Law expressly

entitles the debtor-mortgagor to the balance of the
proceeds, upon satisfaction of the principal loan and
costs. Prevailing jurisprudence also holds that the
Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds.