however, can only cover obligations existing at the time the mortgage is constituted.
Although
INTRODUCTION TO CREDIT TRANSACTION
FIRST DIVISION
[G.R. No. 103576. August 22, 1996.]
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA
PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS BANK OF
THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN
CITY,respondents.
Sotto & Sotto Law Offices for petitioners.
R. C. Domingo, Jr., & Associates for Producers Bank of the Philippines.
SYLLABUS
1. REMEDIAL LAW; ACTIONS; APPEALS; APPEAL FROM JUDGMENT OF LOWER COURTS, NOT A
MATTER OF RIGHT BUT OF SOUND JUDICIAL DISCRETION. — Except in criminal cases where the
penalty of reclusion perpetua or death is imposed 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.
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF SECURITY, CONSTRUED. —
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 debtor 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 principal obligation
becomes due and the debtor defaults, then the property encumbered can be alienated for the payment
of the obligation, but that should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character 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.
3. ID.; ID.; CONTRACTS OF SECURITY; CHATTEL MORTGAGE; COVERS OBLIGATION EXISTING AT
TIME MORTGAGE IS CONSTITUTED; EFFECT OF PROMISE TO INCLUDE DEBTS THAT ARE TO BE
CONTRACTED. — While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, a chattel mortgage,
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. 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. 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. (Belgian Catholic Missionaries, Inc., vs. Magallanes
Press, Inc., et al.) 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,
there no longer was any chattel mortgage that could cover the new loans that were concluded
thereafter.
4. ID.; CHATTEL MORTGAGE LAW; EXECUTION OF AFFIDAVIT OF GOOD FAITH, A CLEAR
MANIFESTATION THAT DEBT REFERRED TO IS CURRENT. — 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), the fact, however, that the statute has provided
that the parties to the contract must execute an oath makes it obvious that the debt referred to in the
law is a current, not an obligation that is yet merely contemplated.
5. ID.; DAMAGES; MORAL DAMAGES; NOT RECOVERABLE BY A JURIDICAL PERSON. — 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." 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. In LBC Express, Inc. vs. Court of Appeals, 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 be 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." 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.
6. LEGAL ETHICS; ATTORNEYS; SHOULD BE CIRCUMSPECT IN DEALING WITH COURTS. — 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. The
statement is not called for. The Court invites counsel's attention to the admonition in Guerrero
vs. Villamor; thus: "(L)awyers . . . should bear in mind their basic duty 'to observe and maintain the
respect due to the courts of justice and judical 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 judical 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 . . .'" The virtues of humility and of respect and concern for
others must still live on even in an age of materialism. Atty. Francisco R. Sotto, counsel for petitioners, is
admonished to be circumspect in dealing with the courts.
DECISION
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
extrajudicial foreclosure of the chattel mortgage, hereinbefore 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 denied 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 debtor 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 principal 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
— respect due to the courts of justice and judicial officers and . . . (to) insist on
". . . (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.
"(L)awyers . . . should bear in mind their basic duty 'to observe and maintain the
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.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the Kapunan and Hermosisima, Jr., JJ ., concur.
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 Padilla, J ., took no part.
complaint which has merely asked for the amount of P3,000,000.00 by way of moral
Bellosillo, J ., is on leave.
damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said:
"Moral damages are granted in recompense for physical suffering, mental ||| (Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, G.R. No. 103576, [August 22, 1996], 329 PHIL
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, 531-543)
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 EN BANC
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
[G.R. No. 19190. November 29, 1922.]
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. THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs.
VENANCIO CONCEPCION, defendant-appellant.
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 Recaredo Ma. Calvo for appellant.
to private respondent's comment on the petition his so-called "One Final Word;" viz:
Attorney-General Villa-Real for appellee.
"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 SYLLABUS
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 1. BANKS AND BANKING; "CREDIT AND LOAN." DEFINED AND DISTINGUISHED. —
sanctions on the erring justices. This is one positive step in ridding our courts of The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
law of incompetent and dishonest magistrates especially members of a superior reposed by a lender that he will pay what he may promise. A "loan" means the delivery by one
court of appellate jurisdiction." 21 (Emphasis supplied.) party and the receipt by the other party of a given sum of money, upon an agreement, expresses
or implied, to repay the sum loaned, with or without interest. The concession of a "credit"
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit."
Villamor; 22 thus:
2. ID.' "LOAN" AND "DISCOUNT" DISTINGUISHED. — To discount a paper is a mode of
loaning money, with these distinctions: (1) In a discount, interest is deducted in advanced, while in
 a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper;
a loan is generally on single name paper.
3. STATUTES; INTERPRETATION AND CONSTRUCTION; IN GENERAL. — In the
interpretation and construction of statutes, the primary rule is to ascertain and give effect to the
intention of the Legislature.
4. ID.; ID.; SECTION 35 OF ACT NO. 2747; PROHIBITION AGAINST INDIRECT LOANS.
— The purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of
safety against temptation for a director of the Philippine National Bank. The prohibition against
indirect loans is a recognition of the familiar maxim that no man may serve two masters — that
where personal interest clashes with fidelity to duty the latter almost always suffers.
5. ID.; ID.; ID. — A loan to a partnership of which the wife of a director is a member falls
within the prohibition in section 35 of Act No. 2747 against indirect loans.
6. ID., ID.; ID.; PROHIBITION ON CORPORATION. — When the corporation itself is
forbidden to do an act, the prohibition extends to the board of directors, and to each director
separately and individually.
7. ID.; REPEAL; EFFECT UPON VIOLATIONS OF THE OLD LAW. — Where an Act of the
Legislature which penalizes an offense repeals a former Act which penalized the same offense,
such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try,
convict, and sentence offenders charged with violations of the old law.
8. CRIMINAL LAW; ACT NO. 2747; GOOD FAITH AS A DEFENSE — Under section 35 of
Act No. 2747, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime.
9. ID.; ID.; ID.; — The law will not allow private profit from a trust, and will not listen to
any proof of honest intent.
DECISION
MALCOLM, J p:
By telegrams and a letter of confirmation to the manager of the Aparri branch of the
Philippine National Bank, Venancio Conception, President of the Philippine National Bank,
between April 10, 1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y
Conception, S. en C." in the amount of P300,000. This special authorization was essential in view of
the memorandum order of President Conception dated May 17, 1918, limiting the discretional
power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable documents
to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization,
credit aggregating P300,000, was granted the firm of "Puno y Conception, S. en C.," the only
security required consisting of six demand notes. The notes, together with the interest, were taken
up and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto
Concepcion contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion,
P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada con. Gral. Venancio
Concepcion," P50,000. Member Miguel S. Conception was the administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the Philippine National
Bank and as member of the board of directors of this bank, was charged in the Court of First
Instance of Cagayan with a violation of section 35 of Act No. 2747. He was found guilty by the
Honorable Enrique V Filamor, Judge of First Instance, and was sentenced to imprisonment for one
year and six months, to pay a fine of P3,000, with subsidiary imprisonment in case of insolvency,
and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which
reference must hereafter repeatedly be made, reads as follows: "The National Bank shall not,
directly or indirectly, grant loans to any of the members of the board of directors of the bank nor
to agents of the branch banks." Section 49 of the same Act provides: "Any person who shall violate
any of the provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by
imprisonment not to exceed five years, or by both such fine and imprisonment." These two
sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act
No. 2938, approved on January 30, 1921.
Counsel for the defense assign ten errors as having been committed by the trial court.
These errors they have argued adroitly and exhaustively in their printed brief, and again in oral
argument. Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief,
answers the propositions of appellant one by one.
The questions presented are reduced to their simplest elements in the opinion which
follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S.
en C." by Venacio Concepcion, President of the Philippine National Bank, a "loan" within the
meaning of section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that the authority to make a
loan was given, but only show the concession of a credit. In this statement of fact, counsel is
correct, for the exhibits in question speak of a "credito" (credit) and not of a "prestamo" (loan).
The "credit" of an individual means his ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay what he may promise. (Donnell vs. Jones
[1848], 13 Ala., 490; Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the
receipt by the other party of a given sum of money, upon an agreement, express or implied, to
repay the sum of money, upon an agreement, express or implied, to repay the sum loaned, with or
without interest. (Payne vs. Gardiner [1864], 29 N.Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit."
II. Was the granting of a credit of P300,000 to the copartnership "Puno y Conception, S.
en C.," by Venancio Conception, President of the Philippine National Bank, a "loan" or a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank,
inquired of the Insular Auditor whether section 37 of Act No. 2612 was intended to apply to
discounts as well as to loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was
to placed no restriction upon discount transactions. It be becomes material, therefore, to discover
the distinction between a "loan" and a "discount," and to ascertain if the instant transaction comes
under the first or the latter denomination.
Discounts are favored by bankers because of their liquid nature, growing, as they do,
out of an actual, live transaction. But in its last analysis, to discount a paper is only a mode of
loaning money, with, however, these distinctions: (1) In a discount, interest is deducted in advance,
while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-
name paper; a loan is generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans
and not discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno
y Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness,
because (1) interest was not deducted from the face of the notes, but was paid when the notes fell
due; and (2) they were single-name and not double-name paper.
 The facts of the instant case having relation to this phase of the argument are not As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in
essentially different from the facts in the Binalbagan Estate case. Just as there it was declared that relation to section 35 of the same Act, provides a punishment for any person who shall violate any
the operations constituted a loan and not a discount, so should we here lay down the same ruling. of the provisions of the Act. It is contended, however, by the appellant, that the repeal of these
sections of Act No. 2747 by Act No. 2747 by Act No. 2938 has served to take away the basis for
III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion,
criminal prosecution.
S. en C." by Venancio Concepcion, President of the Philippine National Bank, an "indirect loan"
within the meaning of section 35 of Act No. 2747? This same question has been previously submitted and has received an answer adverse
to such contention in the cases of United States vs. Cuna ([1908], 12 Phil., 241); People vs.
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910],
"indirect loan." In this connection, it should be recalled that the wife of the defendant held one-half
218 U.S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the
of the capital of this partnership.
holding, that where an Act of the Legislature which penalizes an offense, such repeal does not
In the interpretation and construction of statutes, the primary rule is to ascertain and have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentence
give effect to the intention of the Legislature. In this instance, the purpose of the Legislature is offenders charged with violations of the old law.
plainly to erect a wall of safety against temptation for a director of the bank. The prohibition
V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S.
against indirect loans is a recognition of the familiar maxim that no man may serve two masters —
en C." by Venancio Concepcion, President of the Philippine national Bank, in violation of section 35
that where personal interest clashes with fidelity to duty the latter almost always suffers. If,
of Act No. 2747, penalized by this law?
therefore, it is shown that the husband is financially interested in the success or failure of his wife's
business venture, a loan to a partnership of which the wife of a director is a member, falls within Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on
the prohibition. the bank, and since section 49 of said Act provides a punishment not on the bank when it violates
any provision of the law, but on a person violating any provision of the law, but on a person
Various provisions of the Civil Code serve to establish the familiar relationship called a
violating any provision of the same, and imposing imprisonment as part of the penalty, the
conjugal partnership. (Articles 1315, 1393, 1401, 1408, and 1412 can be specially noted.) A loan,
prohibition, contained in said 35 is without penal sanction.
therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan
to such director. The answer is that when the corporation itself is forbidden to do an act, the prohibition
extends to the board of directors, and to each director separately and individually. (People vs.
Concepcion, supra.)
That it was the intention of the Legislature to prohibit exactly such an occurrence is
VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine
shown by the acknowledged fact that in this instance the defendant was tempted to mingle his
National Bank, in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en
personal and family affairs with his official duties, and to permit the loan of P300,000 to a
C." constitute a legal defense?
partnership of no established reputation and without asking for collateral security.
Counsel argue that if defendant committed the acts of which he was convicted, it was
In the case of Lester and Wife vs. Howard bank ([1870], 33 Md., 558; 3 Am. Rep., 211),
because he was misled by rulings coming from the Insular Auditor. It is furthermore stated that
the Supreme Court of Maryland said:
since the loans made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss
"What then was the purpose of the law when it declared that no has been suffered by the Philippine National Bank.
director or officer should borrow of the bank, and "if any director,' etc., 'shall be
Neither argument, even if conceded to be true, is conclusive. Under the statute which
convicted,' etc., 'of directly or indirectly violating this section he shall be
the defendant has violated, criminal intent is not necessarily material. The doing of the inhabited
punished by fine imprisonment?" We say to protect the stockholders,
act, inhibited on account of public policy and public interest, constitutes the crime. And, in this
depositors and creditors of the bank, against the temptation to which the
instance, as previously demonstrated, the acts of the President of the Philippine National Bank do
directors and officers might be exposed, and the power which as such they
not fall within the purview of the rulings have controlling effect.
must necessarily possess in the control and management of the bank, and the
legislature unwilling to rely upon the implied understanding that in assuming Morse, in his work, Banks and Banking, section 125, says:
this relation they would not acquire any interest hostile or adverse to the most
"It is fraud for directors to secure by means of their trust, any
exact and faithful discharge of duty, declared in express terms that they should
advantage not common to the other stockholders. The law will not allow
not borrow, etc., of the bank."
private profit from a trust, and will not listen to any proof of honest intent."
In the case of People vs. Knapp ([1912], 206 N.Y., 373), relied upon in the Binalbagan
JUDGMENT
Estate decision, it was said:
On a review of the evidence of record, with reference to the decision of the trial court,
"We are of opinion the statute forbade the loan to his copartnership
and the errors assigned by the appellant, and with reference to previous decisions of this court on
firm as well as to himself directly. The loan was made indirectly to him through
the same subject, we are irresistibly led to the conclusion that no reversible error was committed
his firm."
in the trial of this case, and that the defendant has been proved guilty beyond a reasonable doubt
IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of the crime charged in the information. The penalty imposed by the trial judge falls within the
of a violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these limits of the punitive provisions of the law.
portions of Act No. 2747 were repealed by Act No. 2938, prior to the filing of the information and
Judgment is affirmed, with the costs of this instance against the appellant. So ordered.
the rendition of the judgment?
 Araullo, C.J., Johnson, Street, Avanceña, Villamor, Ostrand, Johns, and Romualdez,
JJ., concur.
||| (People v. Concepcion, G.R. No. 19190, [November 29, 1922], 44 PHIL 126-134)
SECOND DIVISION
[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.
DECISION
MAKASIAR, C.J p:
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;
. . ." (p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding that Island 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 P17,000.00 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.). prcd
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 Monetary 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.
Afzelins and Afzelins, 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). LexLib
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 valuation 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
rely 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. Cdpr
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his P17,000.00 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 P17,000.00 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]). It 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 6th ed., Wiltsie on Mortgage, Vol. 1,
p. 180). LLpr
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 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
UNENFORCEABLE 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
||| (Central Bank of the Phils. v. Court of Appeals, G.R. No. L-45710, [October 3, 1985], 223 PHIL 266-279)
A.LOAN
FIRST DIVISION
[G.R. No. 154878. March 16, 2007.]
CAROLYN M. GARCIA, petitioner, vs. RICA MARIE S. THIO, respondent.
DECISION
CORONA, J p:
Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision 2 and August 20, 2002
resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check 4dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain
Marilou Santiago. 5 Thereafter, petitioner received from respondent every month (specifically, on
March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and P76,500 7 on July
26, 8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the
amount of P500,000, also payable to the order of Marilou Santiago. 10 Consequently, petitioner
received from respondent the amount of P20,000 every month on August 5, September 5, October 5
and November 5, 1995. 11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and
P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money
and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with interest
thereon at 4% a month from November 5, 1995, plus attorney's fees and actual damages. 12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000
with interest thereon at the rate of 3% per month, which loan would mature on October 26,
1995. 13 The amount of this loan was covered by the first check. On June 29, 1995, respondent again
borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was
on November 5, 1995. 14 The amount of this loan was covered by the second check. For both loans, no
promissory note was executed since petitioner and respondent were close friends at the
time. 15 Respondent paid the stipulated monthly interest for both loans but on their maturity dates, she
failed to pay the principal amounts despite repeated demands. 16
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give
the crossed checks to Santiago. 17 She issued the checks for P76,000 and P20,000 not as payment of
interest but to accommodate petitioner's request that respondent use her own checks instead of
Santiago's. 18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and P500,000 at a
monthly interest of 4%: 20
WHEREFORE, finding preponderance of evidence to sustain the instant
complaint, judgment is hereby rendered in favor of [petitioner], sentencing
[respondent] to pay the former the amount of:
 1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per
month from October 26, 1995 until fully paid; CcAESI
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995
until fully paid.
3. P100,000.00 as and for attorney's fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondent's] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED. 21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate
her claim that [respondent] indeed borrowed money from her. There is
nothing in the record that shows that [respondent] received money from
[petitioner]. What is evident is the fact that [respondent] received a
MetroBank [crossed] check dated February 24, 1995 in the sum of
US$100,000.00, payable to the order of Marilou Santiago and a CityTrust
[crossed] check dated June 29, 1995 in the amount of P500,000.00, again
payable to the order of Marilou Santiago, both of which were issued by
[petitioner]. The checks received by [respondent], being crossed, may not be
encashed but only deposited in the bank by the payee thereof, that is, by
Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check
may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once — to one who has an account with the bank; (c) and the
act of crossing the check serves as warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the
issuance and delivery to the payee in contemplation of law since the latter is
not the person who could take the checks as a holder, i.e., as a payee or
indorsee thereof, with intent to transfer title thereto. Neither could she be
deemed as an agent of Marilou Santiago with respect to the checks because
she was merely facilitating the transactions between the former and
[petitioner].
With the foregoing circumstances, it may be fairly inferred that there were
really no contracts of loan that existed between the parties. . . . (emphasis
supplied) 22
Hence this petition. 23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the
CA (which held that there were no contracts of loan between petitioner and respondent) and the RTC
(which held that there were contracts of loan) are contradictory. 24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of
the contract. 25This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple
loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of the contract.
(Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor
when the checks were encashed) the debtor acquires ownership of such money or loan proceeds
and is bound to pay the creditor an equal amount. 26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main
question to be answered is: who borrowed money from petitioner — respondent or Santiago?
Petitioner insists that it was upon respondent's instruction that both checks were made payable to
Santiago. 27 She maintains that it was also upon respondent's instruction that both checks were
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore,
she argues that once respondent received the checks, the latter had possession and control of them
such that she had the choice to either forward them to Santiago (who was already her debtor), to retain
them or to return them to petitioner. 29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another. 30 Although respondent did not physically
receive the proceeds of the checks, these instruments were placed in her control and possession under
an arrangement whereby she actually re-lent the amounts to Santiago. STcHDC
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as much as
promissory notes or any written acknowledgment of the debt considering that the amounts involved
were quite big. Respondent, on the other hand, already had transactions with Santiago at that time. 32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties' list of witnesses) testified that respondent's plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a
higher rate of 5% and realize a profit of 2%. 33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason why Ruiz' testimony
should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000
each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the P500,000
loan, she also issued her own checks in the amount of P20,000 each for four months. 34 According to
respondent, she merely accommodated petitioner's request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago. 35 She claimed,
however, that Santiago would replace the checks with cash. 36 Her explanation is simply incredible. It is
difficult to believe that respondent would put herself in a position where she would be compelled to pay
interest, from her own funds, for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the
rule that for evidence to be believed, it must not only proceed from the mouth
of a credible witness, but must be credible in itself such as the common
experience of mankind can approve as probable under the circumstances. We
have no test of the truth of human testimony except its conformity to our
 knowledge, observation, and experience. Whatever is repugnant to these
belongs to the miraculous, and is outside of juridical cognizance. 37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago's) creditors. 38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39 The
presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was
not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There was no written proof of the interest payable except
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the
Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. 41
Hence, respondent is liable for the payment of legal interest per annum to be computed from November
21, 1995, the date when she received petitioner's demand letter. 42 From the finality of the decision
until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period being
deemed equivalent to a forbearance of credit. 43
The award of actual damages in the amount of P50,000 and P100,000 attorney's fees is deleted since
the RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The
February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with the
MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and P500,000
at 12% per annum interest from November 21, 1995 until the finality of the decision. The total amount
due as of the date of finality will earn interest of 12% per annum until fully paid. The award of actual
damages and attorney's fees is deleted. cda
SO ORDERED.
Puno, C.J., Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur.
||| (Garcia v. Thio, G.R. No. 154878, [March 16, 2007], 547 PHIL 341-351)
SECOND DIVISION
[G.R. No. L-24968. April 27, 1972.]
SAURA IMPORT & EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT
BANK OF THE PHILIPPINES,defendant-appellant.
Mabanag, Eliger & Associates & Saura, Magno & Associates for plaintiff-appellee.
Jesus A. Avaceña and Hilario G. Orsolino for defendant-appellant.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS; PERFECTION UPON ACCEPTANCE OF
PROMISE TO DELIVER SOMETHING BY WAY OF SIMPLE LOAN; ART. 1954 OF THE CIVIL CODE. —
Where the application of Saura Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage executed and registered, there is undoubtedly offer and
acceptance and We hold that there was indeed a perfected consensual contract as recognized in Article
1954 of the Civil Code.
2. ID.; ID.; ID.; ID.; DEFENDANT DID NOT DEVIATE FROM PERFECTED CONTRACT IN CASE AT BAR. —
The terms laid down in RFC Resolution No. 145 passed on Jan. 7, 1954 which resolution approved the
loan application state 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." There is no serious
dispute 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 . It was in line with such
assumption that when RFC, by Resolution 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 RFC Resolution No. 145.
3. ID.; ID.; ID.; ID.; DEVIATION MADE BY PLAINTIFF. — Evidently Saura Inc., realized that it could not
meet the conditions required by RFC in Resolution 9083, and so wrote its letter of January 21, 1955,
stating that local jute "will not be available 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.
4. ID.; ID.; EXTINGUISHMENT OF OBLIGATION BY MUTUAL DESISTANCE; IN INSTANT CASE. —
When RFC turned down the request of Saura Inc., 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 of mutual desistance — what Manresa terms "mutuo
disenso" — which is a mode of extinguishing obligations. It is a concept that derives from the principle
that since mutual agreement by the parties can create a contract, mutual disagreement by the parties
can cause its extinguishment.
DECISION
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 buildings 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 & 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 re-examination 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 re-examination
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 SauraImport & 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 co-signers, wrote RFC that his company no longer
wished to avail of the loan and therefore considered the same 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 cancelled 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 the Island 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 equipment
per attached list to enable the jute
mill to operate P182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening
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 purposes 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, almost 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 perfected 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 that 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. 9033 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 available 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 of 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 noncompliance. 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.
||| (Saura Import & Export Co., Inc. v. Development Bank of the Phils., G.R. No. L-24968, [April 27, 1972],
150-A PHIL 251-261)
SECOND DIVISION
[G.R. No. 133632. February 15, 2002.]
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.
Benedicto Tale Versoza & Associates for petitioner.
Vicente B. Chuidian for private respondent.
SYNOPSIS
The appellate court affirmed the judgment of the Regional Trial Court of Pasig City in a case for
foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private
respondents ALS Management and Development Corporation and Antonio K. Litonjua, consolidated
with Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by
the private respondents against said petitioner. The trial court held that private respondents were not in
default in the payment of their monthly amortization, hence, the extrajudicial foreclosure conducted by
BPIIC was premature and made in bad faith. In the instant petition, petitioner contended that the Court
of Appeals erred in ruling that because a simple loan is perfected upon the delivery of the object of the
contract, the loan contract in this case was perfected only on September 13, 1982. Petitioner claimed
that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract
of mortgage is executed conformably with the Court's ruling in Bonnevie v. Court of Appeals. In the
present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was
executed, hence, the amortization and interests on the loan should be computed from said date.
The Supreme Court affirmed the judgment of the Court of Appeals with modification as to the
damages. The Court ruled that a loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie. The
contract in Bonnevie declared by the Court as a perfected consensual contract falls under the first clause
of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. In the
present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the second release of the loan. Following the
intentions of the parties on the commencement of the monthly amortization, as found by the Court of
Appeals, private respondents' obligation to pay commenced only on October 13, 1982, a month after
the perfection of the contract.
SYLLABUS
1. CIVIL LAW; CONTRACTS; LOAN; NOT A CONSENSUAL CONTRACT BUT A REAL CONTRACT; IT IS
PERFECTED ONLY UPON DELIVERY OF THE OBJECT OF THE CONTRACT; CASE AT BAR. — A loan
contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the
object of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court
as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan. In Saura Import and Export Co. Inc. vs. Development
Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank.
The latter approved the application through a board resolution. Thereafter, the corresponding
mortgage was executed and registered. However, because of acts attributable to petitioner, the loan
was not released. Later, petitioner instituted an action for damages. We recognized in this case, a
perfected consensual contract which under normal circumstances could have made the bank liable for
not releasing the loan. However, since the fault was attributable to petitioner therein, the court did not
award it damages. A perfected consensual contract, as shown above, can give rise to an action for
damages. However, said contract does not constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and which gives rise to obligations only on the
part of the borrower. In the present case, the loan contract between BPI, on the one hand, and ALS and
Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of the monthly amortization, as
found by the Court of Appeals, private respondents' obligation to pay commenced only on October 13,
1982, a month after the perfection of the contract.
2. ID.; ID.; ID.; INVOLVES RECIPROCAL OBLIGATION WHEREIN THE OBLIGATION OR PROMISE OF
EACH PARTY IS THE CONSIDERATION FOR THAT OF THE OTHER. — We also agree with private
respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other. As averred by private respondents, the promise of
BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It
is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a
party has performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the
payment of the monthly amortization after September 13, 1982 for it was only then when it complied
with its obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and
not May 1, 1981. HESCcA
3. ID.; DAMAGES; NO BASIS FOR AWARD OF MORAL AND EXEMPLARY DAMAGES; NOMINAL
DAMAGES AWARDED TO RESPONDENTS BY REASON OF PETITIONER'S NEGLIGENCE. — As
admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages. However, in our view,
BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking
and correspondingly adjusting its records on the amount actually released to private respondents and
the date when it was released. Such negligence resulted in damage to private respondents, for which an
award of nominal damages should be given in recognition of their rights which were violated by BPIIC.
For this purpose, the amount of P25,000 is sufficient.
DECISION
QUISUMBING, J p:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of
the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage
by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K. Litonjua, 1 consolidated with (b) Civil Case
No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad
faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for
exemplary damages, and P50,000 for attorney's fees and expenses for litigation. It likewise dismissed
the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16¼% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house
on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for
P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roa's indebtedness with
AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of P500,000 to be applied to Roa's debt and secured by the same
property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty
interest at the rate of 21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1,
1981.
On August 13, 1982, ALS and Litonjua updated Roa's arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roa's principal balance to P457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents' loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left
of their loan after full payment of Roa's loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to
Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice
of sheriff's sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total
amount of P464,351.77 was released to private respondents. Hence, applying the effects of legal
compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the
loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and
Development Corporation and Antonio K. Litonjua and against BPI Investment
 Corporation, holding that the amount of loan granted by BPI to ALS and
Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus
service charge of 1% per annum, payable on equal monthly and successive
amortizations at P9,283.83 for ten (10) years or one hundred twenty (120)
months. The amortization schedule attached as Annex "A" to the "Deed of
Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay
ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney's fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being
premature.
Costs against BPI.
SO ORDERED. 2
Both parties appealed to the Court of Appeals. However, private respondents' appeal was dismissed for
non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby
AFFIRMED in toto.
SO ORDERED. 3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of
the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only
on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roa's indebtedness. Thus, payment of the monthly amortization
should commence only a month after the said date, as can be inferred from the stipulations in the
contract. This, despite the express agreement of the parties that payment shall commence on May 1,
1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they already paid a
total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents' delinquency in the
payment of their loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where
BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT
IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT
OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN THE FACE OF
IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF
APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple
loan is perfected upon the delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract,
and a loan contract is perfected at the time the contract of mortgage is executed conformably with our
ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was
perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization
and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of
Frank Roa's loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale
executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should
be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roa's loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a simple
loan is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even
though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982,
when the full loan was released to private respondents. They submit that petitioner misread Bonnevie.
To give meaning to Article 1934, according to private respondents, Bonnevie must be construed to mean
that the contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself was
only perfected upon the delivery of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected
on March 31, 1981, and their payment did not start a month thereafter, still no default took place.
According to private respondents, a perfected loan agreement imposes reciprocal obligations, where
the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay
the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. Therefore, private respondents conclude, they did not
incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract. 5 Petitioner misapplied Bonnevie. The
contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause
of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner
applied for a loan of P500,000 with respondent bank. The latter approved the application through a
board resolution. Thereafter, the corresponding mortgage was executed and registered. However,
because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an
action for damages. We recognized in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said
contract does not constitute the real contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on the part of the borrower. 6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the second release of the loan. Following
the intentions of the parties on the commencement of the monthly amortization, as found by the Court
of Appeals, private respondents' obligation to pay commenced only on October 13, 1982, a month after
the perfection of the contract. 7
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given in recognition of their
rights which were violated by BPIIC. 12 For this purpose, the amount of P25,000 is sufficient.

We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein Lastly, as in SSS where we awarded attorney's fees because private respondents were compelled to
the obligation or promise of each party is the consideration for that of the other. 8 As averred by private litigate, we sustain the award of P50,000 in favor of private respondents as attorney's fees.
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and
Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated
supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral
delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent and exemplary damages in favor of private respondents is DELETED, but the award to them of
upon him. 9 Only when a party has performed his part of the contract can he demand that the other attorney's fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could respondents P25,000 as nominal damages. Costs against petitioner. ACTIcS
only demand for the payment of the monthly amortization after September 13, 1982 for it was only then
SO ORDERED.
when it complied with its obligation under the loan contract. Therefore, in computing the amount due
as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
October 13, 1982 and not May 1, 1981.
||| (BPI Investment Corp. v. Court of Appeals, G.R. No. 133632, [February 15, 2002], 427 PHIL 350-363)
Other points raised by petitioner in connection with the first issue, such as the date of actual release of
the loan and whether private respondents were the cause of the delay in the release of the loan, are
factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule
that only questions of law can be raised in a petition for review under Rule 45 of the Rules of
Court, 10 factual matters need not tarry us now. On these points we are bound by the findings of the SPECIAL SECOND DIVISION
appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages [G.R. No. 174269. August 25, 2010.]
for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right
under the mortgage contract because private respondents were irregular in their monthly amortization.
POLO
It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:
S. PANTALEON, petitioner, vs. AMERICAN EXPRESS INTERNATIONAL, INC.,
respondent.

Nor can the SSS be held liable for moral and temperate damages. As concluded
by the Court of Appeals "the negligence of the appellant is not so gross as to
warrant moral and temperate damages," except that, said Court reduced those RESOLUTION
damages by only P5,000.00 instead of eliminating them. Neither can we agree
with the findings of both the Trial Court and respondent Court that the SSS had
acted maliciously or in bad faith. The SSS was of the belief that it was acting in
the legitimate exercise of its right under the mortgage contract in the face of
BRION, * J p:
irregular payments made by private respondents and placed reliance on the
automatic acceleration clause in the contract. The filing alone of the
foreclosure application should not be a ground for an award of moral damages We resolve the motion for reconsideration filed by
in the same way that a clearly unfounded civil action is not among the grounds respondent American Express International, Inc. (AMEX)dated June 8, 2009, 1 seeking to reverse
for moral damages. our Decision dated May 8, 2009 where we ruled that AMEX was guilty of culpable delay in fulfilling
its obligation to its cardholder — petitioner Polo Pantaleon. Based on this conclusion, we held
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages AMEX liable for moral and exemplary damages, as well as attorney's fees and costs of litigation. 2
because it insisted on the payment of amortization on the loan even before it was released. Further, it
FACTUAL ANTECEDENTS
did not make the corresponding deduction in the monthly amortization to conform to the actual
amount of loan released, and it immediately initiated foreclosure proceedings when private The established antecedents of the case are narrated below.
respondents failed to make timely payment.
AMEX is a resident foreign corporation engaged in the business of providing credit
But as admitted by private respondents themselves, they were irregular in their payment of monthly services through the operation of a charge card system. Pantaleon has been an AMEX cardholder
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad since 1980. 3
faith. Consequently, we should rule out the award of moral and exemplary damages. 11
 In October 1991, Pantaleon, together with his wife (Julialinda), daughter (Regina), and
son (Adrian Roberto), went on a guided European tour. On October 25, 1991, the tour group arrived
in Amsterdam. Due to their late arrival, they postponed the tour of the city for the following day. 4
The next day, the group began their sightseeing at around 8:50 a.m. with a trip to the
Coster Diamond House (Coster). To have enough time for take a guided city tour of Amsterdam
before their departure scheduled on that day, the tour group planned to leave Coster by 9:30
a.m. at the latest.
While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a
total of US$13,826.00. Pantaleon presented his American Express credit card to the sales clerk to
pay for this purchase. He did this at around 9:15 a.m. The sales clerk swiped the credit card and
asked Pantaleon to sign the charge slip, which was then electronically referred to AMEX's
Amsterdam office at 9:20 a.m. 5 TSaEcH
At around 9:40 a.m., Coster had not received approval from AMEX for the purchase
so Pantaleon asked the store clerk to cancel the sale. The store manager, however,
convinced Pantaleon to wait a few more minutes. Subsequently, the store manager
informed Pantaleon that AMEX was asking for bank references; Pantaleonresponded by giving the
names of his Philippine depository banks.
At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still
had not approved the purchase. Since the city tour could not begin until the Pantaleons were
onboard the tour bus, Coster decided to release at around 10:05 a.m. the purchased items
to Pantaleon even without AMEX's approval.
When the Pantaleons finally returned to the tour bus, they found their travel
companions visibly irritated. This irritation intensified when the tour guide announced that they
would have to cancel the tour because of lack of time as they all had to be in Calais, Belgium by 3
p.m. to catch the ferry to London. 6
From the records, it appears that after Pantaleon's purchase was transmitted for
approval to AMEX's Amsterdam office at 9:20 a.m.; was referred to AMEX's Manila office at 9:33
a.m.; and was approved by the Manila office at 10:19 a.m. At 10:38 a.m., AMEX's Manila office
finally transmitted the Approval Code to AMEX's Amsterdam office. In all, it took AMEX a total of
78 minutes to approve Pantaleon's purchase and to transmit the approval to the jewelry
store. 7
After the trip to Europe, the Pantaleon family proceeded to the United States.
Again, Pantaleon experienced delay in securing approval for purchases using
his American Express credit card on two separate occasions. He experienced the first delay when
he wanted to purchase golf equipment in the amount of US$1,475.00 at the Richard Metz Golf
Studio in New York on October 30, 1991. Another delay occurred when he wanted to purchase
children's shoes worth US$87.00 at the Quiency Market in Boston on November 3, 1991.
Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for the
humiliation and inconvenience he and his family experienced due to the delays in obtaining
approval for his credit card purchases. AMEX responded by explaining that the delay in
Amsterdam was due to the amount involved — the charged purchase of US$13,826.00 deviated
from Pantaleon's established charge purchase pattern. Dissatisfied with this
explanation, Pantaleon filed an action for damages against the credit card company with the
Makati City Regional Trial Court (RTC).
On August 5, 1996, the RTC found AMEX guilty of delay, and
awarded Pantaleon P500,000.00 as moral damages, P300,000.00 as exemplary damages,
P100,000.00 as attorney's fees, and P85,233.01 as litigation expenses.
On appeal, the CA reversed the awards. 8 While the CA recognized that delay in the
nature of mora accipiendi or creditor's default attended AMEX's approval of Pantaleon's purchases,
it disagreed with the RTC's finding that AMEX had breached its contract, noting that the delay was
not attended by bad faith, malice or gross negligence. The appellate court found that AMEX
exercised diligent efforts to effect the approval of Pantaleon's purchases; the purchase at Coster
posed particularly a problem because it was at variance with Pantaleon's established charge
pattern. As there was no proof that AMEX breached its contract, or that it acted in a wanton,
fraudulent or malevolent manner, the appellate court ruled that AMEX could not be held liable for
any form of damages. SaDICE
Pantaleon questioned this decision via a petition for review on certiorari with this Court.
In our May 8, 2009 decision, we reversed the appellate court's decision and held that
AMEX was guilty of mora solvendi, or debtor's default. AMEX, as debtor, had an obligation as the
credit provider to act on Pantaleon's purchase requests, whether to approve or disapprove them,
with "timely dispatch." Based on the evidence on record, we found that AMEX failed to timely act
on Pantaleon's purchases.
Based on the testimony of AMEX's credit authorizer Edgardo Jaurique, the approval
time for credit card charges would be three to four seconds under regular circumstances.
In Pantaleon's case, it took AMEX 78 minutes to approve the Amsterdam purchase. We attributed
this delay to AMEX's Manila credit authorizer, Edgardo Jaurique, who had to go over Pantaleon's
past credit history, his payment record and his credit and bank references before he approved the
purchase. Finding this delay unwarranted, we reinstated the RTC decision and
awarded Pantaleonmoral and exemplary damages, as well as attorney's fees and costs of
litigation.
THE MOTION FOR RECONSIDERATION
In its motion for reconsideration, AMEX argues that this Court erred when it found
AMEX guilty of culpable delay in complying with its obligation to act with timely dispatch
on Pantaleon's purchases. While AMEX admits that it normally takes seconds to approve charge
purchases, it emphasizes that Pantaleon experienced delay in Amsterdam because his transaction
was not a normal one. To recall, Pantaleon sought to charge in a single transaction jewelry items
purchased from Coster in the total amount of US$13,826.00 or P383,746.16. While the total
amount of Pantaleon's previous purchases using his AMEX credit card did exceed US$13,826.00,
AMEX points out that these purchases were made in a span of more than 10 years, not in a single
transaction.
Because this was the biggest single transaction that Pantaleon ever made using his
AMEX credit card, AMEX argues that the transaction necessarily required the credit authorizer to
carefully review Pantaleon's credit history and bank references. AMEX maintains that it did this
not only to ensure Pantaleon's protection (to minimize the possibility that a third party was
fraudulently using his credit card), but also to protect itself from the risk that Pantaleon might not
be able to pay for his purchases on credit. This careful review, according to AMEX, is also in
keeping with the extraordinary degree of diligence required of banks in handling its transactions.
AMEX concluded that in these lights, the thorough review of Pantaleon's credit record was
motivated by legitimate concerns and could not be evidence of any ill will, fraud, or negligence by
AMEX.
AMEX further points out that the proximate cause of Pantaleon's humiliation and
embarrassment was his own decision to proceed with the purchase despite his awareness that the
tour group was waiting for him and his wife. Pantaleon could have prevented the humiliation had
he cancelled the sale when he noticed that the credit approval for the Coster purchase was
unusually delayed.
In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was guilty
of mora solvendi, or delay on the part of the debtor, in complying with its obligation to him. Based
on jurisprudence, a just cause for delay does not relieve the debtor in delay from the consequences
 of delay; thus, even if AMEX had a justifiable reason for the delay, this reason would not relieve it
from the liability arising from its failure to timely act on Pantaleon's purchase. HESAIT
In response to AMEX's assertion that the delay was in keeping with its duty to perform
its obligation with extraordinary diligence, Pantaleon claims that this duty includes the timely or
prompt performance of its obligation.
As to AMEX's contention that moral or exemplary damages cannot be awarded absent
a finding of malice, Pantaleon argues that evil motive or design is not always necessary to support
a finding of bad faith; gross negligence or wanton disregard of contractual obligations is sufficient
basis for the award of moral and exemplary damages.
OUR RULING
We GRANT the motion for reconsideration.
Brief historical background
A credit card is defined as "any card, plate, coupon book, or other credit device existing
for the purpose of obtaining money, goods, property, labor or services or anything of value on
credit." 9 It traces its roots to the charge card first introduced by the Diners Club in New York City
in 1950. 10 American Express followed suit by introducing its own charge card to
the American market in 1958. 11
In the Philippines, the now defunct Pacific Bank was responsible for bringing the first
credit card into the country in the 1970s. 12 However, it was only in the early 2000s that credit card
use gained wide acceptance in the country, as evidenced by the surge in the number of credit card
holders then. 13
Nature of Credit Card Transactions
To better understand the dynamics involved in credit card transactions, we turn to the
United States case of Harris Trust & Savings Bank v. McCray 14 which explains:
The bank credit card system involves a tripartite relationship between the
issuer bank, the cardholder, and merchants participating in the system. The
issuer bank establishes an account on behalf of the person to whom the card is
issued, and the two parties enter into an agreement which governs their
relationship. This agreement provides that the bank will pay for cardholder's
account the amount of merchandise or services purchased through the use of
the credit card and will also make cash loans available to the cardholder. It also
states that the cardholder shall be liable to the bank for advances and
payments made by the bank and that the cardholder's obligation to pay the
bank shall not be affected or impaired by any dispute, claim, or demand by the
cardholder with respect to any merchandise or service purchased.
The merchants participating in the system agree to honor the bank's credit
cards. The bank irrevocably agrees to honor and pay the sales slips presented
by the merchant if the merchant performs his undertakings such as checking
the list of revoked cards before accepting the card. . . . . EcATDH
These slips are forwarded to the member bank which originally issued the card.
The cardholder receives a statement from the bank periodically and may then
decide whether to make payment to the bank in full within a specified period,
free of interest, or to defer payment and ultimately incur an interest charge.
We adopted a similar view in CIR v. American Express International, Inc. (Philippine
branch), 15 where we also recognized that credit card issuers are not limited to banks. We said:
Under RA 8484, the credit card that is issued by banks in general, or by non-
banks in particular, refers to "any card . . . or other credit device existing for the
purpose of obtaining . . . goods . . . or services . . . on credit;" and is being used
"usually on a revolving basis." This means that the consumer-credit
arrangement that exists between the issuer and the holder of the credit card
enables the latter to procure goods or services "on a continuing basis as long as
the outstanding balance does not exceed a specified limit." The card holder is,
therefore, given "the power to obtain present control of goods or service on a
promise to pay for them in the future."
Business establishments may extend credit sales through the use of the credit
card facilities of a non-bank credit card company to avoid the risk of
uncollectible accounts from their customers. Under this system, the
establishments do not deposit in their bank accounts the credit card drafts that
arise from the credit sales. Instead, they merely record their receivables from
the credit card company and periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks as payment to these business
establishments, but it does not redeem the drafts at full price. The agreement
between them usually provides for discounts to be taken by the company upon
its redemption of the drafts. At the end of each month, it then bills its credit
card holders for their respective drafts redeemed during the previous month. If
the holders fail to pay the amounts owed, the company sustains the loss.
Simply put, every credit card transaction involves three contracts, namely: (a) the sales
contract between the credit card holder and the merchant or the business establishment which
accepted the credit card; (b) the loan agreement between the credit card issuer and the credit
card holder; and lastly, (c) the promise to pay between the credit card issuer and the merchant or
business establishment. 16
Credit card issuer — cardholder
relationship
When a credit card company gives the holder the privilege of charging items at
establishments associated with the issuer, 17 a necessary question in a legal analysis is — when
does this relationship begin? There are two diverging views on the matter. In City Stores Co. v.
Henderson, 18 another U.S. decision, held that:
The issuance of a credit card is but an offer to extend a line of open account
credit. It is unilateral and supported by no consideration. The offer may be
withdrawn at any time, without prior notice, for any reason or, indeed, for no
reason at all, and its withdrawal breaches no duty — for there is no duty to
continue it — and violates no rights. DcTAIH
Thus, under this view, each credit card transaction is considered a separate offer and acceptance.
Novack v. Cities Service Oil Co. 19 echoed this view, with the court ruling that the mere
issuance of a credit card did not create a contractual relationship with the cardholder.
On the other end of the spectrum is Gray v. American Express Company 20 which
recognized the card membership agreement itself as a binding contract between the credit card
issuer and the card holder. Unlike in the Novack and the City Stores cases, however, the cardholder
in Gray paid an annual fee for the privilege of being an American Express cardholder.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship
between the credit card issuer and the credit card holder as a contractual one that is governed by
the terms and conditions found in the card membership agreement. 21 This contract provides the
rights and liabilities of a credit card company to its cardholders and vice versa.
We note that a card membership agreement is a contract of adhesion as its terms are
prepared solely by the credit card issuer, with the cardholder merely affixing his signature
signifying his adhesion to these terms. 22 This circumstance, however, does not render the
agreement void; we have uniformly held that contracts of adhesion are "as binding as ordinary
contracts, the reason being that the party who adheres to the contract is free to reject it
entirely." 23 The only effect is that the terms of the contract are construed strictly against the
party who drafted it. 24
On AMEX's obligations to Pantaleon
We begin by identifying the two privileges that Pantaleon assumes he is entitled to with
the issuance of his AMEX credit card, and on which he anchors his claims.
First, Pantaleon presumes that since his credit card has no pre-set spending limit, AMEX has the
obligation to approve all his charge requests. Conversely, even if AMEX has no such obligation, at
the very least it is obliged to act on his charge requests within a specific period of time.
i.Use of credit card a mere offer to enter into loan agreements
Although we recognize the existence of a relationship between the credit card issuer
and the credit card holder upon the acceptance by the cardholder of the terms of the card
membership agreement (customarily signified by the act of the cardholder in signing the back of
the credit card), we have to distinguish this contractual relationship from the creditor-debtor
relationship which only arises after the credit card issuer has approved the cardholder's
purchase request. The first relates merely to an agreement providing for credit facility to the
cardholder. The latter involves the actual credit on loan agreement involving three contracts,
namely: the sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card; the loan agreement between the credit card issuer
and the credit card holder; and the promise to pay between the credit card issuer and the
merchant or business establishment. HDIaET
From the loan agreement perspective, the contractual relationship begins to exist only
upon the meeting of the offer 25 and acceptance of the parties involved. In more concrete terms,
when cardholders use their credit cards to pay for their purchases, they merely offer to enter into
loan agreements with the credit card company. Only after the latter approves the purchase
requests that the parties enter into binding loan contracts, in keeping with Article 1319 of the Civil
Code, which provides:
Article 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer.
This view finds support in the reservation found in the card membership agreement
itself, particularly paragraph 10, which clearly states that AMEX "reserve[s] the right to deny
authorization for any requested Charge." By so providing, AMEX made its position clear that it
has no obligation to approve any and all charge requests made by its card holders.
ii.AMEX not guilty of culpable delay
Since AMEX has no obligation to approve the purchase requests of its credit
cardholders, Pantaleon cannot claim that AMEX defaulted in its obligation. Article 1169 of the Civil
Code, which provides the requisites to hold a debtor guilty of culpable delay, states:
Article 1169. Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation. . . . .
The three requisites for a finding of default are: (a) that the obligation is demandable
and liquidated; (b) the debtor delays performance; and (c) the creditor judicially or extrajudicially
requires the debtor's performance. 26
Based on the above, the first requisite is no longer met because AMEX, by
the express terms of the credit card agreement, is not obligated to approve Pantaleon's purchase
request. Without a demandable obligation, there can be no finding of default.
Apart from the lack of any demandable obligation, we also find that Pantaleon failed to
make the demand required by Article 1169 of the Civil Code.
As previously established, the use of a credit card to pay for a purchase is only an offer
to the credit card company to enter a loan agreement with the credit card holder. Before the
credit card issuer accepts this offer, no obligation relating to the loan agreement exists
between them. On the other hand, a demand is defined as the "assertion of a legal right; . . . an
asking with authority, claiming or challenging as due." 27 A demand presupposes the existence
of an obligation between the parties. CHDaAE
Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases,
what the stores transmitted to AMEX were his offers to execute loan contracts. These obviously
could not be classified as the demand required by law to make the debtor in default, given that no
obligation could arise on the part of AMEX until after AMEX transmitted its acceptance
of Pantaleon's offers. Pantaleon's act of "insisting on and waiting for the charge purchases to be
approved by AMEX" 28 is not the demand contemplated by Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169, Pantaleon's charge that AMEX
is guilty of culpable delay in approving his purchase requests must fail.
iii.On AMEX's obligation to act on the offer within a specific period of time
Even assuming that AMEX had the right to review his credit card history before it
approved his purchase requests, Pantaleon insists that AMEX had an obligation to act on his
purchase requests, either to approve or deny, in "a matter of seconds" or "in timely
dispatch." Pantaleon impresses upon us the existence of this obligation by emphasizing two
points: (a) his card has no pre-set spending limit; and (b) in his twelve years of using his AMEX card,
AMEX had always approved his charges in a matter of seconds.
Pantaleon's assertions fail to convince us.
We originally held that AMEX was in culpable delay when it acted on the Coster
transaction, as well as the two other transactions in the United States which took AMEX
approximately 15 to 20 minutes to approve. This conclusion appears valid and reasonable at first
glance, comparing the time it took to finally get the Coster purchase approved (a total of 78
minutes), to AMEX's "normal" approval time of three to four seconds (based on the testimony of
Edgardo Jaurigue, as well as Pantaleon's previous experience). We come to a different result,
however, after a closer look at the factual and legal circumstances of the case.
AMEX's credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending
limit in a credit card simply means that the charges made by the cardholder are approved based on
his ability to pay, as demonstrated by his past spending, payment patterns, and personal
resources. 29 Nevertheless, every time Pantaleon charges a purchase on his credit card, the
credit card company still has to determine whether it will allow this charge, based on his past
credit history. This right to review a card holder's credit history, although not specifically set out in
the card membership agreement, is a necessary implication of AMEX's right to deny authorization
for any requested charge.
As for Pantaleon's previous experiences with AMEX (i.e., that in the past 12 years,
AMEX has always approved his charge requests in three or four seconds), this record does not
establish that Pantaleon had a legally enforceable obligation to expect AMEX to act on his charge
requests within a matter of seconds. For one, Pantaleon failed to present any evidence to support
his assertion that AMEX acted on purchase requests in a matter of three or four seconds as an
established practice. More importantly, even if Pantaleon did prove that AMEX, as a matter of
practice or custom, acted on its customers' purchase requests in a matter of seconds, this would
still not be enough to establish a legally demandable right; as a general rule, a practice or custom is
not a source of a legally demandable or enforceable right. 30 ICAcHE
We next examine the credit card membership agreement, the contract that primarily
governs the relationship between AMEX and Pantaleon. Significantly, there is no provision in this
agreement that obligates AMEX to act on all cardholder purchase requests within a
specifically defined period of time. Thus, regardless of whether the obligation is worded was to
"act in a matter of seconds" or to "act in timely dispatch," the fact remains that no obligation exists
on the part of AMEX to act within a specific period of time. Even Pantaleon admits in his testimony
that he could not recall any provision in the Agreement that guaranteed AMEX's approval of his
charge requests within a matter of minutes. 31
Nor can Pantaleon look to the law or government issuances as the source of AMEX's
alleged obligation to act upon his credit card purchases within a matter of seconds. As the
following survey of Philippine law on credit card transactions demonstrates, the State does not
require credit card companies to act upon its cardholders' purchase requests within a specific
period of time.
Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of 1998,
approved on February 11, 1998, is the controlling legislation that regulates the issuance and use of
access devices, 32 including credit cards. The more salient portions of this law include the
imposition of the obligation on a credit card company to disclose certain important financial
information 33 to credit card applicants, as well as a definition of the acts that constitute access
device fraud.
As financial institutions engaged in the business of providing credit, credit card
companies fall under the supervisory powers of the Bangko Sentral ng Pilipinas (BSP). 34 BSP
Circular No. 398 dated August 21, 2003 embodies the BSP's policy when it comes to credit cards —
The Bangko Sentral ng Pilipinas (BSP) shall foster the development of
consumer credit through innovative products such as credit cards under
conditions of fair and sound consumer credit practices. The BSP likewise
encourages competition and transparency to ensure more efficient delivery of
services and fair dealings with customers. (Emphasis supplied)
Based on this Circular, ". . . [b]efore issuing credit cards, banks and/or their subsidiary
credit card companies must exercise proper diligence by ascertaining that applicants possess good
credit standing and are financially capable of fulfilling their credit commitments." 35 As the above-
quoted policy expressly states, the general intent is to foster "fair and sound consumer credit
practices."
Other than BSP Circular No. 398, a related circular is BSP Circular No. 454, issued on
September 24, 2004, but this circular merely enumerates the unfair collection practices of credit
card companies — a matter not relevant to the issue at hand. DaCTcA
In light of the foregoing, we find and so hold that AMEX is neither contractually bound
nor legally obligated to act on its cardholders' purchase requests within any specific period of time,
much less a period of a "matter of seconds" that Pantaleon uses as his standard. The standard
therefore is implicit and, as in all contracts, must be based on fairness and reasonableness, read in
relation to the Civil Code provisions on human relations, as will be discussed below.
AMEX acted with good faith
Thus far, we have already established that: (a) AMEX had neither a contractual nor a
legal obligation to act upon Pantaleon's purchases within a specific period of time; and (b) AMEX
has a right to review a cardholder's credit card history. Our recognition of these entitlements,
however, does not give AMEX an unlimited right to put off action on cardholders' purchase
requests for indefinite periods of time. In acting on cardholders' purchase requests, AMEX must
take care not to abuse its rights and cause injury to its clients and/or third persons. We cite in this
regard Article 19, in conjunction with Article 21, of the Civil Code, which provide:
Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due and observe
honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.
Article 19 pervades the entire legal system and ensures that a person suffering damage
in the course of another's exercise of right or performance of duty, should find himself without
relief. 36 It sets the standard for the conduct of all persons, whether artificial or natural, and
requires that everyone, in the exercise of rights and the performance of obligations, must: (a) act
with justice, (b) give everyone his due, and (c) observe honesty and good faith. It is not because a
person invokes his rights that he can do anything, even to the prejudice and disadvantage of
another. 37
While Article 19 enumerates the standards of conduct, Article 21 provides the remedy
for the person injured by the willful act, an action for damages. We explained how these two
provisions correlate with each other in GF Equity, Inc. v. Valenzona: 38
[Article 19], known to contain what is commonly referred to as the principle of
abuse of rights, sets certain standards which must be observed not only in the
exercise of one's rights but also in the performance of one's duties. These
standards are the following: to act with justice; to give everyone his due; and to
observe honesty and good faith. The law, therefore, recognizes a primordial
limitation on all rights; that in their exercise, the norms of human conduct set
forth in Article 19 must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless become the source
of some illegality. When a right is exercised in a manner which does not
conform with the norms enshrined in Article 19 and results in damage to
another, a legal wrong is thereby committed for which the wrongdoer must
be held responsible. But while Article 19 lays down a rule of conduct for the
government of human relations and for the maintenance of social order, it does
not provide a remedy for its violation. Generally, an action for damages under
either Article 20 or Article 21 would be proper. CTDAaE
In the context of a credit card relationship, although there is neither a contractual
stipulation nor a specific law requiring the credit card issuer to act on the credit card holder's offer
within a definite period of time, these principles provide the standard by which to judge AMEX's
actions.
According to Pantaleon, even if AMEX did have a right to review his charge purchases,
it abused this right when it unreasonably delayed the processing of the Coster charge purchase, as
well as his purchase requests at the Richard Metz' Golf Studio and Kids' Unlimited Store; AMEX
should have known that its failure to act immediately on charge referrals would entail
inconvenience and result in humiliation, embarrassment, anxiety and distress to its cardholders
who would be required to wait before closing their transactions. 39
 It is an elementary rule in our jurisdiction that good faith is presumed and that the
burden of proving bad faith rests upon the party alleging it. 40 Although it took AMEX some time
before it approved Pantaleon's three charge requests, we find no evidence to suggest that it acted
with deliberate intent to cause Pantaleon any loss or injury, or acted in a manner that was contrary
to morals, good customs or public policy. We give credence to AMEX's claim that its review
procedure was done to ensure Pantaleon's own protection as a cardholder and to prevent the
possibility that the credit card was being fraudulently used by a third person.
Pantaleon countered that this review procedure is primarily intended to protect AMEX's
interests, to make sure that the cardholder making the purchase has enough means to pay for the
credit extended. Even if this were the case, however, we do not find any taint of bad faith in such
motive. It is but natural for AMEX to want to ensure that it will extend credit only to people who
will have sufficient means to pay for their purchases. AMEX, after all, is running a business, not a
charity, and it would simply be ludicrous to suggest that it would not want to earn profit for its
services. Thus, so long as AMEX exercises its rights, performs its obligations, and generally acts
with good faith, with no intent to cause harm, even if it may occasionally inconvenience others, it
cannot be held liable for damages.
We also cannot turn a blind eye to the circumstances surrounding the Coster
transaction which, in our opinion, justified the wait. In Edgardo Jaurigue's own words:
Q 21: With reference to the transaction at the Coster Diamond House covered
by Exhibit H, also Exhibit 4 for the defendant, the approval came at
2:19 a.m. after the request was relayed at 1:33 a.m., can you explain
why the approval came after about 46 minutes, more or less?
A21: Because we have to make certain considerations and evaluations of
[Pantaleon's] past spending pattern with [AMEX] at that time before
approving plaintiff's request because [Pantaleon] was at that time
making his very first single charge purchase of US$13,826 [this is
below the US$16,112.58 actually billed and paid for by the plaintiff
because the difference was already automatically approved by
[AMEX] office in Netherland[s] and the record of [Pantaleon's]
past spending with [AMEX] at that time does not favorably
support his ability to pay for such purchase. In fact, if the
foregoing internal policy of [AMEX] had been strictly followed, the
transaction would not have been approved at all considering that
the past spending pattern of the plaintiff with [AMEX] at that time
does not support his ability to pay for such purchase. 41 AHCcET
xxx xxx xxx
Q: Why did it take so long?
A: It took time to review the account on credit, so, if there is any delinquencies
[sic] of the cardmember. There are factors on deciding the charge
itself which are standard measures in approving the authorization.
Now in the case of Mr. Pantaleon although his account is single
charge purchase of US$13,826. [sic] this is below the US$16,000,
plus actually billed . . . we would have already declined the charge
outright and asked him his bank account to support his charge. But
due to the length of his membership as cardholder we had to make a
decision on hand. 42
As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEX's
approval was because he had to go over Pantaleon's credit card history for the past twelve
months. 43 It would certainly be unjust for us to penalize AMEX for merely exercising its right to
review Pantaleon's credit history meticulously.
Finally, we said in Garciano v. Court of Appeals that "the right to recover [moral damages]
under Article 21 is based on equity, and he who comes to court to demand equity, must come with
clean hands. Article 21 should be construed as granting the right to recover damages to injured
persons who are not themselves at fault." 44 As will be discussed below, Pantaleon is not a
blameless party in all this.
Pantaleon's action was the proximate
cause for his injury
Pantaleon mainly anchors his claim for moral and exemplary damages on the
embarrassment and humiliation that he felt when the European tour group had to wait for him and
his wife for approximately 35 minutes, and eventually had to cancel the Amsterdam city tour. After
thoroughly reviewing the records of this case, we have come to the conclusion that Pantaleon is
the proximate cause for this embarrassment and humiliation.
As borne by the records, Pantaleon knew even before entering Coster that the tour
group would have to leave the store by 9:30 a.m. to have enough time to take the city tour of
Amsterdam before they left the country. After 9:30 a.m., Pantaleon's son, who had boarded the
bus ahead of his family, returned to the store to inform his family that they were the only ones not
on the bus and that the entire tour group was waiting for them. Significantly, Pantaleontried to
cancel the sale at 9:40 a.m. because he did not want to cause any inconvenience to the tour
group. However, when Coster's sale manager asked him to wait a few more minutes for the credit
card approval, he agreed, despite the knowledge that he had already caused a 10-minute delay
and that the city tour could not start without him.
In Nikko Hotel Manila Garden v. Reyes, 45 we ruled that a person who knowingly and
voluntarily exposes himself to danger cannot claim damages for the resulting injury: DaAETS
The doctrine of volenti non fit injuria ("to which a person assents is not
esteemed in law as injury") refers to self-inflicted injury or to the consent to
injury which precludes the recovery of damages by one who has knowingly and
voluntarily exposed himself to danger, even if he is not negligent in doing so.
This doctrine, in our view, is wholly applicable to this case. Pantaleon himself testified
that the most basic rule when travelling in a tour group is that you must never be a cause of any
delay because the schedule is very strict. 46When Pantaleon made up his mind to push through with
his purchase, he must have known that the group would become annoyed and irritated with him.
This was the natural, foreseeable consequence of his decision to make them all wait.
We do not discount the fact that Pantaleon and his family did feel humiliated and
embarrassed when they had to wait for AMEX to approve the Coster purchase in Amsterdam. We
have to acknowledge, however, that Pantaleonwas not a helpless victim in this scenario — at any
time, he could have cancelled the sale so that the group could go on with the city tour. But he did
not.
More importantly, AMEX did not violate any legal duty to Pantaleon under the
circumstances under the principle of damnum absque injuria, or damages without legal wrong, loss
without injury. 47 As we held in BPI Express Card v. CA: 48 DECSIT
We do not dispute the findings of the lower court that private respondent
suffered damages as a result of the cancellation of his credit card. However,
there is a material distinction between damages and injury. Injury is the illegal
invasion of a legal right; damage is the loss, hurt, or harm which results from
the injury; and damages are the recompense or compensation awarded for the
damage suffered. Thus, there can be damage without injury in those
 instances in which the loss or harm was not the result of a violation of a
legal duty. In such cases, the consequences must be borne by the injured
person alone, the law affords no remedy for damages resulting from an act
which does not amount to a legal injury or wrong. These situations are often
called damnum absque injuria.
In other words, in order that a plaintiff may maintain an action for the injuries
of which he complains, he must establish that such injuries resulted from a
breach of duty which the defendant owed to the plaintiff — a concurrence of
injury to the plaintiff and legal responsibility by the person causing it. The
underlying basis for the award of tort damages is the premise that an
individual was injured in contemplation of law. Thus, there must first be a
breach of some duty and the imposition of liability for that breach before
damages may be awarded; and the breach of such duty should be the
proximate cause of the injury.
Pantaleon is not entitled to damages
Because AMEX neither breached its contract with Pantaleon, nor acted with culpable
delay or the willful intent to cause harm, we find the award of moral damages
to Pantaleon unwarranted.
Similarly, we find no basis to award exemplary damages. In contracts, exemplary
damages can only be awarded if a defendant acted "in a wanton, fraudulent, reckless, oppressive
or malevolent manner." 49 The plaintiff must also show that he is entitled to moral, temperate, or
compensatory damages before the court may consider the question of whether or not exemplary
damages should be awarded. 50
As previously discussed, it took AMEX some time to approve Pantaleon's purchase
requests because it had legitimate concerns on the amount being charged; no malicious intent was
ever established here. In the absence of any other damages, the award of exemplary damages
clearly lacks legal basis.
Neither do we find any basis for the award of attorney's fees and costs of litigation. No
premium should be placed on the right to litigate and not every winning party is entitled to an
automatic grant of attorney's fees. 51 To be entitled to attorney's fees and litigation costs, a party
must show that he falls under one of the instances enumerated in Article 2208 of the Civil
Code. 52 This, Pantaleon failed to do. Since we eliminated the award of moral and exemplary
damages, so must we delete the award for attorney's fees and litigation expenses.
Lastly, although we affirm the result of the CA decision, we do so for the reasons stated
in this Resolution and not for those found in the CA decision. HTcDEa
WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision
and GRANT the present motion for reconsideration. The Court of Appeals Decision dated August
18, 2006 is hereby AFFIRMED. No costs.
SO ORDERED.
Carpio Morales, Velasco, Jr., Leonardo-de Castro and Bersamin, JJ., concur.
||| (Pantaleon v. American Express International, Inc., G.R. No. 174269 (Resolution), [August 25, 2010], 643
PHIL 488-519)
B. COMMODATUM
SECOND DIVISION
[G.R. No. 115324. February 19, 2003.]
PRODUCERS BANK OF THE PHILIPPINES (now FIRST
INTERNATIONAL BANK), petitioner, vs. HON. COURT OF APPEALS AND
FRANKLIN VIVES, respondents.
Domingo & Dizon for petitioner.
Mauricio Law Office for private respondent.
SYNOPSIS
Upon request of a friend, Franklin Vives accommodated Arturo Doronilla by opening a savings account
for Sterela Marketing, in coordination with Producer's Bank assistant branch manager, Rufo
Atienza. The purpose was for incorporation, and the agreement was that the money would not be
removed from Sterela's savings account and returned to Vives after thirty (30) days. Later, however,
part of the money had been withdrawn by Doronilla who also opened a current account and
authorized the bank to debit the savings account to cover overdrawing in the current account. Vives
filed a case for recovery of sum of money and both the trial court and the appellate court ruled
on thesolidary liability of Producers Bank to Vives. Hence, this appeal. IDSEAH
The Court affirmed the appealed decision. Under Art. 2180 of the Civil Code, employers shall be held
liable for damages caused by their employees acting within the scope of their assigned tasks. The Bank,
through its employee Atienza, was partly responsible for the loss of Vives' money and is liable for its
restitution. That despite limitation on the savings account passbook issued to Mrs. Vives on
behalf of Sterela, Doronilla was allowed to withdraw several times without presentation of a passbook
as required.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE TRIAL COURT ADOPTED
BY THE APPELLATE COURT, RESPECTED. — At the outset, it must be emphasized that only
questions of law may be raised in a petition for review filed with this Court. The Court has repeatedly
held that it is not its function to analyze and weigh all over again theevidence presented by the parties
during trial. The Court's jurisdiction is in principle limited to reviewing errors of law that might have been
committed by the Court of Appeals. Moreover, factual findings of courts, when adopted and confirmed
by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported
by the evidence on record. There is no showing of any misapprehension of facts
on the part of the Court of Appeals in thecase at bar that would require this Court to review and
overturn the factual findings of that court, especially
since theconclusions of fact of the Court of Appeals and the trial court are not only consistent but are
also amply supported by the evidence on record.
2. CIVIL LAW; SPECIAL CONTRACTS; LOAN; MUTUUM AND COMMODATUM, DISTINGUISHED. —
Article 1933 of theCivil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the condition that thesame
amount of the same kind and quality shall be paid, in which case the contract is simply called a loan
or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation
to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to theborrower. The foregoing provision seems to imply that
if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum.
However, there are some instances where a commodatum may have for its object a consumable thing.
Article 1936 of the Civil Code provides: Consumable goods may
be the subject ofcommodatum if the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or
when the intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is
that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.
3. ID.; ID.; ID.; ADDITIONAL AMOUNT PAID TO ORIGINAL AMOUNT LOANED AS INTEREST DID NOT
CONVERT AGREEMENT OF COMMODATUM TO MUTUUM. — Doronilla's attempts to return to private
respondent the amount ofP200,000.00 which the latter deposited in Sterela's account together with an
additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction
from a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending ofthe P200,000.00. Article
1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use ofthe thing
loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latter's money deposited with petitioner.
4. ID.; EXTRA-CONTRACTUAL OBLIGATIONS; QUASI-DELICTS; EMPLOYERS LIABLE FOR DAMAGES
CAUSED BY EMPLOYEES ACTING WITHIN THE SCOPE OF THEIR ASSIGNED TASKS. — Under Article
2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by
their employees acting within the scope of their assigned tasks. To hold the employer liable under this
provision, it must be shown that an employer-employee relationship exists, and that the employee was
acting within the scope of his assigned task when the act complained ofwas committed. Case law
in the United States of America has it that a corporation that entrusts a general duty to its employee is
responsible to the injured party for damages flowing from the employee's wrongful act done
in the course of his general authority, even though in doing such act, the employee may have failed in its
duty to the employer and disobeyed the latter's instructions. ACTEHI
DECISION
CALLEJO, SR., J p:
This is a petition for review on certiorari of the Decision 1 of the Court of Appeals dated June 25, 1991 in
CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5, 1994, denying the motion for
reconsideration of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private
respondent to deposit in a bank a certain amount of money in the bankaccount of Sterela for
purposes of its incorporation. She assured private respondent that he could withdraw his money from
said account within a month's time. Private respondent asked Sanchez to bring Doronilla to their house
so that they could discuss Sanchez's request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla's
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account
in the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However,
only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an
authorization letter from Doronilla authorizing Sanchez and her companions, "in coordination with Mr.
Rufo Atienza," to open an account for Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A
passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives. 4
Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still
intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed
them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that
only P90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some postdated checks issued by Doronilla. According
to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened
Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings; Account No. 10-1567
for theamounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said
current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated checks, all of which were dishonored. Atienza also
said that Doronilla could assign or withdraw the money in Savings Account No. 10-1567 because he
was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a
letter from Doronilla, assuring him that his money was intact and would be returned to him. On August
13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in
favor of private respondent. However, upon presentment thereof by private respondent
to the drawee bank, the check was dishonored. Doronilla requested private respondent to
present the same check on September 15, 1979 but when the latter presented the check, it was again
dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla
for the return of his client's money. Doronilla issued another check for P212,000.00 in private
respondent's favor but the check was again dishonored for insufficiency of funds. 7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in
Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil
Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No.
44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing
defendants Arturo J. Doronila, Estrella Dumagpi
and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and
severally —
(a) the amount of P200,000.00, representing the money deposited, with
interest at the legal rate from thefiling of the complaint until the same is fully
paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for
exemplary damages;
(c) the amount of P40,000.00 for attorney's fees; and
 (d) the costs of the suit.
SO ORDERED. 8
Petitioner appealed the trial court's decision to the Court of Appeals. In its Decision dated June 25,
1991, the appellate court affirmed in toto the decision of the RTC 9 It likewise denied with finality
petitioner's motion for reconsideration in its Resolution dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that —
I.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla
in the amount of P212,000.00, or P12,000 more than what private respondent deposited in
Sterela's bank account. 15 Moreover, the fact that private respondent sued his good friend Sanchez for
his failure to recover his money from Doronilla shows that the transaction was not merely gratuitous but
"had a business angle" to it. Hence, petitioner argues that it cannot be held liable
for the return of private respondent's P200,000.00 because it is not privy to the transaction
between the latter and Doronilla. 16

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING It argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing
THAT THE TRANSACTION BETWEEN THEDEFENDANT DORONILLA AND Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said
RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT company. Petitioner asserts that Doronilla's May 8, 1979 letter addressed to the bank, authorizing Mrs.
ACCOMMODATION; Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two
to withdraw from said account. Hence, theauthority to withdraw therefrom remained exclusively with
II. Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings
account. 17 Petitioner points out that no evidence other than the testimonies ofprivate respondent and
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT Mrs. Vives was presented during trial to prove that private respondent deposited his P200,000.00 in
PETITIONER'S BANK MANAGER, MR. RUFO ATIENZA, CONNIVED Sterela's account for purposes of its incorporation. 18 Hence, petitioner should not be held liable for
WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should allowing Doronilla to withdraw from Sterela's savings account.
be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OFNATURAL JUSTICE; Petitioner also asserts that the Court of Appeals erred in affirming the trial court's decision
since the findings of fact therein were not accord with the evidence presented by petitioner during trial
III. to prove that the transaction between private respondent and Doronilla was a mutuum, and that it
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE committed no wrong in allowing Doronilla to withdraw from Sterela's savings account. 19
RECORDS OF THE REGIONAL TRIAL COURT AND Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable
AFFIRMING THE JUDGMENT APPEALED FROM, for the actual damages suffered by private respondent, and neither may it be held liable for moral and
AS THE FINDINGS OF THE REGIONAL TRIAL COURTWERE BASED ON A exemplary damages as well as attorney's fees. 20
MISAPPREHENSION OF FACTS;
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not
IV. a mutuum but an accommodation, 21 since he did not actually part with the ownership of his
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that a
THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, certification can be issued to the effect that Sterela had sufficient funds for purposes of its incorporation
UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY but at the same time, he retained some degree of control over his money through his wife who was
AN EMPLOYEE IS APPLICABLE; made a signatory to the savings account and in whose possession the savings account passbook was
given. 22
V.
He likewise asserts that the trial court did not err in finding that petitioner, Atienza's employer, is liable
THE HONORABLE COURT OF APPEALS ERRED IN for the return ofhis money. He insists that Atienza, petitioner's assistant manager, connived with
UPHOLDING THE DECISION OF THE LOWER COURT THAT HEREIN Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of Sterela's
PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER current account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for
DEFENDANTS FOR THE AMOUNT OF P200,000.00 said company, as well as the approval of the authority to debit Sterela's savings account to cover any
REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL overdrawings in its current account. 23
DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR
ATTORNEY'S FEES AND THE COSTS OF SUIT. 11 There is no merit in the petition.

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on At the outset, it must be emphasized that only questions of law may be raised in a petition for review
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply. filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all
However, said rejoinder was filed only on April 21, 1997, due to petitioner's delay in furnishing private over again the evidence presented by the parties during trial. 24 The Court's jurisdiction is in principle
respondent with copy of the reply 12 and several substitutions of counsel on the part of private limited to reviewing errors of law that might have been committed
respondent. 13 On January 17, 2001, the Court resolved to give due course to the petition and by the Court of Appeals. 25 Moreover, factual findings of courts, when adopted and confirmed
required the parties to submit their respective memoranda. 14 Petitioner filed its memorandum on April by the Court of Appeals, are final and conclusive on this Court unless these findings are not supported
16, 2001 while private respondent submitted his memorandum on March 22, 2001. by the evidence on record. 26 There is no showing of any misapprehension of facts
on the part of the Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially
since the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are
also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that thetransaction between them was a commodatum. Article
1933 of the Civil Code distinguishes between the two kinds ofloans in this wise:
By the contract of loan, one of the parties delivers to another, either something
not consumable so that thelatter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as
money, thecontract would be a mutuum. However, there are some instances where a commodatum may
have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may
be the subject of commodatum if the purpose of the contract is
not the consumption ofthe object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or
when the intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. 27 In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that
private respondent agreed to deposit his money in the savings account of Sterela specifically
for the purpose of making it appear "that said firm had sufficient capitalization for incorporation,
with the promise that the amount shall be returned within thirty (30) days. 29 Private respondent
merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good
friend Sanchez. It was however clear to the parties to the transaction that the money would not be
removed from Sterela's savings account and would be returned to private respondent after thirty (30)
days.
Doronilla's attempts to return to private respondent the amount of P200,000.00 which the latter
deposited in Sterela's account together with an additional P12,000.00, allegedly representing interest
on the mutuum, did not convert thetransaction from a commodatum into a mutuum because such was
not the intent of the parties and because theadditional P12,000.00 corresponds
to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he
bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper
for Doronilla to remit to private respondent the interest accruing to the latter's money deposited with
petitioner.
Neither does the Court agree with petitioner's contention that it is not solidarily liable
for the return of private respondent's money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum or
a commodatum, has no bearing on the question of petitioner's liability for the return of private
respondent's money because the factual circumstances of the case clearly show that petitioner, through
its employee Mr. Atienza, was partly responsible for the loss of private respondent's money and is liable
for its restitution.
Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela
for Savings Account No. 10-1567 expressly states that —
"2. Deposits and withdrawals must be made by the depositor personally or
upon his written authority duly authenticated, and neither a deposit nor a
withdrawal will be permitted except upon the production of thedepositor
savings bank book in which will be entered by the Bank the amount deposited
or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch
Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just
once, but several times. Both the Court of Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronilla's "scheme" of defrauding private respondent:
xxx xxx xxx
But the scheme could not have been executed successfully
without the knowledge, help and cooperation ofRufo Atienza, assistant
manager and cashier of the Makati (Buendia) branch of the defendant bank.
Indeed, theevidence indicates that Atienza had not only
facilitated the commission of the fraud but he likewise helped in
devising the means by which it can be done in such manner as to make it
appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant's Buendia branch precisely
because Atienza was a key officer therein. The records show that plaintiff had
suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendant's
branch Makati for "it will be easier for them to get a certification." In fact before
he was introduced to plaintiff, Doronilla had already prepared a letter
addressed to the Buendia branch manager authorizing Angeles B. Sanchez and
company to open a savings account for Sterela in the amount of P200,000.00,
as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank . . ."
(Exh. 1). This is a clear manifestation that the other defendants had been in
consultation with Atienza from the inception of the scheme. Significantly,
there were testimonies and admission that Atienza is the brother-in-law of a
certain Romeo Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund.
Because of the "coordination" between Doronilla and Atienza, the latter knew
before hand that the money deposited did not belong to Doronilla nor to
Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia
Vives that the money belonged to her and her husband and the deposit was
merely to accommodate Doronilla. Atienza even declared that the money
came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records
disclose that the only ones empowered to withdraw the same were Inocencia
 Vives and Angeles B. Sanchez. In the signature card pertaining to this account wrongful act done in the course of his general authority, even though in doing such act, the employee
(Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B. may have failed in its duty to the employer and disobeyed the latter's instructions. 33
Sanchez. Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons whose There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny
authorized signatures are in the signature cards on file with the bank. He, that Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted
however, said that this procedure was not followed here because Sterela was Doronilla in withdrawing funds from Sterela's Savings Account No. 10-1567, in which account private
owned by Doronilla. He explained that Doronilla had thefull authority to respondent's money was deposited, and in transferring the money withdrawn to Sterela's Current
withdraw by virtue of such ownership. The Court is not inclined to agree with Account with petitioner. Atienza's acts of helping Doronilla, a customer of the petitioner, were obviously
Atienza. In the first place, he was all the time aware that the money came from done in furtherance of petitioner's interests 34 even though in the process, Atienza violated
Vives and did not belong to Sterela.. He was also told by Mrs. Vives that they some of petitioner's rules such as those stipulated in its savings account passbook. 35 It was established
were only accommodating Doronilla so that a certification can be issued that the transfer of funds from Sterela's savings account to its current account could not have been
to the effect that Sterela had a deposit of so much amount to be sued accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance
in the incorporation of the firm. In the second place, thesignature of Doronilla which was thecause of private respondent's loss.
was not authorized in so far as that account is concerned inasmuch as he had
not signed the signature card provided by the bank whenever a deposit is
opened. In the third place, neither Mrs. Vives nor Sanchez had given The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code,
Doronilla the authority to withdraw. petitioner is liable for private respondent's loss and is solidarily liable with Doronilla and Dumagpi
for the return of the P200,000.00 since it is clear that petitioner failed to prove that it exercised due
Moreover, the transfer of fund was done without the passbook having been
diligence to prevent the unauthorized withdrawals from Sterela's savings account, and that it was not
presented. It is an accepted practice that whenever a withdrawal is made in a
negligent in the selection and supervision of Atienza. Accordingly, no error was committed
savings deposit, the bank requires the presentation of the passbook. In this
by the appellate court in the award of actual, moral and exemplary damages, attorney's fees and
case, such recognized practice was dispensed with. The transfer
costs of suit to private respondent.
from the savings account to the current account was
without the submission of the passbook which Atienza had given to Mrs. Vives. WHEREFORE, the petition is hereby DENIED. The assailed Decision and
Instead, it was made to appear in a certification signed by Estrella Dumagpi Resolution of the Court of Appeals are AFFIRMED.
that a duplicate passbook was issued to Sterela because the original passbook
had been surrendered to the Makati Branch in view of a loan accommodation SO ORDERED.
assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand
in the execution of this certification, was aware that the contents of the same Bellosillo, Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
are not true. He knew that the passbook was in the hands of Mrs. Vives for he
was the one who gave it to her. Besides, as assistant manager of the branch ||| (Producers Bank of the Philippines v. Court of Appeals, G.R. No. 115324, [February 19, 2003], 445 PHIL
and the bankofficial servicing the savings and current accounts in question, he 702-717)
also was aware that the original passbook was never surrendered. He was also
cognizant that Estrella Dumagpi was not among those authorized to withdraw
so her certification had no effect whatsoever.
FIRST DIVISION
The circumstance surrounding the opening of the current account also
demonstrate that Atienza's active participation in the perpetration of the fraud
and deception that caused the loss. The records indicate that this account was [G.R. No. 146364. June 3, 2004.]
opened three days later after the P200,000.00 was deposited. In spite of his
disclaimer, the Courtbelieves that Atienza was mindful and posted
regarding the opening of the current account considering that Doronilla was COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE
all the while in "coordination" with him. That it was he who GUEVARRA, respondents.
facilitated the approval of the authority to debit the savings account to cover
any overdrawings in the current account (Exh. 2) is not hard to comprehend.

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

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages
caused by their employees acting within the scope of their assigned tasks. To hold the employer liable
under this provision, it must be shown that an employer-employee relationship exists, and CARPIO, J p:
that the employee was acting within the scope of his assigned task when the act complained of was
committed. 32 Case law in the United States of America has it that a corporation that entrusts a general The Case
duty to its employee is responsible to the injured party for damages flowing from the employee's
Before us is a petition for review 1 of the 21 June 2000 Decision 2 and 14 December 2000 Resolution of
the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
decision 3 of the Regional Trial Court of Quezon City, Branch 81, 4 affirming the 15 December 1995
decision 5 of the Metropolitan Trial Court of Quezon City, Branch 31. 6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro Perez for the rights over
a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light
materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyo's demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where
the house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not
show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the
MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the
plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other
person or persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00)
monthly as reasonable compensation for the use of the
premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorney's
fees; and
D) pay the cost of suit.
SO ORDERED. 7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no reversible error in the
decision appealed from, being in accord with the law and evidence presented,
and the same is hereby affirmed en toto.
SO ORDERED. 8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December 1996
to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals,
Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal
by Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution 9 referring the motion
for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution 10 granting the
motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevarra's petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in
Civil Case No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby
declared that the ejectment case filed against defendant-appellant is without
factual and legal basis.
SO ORDERED. 11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarra's petition for review because it was filed out of time.
Moreover, it was Guevarra's counsel and not Guevarra who signed the certification against forum-
shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo's motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby
DENIED. No costs.
SO ORDERED. 12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the
lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance. Thus,
Guevarra's refusal to vacate the house on Pajuyo's demand made Guevarra's continued possession of
the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between Pajuyo
and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarra's claim of a better right under Proclamation No. 137, the Revised National
Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment suit, the
RTC has no power to decide Guevarra's rights under these laws. The RTC declared that in an ejectment
case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title
over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of
Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the agreement is
not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon C.
Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra
was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection
and Disposition of Homelots and Structures in the National Housing Project ("the Code"), the actual
occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of
Appeals concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyo's motion for reconsideration, the appellate court debunked Pajuyo's claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra's motion for extension filed before the Supreme Court
was stamped "13 December 1996 at 4:09 PM" by the Supreme Court's Receiving Clerk. The Court of
Appeals concluded that the motion for extension bore a date, contrary to Pajuyo's claim that the motion
for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14 December 1996.
Thus, the motion for extension properly complied with the condition imposed by the Court of Appeals in
its 28 January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the
petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyo's argument that the appellate court should have dismissed the
petition for review because it was Guevarra's counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY
AND DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent's Motion
for an Extension of thirty days to file petition for review
at the time when there was no more period to extend as
the decision of the Regional Trial Court had already
become final and executory.
2) in giving due course, instead of dismissing, private respondent's
Petition for Review even though the certification against
forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the
parties was in fact a commodatum, instead of a Contract
of Lease as found by the Metropolitan Trial Court and in
holding that "the ejectment case filed against defendant-
appellant is without legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial
Court in Civil Case No. Q-96-26943 and in holding that
the parties are in pari delicto being both squatters,
therefore, illegal occupants of the contested parcel of
land.
5) in deciding the unlawful detainer case based on the so-called
Code of Policies of the National Government Center
Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the
terms and conditions of which are the laws between
themselves. 13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra's petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarra's motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with
the Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that
the filing of the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already
expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law. 14 Decisions of the regional trial courts involving pure questions of law are appealable directly
to this Court by petition for review. 15 These modes of appeal are now embodied in Section 2, Rule 41 of
the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed
his motion for extension to file petition for review before this Court on 14 December 1996. On 3 January
1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra's petition for
review gives the impression that the issues he raised were pure questions of law. There is a question of
law when the doubt or difference is on what the law is on a certain state of facts. 16 There is a question
of fact when the doubt or difference is on the truth or falsity of the facts alleged. 17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra's petition for
review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not
the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a
valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatter's
structure stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal.
However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of the
disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court, 18 we declared that
the Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v. Court of
Appeals, 19 we clarified that the prohibition against granting an extension of time applies only in a case
where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a
petition for review where the pleading needs verification. A petition for review, unlike an ordinary
appeal, requires preparation and research to present a persuasive position. 20 The drafting of the
petition for review entails more time and effort than filing a notice of appeal. 21 Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals, 22 we held
that Liboro's clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact on
the lapse of the reglementary period to appeal if no appeal is perfected. 23 The RTC decision could not
have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra's motion for
extension. The Court of Appeals gave due course to the motion for extension because it complied with
the condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated
that the Court of Appeals would only give due course to the motion for extension if filed on time. The
motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are
(1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the
date of filing of the motion for extension. 24 It is the date of the filing of the motion or pleading, and not
the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even
if the motion for extension bears no date, the date of filing stamped on it is the reckoning point for
determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion
for extension before this Court on 13 December 1996, the date stamped by this Court's Receiving Clerk
on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before the
lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarra's appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarra's favor that Pajuyo raised the procedural issues
against Guevarra's petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court. 25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
court's jurisdiction after voluntarily submitting to it is against public policy. 26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra's failure to sign the
certification against forum shopping. Instead, Pajuyo harped on Guevarra's counsel signing the
verification, claiming that the counsel's verification is insufficient since it is based only on "mere
information." ACIESH
A party's failure to sign the certification against forum shopping is different from the party's failure to
sign personally the verification. The certificate of non-forum shopping must be signed by the party, and
not by counsel. 27 The certification of counsel renders the petition defective. 28
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite. 29 It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith. 30 The party need not sign the verification. A party's representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification. 31
We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely
an afterthought. Pajuyo did not call the Court of Appeals' attention to this defect at the early stage of
the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the
Issue of Possession
Settled is the rule that the defendant's claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case. 32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession. 33 The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land. 34 This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible
entry and unlawful detainer, where the only issue for adjudication is the physical or material possession
over the real property. 35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case?
The Court of Appeals believed so and held that it would just leave the parties where they are since they
are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except
to prove the nature of the possession when necessary to resolve the issue of physical possession. 36 The
same is true when the defendant asserts the absence of title over the property. The absence of title over
the contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is — who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure. 37 It does not even matter if a party's title to the property is questionable, 38 or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency. 39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror. 40 Neither is the
unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself. 41 Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him. 42 To repeat, the only issue that the court has to settle in an ejectment suit is the
right to physical possession.
In Pitargue v. Sorilla, 43 the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff
had prior possession and had already introduced improvements on the public land. The plaintiff had a
pending application for the land with the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The government was
not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while
the application of the plaintiff was still pending, title remained with the government, and the Bureau of
Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts have
jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by
priority of his application and of his entry, acquired prior physical possession over the public land applied
for as against other private claimants. That prior physical possession enjoys legal protection against
other private claimants because only a court can take away such physical possession in an ejectment
case.
While the Court did not brand the plaintiff and the defendant in Pitargue 44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner's permission. Title to the land remained with the government because it
had not awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant
were in effect squatting on government property. Yet, we upheld the courts' jurisdiction to resolve the
issue of possession even if the plaintiff and the defendant in the ejectment case did not have any title
over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his. 45 The party deprived of possession must not take the law into his own
hands. 46 Ejectment proceedings are summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social disturbances. 47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take
cognizance of possessory actions involving these public lands before final
award is made by the Lands Department, and before title is given any of the
conflicting claimants? It is one of utmost importance, as there are public lands
everywhere and there are thousands of settlers, especially in newly opened
regions. It also involves a matter of policy, as it requires the determination of
the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the
old, which was in force in this country before the American occupation, or in
the new, we have a possessory action, the aim and purpose of which is the
recovery of the physical possession of real property, irrespective of the
question as to who has the title thereto. Under the Spanish Civil Code we had
the accion interdictal, a summary proceeding which could be brought within
one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6
Phil. 286, 291); and as early as October 1, 1901, upon the enactment of
the Code of Civil Procedure (Act No. 190 of the Philippine Commission) we
implanted the common law action of forcible entry (section 80 of Act No. 190),
the object of which has been stated by this Court to be "to prevent breaches of
the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves entitled to the
possession of property, resort to force to gain possession rather than to some
appropriate action in the court to assert their claims." (Supia and Batioco
vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first
Public Land Act (Act No. 926) the action of forcible entry was already available
in the courts of the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to alienate and
dispose of the public lands in the Lands Department, to exclude the courts from
entertaining the possessory action of forcible entry between rival claimants or
occupants of any land before award thereof to any of the parties? Did Congress
intend that the lands applied for, or all public lands for that matter, be removed
from the jurisdiction of the judicial Branch of the Government, so that any
troubles arising therefrom, or any breaches of the peace or disorders caused by
rival claimants, could be inquired into only by the Lands Department to the
exclusion of the courts? The answer to this question seems to us evident. The
Lands Department does not have the means to police public lands; neither does
it have the means to prevent disorders arising therefrom, or contain breaches
of the peace among settlers; or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and alienation, and
while it may decide conflicts of possession in order to make proper award, the
settlement of conflicts of possession which is recognized in the court herein has
another ultimate purpose, i.e., the protection of actual possessors and occupants
with a view to the prevention of breaches of the peace. The power to dispose and
alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the
final award. As to this, therefore, the corresponding branches of the
Government must continue to exercise power and jurisdiction within the limits
of their respective functions. The vesting of the Lands Department with authority
to administer, dispose, and alienate public lands, therefore, must not be
understood as depriving the other branches of the Government of the exercise of
the respective functions or powers thereon, such as the authority to stop disorders
and quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not involving,
directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to
the effect that courts have no jurisdiction to determine the rights of claimants
to public lands, and that until the disposition of the land has passed from the
control of the Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093-1094.) We have
no quarrel with this principle. The determination of the respective rights of rival
claimants to public lands is different from the determination of who has the
actual physical possession or occupation with a view to protecting the same
and preventing disorder and breaches of the peace. A judgment of the court
ordering restitution of the possession of a parcel of land to the actual occupant,
who has been deprived thereof by another through the use of force or in any
 other illegal manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other hand, if courts were
deprived of jurisdiction of cases involving conflicts of possession, that threat of
judicial action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice,
would rule.
It must be borne in mind that the action that would be used to solve conflicts of
possession between rivals or conflicting applicants or claimants would be no
other than that of forcible entry. This action, both in England and the United
States and in our jurisdiction, is a summary and expeditious remedy whereby
one in peaceful and quiet possession may recover the possession of which he
has been deprived by a stronger hand, by violence or terror; its ultimate object
being to prevent breach of the peace and criminal disorder. (Supia and Batioco
vs.Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran
vs. Villanueva, 37 Phil. 752.) The title or right to possession is never in issue in an
action of forcible entry; as a matter of fact, evidence thereof is expressly
banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules
of Court.) With this nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of the remedy in the
courts of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the case at bar can
it be pretended at all that its result would in any way interfere with the manner
of the alienation or disposition of the land contested? On the contrary, it would
facilitate adjudication, for the question of priority of possession having been
decided in a final manner by the courts, said question need no longer waste the
time of the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code 48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims 'ex dolo malo non eritur actio'
and 'in pari delicto potior est conditio defedentis.' The law will not aid either party
to an illegal agreement. It leaves the parties where it finds them. 49
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate
well-established public policy. 50
In Drilon v. Gaurana, 51 we reiterated the basic policy behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is
that, regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be turned out by strong hand, violence or
terror. In affording this remedy of restitution the object of the statute is to
prevent breaches of the peace and criminal disorder which would ensue from
the withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their
claims. This is the philosophy at the foundation of all these actions of forcible
entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his. 52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem
and lawlessness. A squatter would oust another squatter from possession of the lot that the latter had
illegally occupied, emboldened by the knowledge that the courts would leave them where they are.
Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at all
cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of
possession seek to prevent. 53 Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a serious and urgent matter that cannot be left
to the squatters to decide. To do so would make squatters receive better treatment under the law. The
law restrains property owners from taking the law into their own hands. However, the principle of pari
delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or
violently retake possession of properties usurped from them. Courts should not leave squatters to their
own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals
refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the
pivotal issue in this case is who between Pajuyo and Guevarra has the "priority right as beneficiary of the
contested land under Proclamation No. 137." 54 According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137.
He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarra's unsubstantiated claim that
he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into
law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No.
137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No.
137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra
did not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra
has a pending application over the lot, courts should still assume jurisdiction and resolve the issue of
possession. However, the jurisdiction of the courts would be limited to the issue of physical possession
only.
In Pitargue, 55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants
to public land is, however, distinct from the determination of who has the actual physical possession or
who has a better right of physical possession. 56 The administrative disposition and alienation of public
lands should be threshed out in the proper government agency. 57
The Court of Appeals' determination of Pajuyo and Guevarra's rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should
not preempt the decision of the administrative agency mandated by law to determine the qualifications
of applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace. 58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyo's prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon
City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang
manirahan sa nasabing bahay at lote ng "walang bayad." Kaugnay nito,
kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila'y kusang aalis ng
walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyo's demand but Guevarra broke his promise and refused to heed Pajuyo's
demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the expiration
or termination of the former's right to hold possession under a contract, express or implied. 59
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie. 60 The defendant's refusal to comply with the demand makes his
continued possession of the property unlawful. 61 The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance
of the owner. 62
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyo's forbearance. Pajuyo did not
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarra's refusal to
comply with Pajuyo's demand to vacate made Guevarra's continued possession of the property
unlawful.
We do not subscribe to the Court of Appeals' theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it. 63 An essential feature of commodatum is
that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is
for a certain period. 64 Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which the commodatum is
constituted. 65 If the bailor should have urgent need of the thing, he may demand its return for
temporary use. 66 If the use of the thing is merely tolerated by the bailor, he can demand the return of
the thing at will, in which case the contractual relation is called a precarium. 67 Under the Civil
Code,precarium is a kind of commodatum. 68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease. 69 The
tenant's withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of
commission, administration and commodatum. 70These contracts certainly involve the obligation to
deliver or return the thing received. 71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy.
Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to
physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarra's
recognition of Pajuyo's better right of physical possession. Guevarra is clearly a possessor in bad faith.
The absence of a contract would not yield a different result, as there would still be an implied promise to
vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act." 72 Guevarra bases his argument on
the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized
housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
Prior possession is not always a condition sine qua non in ejectment. 73 This is one of the distinctions
between forcible entry and unlawful detainer. 74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he
must allege and prove prior possession. 75 But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required. 76
Pajuyo's withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra's transient right WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated 11
property because Guevarra had to seek Pajuyo's permission to temporarily hold the property and November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch
rested with Pajuyo and this is evidence of actual possession. 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorney's fees is deleted.
No costs.
Pajuyo's absence did not affect his actual possession of the disputed property. Possession in the eyes of
the law does not mean that a man has to have his feet on every square meter of the ground before he is SO ORDERED. ASHECD
deemed in possession. 77One may acquire possession not only by physical occupation, but also by the
fact that a thing is subject to the action of one's will. 78 Actual or physical occupation is not always Davide, Jr., C .J ., Panganiban, Ynares-Santiago and Azcuna, JJ ., concur.
necessary. 79
||| (Pajuyo v. Court of Appeals, G.R. No. 146364, [June 3, 2004], 474 PHIL 557-595)
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
EN BANC
property." 80 We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
[G.R. No. L-17474. October 25, 1962.]
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have evicted
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V.
the contending squatters, Pajuyo and Guevarra.
BAGTAS, defendant. FELICIDAD M. BAGTAS, Administratrix of the Intestate
Since the party that has title or a better right over the property is not impleaded in this case, we cannot Estate left by the late Jose V. Bagtas, petitioner-appellant.
evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the courts
in settling the issue of physical possession. Stripping both the plaintiff and the defendant of possession
just because they are squatters would have the same dangerous implications as the application of the D. T. Reyes, Luison & Associates for petitioner-appellant.
principle of pari delicto. Squatters would then rather settle the issue of physical possession among
themselves than seek relief from the courts if the plaintiff and defendant in the ejectment case would Solicitor General for plaintiff-appellee.
both stand to lose possession of the disputed property. This would subvert the policy underlying actions
for recovery of possession.
SYLLABUS
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing 1. CONTRACTS; LOAN OF BULLS FOR BREEDING PURPOSES; NATURE OF CONTRACT AFFECTED BY
evidence and presenting arguments before the proper administrative agency to establish any right to PAYMENT OF FEE. — The loan by the Bureau of Animal Industry to the defendant of three bulls for
which they may be entitled under the law. 81 breeding purposes for a period of one year, later on renewed for another as regards one bull, was
subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. If the
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
breeding fee be considered a compensation, the contract would be a lease of the bulls; it could not be a
physical possession does not affect title to the property nor constitute a binding and conclusive
contract of commodatum, because that contract is essential gratuitous.
adjudication on the merits on the issue of ownership. 82 The owner can still go to court to recover
lawfully the property from the person who holds the property without legal title. Our ruling here does 2. JUDGMENTS; PROCEEDINGS FOR ADMINISTRATIONS AND SETTLEMENT OF ESTATE OF THE
not diminish the power of government agencies, including local governments, to condemn, abate, DECEASED; ENFORCEMENT OF MONEY JUDGMENT. — Where special proceedings for the
remove or demolish illegal or unauthorized structures in accordance with existing laws. administration and settlement of the estate of the deceased have been instituted, the money judgment
rendered in favor of a party cannot be enforced by means of a writ of execution, but must be presented
Attorney's Fees and Rentals
to the probate court for payment by the administrator appointed by the court.
The MTC and RTC failed to justify the award of P3,000 attorney's fees to Pajuyo. Attorney's fees as part
of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code. 83 Thus, the
award of attorney's fees is the exception rather than the rule. 84 Attorney's fees are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to DECISION
litigate. 85 We therefore delete the attorney's fees awarded to Pajuyo.

We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not
dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo.
The P300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995. PADILLA, J p:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the
expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only
one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On
25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of
the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal
Industry advised him that the book value of the three bulls could not be reduced and that they either be
returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of
Manila the Republic of the Philippines commenced an action against him praying that he be ordered to
return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P499.62, both with interests, and costs; and that other just and
equitable relief be granted it (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of
the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of
the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the
bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.
After hearing, on 30 July 1956 the trial court rendered judgment —
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total
value of the three bulls plus the breeding fees in the amount of P626.17 with
interest on both sums of (at) the legal rate from the filing of this complaint and
costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on
18 October and issued on 11 November 1958. On 2 December 1958 it granted an ex-parte motion
filed by the plaintiff on 28 November 1958 for the appointment of a special sheriff to serve the writ
outside Manila. Of this order appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas,
the surviving spouse of the defendant Jose V. Bagtas who died on 23 October 1951 and as
administratrix of his estate, was notified. On 7 January 1959 she filed a motion alleging that on 26
June 1952 the two bulls, Sindhi and Bhagnari, were returned to the Bureau of Animal Industry and
that sometime in November 1953 the third bull, the Sahiniwal, died from gunshot wounds inflicted
during a Huks raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed
and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her
motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court
denied her motion. Hence, this appeal certified by the Court of Appeals to this Court, as stated at
the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned
the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal
Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of
execution the appellee prays "that another writ of execution in the sum of P859.5.3 be issued against the
estate of defendant deceased José V. Bagtas." She cannot be held liable for the two bulls which already
had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of the
returning the bull or paying its value to the appellee. The contention is without merit. The loan by the
appellee to the late defendant José V. Bagtas of the three bulls for breeding purposes for a period of one
year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject
to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant
contends that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure A contract of commodatum is
essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a
lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities
of a possessor in bad faith, because she had continued possession of the bull after the expiry of the
contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of
the Civil Code provides that a bailee in a contract of commodatum —
. . . is liable for loss of the thing, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated. . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event:
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the
bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had each an appraised book
value, to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It
was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the
appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings of
the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that
his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is
untenable, because section 17 of Rule 3 of the Rules of Court provides that —
After a party dies and the claim is not thereby extinguished, the court shall
order, upon proper notice, the legal representative of the deceased to appear
and to be substituted for the deceased, within a period of thirty (30) days, or
within such time as may be granted . . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of
Rule 3 which provides that —
Whenever a party to a pending case dies . . . it shall be the duty of his attorney
to inform the court promptly of such death . . . and to give the name and
residence of the executor or administrator, guardian, or other legal
representative of the deceased . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas
had been issued letters of administration of the estate of the late José V. Bagtas and that "all
persons having claims for money against the deceased José V. Bagtas, arising from contract,
express or implied, whether the same be due, not due, or contingent, for funeral expenses and
expenses of the last sickness of the said decedent, and judgment for money against him, to file
said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six
(6) months from the date of the first publication of this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said
 deceased," is not a notice to the court and the appellee who were to be notified of the defendant's
death in accordance with the abovequoted rule, and there was no reason for such failure to notify,
because the attorney who appeared for the defendant was the same who represented the
administratrix in the special proceedings instituted for the administration and settlement of his
estate. The appellee or its attorney or representative could not be expected to know of the death
of the defendant or of the administration proceedings of his estate instituted in another court, if
the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as
required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is
only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee,
because it was killed while in the custody of the administratrix of his estate. This is the amount prayed
for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the
appellant for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased José V. Bagtas
having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in
favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the
probate court for payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes,
Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand
(Clause 7 of the contract, Exhibit "A"; articles 1740, paragraph, and 1741 of the Civil Code). The
obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand means that he should return all of them to the plaintiff at the latter's residence or house.
The defendant did not comply with this obligation when he merely placed them at the disposal of
the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps.
2. ID.; ID.; EXPENSES FOR DEPOSIT OF FURNITURE. — AS the defendant had
voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the
Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture
at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit;
nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant
wanted to retain the three gas heaters and the four electric lamps.
3. ID.; ID.; VALUE OF FURNITURE. — AS to the value of the furniture. we do not believe
that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to
return some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant
has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to
deliver some of the furniture, the value thereof should be later determined by the trial Court
through evidence which the parties may desire to present.
4. COSTS OF LITIGATION. — The costs in both instances should be borne by the
defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure).
The defendant was the one who breached the contract of Commodatum, and without any reason
Dizon, he refused to return and deliver all the furniture upon the plaintiff's demand. In these
circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which
the plaintiff would not have otherwise defrayed.

||| (Republic v. Bagtas, G.R. No. L-17474, [October 25, 1962], 116 PHIL 570-576)

DECISION
KINDS:

IMPERIAL, J p:
EN BANC

The plaintiff brought this action to compel the defendant to return to her certain
[G.R. No. 46240. November 3, 1939.] furniture which she lent him for his use. She appealed from the judgment of the Court of First
Instance of Manila which ordered that the defendant return to her the three gas heaters and the
four electric lamps found in the possession of the Sheriff of said city, that she call for the other
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs- furniture from the said Sheriff of Manila at her own expense, and that the fees which the sheriff
appellants, vs. BECK, defendant-appellee. may charge for the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on
Mauricio Carlos; for appellants. M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the use of
Felipe Buencamino, Jr.; for appellee.
the furniture described in the third paragraph of the stipulation of facts, subject to the condition
that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold
the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified
SYLLABUS the defendant of the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to return all the
furniture transferred to him for his use. The defendant answered that she may call for them in the
1. COMMODATUM; OBLIGATION OF THE PARTIES. — The contract entered into house where they are found. On November 5, 1936, the defendant, through another person, wrote
between the parties is one of commodatum, because under t the plaintiff gratuitously granted the to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On
use of the furniture to the defendant reserving for herself the ownership thereof, by this contract the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that
he could not give up the three gas heaters and the four electric lamps because he would use them Avanceña, C.J., Villa-Real, Diaz, Laurel, Concepcionand Moran, JJ., concur.
until the 15th of the same month when the lease is due to expire. The plaintiff refused to get the
furniture in view of the fact that the defendant had declined to make delivers of all of them. On
November 15th, before vacating the house, the defendant deposited with the Sheriff all the ||| (Quintos v. Beck, G.R. No. 46240, [November 3, 1939], 69 PHIL 108-112)
furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No.
1521, Rizal Avenue. in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly
applied the law: in holding that they violated the contract by not calling for all the furniture on FIRST DIVISION
November 5, 1936, when the defendant placed them at their disposal; in not ordering the
defendant to pay them the value of the furniture in case they are not delivered; in holding that
they should get all the furniture from the sheriff at their expenses; in ordering them to pay one- [G.R. Nos. 80294-95. September 21, 1988.]
half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both
parties should pay their respective legal expenses or the costs; and in denying the motions for
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF EGMIDIO
defendant complied with his obligation to return the furniture upon the plaintiff's demand;
OCTAVIANO AND JUAN VALDEZ, respondents.
whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the
costs of litigation.
The contract entered into between the parties is one of commodatum, because under it Valdez Ereso Polido & Associates for petitioner.
the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the Claustro, Claustro Claustro Law Office collaborating counsel for petitioner.
plaintiff, upon the latter's demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1,
and 1741 of the Civil Code) The obligation voluntarily assumed by the defendant to return the Jaime G. de Leon for the Heirs of Egmidio Octaviano.
furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the
latter's residence or house. The defendant did not comply with this obligation when he merely Cabato Law Office for the Heirs of Juan Valdez.
placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the
four electric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties
are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion SYLLABUS
that the plaintiff failed to comply with her obligation to get the furniture when they were offered
to her.
REMEDIAL LAW; JUDGMENT; RES JUDICATA.— The findings of the trial court affirmed by the
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, appellate court that the private respondent's predecessor were possessors of the lots in dispute with
upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned claim of ownership from 1906 to 1951 while the petitioner was in possession as borrower
by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to in commodatum up to 1951 are res judicata between the parties.
place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain the three gas heaters and the four electric
lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the DECISION
payment thereof by the defendant in case of his inability to return some of the furniture, because
under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted
the correctness of the said value. Should the defendant fail to deliver some of the furniture, the
value thereof should be later determined by the trial Court through evidence which the parties
GANCAYCO, J p:
may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long
the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who time ago can properly be considered res judicata by respondent Court of Appeals in the present two
breached the contract of commodatum, and without any reason he refused to return and deliver all cases between petitioner and two private respondents.
the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he
pay the legal expenses and other judicial costs which the plaintiff would not have otherwise Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth
defrayed. Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R.
No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the
The appealed judgment is modified and the defendant is ordered to return and deliver Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet
to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and
deposit of the furniture with the Sheriff shall be for the account of the defendant. The defendant "WHEREFORE, Judgment is hereby rendered ordering the
shall pay the costs in both instances. So ordered. defendant, Catholic Vicar Apostolic of the Mountain Province to return and
 surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and
Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio
Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the
plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay
costs." (p 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4, 1977 in CA-G.R. No. 38830-R, in the
two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the
two lots were possessed by the predecessors-in-interest of private respondents under
claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same
lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is
no possibility of acquisitive prescription which requires 10 years possession with just title and 30
years of possession without; that the principle of res judicata on these findings by
the Court of Appeals will bar a reopening of these questions of fact; and that those facts may no longer
be altered. cdll
Petitioner's motion for reconsideration of the respondent appellate court's Decision in the two
aforementioned cases (CA-G.R. No. CV-05418 and 05419) was denied.
The facts and background of the cases as narrated by the trial court are as follows —
". . . The documents and records presented reveal that the whole controversy
started when the defendant Catholic Vicar Apostolic of the Mountain Province
(VICAR for brevity) filed with the Court of First Instance ofBaguio-Benguet, on
September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4
in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as
LRC N-91, said Lots being the sites ofthe Catholic Church building, convents,
high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the
Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3,
respectively, asserting ownership and title thereto. After trial on the merits, the
land registration court promulgated its Decision, dated November 17, 1965,
confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the
Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607)
appealed the decision of the land registration court to the
then Courtof Appeals, docketed as CA-G.R. No. 38830-R.
The Court of Appeals rendered its decision, dated May 9, 1977, reversing the
decision of the land registration court and dismissing the VICAR's application as
to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now at bar), the
first lot being presently occupied by the convent and the second by the
women's dormitory and the sisters' convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration
praying the Court of Appeals to order the registration of Lot 3 in the
names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the
Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration
praying that both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12, 1977,
the Court of Appealsdenied the motion for reconsideration filed by the
Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify
reconsideration one way or the other . . .," and likewise denied that of the
Heirs ofEgmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on
certiorari of the decision of the Court of Appeals dismissing his (its) application
for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled,
'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and
Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration,
the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the
Supreme Court a petition for review, docketed as G.R. No. L-46872, entitled,
'Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar,
Heirs of Egmidio Octaviano and Amable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both
petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita
Valdez on the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L-46872, the
Heirs of Octaviano filed with the then Court ofFirst Instance of Baguio, Branch
11, a Motion For Execution of Judgment praying that the Heirs of Octaviano be
placed in possession of Lot 3. The Court, presided over by Hon. Salvador J.
Valdez, on December 7, 1978, denied the motion on the ground that
the Court of Appeals decision in CA-G.R. No. 38870 did not grant the
Heirs ofOctaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a
petition for certiorari and mandamus, docketed as CA-G.R. No. 08890-R,
entitled 'Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar.'
In its decision dated May 16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for
recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No.
3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2
(Decision, pp. 199-201, Orig. Rec.).
"In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio
Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the
alleged ownership of the land in question (Lot 3) by their predecessor-in-
interest, Egmidio Octaviano (Exh. C); his written demand (Exh. B - B-4) to
defendant Vicar for the return of the land to them; and the reasonable rentals
for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of Benguet,
Atty. Nicanor Sison, who testified that the land in question is not covered by
any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The
defendant dispensed with the testimony of Mons. William Brasseur when the
plaintiffs admitted that the witness if called to the witness stand, would testify
that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed permanent structures
thereon.
"In Civil Case No. 3655, the parties admitting that the material facts are not in
dispute, submitted the case on the sole issue of whether or not the
decisions of the Court of Appeals and the Supreme Court touching on the
 ownership of Lot 2, which in effect declared the plaintiffs the owners of the
land constitute res judicata.
"In these two cases, the plaintiffs argue that the defendant Vicar is barred from
setting up the defense ofownership and or long and continuous
possession of the two lots in question since this is barred by prior
judgment of the Court of Appeals in CA-G.R. No. 038830-R under the
principle of res judicata. Plaintiffs contend that the question of possession and
ownership have already been determined by the Court of Appeals (Exh. C,
Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1,
Minute Resolution of the Supreme Court). On his part,
defendant Vicar maintains that the principle of res judicata would not prevent
them from litigating the issues of long possession and ownership. Because the
dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely
dismissed their application for registration and titling of lots 2 and 3.
Defendant Vicar contends that only the dispositive portion of the decision, and
not its body, is the controlling pronouncement of the Court of Appeals." 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3
WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY
EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONER'S CLAIM IT PURCHASED LOTS 2
AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED
ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT
LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE
RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS
SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN
1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE
1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE
DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830
WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED
ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE
RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OFLOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP
IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN
POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE (BORROWER)
IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN
GOOD FAITH WITHOUT RIGHTS OF RETENTION AND
REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 033830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it
clearly held that it was in agreement with the findings of the trial court that the
Decision of the Court of Appeals dated May 4, 1977 in CA-G.R. No. 38830-R, on the
question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision (CA-G.R. No.
38830-R) did not positively declare private respondents as owners of the land, neither was it declared
that they were not owners of the land, but it held that the predecessors of private respondents were
possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in
possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the
properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in
1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary acquisitive
prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R.
No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said
findings are res judicatabetween the parties. They can no longer be altered by presentation of evidence
because those issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination of issues without
end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No.
38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register
the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession
for ordinary acquisitive prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3
was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely
no documentary evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both
Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2
and 3, because the buildings standing thereon were only constructed after liberation in 1945.
Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements on Lots 1, 2,
3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed
only in 1951 and the new convent only 2 years before the trial in 1963. prLL
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from
Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the
house, but when they allowed its free use, they became bailors in commodatum and the petitioner the
bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject
matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for
taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by
way ofordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
under claim ofownership in good faith from 1906; that petitioner Vicar was only a bailee
in commodatum; and that the adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its
findings of fact have become incontestible. This Court declined to review said decision, thereby in
effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion,
when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the
principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149.
The facts as supported by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the
Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is
AFFIRMED, with costs against petitioner. LibLex
SO ORDERED.
Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.
||| (Catholic Vicar Apostolic of the Mountain Province v. Court of Appeals, G.R. Nos. 80294-95, [September
21, 1988])
C. SIMPLE LOAN OR MUTUUM: General Concepts
THIRD DIVISION
[G.R. Nos. 173654-765. August 28, 2008.]
PEOPLE OF THE PHILIPPINES, petitioners,vs.TERESITA PUIG and ROMEO
PORRAS, respondent.
DECISION
CHICO-NAZARIO, J p:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner
People of the Philippines, represented by the Office of the Solicitor General, praying for the
reversal of the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of
the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft
filed against respondents Teresita Puig and Romeo Porras, and denying petitioner's Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165. IDAaCc
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before Branch 68 of
the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig)
and Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private
complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to
05-3165.
The allegations in the Informations 1 filed before the RTC were uniform and pro-
forma, except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality
of Pototan, Province of Iloilo, Philippines, and within the jurisdiction of this
Honorable Court, above-named [respondents],conspiring, confederating,
and helping one another, with grave abuse of confidence,being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,Pototan,
Iloilo, without the knowledge and/or consent of the management of the
Bank and with intent of gain, did then and there willfully, unlawfully and
feloniously take, steal and carry away the sum of FIFTEEN THOUSAND
PESOS (P15,000.00),Philippine Currency, to the damage and prejudice of
the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence
of probable cause that would have necessitated the issuance of a warrant of arrest based on the
following grounds:
(1) the element of 'taking without the consent of the owners' was missing on
the ground that it is the depositors-clients, and not the Bank, which
filed the complaint in these cases, who are the owners of the money
allegedly taken by respondents and hence, are the real parties-in-
interest; and
(2) the Informations are bereft of the phrase alleging "dependence,
guardianship or vigilance between the respondents and the
offended party that would have created a high degree of
confidence between them which the respondents could have
abused." ADECcI
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push
through would be violative of the right of the respondents under Section 14 (2), Article III of
the 1987 Constitution which states that in all criminal prosecutions, the accused shall enjoy the
right to be informed of the nature and cause of the accusation against him. Following Section 6,
Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January
2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration 2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order 3 denying petitioner's Motion for Reconsideration was issued
by the RTC, finding as follows:
 Accordingly, the prosecution's Motion for Reconsideration should
be, as it hereby, DENIED. The Order dated January 30, 2006 STANDS in all
respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45,
raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED
THEFT SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE
CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF
GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders
dated 30 January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed
with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and
current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "a person
who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality." Thus, it posits that the
depositors who place their money with the bank are considered creditors of the bank. The bank
acquires ownership of the money deposited by its clients, making the money taken by respondents
as belonging to the bank. aSEHDA
Petitioner also insists that the Informations sufficiently allege all the elements of the
crime of qualified theft, citing that a perusal of the Informations will show that they specifically
allege that the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan,
Inc.,respectively, and that they took various amounts of money with grave abuse of confidence,
and without the knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the
ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a
finding of probable cause for the issuance of a warrant of arrest presupposes evaluation of facts
and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ),through the Secretary
of Justice, is the principal party to file a Petition for Review on Certiorari, considering that the
incident was indorsed by the DOJ. HECTaA
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of probable
cause which will justify the issuance of the warrant of arrest. Petitioner assails the dismissal
contending that the Informations for Qualified Theft sufficiently state facts which constitute (a)
the qualifying circumstance of grave abuse of confidence; and (b) the element of taking, with intent
to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC
judge found the allegations in the Information inadequate. He ruled that the Information failed to
state facts constituting the qualifying circumstance of grave abuse of confidence and the element
of taking without the consent of the owner,since the owner of the money is not the Bank, but the
depositors therein. He also cites People v. Koc Song, 4 in which this Court held:
There must be allegation in the information and proof of a
relation, by reason of dependence, guardianship or vigilance, between the
respondents and the offended party that has created a high degree of
confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts
constitutive of the elements of the offense charged. This, therefore, makes the issue of sufficiency of
the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows,viz.:
ART. 310. Qualified Theft.— The crime of theft shall be punished
by the penalties next higher by two degrees than those respectively
specified in the next preceding article, if committed by a domestic
servant, or with grave abuse of confidence, or if the property stolen is motor
vehicle, mail matter or large cattle or consists of coconuts taken from the
premises of a plantation, fish taken from a fishpond or fishery or if property
is taken on the occasion of fire, earthquake, typhoon, volcanic eruption, or
any other calamity, vehicular accident or civil disturbance. (Emphasis
supplied.) HcaDIA
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking
of another's property without violence or intimidation against persons or force upon things. The
elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force
upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner's consent;
5. That it be accomplished without the use of violence or
intimidation against persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court
requires, inter alia, that the information must state the acts or omissions complained of as
constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the
Rules of Court, is enlightening:
Section 9. Cause of the accusation.— The acts or omissions
complained of as constituting the offense and the qualifying and
aggravating circumstances must be stated in ordinary and concise language
and not necessarily in the language used in the statute but in terms sufficient
to enable a person of common understanding to know what offense is being
charged as well as its qualifying and aggravating circumstances and for the
court to pronounce judgment.
 It is evident that the Information need not use the exact language of the statute in
alleging the acts or omissions complained of as constituting the offense. The test is whether it
enables a person of common understanding to know the charge against him, and the court to
render judgment properly. 5
The portion of the Information relevant to this discussion reads: HcTSDa
[A]bove-named [respondents],conspiring, confederating, and
helping one another, with grave abuse of confidence, being the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc.,Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank ....
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank
who come into possession of the monies deposited therein enjoy the confidence reposed in them
by their employer. Banks, on the other hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express provisions of the law, but from
established jurisprudence. The relationship between banks and depositors has been held to be
that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately pointed
out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning
loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the
nature of possession by the Bank of the money deposits therein, and the duties being performed
by its employees who have custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such employees acted with grave
abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to it
as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a graphic
illustration, we cite Roque v. People, 6 where the accused teller was convicted for Qualified Theft
based on this Information:
That on or about the 16th day of November, 1989, in the
municipality of Floridablanca, province of Pampanga, Philippines and within
the jurisdiction of his Honorable Court, the above-named accused
ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air
Base Savings and Loan Association Inc. (BABSLA) with office address at
Basa Air Base, Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital contributions
from its member/contributors of said corporation, and having collected and
received in her capacity as teller of the BABSLA the sum of TEN THOUSAND
PESOS (P10,000.00),said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said
corporation, did then and there willfully, unlawfully and feloniously take,
steal and carry away the amount of P10,000.00, Philippine currency, by
making it appear that a certain depositor by the name of Antonio Salazar
withdrew from his Savings Account No. 1359, when in truth and in fact said
Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the
damage and prejudice of BABSLA in the total amount of P10,000.00,
Philippine currency. aEcHCD
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank
places money in the teller's possession due to the confidence reposed on the
teller, the felony of qualified theft would be committed. 7
Also in People v. Sison, 8 the Branch Operations Officer was convicted of the crime of
Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between
January 24, 1992 and February 13, 1992, both dates inclusive, in the City of
Manila, Philippines, the said accused did then and there wilfully, unlawfully
and feloniously, with intent of gain and without the knowledge and consent
of the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different
denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity),Luneta Branch, Manila
represented by its Branch Manager, HELEN U. FARGAS, to the damage and
prejudice of the said owner in the aforesaid amount of P6,000,000.00,
Philippine Currency.
That in the commission of the said offense, herein accused acted
with grave abuse of confidence and unfaithfulness, he being the Branch
Operation Officer of the said complainant and as such he had free access to
the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the
Philippine Commercial and Industrial Bank (PCIB),is Qualified Theft.
Appellant could not have committed the crime had he not been holding the
position of Luneta Branch Operation Officer which gave him not only sole
access to the bank vault ....The management of the PCIB reposed its trust
and confidence in the appellant as its Luneta Branch Operation Officer, and
it was this trust and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB .... 9 cCTAIE
From another end, People v. Locson, 10 in addition to People v. Sison, described the
nature of possession by the Bank. The money in this case was in the possession of the defendant
as receiving teller of the bank, and the possession of the defendant was the possession of the
Bank. The Court held therein that when the defendant, with grave abuse of confidence, removed
the money and appropriated it to his own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of confidence, with
intent to gain and without the knowledge and consent of the Bank, without necessarily stating the
phrase being assiduously insisted upon by respondents, "of a relation by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which respondents abused," 12 and without employing
the word "owner" in lieu of the "Bank" were considered to have satisfied the test of sufficiency of
allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the
Bank in this case, there is even no reason to quibble on the allegation in the Informations that they
acted with grave abuse of confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the requirement of the law in
qualifying the crime of Theft.
 In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the
confidence reposed in them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant
petition, the ruling inMobilia Products, Inc. v. Hajime Umezawa 13 is instructive. The Court thus
enunciated: CacTIE
In a criminal case in which the offended party is the State, the
interest of the private complainant or the offended party is limited to the
civil liability arising therefrom. Hence, if a criminal case is dismissed by the
trial court or if there is an acquittal, a reconsideration of the order of
dismissal or acquittal may be undertaken, whenever legally feasible, insofar
as the criminal aspect thereof is concerned and may be made only by the
public prosecutor; or in the case of an appeal, by the State only, through the
OSG. ....
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is
well-settled that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may
be raised, 14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a
closer look at the records of the preliminary investigation conducted will show that, indeed,
probable cause exists for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of
the Rules of Court, the judge shall issue a warrant of arrest only upon a finding of probable cause
after personally evaluating the resolution of the prosecutor and its supporting evidence. Soliven v.
Makasiar, 15 as reiterated in Allado v. Driokno, 16 explained that probable cause for the issuance
of a warrant of arrest is the existence of such facts and circumstances that would lead a reasonably
discreet and prudent person to believe that an offense has been committed by the person sought
to be arrested. 17The records reasonably indicate that the respondents may have, indeed,
committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the
judge, as the case may be, to relieve the respondents from the pain of going through a trial once it
is ascertained that no probable cause exists to form a sufficient belief as to the guilt of the
respondents, conversely, it is also equally imperative upon the judge to proceed with the case
upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal
Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of
Arrest issue against herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of
Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054
to 05-3165, inclusive, with reasonable dispatch. No pronouncement as to costs. CDEaAI
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Reyes and Leonardo-de Castro, * JJ., concur.
||| (People v. Puig, G.R. Nos. 173654-765, [August 28, 2008], 585 PHIL 555-568)
THIRD DIVISION
[G.R. NO. 123498. November 23, 2007.]
BPI FAMILY BANK, petitioner, vs. AMADO FRANCO and COURT OF
APPEALS, respondents.
DECISION
NACHURA, J p:
Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity.
We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision 1 in CA-G.R. CV No. 43424 which affirmed with modification the judgment 2 of the Regional
Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals, 3 some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment Corporation
(FMIC) also opened a time deposit account with the same branch of BPI-FB with a deposit of
P100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current, 4 savings, 5 and
time deposit, 6with BPI-FB. The current and savings accounts were respectively funded with an initial
deposit of P500,000.00 each, while the time deposit account had P1,000,000.00 with a maturity date of
August 31, 1990. The total amount of P2,000,000.00 used to open these accounts is traceable to a check
issued by Tevesteco allegedly in consideration of Franco's introduction of Eladio Teves, 7 who was
looking for a conduit bank to facilitate Tevesteco's business transactions, to Jaime Sebastian, who was
then BPI-FB SFDM's Branch Manager. In turn, the funding for the P2,000,000.00 check was part of the
P80,000,000.00 debited by BPI-FB from FMIC's time deposit account and credited to Tevesteco's
current account pursuant to an Authority to Debit purportedly signed by FMIC's officers.
It appears, however, that the signatures of FMIC's officers on the Authority to Debit were forged. 8 On
September 4, 1989, Antonio Ong, 9 upon being shown the Authority to Debit, personally declared his
signature therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals
from its current account (to which had been credited the P80,000,000.00 covered by the forged
Authority to Debit) amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMIC's forgery claim, BPI-
FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin 10 to debit Franco's
savings and current accounts for the amounts remaining therein. 11 However, Franco's time deposit
account could not be debited due to the capacity limitations of BPI-FB's computer. 12
In the meantime, two checks 13 drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation "account under garnishment."
Apparently, Franco's current account was garnished by virtue of an Order of Attachment issued by the
Regional Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been
filed by BPI-FB against Franco et al., 14 to recover the P37,455,410.54 representing Tevesteco's total
withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Franco's receipt of notice that his accounts were under garnishment. 15 In fact, at the time the Notice of
Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in the
Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil
Case No. 89-4996, that Franco was impleaded in the Makati case. 16 Immediately, upon receipt of such
copy, Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16, 1990.
The Order Lifting the Order of Attachment was served on BPI-FB on even date, with Franco demanding
the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FB's new
manager, could not forthwith comply with the demand as the funds, as previously stated, had already
been debited because of FMIC's forgery claim. As such, BPI-FB's computer at the SFDM Branch
indicated that the current account record was "not on file."
With respect to Franco's savings account, it appears that Franco agreed to an arrangement, as a favor to
Sebastian, whereby P400,000.00 from his savings account was temporarily transferred to Domingo
Quiaoit's savings account, subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part of the
arrangement, Sebastian retained custody of Quiaoit's savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Franco's deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
P63,189.00 from the remaining balance of the time deposit account representing advance interest paid
to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of P80,000,000.00 debited from
its account. 17 The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First Metro
Investment Corporation, 18 we upheld the finding of the courts below that BPI-FB failed to exercise the
degree of diligence required by the nature of its obligation to treat the accounts of its depositors with
meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its time deposit. It was
ordered to pay P65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully restored.
In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.), 19 recipients of a P500,000.00 check proceeding from the P80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals 20 from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura, 21 we ruled that BPI-FB had no right to freeze Buenaventura, et al.'s accounts and
adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators
of the multi-million peso scam. 22 In the criminal case, Franco, along with the other accused, except for
Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and penalized
under Article 351, par. 2 (a) of the Revised Penal Code. 23 However, the civil case 24 remains under
litigation and the respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FB's refusal to heed Franco's demands to unfreeze his accounts and release
his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his
complaint, Franco prayed for the following reliefs: (1) the interest on the remaining balance 25 of his
current account which was eventually released to him on October 31, 1991; (2) the balance 26 on his
savings account, plus interest thereon; (3) the advance interest 27paid to him which had been deducted
when he pre-terminated his time deposit account; and (4) the payment of actual, moral and exemplary
damages, as well as attorney's fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and
refusing to release his deposits, claiming that it had a better right to the amounts which consisted of
part of the money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Franco's
accounts. BPI-FB asseverated that the claimed consideration of P2,000,000.00 for the introduction
facilitated by Franco between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian,
on the other, spoke volumes of Franco's participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor
of [Franco] and against [BPI-FB], ordering the latter to pay to the former the
following sums:
1. P76,500.00 representing the legal rate of interest on the amount of
P450,000.00 from May 18, 1990 to October 31, 1991;
2. P498,973.23 representing the balance on [Franco's] savings account as of
May 18, 1990, together with the interest thereon in accordance with the bank's
guidelines on the payment therefor;
3. P30,000.00 by way of attorney's fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal
anchor.
Costs against [BPI-FB].
SO ORDERED. 28
Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined
his appeal to the Manila RTC's denial of his claim for moral and exemplary damages, and the diminutive
award of attorney's fees. In affirming with modification the lower court's decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby
AFFIRMED with modification ordering [BPI-FB] to pay [Franco] P63,189.00
representing the interest deducted from the time deposit of plaintiff-appellant.
P200,000.00 as moral damages and P100,000.00 as exemplary damages,
deleting the award of nominal damages (in view of the award of moral and
exemplary damages) and increasing the award of attorney's fees from
P30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED. 29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2)
Franco is entitled to interest on his current account; (3) Franco can recover the P400,000.00 deposit in
Quiaoit's savings account; (4) the dishonor of Franco's checks was not legally in order; (5) BPI-FB is liable
for interest on Franco's time deposit, and for moral and exemplary damages; and (6) BPI-FB's counter-
claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Franco's accounts and preclude him from withdrawing his deposits. However, contrary to the appellate
court's ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well as to
moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Franco's accounts, BPI-FB urges us that
the legal consequence of FMIC's forgery claim is that the money transferred by BPI-FB to Tevesteco is
its own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Franco's accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where X's
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of
the TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which
provides:
Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of
the same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
BPI-FB's argument is unsound. To begin with, the movable property mentioned in Article 559 of the Civil
Code pertains to a specific or determinate thing. 30 A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind. 31
In this case, the deposit in Franco's accounts consists of money which, albeit characterized as a
movable, is generic and fungible. 32 The quality of being fungible depends upon the possibility of the
property, because of its nature or the will of the parties, being substituted by others of the same kind,
not having a distinct individuality. 33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership of
the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from FMIC's
account and credited to Tevesteco's, and subsequently traced to Franco's account. In fact, this is what
BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which
passed from one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership, 34 and this characteristic is
all the more manifest in the instant case which involves money in a banking transaction gone awry. Its
primary function is to pass from hand to hand as a medium of exchange, without other evidence of its
title. 35 Money, which had passed through various transactions in the general course of banking
business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FB's
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC's deposits to Tevesteco's account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on
simple loan or mutuum. 36 As there is a debtor-creditor relationship between a bank and its depositor,
BPI-FB ultimately acquired ownership of Franco's deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand. 37 Although BPI-FB owns the
deposits in Franco's accounts, it cannot prevent him from demanding payment of BPI-FB's obligation by
drawing checks against his current account, or asking for the release of the funds in his savings account.
Thus, when Franco issued checks drawn against his current account, he had every right as creditor to
expect that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its
mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it
pleases on deposits which it supposes are derived from shady transactions, would open the floodgates
of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals 38 continues to resonate,
thus:
The banking system is an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized nation. Whether as mere
passive entities for the safekeeping and saving of money or as active
instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-
earner has not hesitated to entrust his life's savings to the bank of his choice,
knowing that they will be safe in its custody and will even earn some interest
for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly
bills and the payment of ordinary expenses. . . . .
In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or
of millions. The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible. This has to be done if the account
is to reflect at any given time the amount of money the depositor can dispose
of as he sees fit, confident that the bank will deliver it as and to whomever
directs. A blunder on the part of the bank, such as the dishonor of the check
without good reason, can cause the depositor not a little embarrassment if not
also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship. . . . .
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of
its customers. Having failed to detect the forgery in the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco
and the other payees of checks issued by Tevesteco, or prevent withdrawals from their respective
accounts without the appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in
the Authority to Debit, effected the transfer of P80,000,000.00 from FMIC's to Tevesteco's account,
when FMIC's account was a time deposit and it had already paid advance interest to FMIC. Considering
that there is as yet no indubitable evidence establishing Franco's participation in the forgery, he remains
an innocent party. As between him and BPI-FB, the latter, which made possible the present
predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Franco's current account, BPI-FB argues that its non-
compliance with the Makati RTC's Order Lifting the Order of Attachment and the legal consequences
thereof, is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this respect. The
Manila RTC's order to pay interests on Franco's current account arose from BPI-FB's unjustified refusal
to comply with its obligation to pay Franco pursuant to their contract of mutuum. In other words, from
the time BPI-FB refused Franco's demand for the release of the deposits in his current account,
specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon. 39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-
FB's non-compliance with the Order Lifting the Order of Attachment. However, such authority does not
preclude the Manila RTC from ruling on BPI-FB's liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual obligation upon demand. After all, this was
the core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit's account, we find no reason to depart from
the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually owned
by Franco who simply accommodated Jaime Sebastian's request to temporarily transfer P400,000.00
from Franco's savings account to Quiaoit's account. 40 His testimony cannot be characterized as
hearsay as the records reveal that he had personal knowledge of the arrangement made between
Franco, Sebastian and himself. 41
BPI-FB makes capital of Franco's belated allegation relative to this particular arrangement. It insists that
the transaction with Quiaoit was not specifically alleged in Franco's complaint before the Manila RTC.
However, it appears that BPI-FB had impliedly consented to the trial of this issue given its extensive
cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence.—
When issues not raised by the pleadings are tried with the express or
implied consent of the parties, they shall be treated in all respects as if they
had been raised in the pleadings. Such amendment of the pleadings as may
be necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is now
within the issues made by the pleadings, the court may allow the pleadings to
be amended and shall do so with liberality if the presentation of the merits of
the action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.
(Emphasis supplied)
In all, BPI-FB's argument that this case is not the right forum for Franco to recover the P400,000.00 begs
the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of the
funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Franco's action for the
recovery of his deposits appropriately covers the deposits in Quiaoit's account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco's
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTC's
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied
for the writ of attachment before the Makati RTC, it need not be served with the Notice of Garnishment
before it could place Franco's accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB's clever but transparent ploy to
circumvent Section 4, 42Rule 13 of the Rules of Court. It should be noted that the strict requirement on
service of court papers upon the parties affected is designed to comply with the elementary requisites of
due process. Franco was entitled, as a matter of right, to notice, if the requirements of due process are
to be observed. Yet, he received a copy of the Notice of Garnishment only on September 27, 1989,
several days after the two checks he issued were dishonored by BPI-FB on September 20 and 21, 1989.
Verily, it was premature for BPI-FB to freeze Franco's accounts without even awaiting service of the
Makati RTC's Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof. Section 5, Rule
13 of the Rules of Court specifically provides that "no levy or attachment pursuant to the writ issued . . .
shall be enforced unless it is preceded, or contemporaneously accompanied, by service of summons,
together with a copy of the complaint, the application for attachment, on the defendant within the
Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts. 43 Effectively, therefore, the
Makati RTC had no authority yet to bind the deposits of Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CA's finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Franco's time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of P10,000.00. However, we retain the CA's award of P75,000.00 as attorney's fees.
In granting Franco's prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to
Franco; (2) misleadingly claimed that Franco's deposits were under garnishment; (3) misrepresented
that Franco's current account was not on file; and (4) refused to return the P400,000.00 despite the fact
that the ostensible owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural and
probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonable foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and
should not be held liable for all damages now being imputed to it for its breach of obligation. For the
same reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it partakes of the nature of fraud. 44 We have held that it
is a breach of a known duty through some motive of interest or ill will. 45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found, there was no
denial whatsoever by BPI-FB of the existence of the accounts. The computer-generated document
which indicated that the current account was "not on file" resulted from the prior debit by BPI-FB of the
deposits. The remedy of freezing the account, or the garnishment, or even the outright refusal to honor
any transaction thereon was resorted to solely for the purpose of holding on to the funds as a security
for its intended court action, 46 and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith, 47 moral damages cannot be
awarded; and that the adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages. 48
An award of moral damages contemplates the existence of the following requisites: (1) there must be an
injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a
culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. 49
Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code, 50 upon which to base his claim for moral damages.
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220
of the Civil Code for breach of contract. 51
We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded to him. 52 As there is no basis for the award of moral damages,
neither can exemplary damages be granted.
While it is a sound policy not to set a premium on the right to litigate, 53 we, however, find that Franco
is entitled to reasonable attorney's fees for having been compelled to go to court in order to assert his
right. Thus, we affirm the CA's grant of P75,000.00 as attorney's fees.
Attorney's fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest, 54 or when the court deems it just and equitable. 55 In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati RTC's Order Lifting the Order of Attachment and
Quiaoit's unwavering assertion that the P400,000.00 was part of Franco's savings account. This refusal
constrained Franco to incur expenses and litigate for almost two (2) decades in order to protect his
interests and recover his deposits. Therefore, this Court deems it just and equitable to grant Franco
P75,000.00 as attorney's fees. The award is reasonable in view of the complexity of the issues and the
time it has taken for this case to be resolved. 56
Sixth. As for the dismissal of BPI-FB's counter-claim, we uphold the Manila RTC's ruling, as affirmed by
the CA, that BPI-FB is not entitled to recover P3,800,000.00 as actual damages. BPI-FB's alleged loss of
profit as a result of Franco's suit is, as already pointed out, of its own making. Accordingly, the denial of
its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November
29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit
and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Chico-Nazario and Reyes, JJ., concur.
||| (BPI Family Bank v. Franco, G.R. NO. 123498, [November 23, 2007], 563 PHIL 495-516)
C. SIMPLE LOAN OR MUTUUM: Conventional Interest
EN BANC
[G.R. No. 97412. July 12, 1994.]
EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS
AND MERCANTILE INSURANCE COMPANY, INC., respondents.
SYLLABUS
1. CIVIL LAW; COMMON CARRIERS; TIME FRAME WITHIN WHICH DILIGENCE REQUIRED IN
SHIPMENT OF GOODS LAST. — The common carrier's duty to observe the requisite diligence in the
shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance, by the person entitled to receive them (Arts. 1736-1738, Civil
Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
2. ID.; ID.; ID.; PRESUMPTION OF CARRIER'S FAULT ON LOST OR DAMAGED GOODS SHIPPED; CASE
AT BAR NOT AN EXCEPTION. — When the goods shipped either are lost or arrive in damaged
condition, a presumption arises against the carrier of its failure to observe that diligence, and there need
not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National
Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There
are, of course, exceptional cases when such presumption of fault is not observed but these cases,
enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be applied to this case.
3. ID.; DAMAGES; INTEREST AWARDED AS A CONCEPT THEREOF; RATE AND ACCRUAL THEREOF,
HOW DETERMINED. — 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 a 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 of 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 of 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.
DECISION
VITUG, J p:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award of loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed
from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%). llcd
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:
"This is an action against defendants shipping company, arrastre operator and
broker-forwarded for damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the consignee the value of such
losses/damages.
"On December 4, 1981, two fiber drums of riboflavin were shipped from
Yokohama, Japan for delivery vessel `SS EASTERN COMET' owned by
defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The
shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
"Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of defendant Metro Port Services, Inc. The latter
excepted to one drum, said to be in bad order, which damage was unknown to
plaintiff.
"On January 7, 1982 defendant Allied Brokerage Corporation received the
shipment from defendant Metro Port Service, Inc., one drum opened and
without seal (per 'Request for Bad Order Survey.' (Exh. D).
"On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
deliveries of the shipment to the consignees' warehouse. The latter excepted to
one drum which contained spillages, while the rest of the contents was
adulterated/fake (per 'Bad Order Waybill' No. 10649, Exh. E).
"Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence
of defendants. Claims were presented against defendants who failed and
refused to pay the same (Exhs. H, I, J, K, L). Cdpr
"As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against
defendants (per 'Form of Subrogation,' 'Release' and Philbanking check, Exhs.
M, N, and O)." (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
"Defendants filed their respective answers, traversing the material allegations
of the compliant contending that: As for defendant Eastern Shipping it alleged
that the shipment was discharged in good order from the vessel unto the
custody of Metro Port Service so that any damage/losses incurred after the
shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject
shipment was discharged unto its custody, portion of the same was already in
bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of
action against it, not having negligent or at fault for the shipment was already
in damage and bad order condition when received by it, but nonetheless, it still
exercised extra ordinary care and diligence in he handling/delivery of the cargo
to consignee in the same condition shipment was received by it.
"From the evidence that court found the following:
"'The issues are:
'1. Whether or not the shipment
sustained losses/damages;
'2. Whether or not these
losses/damages were sustained while in the
custody of defendants (in whose respective
custody, if determinable); prLL
'3. Whether or not defendant(s)
should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's Records, p.
38).'
'As to the first issue, there can be no doubt that the shipment
sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
'Correspondingly, as to the second issue, it follows that
the losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its 'Additional Survey Notes,' are considered. In the latter
notes, it is stated that when the shipment was 'landed on vessel' to
dock of Pier # 15, South Harbor, Manila on December 12, 1981,' it
was observed that 'one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad order Tally Sheet No. 86427.' The
report further states that when defendant Allied Brokerage
withdrew the shipment, from defendant arrastre operator's custody
on January 7, 1982, one drum was found opened without seal, cello
bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached
the consignee, one drum was found with adulterated/faked
contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the New
Civil Code, the common carrier's duty to observe extraordinary
diligence in the vigilance of goods remains in full force and effect
even if the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until the
consignee has been advised and has had reasonable opportunity to
remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern
 Shipping's own exhibit, the 'Turn-Over Survey of Bad Order Cargoes'
(Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found 'open.'
"and thus held:
'WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay
plaintiff, jointly and severally:
1. The amount of
P19,032.95 with the present legal
interest of 12% per annum from
October 1, 1982, the date of filing of
this complaints, until fully paid (the
liability of defendant Eastern
Shipping, Inc. shall not exceed
US$500 per case or the CIF value of
the loss, whichever is lesser, while the
liability of defendant Metro Port
Service, Inc. shall be to the extent of
the actual invoice value of each
package, crate box or container in no
case to exceed P5,000.00 each,
pursuant to Section 6.01 of the
Management Contract); LexLib
2. P3,000.00 as attorney's
fees, and
3. Costs.
B. Dismissing the counterclaims and
crossclaim of defendant/cross-claimant Allied
Brokerage Corporation.
SO ORDERED.' (p. 207, Record).
"Dissatisfied, defendant's recourse to US.
"The appeal is devoid of merit.
"After a careful scrutiny of the evidence on record. We find that the conclusion
drawn therefrom is correct. As there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to
the consignee." (pp. 87-89, Rollo.)
The Court of Appeal thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD
OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT
THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM
BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to. Cdpr
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by, the
carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance,
by the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161
SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil
Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not
observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which
can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained in holding the carrier and the
arrastre operator liable in solidum, thus: Cdpr
"The legal relationship between the consignee and the arrastre operator is akin
to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19
SCRA 5 [1967]. The relationship between the consignee and the common
carrier is similar to that of the consignee and the arrastre operator (Northern
Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver
them in good condition to the consignee, such responsibility also devolves
upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods in goods condition to the
consignee."
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines which, being the carrier and not having been able to rebut the presumption of
fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it. llcd
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969,
involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case,
appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total
amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand,
however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later
entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court
rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad
Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the
date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then
assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:
"Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date
of demand, judicial or extrajudicial. The trial court opted for judicial demand as
the starting point.
"But then upon the provisions of Article 2213 of the Civil Code, interest 'cannot
be recovered upon unliquidated claims or damages, except when the demand
can be established with reasonable certainty.' And as was held by this Court in
Rivera vs. Perez 4 , L-6998, February 29, 1956, if the suit were for
damages, 'unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c. Corporacion de P. P. Agustinos,
25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302),' then, interest 'should be from the
date of the decision.'" (Emphasis supplied). Cdpr
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury
to Person and Loss of Property." After trial, the lower court decreed:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third
party defendants and against the defendants and third party plaintiffs as
follows:
"Ordering defendants and third party plaintiffs Shell and Michael, Incorporated
to pay jointly and severally the following persons:
"(a) . . .
"xxx xxx xxx
"(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus P80,000.00 which is the value of
the insurance recovered and the amount of P10,000.00 a month as the
estimated monthly loss suffered by them as a result of the fire of May 6, 1969
up to the time they are actually paid or already the total sum of P370,000.00 as
of June 4, 1972 with legal interest from the filing of the complaint until paid and to
pay attorney's fees of P5,000.00 with costs against defendants and third party
plaintiffs." (Emphasis supplied.)
On appeal of the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid.
When the appellate court's decision became final, the case was remanded to the lower court for
execution, and this was when the trial court issued its assailed resolution which applied the 6%
interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review
on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus — Cdpr
"By virtue of the authority granted to it under Section 1 of Act 2655, as
amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has
prescribed that 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 express
contract as to such rate of interest, shall be twelve (12%) percent per annum.
This Circular shall take effect immediately." (Emphasis found in the text) —
should have, instead, been applied. This Court 6 ruled:
"The judgments spoken of and referred to are judgments in litigations involving
loans or forbearance of any money, goods or credits. any other kind of
monetary judgment which has nothing to do with, nor involving loans or
forbearance of any money, goods or credits does not fall within the coverage of
the said law for it is not within the ambit of the authority granted to the Central
Bank.
"xxx xxx xxx
"Coming to the case at bar, the decision herein sought to be
executed is one rendered in an Action for Damages for injury to
persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by
the private respondents, the law applicable to the said case is Article
2209 of the New Civil Code which reads —
'ARTICLE 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 interest agreed upon, and in the absence of stipulation,
the legal interest which is six percent per annum.'"
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986.
The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the
Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but
sustained the time computation thereof, i.e., from the filing of the complaint until fully paid. Cdpr
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising
from the collapse of a building, ordered inter alia, the "defendant United Construction Co., Inc. (one of
the petitioners) . . . to pay the plaintiff, . . ., the sum of P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the
modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's
decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:
"WHEREFORE, the decision appealed from is hereby MODIFIED and
considering the special and environmental circumstances of this case, we deem
it reasonable to render a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception of Roman
Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the
building and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (except
Roman Ozaeta)." (Emphasis supplied).
 A motion for reconsideration was filed by United Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the total amount of the monetary award was in
contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained: LLphil
"There should be no dispute that the imposition of 12% interest pursuant to
Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans;
(2) forbearance of any money, goods or credit; and (3) rate allowed in
judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v.
Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance,
but then no interest is actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.
"It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the filing of the complaint until paid; in other
words, as part of the judgment for damages. Clearly, they are not applicable to
the instant case." (Emphasis supplied)
The subsequent case of American Express International, Inc., vs. International Appellate Court 11 was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000,00 as moral damages and P400,000.00
as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit.
In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to
recover damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from
the finality of this decision until paid." (Emphasis supplied). Cdpr
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a
breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter held:
"WHEREFORE, except as modified hereinabove the decision of the CFI of
Negros Oriental dated October 31, 1972 is affirmed in all respects, with the
modification that defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal rate from the date of the filing
of the complaint until fully paid." (Emphasis supplied)
The petition for review to this Court was denied. The records were thereupon transmitted to the
trial court, and an entry of judgment was made. The writ of execution issued by the trial court
directed that only compensatory damages should earn interest at 6% per annum from the date of
the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a
petition for certiorari assailed the said order. This court said:
". . ., it is to be noted that the Court of Appeals ordered the payment of interest
'at the legal rate' from the time of the filing of the complaint. . . . Said circular
[Central Bank Circular No. 416] does not apply to actions based on a breach of
employment contract like the case at bar." (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from
the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs.
Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay
the private respondents certain sums of money as just compensation for their lands so expropriated
"with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under
the Civil Code, the Court 15 declared: LLpr
". . ., (T)he transaction involved is clearly not a loan or forbearance of money,
goods or credits but expropriation of certain parcels of land for a public
purpose, the payment of which is without stipulation regarding interest, and
the interest adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of
indemnity for damages for the delay in the payment thereof. Therefore, since
the kind of interest involved in the joint judgment of the lower court sought to
be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply."
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The " first group" would consist of the cases of Reformina v.
Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989) and National Power
Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila Port
Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.
Intermediate Appellate Court (1988). LLpr
In the " first group," the basic issue focus on the application of either the 6% (under the Civil Code) or
12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there
has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum
applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving
such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the concept of damage arising
from the breach of a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e.,
from the time the complaint is filed until the adjudged amount is fully paid.
The "second group," did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17 depending on whether or not the amount involved is a loan or forbearance, on the one hand,
or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest should be from the time of the filing of the
complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest. cdll
Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date
of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning
the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil
and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision
until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different DARIO NACAR, petitioner, vs. GALLERY FRAMES and/or FELIPE BORDEY,
applications, guided by the rule that the courts are vested with discretion, depending on the equities of JR., respondents.
each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
DECISION
delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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: LibLex PERALTA, J p:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
This is a petition for review on certiorari assailing the Decision 1 dated September 23,
forbearance of money, the interest due should be that which may have been stipulated in
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution 2 dated October 9,
writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
2009 denying petitioner's motion for reconsideration.
demanded. 22 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 The factual antecedents are undisputed.
1169 23 of the Civil Code.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the
2. When a obligation, not constituting a loan or forbearance of money, is breached, an interest on the Arbitration Branch of the National Labor Relations Commission (NLRC) against
amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-
annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or 00519-97.
until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and
established with reasonable certainty, the interest shall begin to run from the time the claim is made
found that he was dismissed from employment without a valid or just cause. Thus, petitioner was
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
awarded backwages and separation pay in lieu of reinstatement in the amount of P158,919.92.
established at the time the demand is made, the interest shall begin to run only from the date of the
The dispositive portion of the decision, reads:
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 With the foregoing, we find and so rule that respondents failed to discharge the
on the amount of finally adjudged. LLjur burden of showing that complainant was dismissed from employment for a just
or valid cause. All the more, it is clear from the records that complainant was
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of never afforded due process before he was terminated. As such, we are perforce
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum constrained to grant complainant's prayer for the payments of separation pay
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a in lieu of reinstatement to his former position, considering the strained
forbearance of credit.
relationship between the parties, and his apparent reluctance to be reinstated,
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the computed only up to promulgation of this decision as follows: CcSTHI
MODIFICATION that the legal interest to be paid is SIX PERCENT(6%) on the amount due computed
from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in
lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the
payment thereof. cdll SEPARATION PAY

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
Date Hired = August 1990
Puno and Kapunan, JJ., concur.
Rate = P198/day
Mendoza, J., took no part.
Date
||| (Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, [July 12, 1994], 304 of Decision
PHIL 236-254) = Aug. 18, 1998

Length of Service = 8 yrs. & 1 month

EN BANC
P198.00 x 26 days x 8 months = P41,184.00

[G.R. No. 189871. August 13, 2013.]

BACKWAGES

= January 24, 1997
= P196.00
= Aug. 18, 1998
1/24/97 to 2/5/98 = 12.36 mos.
P196.00/day x 12.36 mos. = P62,986.56
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no
reversible error on the part of the CA, this Court denied the petition in the Resolution dated April 17,
2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May
27, 2002. 9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was
consequently scheduled, but respondents failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the
Supreme Court on May 27, 2002. 11 Upon recomputation, the Computation and Examination Unit of the
NLRC arrived at an updated amount in the sum of P471,320.31. 12 DSCIEa

On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to
2/6/98 to 8/18/98 = 6.4 months
collect from respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ of
Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay of
Prevailing Rate per day = P62,986.00
P62,986.56 and limited backwages of P95,933.36, no more recomputation is required to be made of the
said awards. They claimed that after the decision becomes final and executory, the same cannot be
P198.00 x 26 days x 6.4 mos. = P32,947.20 altered or amended anymore. 14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying the
motion. Thus, an Alias Writ of Execution 16 was issued on January 14, 2003.
——————
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting
TOTAL = P95,933.76 the appeal in favor of the respondents and ordered the recomputation of the judgment award.

======== On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final
and executory. Consequently, another pre-execution conference was held, but respondents failed to
appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the
earlier recomputed judgment award in the sum of P471,320.31. 18

The records of the case were again forwarded to the Computation and Examination Unit for
xxx xxx xxx
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only P147,560.19.

WHEREFORE, premises considered, judgment is hereby rendered finding
respondents guilty of constructive dismissal and are therefore, ordered:
1. To pay jointly and severally the complainant the amount of sixty-
two thousand nine hundred eighty-six pesos and 56/100
(P62,986.56) Pesos representing his separation pay;
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award
that was due to petitioner in the amount of P147,560.19, which petitioner eventually received.

2. To pay jointly and severally the complainant the amount of nine
(sic) five thousand nine hundred thirty-three and 36/100
(P95,933.36) representing his backwages; and
3. All other claims are hereby dismissed for lack of merit.
SO ORDERED. 4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the
CA issued a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it
was likewise denied in a Resolution dated May 8, 2001. 7
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award
to include the appropriate interests. 19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount
of P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor Arbiter
reasoned that since the decision states that the separation pay and backwages are computed only up to
the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus,
since petitioner already received P147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC in its
Resolution 22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution 23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became
final and executory, a belated correction thereof is no longer allowed. The CA stated that there is
nothing left to be done except to enforce the said judgment. Consequently, it can no longer be modified
in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9,
2009.
Hence, the petition assigning the lone error: ScaATD
I and the awards of separation pay in lieu of reinstatement, backwages,
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED, COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED
CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS
OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005 ORDER OF
LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE
OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT
TO AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION. 26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor
Arbiter's decision, the same is not final until reinstatement is made or until finality of the decision, in
case of an award of separation pay. Petitioner maintains that considering that the October 15, 1998
decision of the Labor Arbiter did not become final and executory until the April 17, 2002 Resolution of
the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and separation pay should be on May 27, 2002
and not when the decision of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner
posits that he is also entitled to the payment of interest from the finality of the decision until full
payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded
to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required
to be made of said awards. Respondents insist that since the decision clearly stated that the separation
pay and backwages are "computed only up to [the] promulgation of this decision," and considering that
petitioner no longer appealed the decision, petitioner is only entitled to the award as computed by the
Labor Arbiter in the total amount of P158,919.92. Respondents added that it was only during the
execution proceedings that the petitioner questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the further recomputation of the backwages to
be awarded to petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals
(Sixth Division), 27 wherein the issue submitted to the Court for resolution was the propriety of the
computation of the awards made, and whether this violated the principle of immutability of judgment.
Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in the above-cited
case that the decision already provided for the computation of the payable separation pay and
backwages due and did not further order the computation of the monetary awards up to the time of the
finality of the judgment. Also in Session Delights, the dismissed employee failed to appeal the decision
of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of
execution of the labor arbiter's original computation of the awards made,
pegged as of the time the decision was rendered and confirmed with
modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the
original labor arbiter's decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case
proceeds from the way the original labor arbiter framed his decision. The
decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has
been confirmed with finality. This is the finding of the illegality of the dismissal
attorney's fees, and legal interests. TaISEH
The second part is the computation of the awards made. On its face, the
computation the labor arbiter made shows that it was time-bound as can be
seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now
posits should no longer be re-computed because the computation is already in
the labor arbiter's decision that the CA had affirmed. The public and private
respondents, on the other hand, posit that a re-computation is necessary
because the relief in an illegal dismissal decision goes all the way up to
reinstatement if reinstatement is to be made, or up to the finality of the
decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal
dismissal had taken place, also made a computation of the award, is
understandable in light of Section 3, Rule VIII of the then NLRC Rules of
Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards
and at all events, as far as practicable, shall embody in any such
decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality
of the labor arbiter's decision. As we noted above, this implication is apparent
from the terms of the computation itself, and no question would have arisen
had the parties terminated the case and implemented the decision at that
point.
However, the petitioner disagreed with the labor arbiter's findings on all counts
— i.e., on the finding of illegality as well as on all the consequent awards made.
Hence, the petitioner appealed the case to the NLRC which, in turn, affirmed
the labor arbiter's decision. By law, the NLRC decision is final, reviewable only
by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on
jurisdictional grounds through a timely filed Rule 65 petition for certiorari. The
CA decision, finding that NLRC exceeded its authority in affirming the payment
of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal
dismissal portion of the original labor arbiter's decision, the implementing labor
arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been
terminated and implemented at the labor arbiter's level. Thus, the labor arbiter
 re-computed the award to include the separation pay and the backwages due
up to the finality of the CA decision that fully terminated the case on the
merits. Unfortunately, the labor arbiter's approved computation went beyond
the finality of the CA decision (July 29, 2003) and included as well the payment
for awards the final CA decision had deleted — specifically, the proportionate
13th month pay and the indemnity awards. Hence, the CA issued the decision
now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is
necessary as it essentially considered the labor arbiter's original decision in
accordance with its basic component parts as we discussed above. To reiterate,
the first part contains the finding of illegality and its monetary consequences;
the second part is the computation of the awards or monetary consequences of
the illegal dismissal, computed as of the time of the labor arbiter's original
decision. 28 ESaITA
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a necessary
consequence that flows from the nature of the illegality of dismissal declared by the Labor Arbiter in
that decision. 29 A recomputation (or an original computation, if no previous computation has been
made) is a part of the law — specifically, Article 279 of the Labor Code and the established jurisprudence
on this provision — that is read into the decision. By the nature of an illegal dismissal case, the reliefs
continue to add up until full satisfaction, as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision being implemented. The illegal dismissal
ruling stands; only the computation of monetary consequences of this dismissal is affected, and this is
not a violation of the principle of immutability of final judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid
as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's decision.
Article 279 provides for the consequences of illegal dismissal in no uncertain terms, qualified only by
jurisprudence in its interpretation of when separation pay in lieu of reinstatement is allowed. When that
happens, the finality of the illegal dismissal decision becomes the reckoning point instead of the
reinstatement that the law decrees. In allowing separation pay, the final decision effectively declares
that the employment relationship ended so that separation pay and backwages are to be computed up
to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court
of Appeals, 32the Court laid down the guidelines regarding the manner of computing legal interest, to
wit:
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. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 2 34 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, 35 Series of 2013, effective July 1, 2013, the pertinent portion of
which reads: AHcaDC
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 36 of the Manual
of Regulations for Banks and Sections 4305Q.1, 37 4305S.3 38 and
4303P.1 39 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the
case of Eastern Shipping Lines 40and 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, before its amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall
be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko
Sentral Monetary Board, 41 this Court affirmed the authority of the BSP-MB to set interest rates and to
issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including above, shall be 6% per annum from such finality until its
those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, satisfaction, this interim period being deemed to be by
finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different then an equivalent to a forbearance of credit.
maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or
loans of financial intermediaries." And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013,
said judgments shall not be disturbed and shall continue to be implemented applying the rate of interest WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in
fixed therein. CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET
ASIDE. Respondents are ORDERED to PAY petitioner:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines 42 are accordingly modified to embody BSP-MB Circular No. 799, as follows: (1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May
27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can (2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per
be held liable for damages. The provisions under Title XVIII on year of service; and
"Damages" of the Civil Code govern in determining the measure of
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27,
recoverable damages.
2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
II. With regard particularly to an award of interest in the concept of actual and
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits
compensatory damages, the rate of interest, as well as the accrual
awarded and due to petitioner in accordance with this Decision.
thereof, is imposed, as follows: HcSaTI
SO ORDERED. TSIaAc
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 Sereno, C.J., Carpio, Velasco, Jr., Leonardo-de Castro, Brion, Bersamin, Del Castillo, Abad, Villarama, Jr.,
interest due should be that which may have been Perez, Mendoza, Reyes, Perlas-Bernabe and Leonen, JJ., concur.
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially ||| (Nacar v. Gallery Frames, G.R. No. 189871, [August 13, 2013], 716 PHIL 267-283)
demanded. In the absence of stipulation, the rate of
interest shall be 6%per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
SECOND DIVISION
and subject to the provisions of Article 1169 of the Civil
Code.
[G.R. No. 176381. December 15, 2010.]
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 PCI LEASING AND FINANCE, INC., petitioner, vs. TROJAN METAL INDUSTRI
the court at the rate of 6% per annum. No interest, ES, INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, and JOHN
however, shall be adjudged on unliquidated claims or DOE, respondents.
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. DECISION
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 CARPIO, J p:
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the The Case
computation of legal interest shall, in any case, be on the
amount finally adjudged. This is a petition for review 1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the 5 October 2006
3. When the judgment of the court awarding a sum of money Decision 2 and the 23 January 2007 Resolution 3 of the Court of Appeals in CA-G.R. CV No. 75855.
becomes final and executory, the rate of legal interest, The 5 October 2006 Decision set aside the 23 July 2002 Decision 4 of the Regional Trial Court
whether the case falls under paragraph 1 or paragraph 2, (Branch 79) of Quezon City in Civil Case No. Q-99-37559, which granted petitioner's complaint for
recovery of sum of money and personal property with prayer for the issuance of a writ of replevin.
The 23 January 2007 Resolution denied petitioner's motion for reconsideration.
The Facts
Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to
petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF
offered to buy various equipment TMI owned, namely: a Verson double action hydraulic press with
cushion, a Hinohara powerpress 75-tons capacity, a USI-clearing powerpress 60-tons capacity, a
Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-tons capacity, a YMGP
powerpress 15-tons capacity, a lathe machine, a vertical milling machine, and a radial drill. Hard-
pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of sale 5 evidencing
TMI's sale to PCILF of the various equipment in consideration of the total amount of
P2,865,070.00.
PCILF and TMI then entered into a lease agreement, 6 dated 8 April 1997, 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 monthly
rental for the Verson double action hydraulic press with cushion was in the amount of P62,328.00;
for the Hinohara powerpress 75-tons capacity, the USI-clearing powerpress 60-tons capacity, the
Watanabe powerpress 60-tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP
powerpress 15-tons capacity, the monthly rental was in the amount of P49,259.00; and for the
lathe machine, the vertical milling machine, and the radial drill, the monthly rental was in the
amount of P22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of
P1,030,350.00, 7 which would serve as security for the timely performance of TMI's obligations
under the lease agreement, to be automatically forfeited should TMI return the leased equipment
before the expiration of the lease agreement. AaEcHC
Further, spouses Walfrido and Elizabeth Dizon, as TMI's President and Vice-President,
respectively executed in favor of PCILF a Continuing Guaranty of Lease Obligations. 8 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, 9 TMI used the leased
equipment as temporary collateral. 10 PCILF considered the second mortgage a violation of the
lease agreement. At this time, TMI's partial payments had reached P1,717,091.00. 11 On 8
December 1998, PCILF sent TMI a demand letter 12 for the payment of the latter's outstanding
obligation. PCILF's demand remained unheeded.
On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City a
complaint 13 against TMI, spouses Dizon, and John Doe (collectively referred to as "respondents"
hereon) for recovery of sum of money and personal property with prayer for the issuance of a writ
of replevin, docketed as Civil Case No. Q-99-37559.
On 7 September 1999, the RTC issued the writ of replevin 14 PCILF prayed for, directing
the sheriff to take custody of the leased equipment. Not long after, PCILF sold the leased
equipment to a third party and collected the proceeds amounting to P1,025,000.00. 15
In their answer, 16 respondents claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCILF and TMI. Respondents explained that in a
simulated financial lease, property of the debtor would be sold to the creditor to be repaid through
rentals; at the end of the lease period, the property sold would revert back to the debtor.
Respondents prayed that they be allowed to reform the lease agreement to show the true
The petition lacks merit.
agreement between the parties, which was a loan secured by a chattel mortgage.
The Ruling of the RTC
In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint. The
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. The dispositive portion
of its Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff-
PCI Leasing and Finance, Inc. and against defendants Trojan Metal, Walfrido
Dizon, and Elizabeth Dizon, as follows:
1. Ordering the plaintiff to be entitled to the possession of herein machineries.
2. Ordering the defendants to pay the remaining rental obligation in the
amount of Php888,434.48 plus legal interest from the date of filing of the
complaint;
3. Ordering defendant to pay an attorneys fees in the amount of Php50,000.00;
4. Ordering the defendant to pay the cost of suit.
SO ORDERED. 17
Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling that
PCILF was entitled to the possession of TMI's equipment and that respondents still owed PCILF the
balance of P888,423.48.
The Ruling of the Court of Appeals
The Court of Appeals ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. The Court of Appeals held that since PCILF sold the equipment to a
third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit of P1,030,000.00, PCILF had
in its hands the sum of P2,055,250.00, as against TMI's remaining obligation of P888,423.48,
or an excess of P1,166,826.52, which should be returned to TMI in accordance with Section 14 of
the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of the
RTC. The Court of Appeals entered a new one dismissing PCILF's complaint and directing PCILF to
pay TMI, by way of refund, the amount of P1,166,826.52. The decretal part of its Decision
reads: ETaSDc
WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional
Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby
REVERSED and SET ASIDE, and a new one entered DISMISSING the complaint
and DIRECTING the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by
way of REFUND, to the defendant-appellant Trojan Metal Industries, Inc., the
net amount of Php1,166,826.52.
SO ORDERED. 18
The Issues
The issues for resolution are (1) whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by chattel mortgage; and (2) whether PCILF
should pay TMI, by way of refund, the amount of P1,166,826.52.
The Court's Ruling
PCILF contends that the transaction between the parties was a sale and leaseback
financing arrangement where the client sells movable property to a financing company, which
then leases the same back to the client. PCILF insists the transaction is not financial leasing, which
contemplates extension of credit to assist a buyer in acquiring movable property which the buyer
can use and eventually own. PCILF claims that the sale and leaseback financing arrangement is not
contrary to law, morals, good customs, public order, or public policy. PCILF stresses that the
guaranty deposit should be forfeited in its favor, as provided in the lease agreement. PCILF points
out that this case does not involve mere failure to pay rentals, it deals with a flagrant violation of
the lease agreement.
Respondents counter that from the very beginning, transfer to PCILF of ownership over
the subject equipment was never the intention of the parties. Respondents claim that under the
lease agreement, the guaranty deposit would be forfeited if TMI returned the leased equipment to
PCILF before the expiration of the lease agreement; thus, since TMI never returned the leased
equipment voluntarily, but through a writ of replevin ordered by the RTC, the guaranty deposit
should not be forfeited.
Since the lease agreement in this case was executed on 8 April 1997, Republic Act No.
5980 (RA 5980), otherwise known as the Financing Company Act, governs as to what constitutes
financial leasing. Section 1, paragraph (j) of the New Rules and Regulations to Implement RA
5980 19 defines financial leasing as follows:
LEASING shall refer to financial leasing which is a mode of extending credit
through a non-cancelable contract under which the lessor purchases or
acquires at the instance of the lessee heavy equipment, motor vehicles,
industrial machinery, appliances, business and office machines, and other
movable property in consideration of the periodic payment by the lessee of a
fixed amount of money sufficient to amortize at least 70% of the purchase price
or acquisition cost, including any incidental expenses and a margin of profit,
over the lease period. The contract shall extend over an obligatory period
during which the lessee has the right to hold and use the leased property and
shall bear the cost of repairs, maintenance, insurance, and preservation
thereof, but with no obligation or option on the part of the lessee to purchase
the leased property at the end of the lease contract.
The above definition of financial leasing gained statutory recognition with the
enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing Company Act of
1998. 20 Section 3 (d) of RA 8556 defines financial leasing as:
a mode of extending credit through a non-cancelable lease contract under
which the lessor purchases or acquires, at the instance of the lessee,
machinery, equipment, motor vehicles, appliances, business and office
machines, and other movable or immovable property in consideration of the
periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost,
including any incidental expenses and a margin of profit over an obligatory
period of not less than two (2) years during which the lessee has the right to
hold and use the leased property with the right to expense the lease rentals
paid to the lessor and bears the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on his part to purchase
the leased property from the owner-lessor at the end of the lease
contract. HSacEI
Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company
purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to
financial limitations, is incapable of doing so. The finance company then leases the equipment to
the lessee in exchange for the latter's periodic payment of a fixed amount of rental.
In this case, however, TMI already owned the subject equipment before it transacted
with PCILF. Therefore, the transaction between the parties in this case cannot be deemed to be in
the nature of a financial leasing as defined by law.
The facts in the instant case are analogous to those in Cebu Contractors Consortium
Co. v. Court of Appeals. 21There, Cebu Contractors Consortium Co. (CCCC) approached
Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC agreed to extend financial
assistance to CCCC but, instead of a loan with collateral, MLFC induced CCCC to adopt a sale and
leaseback scheme. Under the scheme, several of CCCC's equipment were made to appear as sold
to MLFC and then leased back to CCCC, which in turn paid lease rentals to MLFC. The rentals were
treated as installment payments to repurchase the equipment.
The Court held in Cebu Contractors Consortium Co. v. Court of Appeals 22 that the
transaction between CCCC and MLFC was not one of financial leasing as defined by law, but simply
a loan secured by a chattel mortgage over CCCC's equipment. The Court went on to explain that
where the client already owned the equipment but needed additional working capital and
the finance company purchased such equipment with the intention of leasing it back to him, the
lease agreement was simulated to disguise the true transaction that was a loan with security. In
that instance, continued the Court, the intention of the parties was not to enable the client to
acquire and use the equipment, but to extend to him a loan.
Similarly, in Investors Finance Corporation v. Court of Appeals, 23 a borrower came to
Investors FinanceCorporation (IFC) to secure a loan with his heavy equipment and machinery as
collateral. The parties executed documents where IFC was made to appear as the owner of the
equipment and the borrower as the lessee. As consideration for the lease, the borrower-lessee was
to pay monthly amortizations over a period of 36 months. The parties executed a lease agreement
covering various equipment described in the lease schedules attached to the lease agreement. As
security, the borrower-lessee also executed a continuing guaranty.
The Court in Investors Finance Corporation v. Court of Appeals 24 held that the
transaction between the parties was not a true financial leasing because the intention of the
parties was not to enable the borrower-lessee to acquire and use the heavy equipment and
machinery, which already belonged to him, but to extend to him a loan to use as capital for his
construction and logging businesses. The Court held that the lease agreement was simulated to
disguise the true transaction between the parties, which was a simple loan secured by heavy
equipment and machinery owned by the borrower-lessee. The Court differentiated between a true
financial leasing and a loan with mortgage in the guise of a lease. The Court said that
financial leasing contemplates the extension of credit to assist a buyer in acquiring movable
property which he can use and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties, according to the Court, was a loan with
mortgage in the guise of a lease.
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.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct, or
accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument. TICaEc
 Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years. 25 The right of action for
reformation accrued from the date of execution of the lease agreement on 8 April 1997. TMI timely
exercised its right of action when it filed an answer 26 on 14 February 2000 asking for the
reformation of the lease agreement.
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 TMI's default, PCILF was entitled to seize the mortgaged
equipment, not as owner but as creditor-mortgagee for the purpose of foreclosing the chattel
mortgage. PCILF's 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.
The Court of Appeals correctly ruled that the transaction between the parties was
simply a loan secured by a chattel mortgage. However, in reckoning the amount of the principal
obligation, the Court of Appeals should have taken into account the proceeds of the sale to PCILF
less the guaranty deposit paid by TMI. After deducting payments made by TMI to PCILF, the
balance plus applicable interest should then be applied against the aggregate cash already in
PCILF's hands.
Records show that PCILF paid TMI P2,865,070.00 27 as consideration for acquiring the
mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of P1,030,350.00. 28 Thus, the
amount of the principal loan was P1,834,720.00, which was the net amount actually received
by TMI (proceeds of the sale of the equipment to PCILF minus the guaranty deposit). Against
the principal loan of P1,834,720.00 plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00. 29 Since PCILF sold the mortgaged equipment to a third party for
P1,025,000.00, 30 the proceeds of the said sale should be applied to offset the remaining balance
on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is needed to
compute the interest on the remaining balance of the principal loan, cannot be gleaned from the
facts on record. We thus remand the case to the RTC for the computation of the total amount due
from the date of demand on 8 December 1998 until the date of sale of the mortgaged equipment
to a third party, which amount due shall be offset against the proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining balance of
the loan is the legal rate of 12% per annum, computed from the date PCILF sent a demand letter to
TMI on 8 December 1998. No interest can be charged prior to this date because TMI was not yet in
default prior to 8 December 1998. The interest due shall also earn legal interest from the time it is
judicially demanded, pursuant to Article 2212 of the Civil Code, which provides:
Art. 2212.Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
The foregoing provision has been incorporated in the comprehensive summary of
existing rules on the computation of legal interest laid down by the Court in Eastern Shipping
Lines, Inc. v. Court of Appeals, 31 to wit:
1. When an 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. IaSAHC
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 anequivalent to a forbearance of credit.
(Emphasis supplied)
Applying the rules in the computation of interest, the remaining balance of the principal
loan subject of the chattel mortgage must earn the legal interest of 12% per annum, which
interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the filing of
the complaint on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals, 32 we derive the following formula for the RTC's guidance:
TOTAL AMOUNT DUE = [principal - partial payments made] + [interest +
interest on interest], where
Interest = remaining balance x 12% per annum x no. of years from due date (8
December 1998 when demand was made) until date of sale to a third party
Interest on interest = interest computed as of the filing of the complaint on 7
May 1999 x 12% x no. of years until date of sale to a third party
From the computed total amount should be deducted P1,025,000.00 representing the
proceeds of the sale already in PCILF's hands. The difference represents overpayment by TMI,
which the law requires PCILF to refund to TMI.
Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:
Section 14. Sale of property at public auction; officer's return; fees; disposition of
proceeds. — . . . The proceeds of such sale shall be applied to the payment, first,
of the costs and expenses of keeping and sale, and then to the payment of the
demand or obligation secured by such mortgage, and the residue shall be paid
to persons holding subsequent mortgages in their order, and the balance, after
paying the mortgages, shall be paid to the mortgagor or person holding under
him on demand.
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 33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds.
 TMI's 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 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 refund due. Nonetheless, in accord with prevailing jurisprudence, 34 the excess amount PCILF
must refund to TMI is subject to interest at 12% per annum from finality of this Decision until fully
paid.
WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5 October
2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in CA-G.R. CV No.
75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess
amount to be computed by the Regional Trial Court based on the formula specified above, with
interest at 12% per annum from finality of this Decision until fully paid. aScIAC
Costs against petitioner.
SO ORDERED.
Nachura, Peralta, Abad and Mendoza, JJ., concur.
||| (PCI Leasing and Finance, Inc. v. Trojan Metal Industries, Inc., G.R. No. 176381, [December 15, 2010], 653
PHIL 296-313)
THIRD DIVISION
[G.R. No. 173227. January 20, 2009.]
SEBASTIAN SIGA-AN, petitioner, vs. ALICIA VILLANUEVA, respondent.
DECISION
CHICO-NAZARIO, J p:
Before Us is a Petition 1 for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision, 2 dated 16 December 2005, and Resolution, 3 dated 19 June
2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision, 4 dated
26 January 2001, of the Las Piñas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-
0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money
against petitioner Sebastian Siga-an before the Las Piñas City Regional Trial Court (RTC), Branch
255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located
at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO
from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO
and offered to loan her the amount of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioner's proposal. The loan agreement was not
reduced in writing. Also, there was no stipulation as to the payment of interest for the
loan. 6 IaDTES
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as
partial payment of the loan. On 31 October 1993, she issued another check in the amount of
P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told her that
since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess
amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount
applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to
block or disapprove her transactions with the PNO if she would not comply with his demand. As all
her transactions with the PNO were subject to the approval of petitioner as comptroller of the
PNO, and fearing that petitioner might block or unduly influence the payment of her vouchers in
the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for the
loan. She asked petitioner for receipt for the payments but petitioner told her that it was not
necessary as there was mutual trust and confidence between them. According to her computation,
the total amount she paid to petitioner for the loan and interest accumulated to P1,200,000.00. 7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on
the loan despite absence of agreement to that effect. Her lawyer told her that petitioner could not
validly collect interest on the loan because there was no agreement between her and petitioner
regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the
P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement. 8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral
damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of
P660,000.00 as attorney's fees. 9
In his answer 10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he could grant her a
loan, as she needed money to finance her business venture with the PNO. At first, he was reluctant
to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However,
since respondent was an acquaintance of his officemate, he agreed to grant her a loan.
Respondent paid the loan in full. 11 jur2005
Subsequently, respondent again asked him to give her a loan. As respondent had been
able to pay the previous loan in full, he agreed to grant her another loan. Later, respondent
requested him to restructure the payment of the loan because she could not give full payment on
the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring
of the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute
a promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and
that she would issue several postdated checks to guarantee the payment of her obligation. Upon
his approval of respondent's request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an amount of
P1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March
1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 as
guarantee of compliance with her obligation. Subsequently, he presented the six checks for
encashment but only one check was honored. He demanded that respondent settle her obligation,
but the latter failed to do so. Hence, he filed criminal cases for Violation of the Bouncing Checks
Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC). 12
 Petitioner insisted that there was no overpayment because respondent admitted in the
latter's promissory note that her monetary obligation as of 12 September 1994 amounted to
P1,240,000.00 inclusive of interests. He argued that respondent was already estopped from
complaining that she should not have paid any interest, because she was given several times to
settle her obligation but failed to do so. He maintained that to rule in favor of respondent is
tantamount to concluding that the loan was given interest-free. Based on the foregoing
averments, he asked the RTC to dismiss respondent's complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should refund the
excess amount to the former. It ratiocinated that respondent's obligation was only to pay the
loaned amount of P540,000.00, and that the alleged interests due should not be included in the
computation of respondent's total monetary debt because there was no agreement between them
regarding payment of interest. It concluded that since respondent made an excess payment to
petitioner in the amount of P660,000.00 through mistake, petitioner should return the said
amount to respondent pursuant to the principle of solutio indebiti. 13 HEIcDT
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay exemplary
damages by way of example or correction for the public good, plus attorney's fees and costs of
suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is
paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary
damages; CcAESI
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
P660,000.00 as attorney's fees; and
(5) Ordering defendant to pay the costs of suit. 14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED
and the assailed decision [is] AFFIRMED in toto. 15
Petitioner filed a motion for reconsideration of the appellate court's decision but this
was denied. 16 Hence, petitioner lodged the instant petition before us assigning the following
errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER; aHcDEC
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE
OF SOLUTIO INDEBITI. 17
Interest is a compensation fixed by the parties for the use or forbearance of money.
This is referred to as monetary interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called compensatory interest. 18 The right to interest
arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal
loan on which interest is demanded. 19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically
mandates that no interest shall be due unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there
was an express stipulation for the payment of interest; and (2) the agreement for the payment of
interest was reduced in writing. The concurrence of the two conditions is required for the payment
of monetary interest. Thus, we have held that collection of interest without any stipulation
therefor in writing is prohibited by law. 21
It appears that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between the two regarding the
payment of interest. Respondent testified that although she accepted petitioner's offer of loan
amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay
interest on the loan. 22
Petitioner presented a handwritten promissory note dated 12 September
1994 23 wherein respondent purportedly admitted owing petitioner "capital and interest".
Respondent, however, explained that it was petitioner who made a promissory note and she was
told to copy it in her own handwriting; that all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her
transactions with the PNO if she would not pay interest; that being unaware of the law on interest
and fearing that petitioner would make good of his threats if she would not obey his instruction to
copy the promissory note, she copied the promissory note in her own handwriting; and that such
was the same promissory note presented by petitioner as alleged proof of their written agreement
on interest. 24 Petitioner did not rebut the foregoing testimony. It is evident that respondent did
not really consent to the payment of interest for the loan and that she was merely tricked and
coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note
pertains to an express stipulation of interest or written agreement of interest on the loan between
petitioner and respondent. cCTAIE
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that
he and respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7%
rate of interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg.
22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC
and the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due
him since the agreement on interest was not reduced in writing; that the application of Article
1956 of the Civil Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed upon as in
the present case; and that it would be unfair to allow respondent to pay only the loan when the
latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an
agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not make a
ruling therein that petitioner and respondent agreed on the payment of interest at the rate of 7%
for the loan. The RTC clearly stated that although petitioner and respondent entered into a valid
oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of
interest thereon. 26 While the Court of Appeals mentioned in its Decision that it concurred in the
RTC's ruling that petitioner and respondent agreed on a certain rate of interest as regards the loan,
we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The
rule is that factual findings of the trial court deserve great weight and respect especially when
affirmed by the appellate court. 27 We found no compelling reason to disturb the ruling of both
courts.
Petitioner's reliance on respondent's alleged admission in the Batas Pambansa Blg.
22 cases that they had agreed on the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified that after paying the total amount of
loan, petitioner ordered her to pay interest. 28 Respondent did not categorically declare in the
same case that she and respondent made an express stipulation in writing as regards payment of
interest at the rate of 7%. As earlier discussed, monetary interest is due only if there was an
express stipulation in writing for the payment of interest. cSTCDA
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the
payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty
or damages for breach of contractual obligations. It cannot be charged as a compensation for the
use or forbearance of money. In other words, the two instances apply only to compensatory
interest and not to monetary interest. 29 The case at bar involves petitioner's claim for monetary
interest.
Further, said compensatory interest is not chargeable in the instant case because it was
not duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest
was due on the loan because there was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the alleged
excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the person who has no right
to receive such payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense
of another. 31 The principle of solutio indebiti applies where (1) a payment is made when there
exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not through liberality or
some other cause. 32 We have held that the principle of solutio indebiti applies in case of erroneous
payment of undue interest. 33 IcCATD
It was duly established that respondent paid interest to petitioner. Respondent was
under no duty to make such payment because there was no express stipulation in writing to that
effect. There was no binding relation between petitioner and respondent as regards the payment
of interest. The payment was clearly a mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by
the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner. 34 Respondent issued two checks with a total worth of P700,000.00 in favor of
petitioner as payment of the loan. 35 These checks were subsequently encashed by
petitioner. 36 Obviously, there was an excess of P160,000.00 in the payment for the loan.
Petitioner claims that the excess of P160,000.00 serves as interest on the loan to which he was
entitled. Aside from issuing the said two checks, respondent also paid cash in the total amount of
P175,000.00 to petitioner as interest. 37 Although no receipts reflecting the same were presented
because petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his
Reply-Affidavit 38 in the Batas Pambansa Blg. 22 cases that respondent paid him a total amount of
P175,000.00 cash in addition to the two checks. Section 26, Rule 130 of the Rules of Evidence
provides that the declaration of a party as to a relevant fact may be given in evidence against him.
Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of
additional payment as interest was presented by respondent. Since we have previously found that
petitioner is not entitled to payment of interest and that the principle of solutio indebiti applies to
the instant case, petitioner should return to respondent the excess amount of P160,000.00 and
P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable amount to
respondent fixed by the RTC and the Court of Appeals should be reduced from P660,000.00 to
P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa
Blg. 22 against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondent's
conviction therein does not affect our ruling in the instant case. The two checks, subject matter of
this case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of
loan, were not among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason of the
interest which the latter paid to petitioner. 39
Article 2217 of the Civil Code provides that moral damages may be recovered if the
party underwent physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation and similar injury. Respondent
testified that she experienced sleepless nights and wounded feelings when petitioner refused to
return the amount paid as interest despite her repeated demands. Hence, the award of moral
damages is justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and
the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code
instructs that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount awarded
should not be palpably excessive as to indicate that it was the result of prejudice or corruption on
the part of the trial court. 40 To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent. SACHcD
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and threatened to
block her transactions with the PNO if she would not pay interest. This forced respondent to pay
interest despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate.
The amount of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so
as to deter petitioner and other lenders from committing similar and other serious
wrongdoings. 41
Jurisprudence instructs that in awarding attorney's fees, the trial court must state the
factual, legal or equitable justification for awarding the same. 42 In the case under consideration,
the RTC stated in its Decision that the award of attorney's fees equivalent to 25% of the amount
paid as interest by respondent to petitioner is reasonable and moderate considering the extent of
work rendered by respondent's lawyer in the instant case and the fact that it dragged on for
 several years. 43 Further, respondent testified that she agreed to compensate her lawyer handling
the instant case such amount. 44 The award, therefore, of attorney's fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment. This is
erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that 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 rate of 6% per annum. We further declared that when
the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed equivalent to a forbearance of
credit. aCTcDS
In the present case, petitioner's obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per annum should be
imposed on the amount to be refunded as well as on the damages awarded and on the attorney's
fees, to be computed from the time of the extra-judicial demand on 3 March 1998, 46 up to the
finality of this Decision. In addition, the interest shall become 12% per annum from the finality of
this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of
P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE
THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is
reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per
annum is imposed on the P335,000.00, on the damages awarded and on the attorney's fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up
to its satisfaction. Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Leonardo-de Castro, * JJ., concur.
||| (Siga-an v. Villanueva, G.R. No. 173227, [January 20, 2009], 596 PHIL 760-777)
THIRD DIVISION
[G.R. No. 138677. February 12, 2002.]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON.
COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
Florimundo C. Rous for petitioners.
Castro Biñas Samillano & Mangrobang for private respondent.
SYNOPSIS
Petitioners obtained a loan from respondent bank in the amount of P120,000.00 at 15.189% interest per
annum with a 5% penalty per month in case of default and 10% attorney's fees if a suit were instituted
for collection. When petitioners defaulted in payment, respondent bank sued for recovery of the
amount due. Two years after the case was submitted for decision without petitioners presenting their
evidence, petitioners filed a motion for reconsideration of the order declaring them as having waived
their right to present evidence and prayed that they be allowed to prove their case. The motion was
denied by the trial court which eventually rendered a decision in favor of respondent bank ordering
petitioners to pay the amount due with the agreed interest rate of 15.189%, 5% penalty charge and 10%
attorney's fees. The decision was affirmed on appeal by the Court of Appeals. On reconsideration, the
appellate court reduced the penalty interest from 5% to 3%. Petitioners filed a second motion for
reconsideration and to admit newly discovered evidence that the real estate mortgage they executed
novated the contract of loan. The mortgage, however, did not contain an express stipulation that the
parties intended to supersede the existing loan agreement but was an accessory contract to secure the
loan. The Court of Appeals denied the same. Hence, this recourse, with petitioners raising for the first
time the reasonableness of the interest rate.
A penalty clause is an accessory undertaking to strengthen the coercive force of the obligation and that
the 3% penalty interest rate considering the repeated acts of breach of petitioners' contractual
obligations is not iniquitous.
The issue of reasonableness of interest rate cannot be raised for the first time on appeal. In any event,
the Court held that the stipulated interest of 15.189% per annum is not excessive.
An obligation to pay a sum of money is not extinctively novated by a new instrument which merely
supplements the old contract.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PENALTY CLAUSE, CONSTRUED. — A penalty clause,
expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an
obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation
and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. Although a court may not at liberty
ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless,
may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation
has been partly or irregularly complied with.
2. ID.; ID.; ID.; 3% PENALTY INTEREST A MONTH, REASONABLE; CASE AT BAR. — The question of
whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution
would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the application of which, by and large,
is addressed to the sound discretion of the court. The Court of Appeals, exercising its good judgment in
the instant case, has reduced the penalty interest from 5% a month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the repeated acts of breach by petitioners of their
contractual obligation, the Court sees no cogent ground to modify the ruling of the appellate
court. HEcaIC
3. ID.; ID.; ID.; INTEREST STIPULATION, FUNDAMENTAL PART OF THE BANKING BUSINESS AND
THE CORE OF A BANK'S EXISTENCE. — Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness and prays that the Court reduce the amount.
This contention is a fresh issue that has not been raised and ventilated before the courts below. In any
event, the interest stipulation, on its face, does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as
that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is
an agreement to that effect, the two being distinct concepts which may separately be demanded. What
may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction
of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the
banking business and the core of a bank's existence.
4. ID.; DAMAGES; PAYMENT OF 10% ATTORNEY'S FEES, REASONABLE IN CASE AT BAR. —
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees
for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorney's fees has been agreed to by the parties and intended to answer not only for litigation expenses
but also for collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorney's fees to be reasonable.
5. REMEDIAL LAW; CIVIL PROCEDURE; NEW TRIAL; NEWLY DISCOVERED EVIDENCE; MUST NOT BE
EXISTING AT TIME WHEN APPEAL OR FIRST MOTION FOR RECONSIDERATION WAS FILED; CASE AT
BAR. — Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial
or to admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 —
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be entertained. Considering that the instant motion
is already a second motion for reconsideration, the same must therefore be denied. "Furthermore, it
would appear from the records available to this court that the newly-discovered evidence being invoked
by defendants-appellants have actually been existent when the case was brought on appeal to this court
as well as when the first motion for reconsideration was filed. Hence, it is quite surprising why
defendants-appellants raised the alleged newly-discovered evidence only at this stage, when they could
have done so in the earlier pleadings filed before this court.
6. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINCTIVE NOVATION; REQUISITES. — Extinctive
novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new
contract; third, the extinguishment of the obligation; and fourth, the validity of the new one. In order
that an obligation may be extinguished by another which substitutes the same, it is imperative that it be
so declared in unequivocal terms, or that the old and the new obligation be on every point incompatible
with each other.
7. ID.; ID.; ID.; MUST PRODUCE INCOMPATIBILITY IN ANY OF THE ESSENTIAL ELEMENTS OF THE
OBLIGATION. — An obligation to pay a sum of money is not extinctively novated by a new instrument
which merely changes the terms of payment or adding compatible covenants or where the old contract
is merely supplemented by the new one. When not expressed, incompatibility is required so as to ensure
that the parties have indeed intended such novation despite their failure to express it in categorical
terms. The incompatibility, to be sure, should take place in any of the essential elements of the
obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage to antichresis, or from a sale to one of loan; (2)
the object or principal conditions, such as a change of the nature of the prestation; or (3) the subjects,
such as the substitution of a debtor or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain terms and conditions
may be carried, expressly or by implication, over to the new obligation. CSTHca
DECISION
VITUG, J p:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and
Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory
note binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest
in case of default. In addition, petitioners agreed to pay 10% of the total amount due by way of
attorney's fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to
enforce payment. The obligation matured on 8 September 1981; the bank, however, granted an
extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners
informing them that they had five days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of
Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of
the case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on
28 August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the
case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the
trial court declaring them as having waived their right to present evidence and prayed that they be
allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988,
and on 20 October 1989, it rendered its decision, 1 the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to pay, jointly and severally, to the
plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum, 2% service charge and 5% per
month penalty charge, commencing on 20 May 1982
until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorney's fees; and
"3. To pay the costs of the suit." 2
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court
of their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per
month penalty charge and 10% attorney's fees. In its decision 3 of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate
court, both parties filed their respective motions for reconsideration. 4 Petitioners prayed for the
reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other hand, asked
that the payment of interest and penalty be commenced not from the date of filing of complaint but
from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee's claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing of
the complaint as we have previously held in our decision but on the date when
the obligation became due.
"Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render
the obligor in default when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where
they undertook to pay the obligation on its maturity date 'without necessity of
demand.' They also agreed to pay the interest in case of non-payment from the
date of default.
"xxx xxx xxx
"While we maintain that defendants-appellants must be bound by the contract
which they acknowledged and signed, we take cognizance of their plea for the
application of the provisions of Article 1229 . . . .
"Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original amount
of P120,000.00 to P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest of justice and public
policy, a penalty of 3% per month or 36% per annum would suffice.
"xxx xxx xxx
"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED.
The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are
hereby ordered to pay the plaintiff-appellee Security Bank and Trust Company
the following:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum and 3% per month penalty charge
commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorney's fees." 5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
discovered evidence, 6 alleging that while the case was pending before the trial court, petitioner
Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984
to secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners
contended that the execution of the real estate mortgage had the effect of novating the contract
between them and the bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to
admit newly discovered evidence, ratiocinating that such a second motion for reconsideration cannot be
entertained under Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate
court said, the newly-discovered evidence being invoked by petitioners had actually been known to
them when the case was brought on appeal and when the first motion for reconsideration was filed. 7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this
Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting
thusly —
"I. The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or
thirty-six (36%) percent per annum imposed by private respondent
bank on petitioners' loan obligation are still manifestly exorbitant,
iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a
reasonable level the ten (10%) percent award of attorney's fees
which is highly and grossly excessive, unreasonable and
unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners'
newly discovered evidence which could not have been timely
produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there
was a novation of the cause of action of private respondent's
complaint in the instant case due to the subsequent execution of the
real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage." 8
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be
deleted by petitioners was even insufficient to fully cover and compensate for the cost of money
brought about by the radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 had been remitted out of the entire loan of
P120,000.00. 9
A penalty clause, expressly recognized by law, 10 is an accessory undertaking to assume greater liability
on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force
of the obligation 11 and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity
of proof on the existence and on the measure of damages caused by the breach. 12 Although a court
may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see
fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if
the principal obligation has been partly or irregularly complied with. 13
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial
Banking Corp. vs. Court of Appeals, 14 just an example, the Court has tempered the penalty charges after
taking into account the debtor's pitiful situation and its offer to settle the entire obligation with the
creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance
is made by the debtor. 15 The stipulated penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor, 16 when the penalty clause itself suffers from fatal
infirmity, or when exceptional circumstances so exist as to warrant it. 17
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest
from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention
the repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent
ground to modify the ruling of the appellate court.
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not
been raised and ventilated before the courts below. In any event, the interest stipulation, on its face,
does not appear as being that excessive. The essence or rationale for the payment of interest, quite
often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being
distinct concepts which may separately be demanded. 18 What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the nonpayment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the core of
a bank's existence. 19
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees
for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorney's fees has been agreed to by the parties and intended to answer not only for litigation expenses
but also for collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorney's fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to
admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 —
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same party
shall be entertained. Considering that the instant motion is already a second
motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as
well as when the first motion for reconsideration was filed. Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier
pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is
not contingent upon the averment of 'new' grounds to assail the
judgment, i.e., grounds other than those theretofore presented and rejected.
Otherwise, attainment of finality of a judgment might be stayed off
indefinitely, depending on the party's ingeniousness or cleverness in conceiving
and formulating 'additional flaws' or 'newly discovered errors' therein, or
thinking up some injury or prejudice to the rights of the movant for
reconsideration." 20
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan
would not have resulted in the extinguishment of the original contract of loan because of novation.
Petitioners acknowledge that the real estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing loan agreement between the
petitioners and the bank. 21 Respondent bank has correctly postulated that the mortgage is but
an accessory contract to secure the loan in the promissory note. SAHEIc
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to
the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new
one. 22 In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on
every point incompatible with each other. 23 An obligation to pay a sum of money is not extinctively
novated by a new instrument which merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by the new one. 24 When not expressed,
incompatibility is required so as to ensure that the parties have indeed intended such novation despite
their failure to express it in categorical terms. The incompatibility, to be sure, should take place in any of
the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to
antichresis, 25 or from a sale to one of loan; 26 (2) the object or principal conditions, such as a change of
the nature of the prestation; or (3) the subjects, such as the substitution of a debtor 27 or the
subrogation of the creditor. Extinctive novation does not necessarily imply that the new agreement
should be complete by itself; certain terms and conditions may be carried, expressly or by implication,
over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo, Panganiban, Sandoval-Gutierrez and Carpio, JJ., concur.
||| (Ligutan v. Court of Appeals, G.R. No. 138677, [February 12, 2002], 427 PHIL 42-55)
SECOND DIVISION
[G.R. No. 169975. March 18, 2010.]
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL
ROSARIO, petitioners, vs. EQUITABLE PCI BANK (formerly THE PHILIPPINE
COMMERCIAL INTERNATIONAL BANK), respondent.
DECISION
CARPIO, J p:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this
Petition for Review 1assailing the Court of Appeals' (CA) Decision 2 dated 30 June 2005 in CA-G.R.
CV No. 63966 as well as the Resolution 3dated 5 October 2005 denying the Motion for
Reconsideration. In the assailed decision, the CA modified the 12 April 1999 Decision 4 of the
Regional Trial Court of Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank 5(respondent)
to pay petitioners P1,516,015.07 with interest at the legal rate of 12% per annum starting 6 May
1994 until the amount is fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical
works on airconditioning system. On 24 November 1989, Pan Pacific, through its President,
Ricardo F. Del Rosario (Del Rosario), entered into a contract of mechanical works (Contract) with
respondent for P20,688,800. Pan Pacific and respondent also agreed on nine change orders for
P2,622,610.30. Thus, the total consideration for the whole project was P23,311,410.30. 6 The
Contract stipulated, among others, that Pan Pacific shall be entitled to a price adjustment in case
of increase in labor costs and prices of materials under paragraphs 70.1 7 and 70.2 8 of the "General
Conditions for the Construction of PCIB Tower II Extension" (the escalation clause). 9
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project
site, the PCIB Tower II extension building in Makati City. The project was completed in June 1992.
Respondent accepted the project on 9 July 1992. 10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance
with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondent's
appointed project engineer, TCGI Engineers, asked for a reduction in the price adjustment. To
show goodwill, Pan Pacific reduced the price adjustment to P4,858,548.67. 11
On 28 April 1992, TCGI Engineers recommended to respondent that the price
adjustment should be pegged at P3,730,957.07. TCGI Engineers based their evaluation of the price
adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2. Price Index of the National Statistics Office.
3. PD 1594 and its Implementing Rules and Regulations as amended, 15 March
1991.
4. Shipping Documents submitted by PPSCI.
5. Sub-clause 70.1 of the General Conditions of the Contract
Documents. 12 TADaCH
Pan Pacific contended that with this recommendation, respondent was already
estopped from disclaiming liability of at least P3,730,957.07 in accordance with the escalation
clause. 13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific's
operational capital was becoming inadequate for the project. However, respondent withheld the
payment of the price adjustment under the escalation clause despite Pan Pacific's repeated
demands. 14 Instead, respondent offered Pan Pacific a loan of P1.8 million. Against its will and on
the strength of respondent's promise that the price adjustment would be released soon, Pan
Pacific, through Del Rosario, was constrained to execute a promissory note in the amount of P1.8
million as a requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was
released directly to laborers and suppliers and not a single centavo was given to Pan Pacific. 15
Pan Pacific made several demands for payment on the price adjustment but respondent
merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured and
respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan
Pacific insisted that it would not have incurred the loan if respondent released the price
adjustment on time. Pan Pacific alleged that the promissory note did not express the true
agreement of the parties. Pan Pacific maintained that the P1.8 million was to be considered as an
advance payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning. 16
Respondent stood firm that it would not release any amount of the price adjustment to
Pan Pacific but it would offset the price adjustment with Pan Pacific's outstanding balance of
P3,226,186.01, representing the loan, interests, penalties and collection charges. 17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial settlement,
less P1.8 million and P414,942 as advance payments. 18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the
promissory note, sum of money, and damages against the respondent with the RTC of Makati
City, Branch 59. On 12 April 1999, the RTC rendered its decision, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the plaintiffs and against the defendant as follows:
1. Declaring the promissory note (Exhibit "B") null and void;
2. Ordering the defendant to pay the plaintiffs the following
amounts:
a. P1,389,111.10 representing unpaid balance of the
adjustment price, with interest thereon at the
legal rate of twelve (12%) percent per annum
starting May 6, 1994, the date when the
complaint was filed, until the amount is fully
paid;
b. P100,000.00 representing moral damages;
c. P50,000.00 representing exemplary damages; and
d. P50,000.00 as and for attorney's fees.
3. Dismissing defendant's counterclaim, for lack of merit; and
4. With costs against the defendant.
SO ORDERED. 19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May
1999, respondent appealed the entire RTC Decision for being contrary to law and evidence. In sum,
the appeals of the parties with the CA are as follows: ECaITc
1. With respect to the petitioners, whether the RTC erred in deductng n the
amount of P126,903.97 from the balance of the adjusted price and in
awarding only 12% annual interest on the amount due, instead of
the bank loan rate of 18% compounded annually beginning
September 1992.
2. With respect to respondent, whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary
damages and attorney's fees in favor of petitioners and in dismissing
its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to
the principal amount due to petitioners. The CA removed the deduction of P126,903.97 because it
represented the final payment on the basic contract price. Hence, the CA ordered respondent to
pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May
1994. 20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CA's Decision imposing the legal rate of 12%. Petitioners claimed that the
interest rate applicable should be the 18% bank lending rate. Respondent likewise filed a Motion
for Reconsideration of the CA's decision. In a Resolution dated 5 October 2005, the CA denied both
motions.
Aggrieved by the CA's Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding
the unpaid balance of the price adjustment, erred in fixing the interest rate at 12% instead of the
18% bank lending rate.
Ruling of the Court
We grant the petition.
This Court notes that respondent did not appeal the decision of the CA. Hence, there is
no longer any issue as to the principal amount of the unpaid balance on the price adjustment,
which the CA correctly computed at P1,516,015.07. The only remaining issue is the interest rate
applicable for respondent's delay in the payment of the balance of the price adjustment.
The CA denied petitioners' claim for the application of the bank lending rate of 18%
compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the
contract provides for an interest at the current bank lending rate in case of
delay in payment by the Owner, and the promissory note charged an interest of
18%, the said proviso does not authorize plaintiffs to unilaterally raise the
interest rate without the other party's consent. Unlike their request for price
adjustment on the basic contract price, plaintiffs never informed nor sought the
approval of defendant for the imposition of 18% interest on the adjusted price.
To unilaterally increase the interest rate of the adjusted price would be violative
of the principle of mutuality of contracts. Thus, the Court maintains the legal
rate of twelve percent per annum starting from the date of judicial demand.
Although the contract provides for the period when the recommendation of
the TCGI Engineers as to the price adjustment would be binding on the parties,
it was established, however, that part of the adjusted price demanded by
plaintiffs was already disbursed as early as 28 February 1992 by defendant bank
to their suppliers and laborers for their account. 21
In this appeal, petitioners allege that the contract between the parties consists of two
parts, the Agreement 22and the General Conditions, 23 both of which provide for interest at the
bank lending rate on any unpaid amount due under the contract. Petitioners further claim that
there is nothing in the contract which requires the consent of the respondent to be given in order
that petitioners can charge the bank lending rate. 24 Specifically, petitioners invoke Section 2.5 of
the Agreement and Section 60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge
interest thereon at the current bank lending rates,
without prejudice to OWNER'S recourse to any other
remedy available under existing law. 25
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate
issued by the Engineer pursuant to this Clause, or to any term of the
Contract, shall, subject to clause 47, be paid by the Owner to the
Contractor within 28 days after such interim certificate has been
delivered to the Owner, or, in the case of the Final Certificate
referred to in Sub-Clause 60.8, within 56 days, after such Final
Certificate has been delivered to the Owner. In the event of the
failure of the Owner to make payment within the times stated, the
Owner shall pay to the Contractor interest at the rate based on
banking loan rates prevailing at the time of the signing of the
contract upon all sums unpaid from the date by which the same
should have been paid. The provisions of this Sub-Clause are
without prejudice to the Contractor's entitlement under Clause
69. 26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of
interest from the time an amount is determined to be due thereto, which respondent should have
paid. Therefore, as petitioners have already proven their entitlement to the price adjustment, it
necessarily follows that the bank lending interest rate of 18% shall be applied. 27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the
General Conditions, it is stipulated that any additional cost shall be determined by the Engineer
and shall be added to the contract price after due consultation with the Owner, herein respondent.
Hence, there being no prior consultation with the respondent regarding the additional cost to the
basic contract price, it naturally follows that respondent was never consulted or informed of the
imposition of 18% interest rate compounded annually on the adjusted price. 28
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments, and the
consent for the imposition of the bank lending rate. Thus, while the CA held that petitioners
consulted respondent for price adjustment on the basic contract price, petitioners, nonetheless,
are not entitled to the imposition of 18% interest on the adjusted price, as petitioners never
informed or sought the approval of respondent for such imposition. 29
We disagree.
It is settled that the agreement or the contract between the parties is the formal
expression of the parties' rights, duties, and obligations. It is the best evidence of the intention of
the parties. Thus, when the terms of an agreement have been reduced to writing, it is considered
as containing all the terms agreed upon and there can be, between the parties and their successors
in interest, no evidence of such terms other than the contents of the written
agreement. 30 cSICHD
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in
respect of rise or fall in the cost of labor and/or materials or any other matters
affecting the cost of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the
Contract there occur in the country in which the Works are being or are to be
executed changes to any National or State Statute, Ordinance, Decree or other
Law or any regulation or bye-law (sic) of any local or other duly constituted
authority, or the introduction of any such State Statute, Ordinance, Decree,
Law, regulation or bye-law (sic) which causes additional or reduced cost to the
contractor, other than under Sub-Clause 70.1, in the execution of the Contract,
such additional or reduced cost shall, after due consultation with the Owner
 and Contractor, be determined by the Engineer and shall be added to or
deducted from the Contract Price and the Engineer shall notify the Contractor
accordingly, with a copy to the Owner. 31
In this case, the CA already settled that petitioners consulted respondent on the
imposition of the price adjustment, and held respondent liable for the balance of P1,516,015.07.
Respondent did not appeal from the decision of the CA; hence, respondent is estopped from
contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give
its consent to the imposition of interest before petitioners can hold respondent liable for interest
at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and
Section 60.10 of the General Conditions shows that the consent of the respondent is not needed
for the imposition of interest at the current bank lending rate, which occurs upon any delay in
payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases, courts have no
authority to alter a contract by construction or to make a new contract for the parties. The Court's
duty is confined to the interpretation of the contract which the parties have made for themselves
without regard to its wisdom or folly as the court cannot supply material stipulations or read into
the contract words which it does not contain. It is only when the contract is vague and ambiguous
that courts are permitted to resort to construction of its terms and determine the intention of the
parties. 32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement
and Section 60.10 of the General Conditions which pertain to the time of payment. Once the
parties agree on the price adjustment after due consultation in compliance with the provisions of
the escalation clause, the agreement is in effect an amendment to the original contract, and gives
rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of the General
Conditions, the respondent shall pay such liability to the petitioner within 28 days from issuance of
the interim certificate. Upon respondent's failure to pay within the time provided (28 days), then it
shall be liable to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of
interest. To provide a contrary interpretation, as one requiring a separate consent for the
imposition of the stipulated interest, would render the intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing. Therefore, payment
of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary interest. 33
We agree with petitioners' interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon in the contract of the parties. In the absence of a
stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to
the regular monetary interest becomes due and payable. Finally, if no regular interest had been
agreed upon by the contracting parties, then the damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. 34 It is only
when the parties to a contract have failed to fix the rate of interest or when such amount is
unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of
money. 35
The written agreement entered into between petitioners and respondent provides for
an interest at the current bank lending rate in case of delay in payment and the promissory note
charged an interest of 18%.
To prove petitioners' entitlement to the 18% bank lending rate of interest, petitioners
presented the promissory note 36 prepared by respondent bank itself. This promissory note,
although declared void by the lower courts because it did not express the real intention of the
parties, is substantial proof that the bank lending rate at the time of default was 18% per annum.
Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners
against the respondent, the interest rate agreed upon is binding on them. 37 aSEHDA
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay petitioners
P1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May 1994 until
the amount is fully paid.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
||| (Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank, G.R. No. 169975, [March 18, 2010], 630 PHIL
94-107)
SECOND DIVISION
[G.R. No. 160545. March 9, 2010.]
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO
S. PANTALEON, petitioners, vs. ARTHUR F. MENCHAVEZ, respondent.
DECISION
BRION, J p:
We resolve in this Decision the petition for review on certiorari 1 filed by petitioners
Prisma Construction & Development Corporation (PRISMA) and Rogelio S.
Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the
Decision 2 dated May 5, 2003 and the Resolution 3 dated October 22, 2003 of the Former Ninth
Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed
the Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552
that held the petitioners liable for payment of P3,526,117.00 to respondent Arthur F.
Menchavez (respondent), but modified the interest rate from 4% per month to 12% per annum,
computed from the filing of the complaint to full payment. The assailed CA Resolution denied the
petitioners' Motion for Reconsideration.
 FACTUAL BACKGROUND October 8, 1995 P600,000.00
November 8, 1995 P158,772.00
The facts of the case, gathered from the records, are briefly summarized below.
January 4, 1997 P30,000.00 11
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
obtained a P1,000,000.00 4 loan from the respondent, with a monthly interest of P40,000.00 respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of
payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6) January 4, 1997, to which it applied a 4% monthly interest. 12 Thus, on August 28, 1997, the
months, 5 under the following schedule of payments: respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus
4% monthly interest, P30,000.00 in attorney's fees, P1,000.00 per court appearance and costs of
January 8, 1994 P40,000.00 suit. 13

February 8, 1994 P40,000.00 In their Answer dated October 6, 1998, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest
March 8, 1994 P40,000.00 was not provided in the promissory note. Pantaleon also denied that he made himself personally
liable and that he made representations that the loan would be repaid within six (6) months. 14
April 8, 1994 P40,000.00 THE RTC RULING

May 8, 1994 P40,000.00 The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a
check for P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or
June 8, 1994 P1,040,000.00 6 P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that the petitioners
made several payments amounting to P1,228,772.00, but they were still indebted to the
––––––––––––– respondent for P3,526,117.00 as of February 11, 15 1999 after considering the 4% monthly interest.
The RTC observed that PRISMA was a one-man corporation of Pantaleon and used this
Total P1,240,000.00 circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per
month interest from February 11, 1999 until fully paid. 16
=============
To secure the payment of the loan, Pantaleon issued a promissory note 7 that states: The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the
Rules of Court, insisting that there was no express stipulation on the 4% monthly interest. AEHTIC
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO
THE CA RULING
HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from
Mr. Arthur F. Menchavez, representing a six-month loan payable according to The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a
the following schedule: cACEHI 4% monthly interest principally based on the board resolution that authorized Pantaleon to
transact a loan with an approved interest of not more than 4% per month. The appellate court,
January 8, 1994 P40,000.00 however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and
should be reduced to 12% per annum. The CA affirmed the RTC's finding that PRISMA was a mere
February 8, 1994 P40,000.00 instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA
modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of the
March 8, 1994 P40,000.00 complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17
After the CA's denial 18 of their motion for reconsideration, 19 the petitioners filed the
April 8, 1994 P40,000.00 present petition for review on certiorari under Rule 45 of the Rules of Court.

May 8, 1994 P40,000.00 THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to
June 8, 1994 P1,040,000.00
conclude that the parties agreed to a 4% monthly interest because the board resolution was not an
The checks corresponding to the above amounts are hereby acknowledged. 8 evidence of a loan or forbearance of money, but merely an authorization for Pantaleon to perform
certain acts, including the power to enter into a contract of loan. The expressed mandate of Article
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the 1956 of the Civil Code is that interest due should be stipulated in writing, and no such stipulation
promissory note in his personal capacity, 9 and as duly authorized by the Board of Directors of exists. Even assuming that the loan is subject to 4% monthly interest, the interest covers the six
PRISMA. 10 The petitioners failed to completely pay the loan within the stipulated six (6)-month (6)-month period only and cannot be interpreted to apply beyond it. The petitioners also point out
period. the glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the 48% per annum to 12% per annum, but failed to consider that the amount of P3,526,117.00 that
respondent: the RTC ordered them to pay includes the compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
September 8, 1994 P320,000.00
 The respondent counters that the CA correctly ruled that the loan is subject to a 4%
monthly interest because the board resolution is attached to, and an integral part of, the
promissory note based on which the petitioners obtained the loan. The respondent further
contends that the petitioners are estopped from assailing the 4% monthly interest, since they
agreed to pay the 4% monthly interest on the principal amount under the promissory note and the
board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on
the loan. If so, does the rate of interest apply to the 6-month payment period only or until full
payment of the loan?
OUR RULING
We find the petition meritorious.
Interest due should be
stipulated in writing;
otherwise, 12% per annum
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. 20 When the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations
governs. 21 In such cases, courts have no authority to alter the contract by construction or to make
a new contract for the parties; a court's duty is confined to the interpretation of the contract the
parties made for themselves without regard to its wisdom or folly, as the court cannot supply
material stipulations or read into the contract words the contract does not contain. 22 It is only
when the contract is vague and ambiguous that courts are permitted to resort to the interpretation
of its terms to determine the parties' intent. DISEaC
In the present case, the respondent issued a check for P1,000,000.00. 23 In turn,
Pantaleon, in his personal capacity and as authorized by the Board, executed the promissory note
quoted above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from
January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00
per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this
agreed sum can be computed at 4% interest per month, but no such rate of interest was
stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless
it has been expressly stipulated in writing." Under this provision, the payment of interest in loans
or forbearance of money is allowed only if: (1) there was an express stipulation for the payment of
interest; and (2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of interest at a stipulated rate. Thus,
we held in Tan v. Valdehueza 24 and Ching v. Nicdao 25 that collection of interest without any
stipulation in writing is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per month corresponds
only to the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed
upon by the parties in the promissory note. Thereafter, the interest on the loan should be at the
legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals: 26 HcSaTI
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." (Emphasis supplied)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61, 27 Sulit v.
Court of Appeals, 28Crismina Garments, Inc. v. Court of Appeals, 29 Eastern Assurance and Surety
Corporation v. Court of Appeals, 30 Sps. Catungal v. Hao, 31 Yong v. Tiu, 32 and Sps. Barrera v. Sps.
Lorenzo. 33 Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding
that the parties agreed to a 4% interest, compounded by the application of this interest beyond
the promissory note's six (6)-month period. The facts show that the parties agreed to the payment
of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest
payable within a six (6)-month period.
Medel v. Court of Appeals not
applicable
The CA misapplied Medel v. Court of Appeals 34 in finding that a 4% interest per month
was unconscionable. cDaEAS
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorney's
fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the
stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive,
iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby rendering the
stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon
v. Salazar 35 of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
Appeals, 36 of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.
Jaucian, 37 of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.
Quiño, 38 of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.
Yasuma, 39 of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan, 40of 7% and 5% per month for loans totalling P964,000.00. We note that in all these cases,
the terms of the loans were open-ended; the stipulated interest rates were applied for an
indefinite period.
Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per month on the principal of a
loan payable within six months. Additionally, no issue on the excessiveness of the stipulated
amount of P40,000.00 per month was ever put in issue by the petitioners; 41 they only assailed the
application of a 4% interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them,
the only limitation being that these stipulations, clauses, terms and conditions are not contrary to
law, morals, public order or public policy. 42 The payment of the specific sum of money of
P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is
nothing from the records and, in fact, there is no allegation showing that petitioners were victims
of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per
month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total
principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum
shall apply. The amounts already paid by the petitioners during the pendency of the suit,
amounting to P1,228,772.00 as of February 12, 1999, 43 should be deducted from the total amount
due, computed as indicated above. We remand the case to the trial court for the actual
computation of the total amount due.
Doctrine of Estoppel not applicable
 The respondent submits that the petitioners are estopped from disputing the 4%
monthly interest beyond the six-month stipulated period, since they agreed to pay this interest on
the principal amount under the promissory note and the board resolution. CacEIS
We disagree with the respondent's contention. C. SIMPLE LOAN OR MUTUUM: Finance Charge

We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the promissory
note, 44 what the petitioners agreed to was the payment of a specific sum of P40,000.00 per
month for six months — not a 4% rate of interest per month for six (6) months — on a loan
whose principal is P1,000,000.00, for the total amount of P1,240,000.00. Thus, no reason exists
to place the petitioners in estoppel, barring them from raising their present defenses against a 4%
per month interest after the six-month period of the agreement. The board resolution, 45 on the
other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest of not more
than 4%. This resolution merely embodies the extent of Pantaleon's authority to contract and does
not create any right or obligation except as between Pantaleon and the board. Again, no cause
exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil
of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud
cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or
c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. 46 In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable for corporate
liabilities. 47
In the present case, we see no competent and convincing evidence of any wrongful,
fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil. While
Pantaleon denied personal liability in his Answer, he made himself accountable in the promissory
note "in his personal capacity and as authorized by the Board Resolution" of PRISMA. 48 With this
statement of personal liability and in the absence of any representation on the part of PRISMA
that the obligation is all its own because of its separate corporate identity, we see no occasion to
consider piercing the corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the
Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The petitioners' loan
of P1,000,000.00 shall bear interest of P40,000.00 per month for six (6) months from December 8,
1993 as indicated in the promissory note. Any portion of this loan, unpaid as of the end of the six-
month payment period, shall thereafter bear interest at 12% per annum. The total amount due and
unpaid, including accrued interests, shall bear interest at 12% per annum from the finality of this
Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the
proper computation of the amount due as herein directed, with due regard to the payments the
petitioners have already remitted. Costs against the respondent. HEcTAI
SO ORDERED.
Nachura, * Del Castillo, Abad and Perez, JJ., concur.
||| (Prisma Construction & Development Corporation v. Menchavez, G.R. No. 160545, [March 9, 2010], 628
PHIL 495-508)
THIRD DIVISION
[G.R. No. 159912. August 17, 2007.]
UNITED COCONUT PLANTERS BANK, petitioner, vs. SPOUSES SAMUEL
and ODETTE BELUSO,respondents.
DECISION
CHICO-NAZARIO, J p:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the
Court of Appeals Decision 1 dated 21 January 2003 and its Resolution 2 dated 9 September 2003 in CA-
G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution affirmed in turn the
Decision 3 dated 23 March 2000 and Order 4 dated 8 May 2000 of the Regional Trial Court (RTC), Branch
65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the promissory
notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of
petitioner United Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement
whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million pesos
for a term ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a
real estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-
31539 and T-27828, as additional security for the obligation. The Credit Agreement was subsequently
amended to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos
and to extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PN # Date of PN Maturity Date Amount Secured
8314-96-00083-3 29 April 1996 27 August 1996 P700,000
8314-96-00085-0 2 May 1996 30 August 1996 P500,000
8314-96-000292-2 20 November 1996 20 March 1997 P800,000
The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal
and interest of the latter two promissory notes were debited from the spouses Beluso's account with
UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses Beluso under one
promissory note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses
Beluso executed two more promissory notes for a total of P350,000.00:
PN # Date of PN Maturity Date Amount Secured
97-00363-1 11 December 1997 28 February 1998 P200,000
98-00002-4 2 January 1998 28 February 1998 P150,000
However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%.
From 1996 to February 1998 the spouses Beluso were able to pay the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:
PN # Amount Secured Interest Penalty Total
97-00363-1 P200,000 31% 36% P225,313.24
97-00366-6 P700,000 30.17% 32.786% P795,294.72
(7 days) (102 days)
97-00368-2 P1,300,000 28% 30.41% P1,462,124.54
(2 days) (102 days)
98-00002-4 P150,000 33% 36% P170,034.71
(102 days)
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorney's fees, but the spouses Beluso failed to comply therewith. On 28
December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their credit
line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest
rate used by [UCPB] void and the foreclosure and Sheriff's Certificate of Sale
void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties
subject of the foreclosure; to pay [the spouses Beluso] the amount of
P50,000.00 by way of attorney's fees; and to pay the costs of suit. [The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00. 5
On 8 May 2000, the RTC denied UCPB's Motion for Reconsideration, 6 prompting UCPB to appeal the
RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the
Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby
AFFIRMED subject to the modification that defendant-appellant UCPB is not
liable for attorney's fees or the costs of suit. 7
On 9 September 2003, the Court of Appeals denied UCPB's Motion for Reconsideration for lack of merit.
UCPB thus filed the present petition, submitting the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST
RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION
BY THE TRIAL COURT OF RESPONDENTS' INDEBTEDNESS AND ORDERED
RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION
FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS
(P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER
OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED "INCORRECT
COMPUTATION" OF RESPONDENTS' INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF
THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING 8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL
AND ODETTE BELUSO (BORROWER), jointly and severally promise to pay to
UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg.,
Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS,
(P_____), Philippine Currency, with interest thereon at the rate indicative of
DBD retail rate or as determined by the Branch Head. 9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically
quantified in the face of the promissory notes, it was nonetheless categorically fixed, at the time of
execution thereof, at the "rate indicative of the DBD retail rate." UCPB contends that said provision
must be read with another stipulation in the promissory notes subjecting to review the interest rate as
fixed:
 The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations;
and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER. 10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or "prime rate"
allowed by this Court in Polotan v. Court of Appeals. 11 Furthermore, UCPB argues that even if the
proviso "as determined by the branch head" is considered void, such a declaration would not ipso
facto render the connecting clause "indicative of DBD retail rate" void in view of the separability clause
of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained
in this AGREEMENT, or documents executed in connection herewith shall be
declared invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions hereof shall not in any way be
affected or impaired. 12
According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of
mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to renew
their credit line at the new interest rates pegged by petitioner. 13 UCPB also claims that assuming there
was any defect in the mutuality of the contract at the time of its inception, such defect was cured by the
subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996 to
February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According
to UCPB, therefore, the spouses Beluso are in estoppel. 14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals, 15 where we held:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition 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 between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, 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 agreement with the
character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua 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.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as determined
by the Branch Head" is indeed dependent solely on the will of petitioner UCPB. Under such provision,
petitioner UCPB has two choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of these two choices presents an opportunity for
UCPB to fix the rate at will, the bank can easily choose such an option, thus making the entire interest
rate provision violative of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate
"as determined by the Branch Head" gives the latter unfettered discretion on what the rate may be. The
Branch Head may choose any rate he or she desires. As regards the rate "indicative of the DBD retail
rate," the same cannot be considered as valid for being akin to a "prevailing rate" or "prime rate" allowed
by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. . . . . 16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB
can peg the interest at any percentage above or below the DBD retail rate, again giving it
unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said
stipulation:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations;
and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER. 17
It should be pointed out that the authority to review the interest rate was given UCPB alone as the
lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes.
As worded in the above provision, UCPB may give as much weight as it desires to each of the
following considerations: (1) the prevailing financial and monetary condition; (2) the rate of
interest and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the
interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by law or is against public policy. 18
The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil
Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in
Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is,
furthermore, a form of deception which we cannot countenance. It is against the policy of the State as
stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. — It is hereby declared to be the policy of the State
to protect its citizens from a lack of awareness of the true cost of credit to the
user by assuring a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy. 19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are
found in the promissory notes themselves, not in the credit line. In fixing the interest rates in the
promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two options —
(1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by
UCPB, both failed to include in their computation of the outstanding obligation of the spouses Beluso
the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also deleted in the
decisions of the RTC and the Court of Appeals. Section 2.04, Article II on "Interest and other Bank
Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section
2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is
not paid when due shall be subject to a penalty charge of one percent (1%) of
the amount of such obligation per month computed from due date until the
obligation is paid in full. If the bank accelerates teh (sic) payment of availments
hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on
the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full. 20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We,
jointly and severally, agree to pay an additional sum equivalent to twenty-five
percent (25%) of the total due on the Note as attorney's fee, aside from the
expenses and costs of collection whether actually incurred or not, and a penalty
charge of one percent (1%) per month on the total amount due and unpaid
from date of default until fully paid. 21
Petitioner further claims that it is likewise entitled to attorney's fees, pursuant to Section 9.06 of the
Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its
rights under this AGREEMENT, the Note(s), the collaterals and other related
documents, the BANK shall be entitled to recover attorney's fees equivalent to
not less than twenty-five percent (25%) of the total amounts due and
outstanding exclusive of costs and other expenses. 22
Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest
agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part
of the principal and shall be subject to the same interest rate as herein
stipulated. 23
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal
and shall likewise bear interest at the same rate. 24
UCPB lastly avers that the application of the spouses Beluso's payments in the disputed computation
does not reflect the parties' agreement. The RTC deducted the payment made by the spouses Beluso
amounting to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent with the
Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In paragraph 7
of the spouses Beluso's Manifestation and Motion on Proposed Stipulation of Facts and Issues vis-a-
vis UCPB's Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest
and not to the principal, in accord with Section 3.03, Article II of the Credit Agreement on "Order of the
Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be
applied in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorney's Fee and other
expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any. 25
Thus, according to UCPB, the interest charges, penalty charges, and attorney's fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total amount
due and demandable from spouses Beluso.
The spouses Beluso's defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being no
valid demand, according to the spouses Beluso, there would be no default, and therefore the interests
and penalties would not commence to run. As it was likewise improper to foreclose the mortgaged
properties or file a case against the spouses Beluso, attorney's fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand. 26 The
excess amount in such a demand does not nullify the demand itself, which is valid with respect to the
proper amount. A contrary ruling would put commercial transactions in disarray, as validity of demands
would be dependent on the exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in
default with respect to the proper amount and, therefore, the interests and the penalties began to run at
that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said
legal interest should be imposed, thus: "There being no valid stipulation as to interest, the legal rate of
interest shall be charged." 27 It seems that the RTC inadvertently overlooked its non-inclusion in its
computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the
body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the
respondent Bank is null and void, only the legal rate of interest which is 12% per
annum can be legally charged and imposed by the bank, which would amount
to only about P599,000.00 since 1996 up to August 31, 1998.
xxx xxx xxx
 WHEREFORE, in view of the foregoing, petitioners pray for judgment or order:
xxx xxx xxx
2. By way of example for the public good against the Bank's taking unfair
advantage of the weaker party to their contract, declaring the legal rate of 12%
per annum, as the imposable rate of interest up to February 28, 1999 on the
loan of 2.350 million. 28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a
12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12%
legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The provisions
in the Credit Agreement and in the promissory notes providing for the compounding of interest were
neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition
with the RTC. The compounding of interests has furthermore been declared by this Court to be legal.
We have held in Tan v. Court of Appeals, 29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid
shall not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn
new interest.
As regards the imposition of penalties, however, although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests, the
penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or
unconscionable. 30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the
fact that this penalty is already over and above the compounded interest likewise imposed in the
contract. If a 36% interest in itself has been declared unconscionable by this Court, 31 what more a
30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself must have
realized this, as it gave us a sample computation of the spouses Beluso's obligation if both the interest
and the penalty charge are reduced to 12%.
As regards the attorney's fees, the spouses Beluso can actually be liable therefor even if there had been
no demand. Filing a case in court is the judicial demand referred to in Article 1169 32 of the Civil Code,
which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorney's fees in this case, as the spouses Beluso were
forced to litigate the issue on the illegality of the interest rate provision of the promissory notes. The
award of attorney's fees, it must be recalled, falls under the sound discretion of the court. 33 Since both
parties were forced to litigate to protect their respective rights, and both are entitled to the award of
attorney's fees from the other, practical reasons dictate that we set off or compensate both parties'
liabilities for attorney's fees. Therefore, instead of awarding attorney's fees in favor of petitioner, we
shall merely affirm the deletion of the award of attorney's fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12%
per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding attorney's
fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney's fees to the
spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19
February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their
right of redemption which expired on 25 March 2000. The RTC, however, annulled the foreclosure of
mortgage based on an alleged incorrect computation of the spouses Beluso's indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at
bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale were
mooted by the subsequent issuance of new certificates of title in the name of said bank. UCPB claims
that the spouses Beluso's action for annulment of foreclosure constitutes a collateral attack on its
certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as
the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. — A certificate of title
shall not be subject to collateral attack. It cannot be altered, modified or
cancelled except in a direct proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on
their account, they cannot be said to be in default for refusing to pay the same. Consequently, according
to the spouses Beluso, the "enforcement of such illegal and overcharged demand through foreclosure of
mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that
a valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the spouses
Beluso are considered in default with respect to the proper amount of their obligation to UCPB and,
thus, the property they mortgaged to secure such amounts may be foreclosed. Consequently, proceeds
of the foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully
entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case.
The grounds for the proper annulment of the foreclosure sale are the following: (1) that there was fraud,
collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2) that the sale
had not been fairly and regularly conducted; or (3) that the price was inadequate and the inadequacy
was so great as to shock the conscience of the court. 34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPB's alleged violation
of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6 (a) of the Truth in Lending Act which
mandates the filing of an action to recover such penalty must be made under the following
circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to recover
such penalty may be brought by such person within one year from the date
of the occurrence of the violation, in any court of competent jurisdiction. . . .
(Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint did not
explicitly allege a violation of the 'Truth in Lending Act' and no action to formally admit the amended
petition [which expressly alleges violation of the Truth in Lending Act] was made either by
[respondents] spouses Beluso and the lower court. . . . ." 35
UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending
Act had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that per
the records of the case, the latest of the subject promissory notes had been executed on 2 January 1998,
but the original petition of the spouses Beluso was filed before the RTC on 9 February 1999, which was
after the expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the
'Truth in Lending Act' and no action to formally admit the amended petition
was made either by [respondents] spouses Beluso and the lower court. In such
transactions, the debtor and the lending institutions do not deal on an equal
footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof
by the lender. We find that its infringement may be inferred or implied from
allegations that when [respondents] spouses Beluso executed the promissory
notes, the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents] Spouses
Beluso the charges applicable on their loans. 36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof,
are controlling. Other than that stated by the Court of Appeals, we find that the allegation of violation
of the Truth in Lending Act can also be inferred from the same allegation in the complaint we discussed
earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has
relied on the provision of their promissory note granting respondent bank the
power to unilaterally fix the interest rates, which rate was not determined in
the promissory note but was left solely to the will of the Branch Head of the
respondent Bank, . . . . 37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a "clear statement in writing" of "(6) the
finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance charge
bears to the amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation." 38 Furthermore, the spouses Beluso's prayer "for such other reliefs just and
equitable in the premises" should be deemed to include the civil penalty provided for in Section 6 (a) of
the Truth in Lending Act.
UCPB's contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an
amount equal to twice thefinance charge required by such creditor in connection with such transaction,
whichever is greater, except that such liability shall not exceed P2,000.00 on any credit
transaction. 39 As this penalty depends on the finance charge required of the borrower, the borrower's
cause of action would only accrue when such finance charge is required. In the case at bar, the date of
the demand for payment of the finance charge is 2 September 1998, while the foreclosure was made on
28 December 1998. The filing of the case on 9 February 1999 is therefore within the one-year
prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred
nor implied from the allegations made in the complaint. 40 Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is the greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to recover
such penalty may be brought by such person within one year from the date of
the occurrence of the violation, in any court of competent jurisdiction. In any
action under this subsection in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorney's fees and court costs as
determined by the court.
xxx xxx xxx
(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,000 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6 (a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6 (c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6
(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor
is an amount of P100 or in an amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the liability shall not exceed
P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by the
aggrieved private person separately and independently from the criminal case for the same
offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6 (a) of the Truth in
Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory
notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2,
Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action. — A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder
of parties;
(b) The joinder shall not include special civil actions or actions governed by
special rules;
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional
Trial Court provided one of the causes of action falls within the jurisdiction of
said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of
money, the aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTC's disposition on the violation of the Truth in Lending Act since the same was not
alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due process
mandates that a defendant should be sufficiently apprised of the matters he or she would be defending
himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before
the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly alleged,
thus:
Moreover, since from the start, respondent bank violated the Truth in Lending
Act in not informing the borrower in writing before the execution of the
 Promissory Notes of the interest rate expressed as a percentage of the total
loan, the respondent bank instead is liable to pay petitioners double the
amount the bank is charging petitioners by way of sanction for its violation. 41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth
in Lending Act provision to express the interest rate as a simple annual
percentage of the loan? 42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the
assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6 (a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. There had been no question
that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section
5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional
Trial Court provided one of the causes of action falls within the jurisdiction of
said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the
former is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the
bank is merely obliged, for the considerations specified therefor, to lend to the other party amounts not
exceeding the limit provided. The credit transaction thus occurred not when the credit line was opened,
but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending
Act allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was
mentioned, but when the parties executed the promissory notes, where the allegedly offending interest
rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory
notes after their execution, then they were duly notified of the terms thereof, in substantial compliance
with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be
acquired;
(2) the amounts, if any, to be credited as down payment and/or
trade-in;
(3) the difference between the amounts set forth under clauses (1)
and (2)
(4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos;
and
(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The
law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan,
to enable them to give full consent to the contract, and to properly evaluate their options in arriving at
business decisions. Upholding UCPB's claim of substantial compliance would defeat these purposes of
the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to
reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision
therein does not sufficiently indicate with particularity the interest rate to be applied to the loan covered
by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the
ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas
City, involving the same parties and issues. UCPB claims that while Civil Case No. V-7227 initially
appears to be a different action, as it prayed for the issuance of a temporary restraining order and/or
injunction to stop foreclosure of spouses Beluso's properties, it poses issues which are similar to those of
the present case. 43 To prove its point, UCPB cited the spouses Beluso's Amended Petition in Civil Case
No. V-7227, which contains similar allegations as those in the present case. The RTC of Makati denied
UCPB's Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with
the Court of Appeals, and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition
for Injunction Against Foreclosure, is the propriety of the foreclosure before the true account of spouses
Beluso is determined. On the other hand, the issue in Case No. 99-314 before the RTC of Makati City is
the validity of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has
become moot because, before the RTC of Roxas City could act on the restraining order, UCPB
proceeded with the foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-
7227 has already been accomplished, the spouses Beluso had to file a different action, that of
Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in the
two civil actions, namely, the violation of the right of the spouses Beluso not to have their property
foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the filing of the
second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of Case
No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for in the Credit
Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:
 SEC. 5. Effect of dismissal. — Subject to the right of appeal, an order granting a
motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall
bar the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in
paragraphs (f), (h) and (i):
SECTION 1. Grounds. — Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on
any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same
cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiff's pleading has been
paid, waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied
with. 44 (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards
all the other grounds, the complainant is allowed to file same action, but should take care that, this
time, it is filed with the proper court or after the accomplishment of the erstwhile absent condition
precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses
Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when
the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two
pending actions between the same parties on the same issue at the time of the filing of Civil Case No.
99-314 on 9 February 1999 with the RTC of Makati. This will still not change our findings. It is indeed the
general rule that in cases where there are two pending actions between the same parties on the same
issue, it should be the later case that should be dismissed. However, this rule is not absolute. According
to this Court in Allied Banking Corporation v. Court of Appeals: 45
In these cases, it is evident that the first action was filed in anticipation of the
filing of the later action and the purpose is to preempt the later suit or provide a
basis for seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may
nevertheless be dismissed if the later action is the more appropriate vehicle
for the ventilation of the issues between the parties. Thus, inRamos v.
Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case
should yield to the earlier case. What is required merely is that there
be another pending action, not a prior pending action. Considering
the broader scope of inquiry involved in Civil Case No. 4102 and the
location of the property involved, no error was committed by the
lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant
considerations in determining which action should be dismissed: (1) the date of
filing, with preference generally given to the first action filed to be retained; (2)
whether the action sought to be dismissed was filed merely to preempt the
later action or to anticipate its filing and lay the basis for its dismissal; and (3)
whether the action is the appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction
against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of
Makati City includes an action for the annulment of said foreclosure, an action certainly more proper in
view of the execution of the foreclosure sale. The former case was improperly filed in Roxas City, while
the latter was filed in Makati City, the proper venue of the action as mandated by the Credit Agreement.
It is evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues
between the parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City
was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,
respondent spouses Samuel and Odette Beluso are also liable for
the following amounts:
a. Penalty of 12% per annum on the amount due 46 from the date of
demand; and
b. Compounded legal interest of 12% per annum on the amount
due 47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses
Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00.
These payments shall be applied to the date of actual
payment of the following in the order that they are
listed, to wit:
i. penalty charges due and demandable as of the time of
payment;
ii. interest due and demandable as of the time of
payment;
iii. principal amortization/payment in arrears as of the
time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00.
This amount shall be deducted from the liability of the
 spouses Samuel and Odette Beluso on 9 February
1999 to the following in the order that they are listed, to
wit:

i. penalty charges due and demandable as of time of

payment;

ii. interest due and demandable as of the time of

payment;

iii. principal amortization/payment in arrears as of the

time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the

amounts which the Regional Trial Court and the Court of Appeals
ordered respondents to pay, as modified in this Decision, shall be
deducted from the proceeds of the foreclosure sale.

SO ORDERED.

Ynares-Santiago, Austria-Martinez and Nachura, JJ., concur.

Reyes, J., took no part, being the former Chairman of the CA Division which rendered the assailed
Decision.

||| (United Coconut Planters Bank v. Spouses Beluso, G.R. No. 159912, [August 17, 2007], 557 PHIL 326-363)