CASES IN CREDIT TRANSACTIONS

1. Catholic Vicar vs CA

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a
long time ago can properly be considered res judicata by respondent Court of Appeals in the
present two cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of
Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No.
05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the
Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case
No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar

Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to
the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in
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the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question;
that the two lots were possessed by the predecessors-in-interest of private respondents under claim
of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots
as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there
is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years
of possession without; that the principle of res judicata on these findings by the Court of Appeals will
bar a reopening of these questions of facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic of the
Mountain Province (VICAR for brevity) filed with the Court of First Instance
of Baguio Benguet on September 5, 1962 an application for registration of
title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the
Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22,
1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed
their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. After trial on the merits, the land registration
court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and
the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607)
appealed the decision of the land registration court to the then Court of
Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals
rendered its decision, dated May 9, 1977, reversing the decision of the
land registration court and dismissing the VICAR's application as to Lots 2
and 3, the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now at bar),
the first lot being presently occupied by the convent and the second by
the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration

praying the Court of Appeals to order the registration of Lot 3 in the
names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs
of Juan Valdez and Pacita Valdez filed their motion for reconsideration
praying that both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of
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 Appeals denied the motion for reconsideration filed by the Heirs of Juan
Valdez on the ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise denied that of the
Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review
on certiorari of the decision of the Court of Appeals dismissing his (its)
application for registration of Lots 2 and 3, docketed as G.R. No. L-46832,
entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of
Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for

reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for review,
docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita
Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and
Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution

both petitions (of VICAR on the one hand and the Heirs of Juan Valdez
and Pacita Valdez on the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the
Heirs of Octaviano filed with the then Court of First Instance of Baguio,
Branch II, a Motion For Execution of Judgment praying that the Heirs of
Octaviano be placed in possession of Lot 3. The Court, presided over by
Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the
ground that the Court of Appeals decision in CA-G.R. No. 38870 did not
grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of

Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R.
No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J.
Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of
Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655
(429) on September 24, 1979, likewise for recovery of possession of Lot 2
(Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of
the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C );
his written demand (Exh. B—B-4 ) to defendant Vicar for the return of the land to them;
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 and the reasonable rentals for the use of the land at P10,000.00 per month. On the
other hand, defendant Vicar presented the Register of Deeds for the Province of
Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by
any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The
defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs
admitted that the witness if called to the witness stand, would testify that defendant
Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and
peacefully and has constructed permanent structures thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of
Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect
declared the plaintiffs the owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting
up the defense of ownership and/or long and continuous possession of the two lots in
question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs contend that the question of
possession and ownership have already been determined by the Court of Appeals
(Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1,
Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that
the principle of res judicata would not prevent them from litigating the issues of long
possession and ownership because the dispositive portion of the prior judgment in CA-
G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2
and 3. Defendant Vicar contends that only the dispositive portion of the decision, and
not its body, is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE
BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN

POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

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6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A
PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2
AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2
AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS
OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE
DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when
it clearly held that it was in agreement with the findings of the trial court that the Decision of the
Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2
and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively
declare private respondents as owners of the land, neither was it declared that they were not owners
of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3,
with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires
possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30
years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in
CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling
that said findings are res judicatabetween the parties. They can no longer be altered by presentation
of evidence because those issues were resolved with finality a long time ago. To ignore the principle
of res judicata would be to open the door to endless litigations by continuous determination of issues
without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No.
38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register
the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.

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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 oil Lots 1,
2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was
constructed only in 1951 and the new convent only 2 years before the trial in 1963.

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

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

The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner 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.

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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.

SO ORDERED.

2. Tolentino v Gonzales

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 26085 August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.

JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay
a certain amount per month as rent, may such rent render such a contract usurious when the
amount paid as rent, computed upon the purchase price, amounts to a higher rate of interest upon
said amount than that allowed by law?

(c) May the contract in the present case may be modified by parol evidence?

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ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills,
Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of
Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three
installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the second
installment of P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per
cent interest was due and payable on or about the 30th day of November, 1922. One of the
conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and
appellants) to pay the balance of said purchase price or any of the installments on the date agreed
upon, the property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the
record shows upon the due dates. The balance of P15,000 due on said contract of purchase was
paid on or about the 1st day of December, 1922, in the manner which will be explained below. On
the date when the balance of P15,000 with interest was paid, the vendor of said property had issued
to the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title
(No. 528) was transfer certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote
a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of
said indebtedness was not paid, an action would be brought for the purpose of recovering the
property, together with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos
judicialmente contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios
ocasionados a la compañia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

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According to Exhibits B and D, which represent the account rendered by the vendor, there was due
and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due,
began to make an effort to borrow money with which to pay the balance due, began to make an
effort to borrow money with which to pay the balance of their indebtedness on the purchase price
of the property involved. Finally an application was made to the defendant for a loan for the
purpose of satisfying their indebtedness to the vendor of said property. After some negotiations the
defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that
the plaintiffs execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the
sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the
plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for
drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and
for the plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was
dated the 28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad,
residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta
Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con
Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la cantidad
de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto hemos recibido a
nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a
favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que,
segun el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de Titulos de la
Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que al incorporarse se donomino y
se denomina "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se
describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac.
Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la Manila
Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el plano, cuyo punto
se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en
Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.;
54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S. 2 gds.
42' E., 61.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil doscientos
diez y seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados

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en el plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x
70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera,
siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.º de febrero de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados
desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el
referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez
y Chiam a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco años sin
ejercitar el derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e
irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba
descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy
Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro contra incendios, si el conviniera al referido Sr. Benito
Gonzalez Sy Chiam asegurar dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la
terminacion de este arrendamieno y a la perdida del derecho de retracto que nos hemos
reservado, como si naturalmente hubiera expirado el termino para ello, pudiendo en su virtud dicho
Sr. Gonzalez Sy Chiam tomar posesion de la finca y desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos
terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado
en Manila, hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

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An examination of said contract of sale with reference to the first question above, shows clearly that
it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that
said contract, standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados
desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el
referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzales
Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5) años
sin ejercitar al derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that
there can certainly be not doubt as to the purpose of the plaintiff to sell the property in question,
reserving the right only to repurchase the same. The intention to sell with the right to repurchase
cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she
became the "tenant" of the purchaser. That contract of rent appears in said quoted document
above as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba
descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy
Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido Sr. Benito
Gonzalez Sy Chiam asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de
retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,
second, that by virtue of the said contract the vendor became the tenant of the purchaser, under
the conditions mentioned in paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they intended the contract to be
a "mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252;
Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379;
Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)

11
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court
will not construe an instrument to one of sale with pacto de retro, with the stringent and onerous
effect which follows, unless the terms of the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a
contract, but when an issue is squarely presented that a contract does not express the intention of
the parties, courts will, when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de
retro. They admit that they signed it. They admit they sold the property in question with the right to
repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a "sale" with
pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us in
construing said contract to be a mere "loan" with guaranty. In every case in which this court has
construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done
so, either because the terms of such contract were incompatible or inconsistent with the theory that
said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra;
Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the
conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while
the vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In the
case of Rodriguez vs. Pamintuan and De Jesus the person who executed the instrument, purporting
on its face to be a deed of sale of certain parcels of land, had merely acted under a power of
attorney from the owner of said land, "authorizing him to borrow money in such amount and upon
such terms and conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a
deed of sale was executed, the supposed vendor remained in possession of the land and invested
the money he had obtained from the supposed vendee in making improvements thereon, which
fact justified the court in holding that the transaction was a mere loan and not a sale. In the case of
Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor, and
such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of the
title of ownership of the purchaser at the expiration of the term stipulated in the original contract for
the exercise of the right of repurchase."

Referring again to the right of the parties to vary the terms of written contract, we quote from the
dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme
Court of the United States and the contention of the Chief Justice in his dissenting opinion was
affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See decision
of the Supreme Court of the United States, June 3, 1918.)1 The Chief Justice said in discussing that
question:

12
According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however general
the terms of a contract may be, they must not be held to include things and cases different from
those with regard to which the interested parties agreed to contract. "The Supreme Court of the
Philippine Islands held the parol evidence was admissible in that case to vary the terms of the
contract between the Government of the Philippine Islands and the Philippine Sugar Estates
Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice
Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual mistake,
the language used therein did not fully or accurately express the agreement and intention of the
parties. The fact that interpretation or construction of a contract presents a question of law and that,
therefore, the mistake was one of law is not a bar to granting relief. . . . This court is always disposed
to accept the construction which the highest court of a territory or possession has placed upon a
local statute. But that disposition may not be yielded to where the lower court has clearly erred. Here
the construction adopted was rested upon a clearly erroneous assumption as to an established rule
of equity. . . . The burden of proof resting upon the appellant cannot be satisfied by mere
preponderance of the evidence. It is settled that relief by way of reformation will not be granted
unless the proof of mutual mistake be of the clearest and most satisfactory character.

The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale with
the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are clear
and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations
shall be followed." Article 1282 provides: "in order to judge as to the intention of the contracting
parties, attention must be paid principally to their conduct at the time of making the contract and
subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without quoting
from that very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of
his time. He said, in discussing the question whether or not the contract, in the case of Lichauco vs.
Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares and
states that he is the proprietor in fee simple of two parcels of fallow unappropriated crown land
situated within the district of his pueblo. The first has an area of 73 quiñones, 8 balitas and 8 loanes,
located in the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is
bounded on the north, etc., etc."

In the executory part of the said instrument, it is stated:

13
'That under condition of right to repurchase (pacto de retro) he sells the said properties to the
aforementioned Doña Cornelia Laochangco for P4,000 and upon the following conditions: First, the
sale stipulated shall be for the period of two years, counting from this date, within which time the
deponent shall be entitled to repurchase the land sold upon payment of its price; second, the lands
sold shall, during the term of the present contract, be held in lease by the undersigned who shall pay,
as rental therefor, the sum of 400 pesos per annum, or the equivalent in sugar at the option of the
vendor; third, all the fruits of the said lands shall be deposited in the sugar depository of the vendee,
situated in the district of Quiapo of this city, and the value of which shall be applied on account of
the price of this sale; fourth, the deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of this country . . .; fifth, all the
taxes which may be assessed against the lands surveyed by competent authority, shall be payable
by and constitute a charge against the vendor; sixth, if, through any unusual event, such as flood,
tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in part, it shall
be incumbent upon the vendor to repair the damage thereto at his own expense and to put them
into a good state of cultivation, and should he fail to do so he binds himself to give to the vendee
other lands of the same area, quality and value.'

xxx xxx xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's contract
with Laochangco was not one of sale with right of repurchase, but merely one of loan secured by
those properties, and, consequently, that the ownership of the lands in questions could not have
been conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as well as their
possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario
Berenguer, the text of which has been transcribed in this decision, is very clear. Berenguer's heirs may
not go counter to the literal tenor of the obligation, the exact expression of the consent of the
contracting contained in the instrument, Exhibit C. Not because the lands may have continued in
possession of the vendor, not because the latter may have assumed the payment of the taxes on
such properties, nor yet because the same party may have bound himself to substitute by another
any one of the properties which might be destroyed, does the contract cease to be what it is, as set
forth in detail in the public instrument. The vendor continued in the possession of the lands, not as the
owner thereof as before their sale, but as the lessee which he became after its consummation, by
virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of
ownership is not implied by the circumstance of the lessee's assuming the responsibility of the
payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon
the owner, nor is such right implied by the obligation to substitute the thing sold for another while in his
possession under lease, since that obligation came from him and he continues under another
character in its possession—a reason why he guarantees its integrity and obligates himself to return
the thing even in a case of force majeure. Such liability, as a general rule, is foreign to contracts of
lease and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and such
agreement does not on this account involve any sign of ownership, nor other meaning than the will
to impose upon oneself scrupulous diligence in the care of a thing belonging to another.

14
The purchase and sale, once consummated, is a contract which by its nature transfers the ownership
and other rights in the thing sold. A pacto de retro, or sale with right to repurchase, is nothing but a
personal right stipulated between the vendee and the vendor, to the end that the latter may again
acquire the ownership of the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is
likewise true that in practice many cases occur where the consummation of a pacto de retro sale
means the financial ruin of a person; it is also, unquestionable that in pacto de retro sales very
important interests often intervene, in the form of the price of the lease of the thing sold, which is
stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with right of
repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the same
in another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground
that the amount of rent he pays, based upon the real value of the property, amounts to a usurious
rate of interest? When the vendor of property under a pacto de retro rents the property and agrees
to pay a rental value for the property during the period of his right to repurchase, he thereby
becomes a "tenant" and in all respects stands in the same relation with the purchaser as a tenant
under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to
repurchase, or the sum of P375 per month, based upon the value of the property, amounted to usury.
Usury, generally speaking, may be defined as contracting for or receiving something in excess of the
amount allowed by law for the loan or forbearance of money—the taking of more interest for the use
of money than the law allows. It seems that the taking of interest for the loan of money, at least the
taking of excessive interest has been regarded with abhorrence from the earliest times. (Dunham vs.
Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and especially the
English Church, entertained the opinion, then, current in Europe, that the taking of any interest for the
loan of money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's
Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we shall
find that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The
Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It will be
deemed a little singular, that the same voice against usury should have been raised in the laws of
China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the
laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine
Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into
a contract with the tenant for the payment of a specific amount of rent for the use and occupation

15
of said property, even though the amount paid as "rent," based upon the value of the property,
might exceed the rate of interest allowed by law? That question has never been decided in this
jurisdiction. It is one of first impression. No cases have been found in this jurisdiction answering that
question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of
receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,
goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term is used
in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise to
repay, but not a promise to return the same thing. To "loan," in general parlance, is to deliver to
another for temporary use, on condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a compensation for its
use. The word "loan," however, as used in the statute, has a technical meaning. It never means the
return of the same thing. It means the return of an equivalent only, but never the same thing loaned.
A "loan" has been properly defined as an advance payment of money, goods or credits upon a
contract or stipulation to repay, not to return, the thing loaned at some future day in accordance
with the terms of the contract. Under the contract of "loan," as used in said statute, the moment the
contract is completed the money, goods or chattels given cease to be the property of the former
owner and becomes the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events, the money,
goods or chattels, the moment the contract is executed, cease to be the property of the former
owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the
property does not lose his ownership. He simply loses his control over the property rented during the
period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor.
In a contract of "rent" the thing still remains the property of the lessor. He simply loses control of the
same in a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the
relation between the contractors is that of landlord and tenant. In a contract of "loan" of money,
goods, chattels or credits, the relation between the parties is that of obligor and obligee. "Rent" may
be defined as the compensation either in money, provisions, chattels, or labor, received by the
owner of the soil from the occupant thereof. It is defined as the return or compensation for the
possession of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return
for their use. It is that, which is to paid for the use of land, whether in money, labor or other thing
agreed upon. A contract of "rent" is a contract by which one of the parties delivers to the other some
nonconsumable thing, in order that the latter may use it during a certain period and return it to the
former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of the same
kind or quantity, in which cases it is called merely a "loan." In the case of a contract of "rent," under
the civil law, it is called a "commodatum."

16
From the foregoing it will be seen that there is a while distinction between a contract of "loan," as
that word is used in the statute, and a contract of "rent" even though those words are used in
ordinary parlance as interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the
use and occupation of the property may depend upon a thousand different conditions; as for
example, farm lands of exactly equal productive capacity and of the same physical value may have
a different rental value, depending upon location, prices of commodities, proximity to the market,
etc. Houses may have a different rental value due to location, conditions of business, general
prosperity or depression, adaptability to particular purposes, even though they have exactly the
same original cost. A store on the Escolta, in the center of business, constructed exactly like a store
located outside of the business center, will have a much higher rental value than the other. Two
places of business located in different sections of the city may be constructed exactly on the same
architectural plan and yet one, due to particular location or adaptability to a particular business
which the lessor desires to conduct, may have a very much higher rental value than one not so
located and not so well adapted to the particular business. A very cheap building on the carnival
ground may rent for more money, due to the particular circumstances and surroundings, than a
much more valuable property located elsewhere. It will thus be seen that the rent to be paid for the
use and occupation of property is not necessarily fixed upon the value of the property. The amount
of rent is fixed, based upon a thousand different conditions and may or may not have any direct
reference to the value of the property rented. To hold that "usury" can be based upon the
comparative actual rental value and the actual value of the property, is to subject every landlord to
an annoyance not contemplated by the law, and would create a very great disturbance in every
business or rural community. We cannot bring ourselves to believe that the Legislature contemplated
any such disturbance in the equilibrium of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to
repurchase. During the period of redemption the purchaser was the absolute owner of the property.
During the period of redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of redemption the relation
which existed between the vendor and the vendee was that of landlord and tenant. That relation
can only be terminated by a repurchase of the property by the vendor in accordance with the terms
of the said contract. The contract was one of rent. The contract was not a loan, as that word is used
in Act No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make
contracts for parties. They made their own contract in the present case. There is not a word, a
phrase, a sentence or paragraph, which in the slightest way indicates that the parties to the contract
in question did not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the time it

17
was made. There is not a word, a phrase, a sentence or paragraph found in said contract which
needs explanation. The parties thereto entered into said contract with the full understanding of its
terms and should not now be permitted to change or modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the
contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action
the right guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with
the law applicable thereto, that the judgment appealed from should be and is hereby affirmed, with
costs. So ordered.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

MALCOLM, J., dissenting:

I regret to have to dissent from the comprehensive majority decision. I stand squarely on the
proposition that the contract executed by the parties was merely a clever device to cover up the
payment of usurious interest. The fact that the document purports to be a true sale with right of
repurchase means nothing. The fact that the instrument includes a contract of lease on the property
whereby the lessees as vendors apparently bind themselves to pay rent at the rate of P375 per
month and whereby "Default in the payment of the rent agreed for two consecutive months will
terminate this lease and will forfeit our right of repurchase, as though the term had expired naturally"
does mean something, and taken together with the oral testimony is indicative of a subterfuge hiding
a usurious loan. (Usury Law, Act No. 2655, sec. 7, as amended; Padilla vs. Linsangan [1911], 19 Phil.,
65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S., 139 Monagas
vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3rd ed., p. 318.) The
transaction should be considered as in the nature of an equitable mortgage. My vote is for a
modification of the judgment of the trial court.

18
3. Guingona v City Fiscal

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,

vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:

This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining
order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary
restraining order was duly issued ordering the respondents, their officers, agents, representatives
and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain
from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal
of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to
lift restraining order which was denied in the resolution of this Court dated May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged
by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions principally, on the ground of lack of
jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners' obligation is civil in
nature.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in
its Comment dated June 28,1982, as follows:têñ.£îhqwâ£

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of
the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).

19
In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and
the following directors of the Nation Savings and Loan Association, Inc., namely Homero
Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime
V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank
Circular No. 364 and related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex "A"):têñ.£îhqwâ£

"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments
by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner
Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos,
then NSLA General Manager; that on March 21, 1981 N LA was placed
under receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only P305,821.92 of
those investments were entered in the records of NSLA; that, therefore, the
respondents in I.S. No. 81-31938 misappropriated the balance of the
investments, at the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange transactions; that
after demands, petitioner Guingona Jr. paid only P200,000.00, thereby
reducing the amounts misappropriated to P959,078.14 and US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which
they stated the following.têñ.£îhqwâ£

"That Martin became President of NSLA in March 1978 (after the

resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that because
NSLA was urgently in need of funds and at David's insistence, his
investments were treated as special- accounts with interest above the
legal rate, an recorded in separate confidential documents only a portion
of which were to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total investments;
that all transactions with David were recorded except the sum of
US$15,000.00 which was a personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s dollar account because
NSLA did not have one, that a draft of US$30,000.00 was placed in the
name of one Paz Roces because of a pending transaction with her; that
the Philippine Deposit Insurance Corporation had already reimbursed
20
 David within the legal limits; that majority of the stockholders of NSLA had
filed Special Proceedings No. 82-1695 in the Court of First Instance to
contest its (NSLA's) closure; that after NSLA was placed under receivership,
Martin executed a promissory note in David's favor and caused the
transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a
net value of P510,000.00; and, that the liabilities of NSLA to David were civil
in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:têñ.£îhqwâ£

"That he had no hand whatsoever in the transactions between David and

NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he placed
his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona,
Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00
in stated installments; that he (Guingona, Jr.) secured payment of those
amounts with second mortgages over two (2) parcels of land under a
deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was
provided that the mortgage over one (1) parcel shall be cancelled upon
payment of one-half of the obligation to David; that he (Guingona, Jr.)
paid P200,000.00 and tendered another P300,000.00 which David refused
to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the
Court of First Instance of Rizal at Quezon City, to effect the release of the
mortgage over one (1) of the two parcels of land conveyed to David
under second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners

moved to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota
denied the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on the
part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and
(b) David's principal witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies
because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].
21
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation of
CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter
of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil in nature and therefore,
public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of
Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and
Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings
and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David,
together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum
of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits
and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742,
or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together
with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March
21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed
the obligation of the bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the inclusion of
other deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17,
1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02)
and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid
promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne
with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this
Court indisputably show that he has indeed invested his money on time and savings deposits with the
Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:têñ.£îhqwâ£

Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
22
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:

It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such, are
not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China
Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang
Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL
429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102
[1980]) that:

Bank deposits are in the nature of irregular deposits. They are really 'loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas
vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn
interests will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a depositary's failure to
return the subject matter of the deposit(Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable under Article 315,
par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.

WE have already laid down the rule that:

In order that a person can be convicted under the above-quoted provision, it must be
proven that he has the obligation to deliver or return the some money, goods or
personal property that he received Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents. This is
so because as clearly as stated in criminal complaints, the related civil complaints and
the supporting sworn statements, the sums of money that petitioners received were
loans.

23
 The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.têñ.£îhqwâ£

"Art. 1933. — By the contract of loan, one of the parties delivers to

another, either something not consumable so that the latter may use the
same for a certain time- and return it, in which case the contract is called
a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall he
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.

"Art. 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."

It can be readily noted from the above-quoted provisions that in simple loan (mutuum),
as contrasted to commodatum the borrower acquires ownership of the money, goods
or personal property borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).

But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed avoided, because when the
aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin
assumed the obligation of the bank to private respondent David, thereby resulting in the novation of
the original contractual obligation arising from deposit into a contract of loan and converting the
original trust relation between the bank and private respondent David into an ordinary debtor-
creditor relation between the petitioners and private respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to pay the deposits of private respondent would not
constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent
the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court.
Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:

As pointed out in People vs. Nery, novation prior to the filing of the criminal information
— as in the case at bar — may convert the relation between the parties into an

24
 ordinary creditor-debtor relation, and place the complainant in estoppel to insist on the
original transaction or "cast doubt on the true nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this
Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:

The novation theory may perhaps apply prior to the filling of the criminal information in
court by the state prosecutors because up to that time the original trust relation may be
converted by the parties into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the justice authorities
have taken cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against the state, only the latter
can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76;
U.S. vs. Montanes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by
the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal habihty or to cast doubt on
the true nature of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil.
581; U.S. vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory
note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the
criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the criminal complaint with the
Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a
civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364
and other related regulations regarding foreign exchange transactions by accepting foreign
currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent David for deposit were all converted
into Philippine currency before acceptance and deposit into Nation Savings and Loan Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association,
the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft
was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar

25
account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and loan Association in order to clear the bank draft through his dollar
account because the bank did not have a dollar account. Immediately after the bank draft was
cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same
in order to be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were
accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to
have followed the ordinary course of the business which is to accept deposits in Philippine currency
only, and that the transaction was regular and fair, in the absence of a clear and convincing
evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact
that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in
the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum
filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were
really converted into Philippine currency before they were accepted and deposited into Nation
Savings and Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no
clear showing that they engaged in foreign exchange transactions, We hold that the public
respondents acted without jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further proceeding with the criminal
case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the proper
administration of justice.

While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction
in extreme cases, thus:

On the issue of whether a writ of injunction can restrain the proceedings in Criminal
Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be
blocked by court prohibition or injunction." Exceptions, however, are allowed in the
following instances:

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive and
vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

26
 "5. in proper cases, because the statute relied upon is unconstitutional or
was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93
SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and
Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a fair and orderly
administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the accused in the case
could have appealed in due time from the order complained of, our action in the
premises being based on the public welfare policy the advancement of public policy.
In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they could have appealed.
We gave due course to their petition for the orderly administration of justice and to
avoid possible oppression by the strong arm of the law. And in Arevalo vs.
Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action
admitting an amended information was sustained despite the availability of appeal at
the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY
ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.

SO ORDERED.

27
4. Compania agricola de ultramar v Nepomuceno

EN BANC

G.R. No. L-32778 November 14, 1930

Involuntary insolvency of Mariano Velasco and Co., et al. COMPAÑIA AGRICOLA DE ULTRAMAR,
claimant-appellee,
vs.
VICENTE NEPOMUCENO, assignee-appellant.

The appellant in his own behalf.

Eusebio Orense and Nicolas Belmonte for appellee.

OSTRAND, J.:

It appears from the record that on March 17, 1927, the registered partnerships, Mariano Velasco &
Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the
creditors, declared insolvent by the Court of First Instance of Manila.

On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at
the rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said
Mariano Velasco & Co. and asked the court to declare it a preferred claim.

The assignee of the insolvency answered the claim by interposing a general denial. The claim was
thereupon referred by the court to a Commissioner to receive the evidence, and on September 23,
1929, the court rendered a decision declaring that the alleged deposit was a preferred claim for the
sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision
the assignee appealed.

The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in
writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time
the note was executed. The receipt reads as follow (translation):

MANILA, P. I., April 5, 1918.

Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a
deposit at the interest of six per cent annually, for the term of three months from date.

In witness thereof, I sign the present.

28
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.

P10,000.00.

In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he
received the said sum of P10,000 from the appellee and deposited it with the bank in the current
account of Mariano Velasco & Co.

In our opinion the court below erred in finding that the claim of the appellee should be considered a
deposit and a preferred claim. In the case of Gavieres vs. De Tavera (1 Phil., 17), very similar to the
present case, this court held that the transaction therein involved was a loan and not a deposit. The
facts of the case were that in 1859 Ignacia de Gorricho delivered P3,000 to Felix Pardo de Tavera.
The agreement between them read as follows (translation):

Received of Señorita Ignacia de Gorricho the sum of 3,000 pesos, gold (3,000 pesos), as a deposit
payable on two months' notice in advance, with interest at 6 percent per annum with a
hypothecation of the goods now owned by me or which may be owned hereafter, as security of the
payment.

In witness whereof I sign in Binondo, January 31, 1859.

FELIX PARDO DE TAVERA

After the death of both parties, Gavieres, as plaintiff and successor in interest of the deceased
Ignacia de Gorricho, brought the action against Trinidad H. Pardo de Tavera, the successor in interest
of the deceased Felix Pardo de Tavera, for the collection of the sum of P1,423.75, the remaining
portion of the 3,000 pesos. The plaintiff Gavieres alleged that the money was delivered to Felix Pardo
de Tavera as a deposit, but the defendant insisted that the agreement above quoted was not a
contract of deposit but one of loan. This court said:

Although in the document in question a deposit is spoken of, nevertheless from an examination of the
entire document it clearly appears that the contract was a loan and that such was the intention of
the parties. It is unnecessary to recur to the cannons of interpretation to arrive at this conclusion. The
obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause
the obligation to be considered as a loan and makes it likewise evident that it was the intention of
the parties that the depository should have the right to make use of the amount deposited, since it
was stipulated that the amount could be collected after notice of two months in advance. Such
being the case, the contract lost the character of a deposit and acquired that of a loan. (Art. 1768,
Civil Code.)

In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through Justice Torres said:

29
Authority from the court having been previously obtained, the complaint was amended on the 10th
of January, 1907; it was then alleged, that on the 26th of May, 1897, the defendants executed and
subscribed a document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six
hundred and eighty-six pesos and fifty-eight cents of pesos fuertes, which we will return to the said
gentleman, jointly and severally on the 20th of January, 1898. — Jaro, 26th of May 1879. — Signed:
JOSE LIM. — Signed: CEFERINO DOMINGO LIM.

That, when the obligation became due, the defendants begged the plaintiff for an extension of time
for the payment thereof binding themselves to pay interest at the rate of 15 per cent on the amount
of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid
on account of interest due the sum of 1,000 pesos, with the exception of which they had not paid
any other sum on account of either capital or interest, notwithstanding the requests made by the
plaintiff, who had thereby been subjected to loss and damages.

xxx xxx xxx

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with
the defendants a given sum of money which they were jointly and severally obliged to return on a
certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibit
2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902 that the amount deposited had not
yet been returned to the creditor, whereby he was subjected to losses and damages amounting to
830 pesos since the 20th of January, 1898, when the return was again stipulated with the further
agreement that the amount deposited should bear interest at the rate of 15 per cent per annum
from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of
May, 1900, according to the receipt issued by him to the debtors, would be included, and that the
said rate of interest would obtain until the debtors paid the creditor the said amount in full. In this
second document the contract between the parties, which is a real loan of money with interest,
appears perfectly defined, notwithstanding the fact that in the original document executed by the
debtors on the 26th of May, 1897, it is called a deposit; so that when they bound themselves jointly
and severally to refund the sum of 2,686.58 pesos to the depositor, Javellana, they did not engage to
return the same coins received and of which the amount deposited consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one received by them.
For this reason it must be understood that the debtors were lawfully authorized to make use of the
amount deposited, which they have done, as subsequently shown when asking for an extension of
the time for the return thereof, inasmuch as, acknowledging that they have subjected the lender,
their creditor, to losses and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that they received
apparently as a deposit, they engaged to pay interest to the creditor from the date named until the
time when the refund should be made. Such conduct on the part of the debtors is unquestionable

30
evidence that the transaction entered in to between the interested parties was not a deposit, but a
real contract of loan.

Article 1767 of the Civil Code provides that —

"The depository cannot make use of the thing deposited without the express permission of the
depositor."

"Otherwise he shall be liable for losses and damages."

Article 1768 also provides that —

"When the depository has permission to make use of the thing deposited, the contract loses the
character of a deposit and becomes a loan or bailment."

"The permission not be presumed, and its existence must be proven."

xxx xxx xxx

Moreover, for the reasons above set forth it may, as a matter of course, be inferred that there was no
renewal of the contract of deposit converted into a loan, because, as has already been stated, the
defendants received said amount by virtue of a real loan contract under the name of a deposit,
since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they
have done, as has been clearly shown.lawphil.net

The two cases quoted are sufficient to show that the ten thousand pesos delivered by the appellee
to Mariano Velasco & Co. cannot de regarded as a technical deposit. But the appellee argues that
it is at least an "irregular deposit." This argument is, we think, sufficiently answered in the case of
Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said:

. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points
of difference between a loan and an irregular deposit. The first difference which he points out
consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor,
while in a loan the essential cause for the transaction is the necessity of the borrower. The contract in
question does not fulfill this requirement of an irregular deposit. It is very apparent that it was not for
the sole benefit of Rogers. It, like any other loan of money, was for the benefit of both parties. The
benefit which Smith, Bell & Co. received was the use of the money; the benefit which Rogers
received was the interest on his money. In the letter in which Smith, Bell & Co. on the 30th of June,
1888, notified the plaintiff of the reduction of the interest, they said: "We call your attention to this
matter in order that you may if you think best employ your money in some other place."

Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in an
irregular deposit, the depositor can demand the return of the article at any time, while a lender is
bound by the provisions of the contract and cannot seek restitution until the time for payment, as

31
provided in the contract, has arisen. It is apparent from the terms of this documents that the plaintiff
could not demand his money at any time. He was bound to give notice of his desire for its return and
then to wait for six months before he could insist upon payment.

In the present case the transaction in question was clearly not for the sole benefit of the Compania
Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged
depositor demand payment until the expiration of the term of three months.

For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in
question must be regarded as a loan, without preference. Without costs. So ordered.

Johnson, Street, Malcolm, Villamor, Johns and Villa-Real, JJ., concur.

Separate Opinions

ROMUALDEZ, J., dissenting:

We are here concerned, I take it, with an irregular deposit and following Manresa's commentaries on
this point (11 Manresa, 694-697, 3d edition), as well as the case he cites from the Supreme Court of
Spain, decided on April 8, 1881, I am of the opinion that although the deposit in question earned
interest, it was a preferred credit .The judgment appealed from should therefore, as I think, be
affirmed.

Avanceña, C.J., concurs.

5. Monte de Piedad v Javier (cant find in net)

32
6. Mina v Pascual
EN BANC

G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,

vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.

N. Segundo for appellants.

Iñigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of
Ilocos Norte, the property having been awarded to him through its purchase at a public auction held
by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15.

Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the
said lot, embracing 14 meters of its frontage by 11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et
al., were recognized without discussion as his heirs.

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta
Pascual were recognized likes without discussion, though it is not said how, and consequently are
entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-
half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-
seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that
the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while
the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as
of the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor
children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization
to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The
plaintiffs — that is Alejandra Mina, et al. — opposed the petition of Ruperta Pascual for the reason
that the latter had included therein the lot occupied by the warehouse, which they claimed was
their exclusive property. All this action was taken in a special proceeding in re guardianship.

33
The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to
decide the question of the ownership of the lot before it pass upon the petition for the sale of the
warehouse. But the court before determining the matter of the ownership of the lot occupied by the
warehouse, ordered the sale of this building, saying:

While the trial continues with respect to the ownership of the lot, the court orders the sale at public
auction of the said warehouse and of the lot on which it is built, with the present boundaries of the
land and condition of the building, at a price of not less than P2,890 Philippine currency . . . .

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant
in this case, for the price mentioned.

The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court
decided it by holding that this land belonged to the owner of the warehouse which had been built
thereon thirty years before.

The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1

When the judgment became final and executory, a writ of execution issued and the plaintiffs were
given possession of the lot; but soon thereafter the trial court annulled this possession for the reason
that it affected Cu Joco, who had not been a party to the suit in which that writ was served.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of
the said lot declared null and void and of no force and effect.

An agreement was had ad to the facts, the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme
Court which found for them by holding that they are the owners of the lot in question, although there
existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants)
had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the
decree of the lower court that ordered the sale.

The obvious purport of the cause "although there existed and still exists a commodatum," etc.,
appears to be that it is a part of the decision of the Supreme Court and that, while finding the
plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum
under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning
of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were
the owners, these former and the defendants agree that there existed, and still exists, a
commodatum, etc. But such an agreement would not affect the truth of the contents of the decision
of this court, and the opinions held by the litigants in regard to this point could have no bearing
whatever on the present decision.

34
Nor did the decree of the lower court that ordered the sale have the least influence in our previous
decision to require our making any finding in regard thereto, for, with or without that decree, the
Supreme Court had to decide the ownership of the lot consistently with its titles and not in
accordance with the judicial acts or proceedings had prior to the setting up of the issue in respect to
the ownership of the property that was the subject of the judicial decree.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have
the ownership, and they themselves only the use, of the said lot.

On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the
manner in which the sale was effected, whether judicially or extrajudicially.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a
transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing
cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void.
The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and
void. On cannot convey to another what he has never had himself.

The returns of the auction contain the following statements:

I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me
on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at
public auction of the six-sevenths part of the one-half of the warehouse constructed of rubble stone,
etc.

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and
all the rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder,
etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the
interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have
and may have in the said property, etc.

The purchaser could not acquire anything more than the interest that might be held by a person to
whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is
disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership of
the six-sevenths part of one-half of the warehouse and the use of the lot occupied by his building.
This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the
lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the
building was null and void, and likewise with still more reason the sale of the lot the building occupies.

The purchaser could and should have known what it was that was offered for sale and what it was
that he purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse

35
of the ownership of the lot that this building occupies, since the minors represented by Ruperta
Pascual never were the owners of the said lot, nor were they ever considered to be such.

The trial court, in the judgment rendered, held that there were no grounds for the requested
annulment of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the
court as the value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu
Joco, were absolved from the complaint, without express finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to
accept the price set on the lot by expert appraisers, not even though the plaintiffs be considered as
coowner of the warehouse. It would be much indeed that, on the ground of coownership, they
should have to abide by and tolerate the sale of the said building, which point this court does not
decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is in all
respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this conclusion is
based on the fact that they did not give their consent (art. 1261, Civil Code), and only the
contracting parties who have given it are obliged to comply (art. 1091, idem).

The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but
subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense
that the action should be deemed to be one for the recovery of possession of a lot and for the
annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney, but was
allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale of the
lot, to have the defendants sentenced immediately to deliver the same to the plaintiffs.

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in
previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason
steps were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was
not a party to that suit, the present action is strictly one for recover against Cu Joco to compel him,
once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs.

As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres
Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty
years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in
interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the
coowners of the warehouse.

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his
successors paid any consideration or price whatever for the use of the lot occupied by the said
building; whence it is, perhaps, that both parties have denominated that use a commodatum.

36
Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the
defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot,
made in the present case.

The defendants do not hold lawful possession of the lot in question.1awphil.net

But, although both litigating parties may have agreed in their idea of the commodatum, on account
of its not being, as indeed it is not, a question of fact but of law, yet that denomination given by
them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not
acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto
agree to give them, but must be construed, duly considering their constitutive elements, as they are
defined and denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not perishable, in
order that the latter may use it during the certain period and return it to the former, in which case it is
called commodatum . . . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to
another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during
which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone
warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by
both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now
in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of
the commodatum sustained by them, since, according to the second paragraph of the aforecited
article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on
page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during
which his brother Andres was to have the use of the lot, because he expected that the warehouse
would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of
Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With
that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a
surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous
use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the
question should be decided in accordance with the statutes that, thirty years ago, governed
accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly
identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361,
the owner of the land on which a building is erected in good faith has a right to appropriate such
edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the
builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are
entitled.

37
For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by
Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the
use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article
361 of the Civil Code.1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void
and of no force or effect. No special finding is made as to the costs of both instances.

Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

7. Mercado v aguilar 45 off gz Supp5 118 (net not found)

8. Delos Santos v jarra (Sentencia)

EN BANC

G.R. No. L-4150 February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-
appellant.

Matias Hilado, for appellant.

Jose Felix Martinez, for appellee.

TORRES, J.:

On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the
administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea
borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power
mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for
the use thereof, under the sole condition that they should be returned to the owner as soon as the
work at the mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos,
notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished;
that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was
appointed by the Court of First Instance of Occidental Negros administratrix of his estate and she
took over the administration of the same and is still performing her duties as such administratrix; that
the plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal term,

38
for the return of the said ten carabaos, but the said commissioners rejected his claim as appears in
their report; therefore, the plaintiff prayed that judgment be entered against the defendant as
administratrix of the estate of the deceased, ordering her to return the ten first-class carabaos loaned
to the late Jimenea, or their present value, and to pay the costs.

The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to
the complaint on the ground that it was vague; but on the 2d of October of the same year, in
answer to the complaint, she said that it was true that the late Magdaleno Jimenea asked the
plaintiff to loan him ten carabaos, but that he only obtained three second-class animals, which were
afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations
contained in paragraph 3 of the complaint; for all of which she asked the court to absolve her of the
complaint with the cost against the plaintiff.

By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant
and her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that
the latter would not compromise the controversy without his consent, and that as fees for his
professional services he was to receive one half of the amount allowed in the judgment if the same
were entered in favor of the plaintiff.

The case came up for trial, evidence was adduced by both parties, and either exhibits were made of
record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra,
as administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the
remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a
total of P720 with the costs.

Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19,
moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to
the weight of the evidence. The motion was overruled, the defendant duly excepted, and in due
course submitted the corresponding bill of exceptions, which was approved and submitted to this
court.

The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten
carabaos which are now claimed by the latter, as shown by two letters addressed by the said
Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late Jimenea
only obtained three second-class carabaos, which were subsequently sold to him by the owner,
Santos; therefore, in order to decide this litigation it is indispensable that proof be forthcoming that
Jimenea only received three carabaos from his son-in-law Santos, and that they were sold by the
latter to him.

The record discloses that it has been fully proven from the testimony of a sufficient number of
witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by
his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and
that Jimenea received them in the presence of some of said persons, one being a brother of said
Jimenea, who saw the animals arrive at the hacienda where it was proposed to employ them. Four

39
died of rinderpest, and it is for this reason that the judgment appealed from only deals with six
surviving carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by
any trustworthy documents such as those of transfer, nor were the declarations of the witnesses
presented by the defendant affirming it satisfactory; for said reason it can not be considered that
Jimenea only received three carabaos on loan from his son-in-law, and that he afterwards kept them
definitely by virtue of the purchase.

By the laws in force the transfer of large cattle was and is still made by means of official documents
issued by the local authorities; these documents constitute the title of ownership of the carabao or
horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or
credential, a document which has not been produced in evidence by the defendant, nor has the
loss of the same been shown in the case, but the old documents ought to be on file in the
municipality, or they should have been delivered to the new purchaser, and in the case at bar
neither did the defendant present the old credential on which should be stated the name of the
previous owner of each of the three carabaos said to have been sold by the plaintiff.

From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum
to the now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six
surviving ones, have not been returned to the owner thereof, Felix de los Santos, and that it is not true
that the latter sold to the former three carabaos that the purchaser was already using; therefore, as
the said six carabaos were not the property of the deceased nor of any of his descendants, it is the
duty of the administratrix of the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of
commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the
following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during a certain period and return it to the former, in
which case it is called commodatum, or money or any other perishable thing, under the condition to
return an equal amount of the same kind and quality, in which case it is merely called a loan.

Commodatum is essentially gratuitous.

A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use
thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use,
the agreement ceases to be a commodatum.

40
ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both
contracting parties, unless the loan has been in consideration for the person of the bailee, in which
case his heirs shall not have the right to continue using the thing loaned.

The carabaos delivered to be used not being returned by the defendant upon demand, there is no
doubt that she is under obligation to indemnify the owner thereof by paying him their value.

Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any
manner whatsoever act in contravention of the stipulations of the same, shall be subjected to
indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision
the legal doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of the thing
loaned, and at the expiration of the period, or after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay
him damages if through the fault of the bailee the thing should have been lost or injured, it is clear
that where public securities are involved, the trial court, in deferring to the claim of the bailor that the
amount loaned be returned him by the bailee in bonds of the same class as those which constituted
the contract, thereby properly applies law 9 of title 11 of partida 5.

With regard to the third assignment of error, based on the fact that the plaintiff Santos had not
appealed from the decision of the commissioners rejecting his claim for the recovery of his carabaos,
it is sufficient to estate that we are not dealing with a claim for the payment of a certain sum, the
collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his
capital, of six carabaos which did not belong to him, and which formed no part of the inheritance.

The demand for the exclusion of the said carabaos belonging to a third party and which did not form
part of the property of the deceased, must be the subject of a direct decision of the court in an
ordinary action, wherein the right of the third party to the property which he seeks to have excluded
from the inheritance and the right of the deceased has been discussed, and rendered in view of the
result of the evidence adduced by the administrator of the estate and of the claimant, since it is so
provided by the second part of section 699 and by section 703 of the Code of Civil Procedure; the
refusal of the commissioners before whom the plaintiff unnecessarily appeared can not affect nor
reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor principle
of justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the
prejudice of Felix de los Santos.

41
For the reasons above set forth, by which the errors assigned to the judgment appealed from have
been refuted, and considering that the same is in accordance with the law and the merits of the
case, it is our opinion that it should be affirmed and we do hereby affirm it with the costs against the
appellant. So ordered.

Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.

Carson, J., reserves his vote.

9. Ansaldo v Beck

EN BANC

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in
the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the
furniture be paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
described in the third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property
to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of
the conveyance, giving him sixty days to vacate the premises under one of the clauses of the
contract of lease. There after the plaintiff required the defendant to return all the furniture transferred
to him for them in the house where they were found. On November 5, 1936, the defendant,
through another person, wrote to the plaintiff reiterating that she may call for the furniture in the
ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the
plaintiff informing her that he could not give up the three gas heaters and the four electric lamps
because he would use them until the 15th of the same month when the lease in due to expire. The

42
plaintiff refused to get the furniture in view of the fact that the defendant had declined to make
delivery of all of them. On November 15th, before vacating the house, the defendant
deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all the furniture from the
Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether
the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.

The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of the furniture because under paragraph 6 of
the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture

43
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

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

10. Martinez v Ramos

EN BANC

G.R. No. L-9417 December 4, 1914

PEDRO MARTINEZ, plaintiff-appellee,

vs.
ANTONINO RAMOS, in his own behalf and as administrator of the estate of his father Julian Ramos,
defendant-appellant and ALEJANDRA RAMOS, defendant-appellee.

P. Joya Admana for appellant.

No appearance for appellees.

ARELLANO, C. J.:

On May 2, 1900, Antonino Ramos signed an obligation to the following effect in favor of Pedro
Martinez

I hereby declare to be a fact that by order of my father, Julian Ramos, I have received from Pedro
Martinez one thousand nine hundred pesos ($1,900) as a loan without interest, which I will return
within three years, and I sign. — Manila, May 2, 1900. — (Sgd.) Antonino Ramos.

Antonino Ramos was appointed judicial administrator of the estate of his deceased father, Julian
Ramos, and against him as such, and personally, in that special proceeding, Pedro Martinez filed suit
for the fulfillment of that obligation, for Antonino Ramos alleged that by order of his father he had
contracted it, and that subsequently he had transferred to some of his coheirs the business started
with the money. But the committee of appraisal of the estate, in its report rendered on February 9,
1912, decided that this was not a debt against the estate, but against the heirs who had
acknowledged it when presented to them. On March 7 of the same year Antonino Ramos appealed
from the decision of the committee; suit was instituted in the Court of First Instance of Batangas and

44
carried forward to judgment whereby he was sentenced to pay to the plaintiff the sum of 1,450 pesos
Mexican currency, reduced to its equivalent in conant at the rate of 30 per cent, the final rate fixed
for the official exchange of the former money with the latter, with legal interest from the filing of the
complaint until total payment, and the costs, the estate of the deceased Julian Ramos being
absolved from the complaint. A sum paid on account was deducted in the judgment from the total
of the obligation.

Antonino Ramos appealed from this judgment and alleges here as the sole assignment of error the
fact that the trial court regarded the obligation in question as a personal one of the appellant's,
attempting to base it on acts that occurred apparently, subsequent to the loan, whereby the
borrower transferred to his parents the business in which had been invested the money received as
an accommodation or loan from the lender, and on the fact that all or some of his coheirs had
acknowledged such sum as a debt of the testamentary administration of said parents of Antonino
Ramos and coheirs. But such assignment of error cannot be sustained.

One who receives as a loan money or other fungible thing, acquires ownership thereof and is bound
to return to his creditor an equal amount of the same kind and quality. (Civil Code, art. 1753.)

In the instrument of obligation Antonino Ramos says:

I have received from Pedro Martinez one thousand nine hundred pesos as a loan without interest,
which I will return within three years, and I sign.

The contract consists in that Antonino, and nobody else, will return to Pedro Martinez in the time
stipulated the 1,900 pesos; and the allegations set up are of no avail against the wording of the
contents of the instrument.1awphil.net

Obligation arising from contracts have legal force between the contracting parties and must be
fullfilled in accordance with their stipulations. (Civil Code, art. 1091.)

Contracts that may have been made subsequent to the one under consideration, either between
Antonio Ramos and his parents or between himself and his coheirs, wherein the lender Pedro
Martinez has not intervened, cannot be alleged against the plaintiff Pedro Martinez, on the principle
that the force of the law of contrast cannot be extended to parties who do not intervene therein.

The judgment appealed from is affirmed, with the costs against the appellant.

Torres, Johnson, Carson, Moreland, Trent and Araullo, JJ., concur.

45
11. Testate Estate of Velayo v Fernando

EN BANC

G.R. No. L-4120 October 25, 1951

Testate estate of the deceased VALERIANA VELAYO. AMANDA DE GUZMAN, administratrix-appellant,

vs. FELINO CH. FERNANDO and MERCEDES T. DE FERNANDO, claimants-appellees.

Lorenzo G. Valentin for appellant.

Arcadio Ejercito for appellees.

BAUTISTA ANGELO, J.:

The estate of the deceased Valeriana Velayo became indebted to Dr. Felino Ch. Fernando and his
wife Mercedes T. Fernando because of a loan obtained by the deceased in the amount of P12,000
with an annual interest of 10 per cent secured by two deeds of mortgage executed on September
15, 1942, and December 29, 1942.chanroblesvirtualawlibrary chanrobles virtual law library

The administratrix is agreeable to pay the principal of the loan but to the interests, invoking in her
favor the moratorium law. It was agreed to sell the properties mortgage and to pay out of the
proceeds the principal in the amount of P12,000 with the understanding that the balance will be
deposited in court until after the question as to whether the interests should be paid shall have been
determined. After the parties had submitted their respective memoranda in support of their
respective contentions, the Court, on June 20, 1950, issued an order holding that the moratorium law
has the effect of suspending merely the payment of the interests, not of condoning them and,
therefore, ordered the administratrix to pay said interests in accordance with the stipulations agreed
upon in the deeds of mortgage under consideration. From this order the administratrix appealed.

The only question to be determined is whether the moratorium law has the effect of condoning the
interest due on a monetary obligation or of merely suspending its payment as in the case of the
principal obligation.

Executive Order No. 25, as amended by Executive Order No. 32, provides:

1. Enforcement of payment of all debts and other monetary obligations payable within the
Philippines, except debts and other monetary obligations entered into in any area after declaration
by Presidential Proclamation that such area has been freed from enemy occupation and control, is
temporarily suspended pending action by the Commonwealth Government.

Interpreting the effect of moratorium law on a monetary obligation, this Court in a recent case said:

The law on debt moratorium does not condone debts or the payments of obligations. It merely
suspends collection and payment. The right to such suspension may be invoked by the debtor; but

46
he may also waive or renounce it. (Araneta vs. Marta Cui Vda. de Sanson, 47 Off. Gaz., 2849; Phil.
142.)

It, therefore, appears that the moratorium law has merely the effect of suspending the collection or
payment of the obligation. It does not condone the debt. Inasmuch as the interest is but an
accessory to the obligation, the same manner. The accessory follows the principal. The moratorium
order is couched in the clear terms. It says that the enforcement of the payment of a debt or other
monetary obligations "is temporarily suspended pending action by the Commonwealth
Government". When the law is clear there is no room for interpretation.

In this connection, it would not be amiss to invite attention to Republic Act No. 401 approved by
Congress on June 18, 1949, which provides for the condonation of all unpaid interests accruing from
January 1, 1942, to December 31, 1945, on all obligations outstanding on December 8, 1941. Said Act
condones all unpaid interests due during the period above mentioned in favor of the Government or
government-owned or controlled corporations under certain conditions. Section 1 of said Act
contains a declaration of policy on the matter, and it says:

SEC. 1. Declaration of Policy. - Rehabilitation of those who have suffered the ravages of war
constitutes a prime concern of the Government. In order to afford opportunities to debtors of the
Government or Government-owned or controlled corporations to rehabilitate themselves, and to
enable them to pay their prewar obligations under terms and conditions beneficial to them, it is the
declared policy of the State that the condonation of the interests contemplated herein be
extended.

While it is true that the condonation of interests is made only as regards debts due to the
Government or any government-owned or controlled corporations, the declaration of policy is very
significant for it indicates the trend of mind of the lawmaker regarding the effects of moratorium or
monetary obligations. If the interests due on debts owed to the Government are not deemed
condoned by virtue of the moratorium order so much so that an express legislation was necessary to
effect their condonation, there is every reason to suppose that the interests due on other kinds of
monetary obligations are not likewise condoned simply because of the existence of the moratorium
law. Said Act No. 401 is a clear indication that the moratorium law does not have the effect of
condoning the interests but merely of suspending their payment as correctly interpreted by the lower
court.

Wherefore, the order appealed from is affirmed, with costs against the appellant.

Paras, C.J., Feria, Pablo, Bengzon, Padilla, Tuason, Reyes and Jugo, JJ., concur.

47
12. Overseas Bank v Cordero

SECOND DIVISION

G.R. No. L-33582 March 30, 1982

THE OVERSEAS BANK OF MANILA, petitioner,

vs.
VICENTE CORDERO and COURT OF APPEALS, respondents.

ESCOLIN, J.:

Again, We are confronted with another case involving the Overseas Bank of Manila, filed by one of
its depositors.

This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed the
judgment of the Court of First Instance of Manila, holding petitioner bank liable to respondent
Vicente Cordero in the amount of P80,000.00 representing the latter's time deposit with petitioner,
plus interest thereon at 6% per annum until fully paid, and costs.

On July 20, 1967, private respondent opened a one-year time deposit with petitioner bank in the
amount of P80,000.00 to mature on July 20, 1968 with interest at the rate of 6% per annum. However,
due to its distressed financial condition, petitioner was unable to pay Cordero his said time deposit
together with the interest. To enforce payment, Cordero instituted an action in the Court of First
Instance of Manila.

Petitioner, in its answer, raised as special defense the finding by the Monetary Board of its state of
insolvency. It cited the Resolution of August 1, 1968 of the Monetary Board which authorized
petitioner's board of directors to suspend all its operations, and the Resolution of August 13, 1968 of
the same Board, ordering the Superintendent of Banks to take over the assets of petitioner for
purposes of liquidation.

Petitioner contended that although the Resolution of August 13, 1968 was then pending review
before the Supreme Court, 1 it effectively barred or abated the action of respondent for even if
judgment be ultimately rendered in favor of Cordero, satisfaction thereof would not be possible in
view of the restriction imposed by the Monetary Board, prohibiting petitioner from issuing manager's
and cashier's checks and the provisions of Section 85 of Rep. Act 337, otherwise known as the
General Banking Act, forbidding its directors and officers from making any payment out of its funds
after the bank had become insolvent. It was further claimed that a judgment in favor of respondent
would create a preference in favor of a particular creditor to the prejudice of other creditors and/or
depositors of petitioner bank.

48
After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss, reiterating the same
defenses raised in its answer. Finding the same unmeritorious, the lower court denied the motion and
proceeded with the trial on the merits. In due time, the lower court rendered the aforesaid decision.
Dissatisfied, petitioner appealed to the Court of Appeals, which affirmed the decision of the lower
court.

Hence, this petition for review on certiorari.

The issues raised in this petition are quite novel. Petitioner stands firm on its contentions that the suit
filed by respondent Cordero for recovery of his time deposit is barred or abated by the state of
insolvency of petitioner as found by the Monetary Board of the Central Bank of the Philippines; and
that the judgment rendered in favor of respondent would in effect create a preference in his favor to
the prejudice of other creditors of the bank.

Certain supervening events, however, have rendered these issues moot and academic. The first of
these supervening events is the letter of Julian Cordero, brother and attorney-in-fact of respondent
Vicente Cordero, addressed to the Commercial Bank of Manila (Combank), successor of petitioner
Overseas Bank of Manila. In this letter dated February 13, 1981, copy of which was furnished this
Court, it appears that respondent Cordero had received from the Philippine Deposit Insurance
Company the amount of P10,000.00.

The second is a Manifestation by the same Julian Cordero dated July 3, 1981, acknowledging receipt
of the sum of P73,840.00. Said Manifestation is in the nature of a quitclaim, pertinent portions of which
We quote:

I, the undersigned acting for and in behalf of my brother Vicente R. Cordero who resides in Canada
and by virtue of a Special Power of Attorney issued by Vicente Romero, our Consul General in
Vancouver, Canada, xerox copy attached, do hereby manifest to this honorable court that we have
decided to waive all and any damages that may be awarded to the above-mentioned case and
we hereby also agree to accept the amount of Seventy Three Thousand Eight Hundred Forty Pesos
(P73,840.00) representing the principal and interest as computed by the Commercial Bank of Manila.
We also agree to hold free and harmless the Commercial Bank of Manila against any claim by any
third party or any suit that may arise against this agreement of payment.

... We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos (P73,840.00) with our
full satisfaction. ...

When asked to comment on this Manifestation, counsel for Combank filed on August 12, 1981 a
Comment confirming and ratifying the same, particularly the portions which state:

We also agree to hold free and harmless the Commercial Bank any third party or any suit that may
arise against this agreement of payment, and

49
We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos (P73,840.00) with our
full satisfaction.

However, upon further examination, this Court noted the absence of the alleged special power of
attorney executed by private respondent in favor of Julian Cordero. When directed to produce the
same, Julian Cordero submitted the following explanatory Comment, to which was attached the
special power of attorney executed by respondent Vicente Cordero:

3. This manifestation (referring to the Manifestation of July 3, 1981) applies only to third party
claims, suit and other damages. It does not mean waiving the interest it should earn while the bank is
closed and also the attorney's fees as decided by the lower court. It is very clear. I did not waive the
attorney's fees because it belongs to our attorney and interest because it belongs to us and we are
entitled to it.

Thus, with the principal claim of respondent having been satisfied, the only remaining issue to be
determined is whether respondent is entitled to (1) interest on his time deposit during the period that
petitioner was closed and (2) to attorney's fees.

We find the answer to be in the negative.

The pronouncement made by this Court, per Justice Barredo, in the recent case of Overseas Bank of
Manila vs. Court of Appeals 2 is explicit and categorical. We quote:

It is a matter of common knowledge which we take judicial notice of, that what enables a bank to
pay stipulated interest on money deposited with it is that thru the other aspects of its operation, it is
able to generate funds to cover the payment of such interest. Unless a bank can lend money,
engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and
generally engage in other banking and financing activities, from which it can derive income, it is
inconceivable how it can carry on as a depository obligated to pay stipulated interest. ...
Consequently, it should be deemed read into every contract of deposit with a bank that the
obligation to pay interest on the deposit ceases the moment the operation of the bank is completely
suspended by the duly constituted authority, the Central Bank.

We consider it of trivial consequence that the stoppage of the bank's operations by the Central Bank
has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank
had no alternative under the law than to obey the orders of the Central Bank. Whatever be the
juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained
that the petitioner was totally crippled from then on from earning the income needed to meet its
obligations to its depositors. If such a situation cannot, strictly speaking be legally denominated as
"force majeure" as maintained by private respondent, We hold it is a matter of simple equity that it be
treated as such.

And concluding, this Court stated:

50
Parenthetically, We may add for the guidance of those who might be concerned and so that
unnecessary litigations may be avoided from further clogging the dockets of the courts that in the
light of the consideration expounded in the above opinion, the same formula that exempts petitioner
from the payment of interest to its depositors during the whole period of factual stoppage of its
operations by orders of the Central Bank, modified in effect by the decision as well as the approval of
a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed
in respect to all other obligations of petitioner which could not be paid during the period of its actual
complete closure.

Neither can respondent Cordero recover attorney's fees. The trial court found that herein petitioner's
refusal to pay was not due to a wilful and dishonest refusal to comply with its obligation but to
restrictions imposed by the Central Bank. 3 Since respondent did not appeal from this decision, he is
now barred from contesting the same.

WHEREFORE, that portion of the lower court's decision ordering petitioner to pay interest on Cordero's
time deposit is set aside. It appearing that the amount of the latter's time deposit had been fully paid,
this case is hereby dismissed. No costs.

SO ORDERED.

13. Reformina v Tumol

EN BANC

G.R. No. L-59096 October 11, 1985

PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners,

vs.
THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First Instance, Branch XI, CEBU
CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, INCORPORATED, respondents.

Mateo Canonoy for petitioners.

Reynaldo A. Pineda, Reyes, Santayana, Tayao and Picaso Law Office for respondent Shell.

Marcelo Fernan & Associates for respondent Michael, Inc.

CUEVAS, J.:

How much, by way of legal interest, should a judgment debtor pay the judgment creditor- is the issue
raised by the REFORMINAS (herein petitioners) in this Petition for Review on certiorari of the Resolution
of the Hon. respondent Judge Valeriano P. Tomol, Jr. of the then Court of First Instance of Cebu-
Branch XI, issued in Civil Case No.

51
R-11279, an action for Recovery of Damages for injury to Person and Loss of Property.

The dispositive portion of the assailed Resolution reads as follows—

In light (sic) of the foregoing, the considered view here that by legal interest is meant six (6%) percent
as provided for by Article 2209 of the Civil Code. Let a writ of execution be issued.

SO ORDERED.1

Petitioners' motion for the reconsideration of the questioned Resolution having been denied, they
now come before Us through the instant petition praying for the setting aside of the said Resolution
and for a declaration that the judgment in their favor should bear legal interest at the rate of twelve
(12%) percent per annum pursuant to Central Bank Circular No. 416 dated July 29, 1974.

Hereunder are the pertinent antecedents:

On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil Case No. R-
11279, 2 the dispositive portion of which reads—

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 Ill 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.

On appeal to the then Court of Appeals, the trial court's judgment was modified to reads as follows—

WHEREFORE. the judgment appealed from is modified such that defendants-appellants Shell Refining
Co. (Phils.), Inc. and Michael, Incorporated are hereby ordered to pay ... The two (2) defendants-
appellants are also directed to pay P100,000.00 with legal interests from the filing of the complaint
until paid as compensatory and moral damages and P41,000.00 compensation for the value of the

52
lost boat with legal interest from the filing of the complaint until fully paid to Pacita F. Reformina and
the heirs of Francisco Reformina. The liability of the two defendants for an the awards is solidary.

xxx xxx xxx

Except as modified above, the rest of the judgment appealed from is affirmed. The defendants-
appellants shall pay costs in favor of the plaintiffs. Appellants Shell and Michael and third party
defendant Anita L. Abellanosa shall shoulder their respective costs.

SO ORDERED. 3

The said decision having become final on October 24, 1980, the case was remanded to the lower
court for execution and this is where the controversy started. In the computation of the "legal interest"
decreed in the judgment sought to be executed, petitioners claim that the "legal interest" should be
at the rate of twelve (12%) percent per annum, invoking in support of their aforesaid submission,
Central Bank of the Philippines Circular No. 416. Upon the other hand, private respondents insist that
said legal interest should be at the rate of six (6%) percent per annum only, pursuant to and by
authority of Article 2209 of the New Civil Code in relation to Articles 2210 and 2211 thereof.

In support of their stand, petitioners contend that Central Bank Circular No. 416 which provides —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as
the "Usury Law" the 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%) per
cent per annum. This Circular shall take effect immediately. (Italics supplied)

includes the judgment sought to be executed in this case, because it is covered by the phrase 2nd
the rate allowed in judgments in the absence of express contract as to such rate of interest ... " in the
aforequoted circular.

The petition is devoid of merit. Consequently, its dismissal is in order.

Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the
Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which
amended Act No. 2655, otherwise known as the Usury Law. The amendment from which said
authority emanated reads as follows—

Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That such changes shall not be made oftener than once every twelve months.

53
In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions
need not necessarily be uniform. (Italics supplied)

Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest
from that of six (6%) percent per annum originally allowed under Section I of Act No. 2655 to twelve
(12%) percent per annum.

It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of any money,
goods, or credits; and (3) rate allowed in judgments.

The issue now is—what kind of judgment is referred to under the said law. Petitioners maintain that it
covers all kinds of monetary judgment.

The contention is devoid of merit.

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. The Monetary
Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely
with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as
a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary
intention, words and phrases in statutes should not be interpreted in isolation from one another. 4 A
word or phrase in a statute is always used in association with other words or phrases and its meaning
may thus be modified or restricted by the latter.5

Another formidable argument against the tenability of petitioners' stand are the whereases of PD No.
116 which brought about the grant of authority to the Central Bank and which reads thus—

WHEREAS, the interest rate, together with other monetary and credit policy instruments, performs a
vital role in mobilizing domestic savings and attracting capital resources into preferred areas of
investments;

WHEREAS, the monetary authorities have recognized the need to amend the present Usury. Law to
allow for more flexible interest rate ceilings that would be more responsive to the requirements of
changing economic conditions;

WHEREAS, the availability of adequate capital resources is, among other factors, a decisive element
in the achievement of the declared objective of accelerating the growth of the national economy.

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

54
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—

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per
annum.

The above provision remains untouched despite the grant of authority to the Central Bank by Act No.
2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than those
specifically provided for by the Usury Law will make the same of doubtful constitutionality since the
Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No.
116.

IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition to be without merit,
the same is hereby DISMISSED with costs against petitioners.

SO ORDERED.

14. Phil Rabbit Bus Lines v Cruz

FIRST DIVISION

G.R. No. 71017 July 28, 1986

PHILIPPINE RABBIT BUS LINES, INC., petitioner,

vs.
HON. LEONARDO I. CRUZ, Presiding Judge, Branch LVI, RTC, Third Judicial Region & PEDRO MANABAT,
respondents.

RESOLUTION

NARVASA, J.:

In Civil Case No. 2244 of the Court of First Instance (now Regional Trial Court, Branch LVI) of Angeles
City, Pedro Manabat, (the private respondent) obtained judgment against Philippine Rabbit Bus
Lines, Inc. (petitioner) the dispositive portion of which reads:

WHEREFORE, in view of the above findings, this Court renders judgment in favor of the plaintiff Pedro
Manabat, and against the defendant, the Philippine Rabbit Bus Lines, Incorporated, sentencing the
latter to pay the former, Pedro Manabat as actual and compensatory damages the amount of

55
P72,500 with legal interest thereon from the filing of the complaint until fully paid, and the costs of this
suit. 1

The judgment having become final and executory following its affirmance by the Intermediate
Appellate Court, Manabat sought its execution and, at his instance, the deputy sheriff of Angeles
City garnished funds of Philippine Rabbit on deposit with Manila Bank in said City to the extent of
P155,150.00. This amount was released by the Bank's manager by means of a check drawn in favor of
the sheriff and was thereafter paid to the private respondent. 2 The amount of P155,150.00 included
interest at the rate of twelve (12%) percent per annum on the award of P72,500.00 computed from
the date of the filing of the complaint, as prescribed in the judgment.

Philippine Rabbit moved to dissolve the garnishment, asserting that while it was willing to pay the
award, the interest chargeable should be only six (6%) percent, not twelve (12%) percent, per annum
and upon being rebuffed, has come to this Court for relief.

The issue raised:

Whether or not Circular No. 416 of the Central Bank of the Philippines, issued pursuant to authority
granted under Act No. 2655, as amended (The Usury Law), and prescribing 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

is applicable to judgments that do not involve loans or forbearances of money, etc.,

is not one of first impression.

In Reformina vs. Tomol, Jr. 3 decided October 11, 1985, essentially the same factual premises
obtained, the only difference being that in said case, which concerned also a judgment awarding
damages for loss or injury to person or property, the interest appeared to have been computed at six
(6%) percent, and it was the judgment creditors who came to this Court on their contention that the
rate should be twelve (12%) percent instead. The Court en banc unanimously rejected that
contention, the majority opinion holding, inter alia, that:

Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the
Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which
amended Act No. 2655, otherwise known as the Usury Law. The amendment from said authority
emanates reads as follows-

Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credit, and to
change such rate or rates whenever warranted by prevailing economic and social conditions.
Provided, That such changes shall not be made oftener than once every twelve months.

56
In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance
companies and other similar credit institutions although the rates prescribed for these institutions
need not necessarily be uniform.' (Emphasis supplied)

Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest
from that of the six (6%) percent per annum originally allowed under Section 1 of Act No. 2655 to
twelve (12%) percent per annum.

It will be noted that Act No. 2655 deals with interest on (1) loans: (2) forbearances of any money,
goods, or credits, and (3) rate allowed in judgments. The issue now is what-kind of judgment is
referred to under the said law. Petitioners maintain that it covers all kinds of monetary judgment.

The contention is devoid of merit.

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. The Monetary
Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely
with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as
a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary
intention, words and phrases in statutes should not be interpreted in isolation from one another. A
word or phrase in a statute is always used in association with other words or phrases and its meaning
may thus be modified or restricted by the latter.

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 private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads—

Art. 2209.— If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnify 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 provisions remains untouched despite the grant of authority to the Central Bank by Act
No. 2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than
those specifically provided for by the Usury Law well make the same of doubtful constitutionality
since the Monetary Board will be exercising legislative functions which was beyond the intendment of
P.D. No. 116.

57
There is no reason to depart or deviate from that ruling here. It seems quite clear that Section 1-a of
Act No. 2655, as amended-which, as distinguished from sec.1 of the same law, appears to be the
actual and operative grant of authority to the Monetary Board of the Central Bank to prescribe
maximum rates of interest where the parties have not stipulated thereon in excluding mention of
rates allowed in judgments, should, at the least, be construed as limiting the authority thus granted
only to loans or forbearances of money, etc., and to judgments involving such loans or forbearances.

WHEREFORE, the petition is granted. It being obvious, as pointed out by the petitioner, 4 that of the
amount of P155,150.00 garnished and turned over to the private respondent, the sum of P 82,650.00
represents interest computed at the rate of twelve (12%) percent per annum, one-half of the last-
stated sum, or P41,325.00, represents interest in excess of the applicable rate of six (6%) percent per
annum, the order of the respondent Court complained of is vacated and set aside, and the private
respondent is ordered to refund to petitioner said excess of P41,325.00. No pronouncement as to
costs in this instance.
SO ORDERED.

15. Gregorio araneta v Tuason de paterno

EN BANC

G.R. No. L-2886 August 22, 1952

GREGORIO ARANETA, INC., plaintiff-appellant,

vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants.

Araneta and Araneta for appellant.

Ramirez and Ortigas for defendants-appellants.
Perkins, Ponce Enrile and Contreras And La O and Feria for appellee.

TUASON, J.:

This is a three-cornered contest between the purchasers, the seller, and the mortgagee of certain
portions (approximately 40,703 square meters) of a big block of residential land in the district of Santa
Mesa, Manila. The plaintiff, which is the purchaser, and the mortgagee elevated this appeal. Though
not an appellant, the seller and mortgagor has made assignments of error in her brief, some to
strengthen the judgment and others for the purpose of new trial.

The case is extremely complicated and multiple issues were raised.

58
The salient facts in so far as they are not controverted are these. Paz Tuason de Paterno is the
registered owner of the aforesaid land, which was subdivided into city lots. Most of these lots were
occupied by lessees who had contracts of lease which were to expire on December 31,1952, and
carried a stipulation to the effect that in the event the owner and lessor should decide to sell the
property the lessees were to be given priority over other buyers if they should desire to buy their
leaseholds, all things being equal. Smaller lots were occupied by tenants without formal contract.

In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling P90,098 and constituted
a first mortgage on the aforesaid property to secure the debt. In January and April, 1943, she
obtained additional loans of P30,000 and P20,000 upon the same security. On each of the last-
mentioned occasions the previous contract of mortgage was renewed and the amounts received
were consolidated. In the first novated contract the time of payment was fixed at two years and in
the second and last at four years. New conditions not relevant here were also incorporated into the
new contracts.

There was, besides, a separate written agreement entitled "Penalidad del Documento de Novacion
de Esta Fecha" which, unlike the principal contracts, was not registered. The tenor of this separate
agreement, all copies, of which were alleged to have been destroyed or lost, was in dispute and
became the subject of conflicting evidence. The lower court did not make categorical findings on
this point, however, and it will be our task to do so at the appropriate place in this decision.

In 1943 Paz Tuason decided to sell the entire property for the net amount of P400,000 and entered
into negotiations with Gregorio Araneta, Inc. for this purpose. The result of the negotiations was the
execution on October 19, 1943, of a contract called "Promesa de Compra y Venta" and identified as
Exhibit "1." This contract provided that subject to the preferred right of the lessees and that of Jose
Vidal as mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc. and the latter would buy for the
said amount of P400,000 the entire estate under these terms.

El precio sera pagado como sigue: un 40 por ciento juntamente con la carta de aceptacion del
arrendatario, un 20 por ciento delprecio al otorgarse la escritura de compromiso de venta, y el
remanente 40 por ciento al otorgarse la escritura de venta definitiva, la cual sera otorgada despues
de que se habiese canceladola hipoteca a favor de Jose Vidal que pesa sobre dichos lotes.
Lacomision del 5 por ciento que corresponde a Jose Araneta serapagada al otorgarse la escritura
de compromiso de venta.

Paz Tuason se obliga a entregar mediante un propio las cartasque dirigira a este efecto a los
arrendatarios, de conformidad con el formulario adjunto, que se marca como Apendice A.

Expirado el plazo arriba mencionado, Paz Tuason otorgara las escrituras correspondientes de venta
a los arrendatarios que hayan decidido comprar sus respectivos lotes.

9. Los alquieres correspondientes a este año se prorratearan entre la vendedora y el comprador,

correspondiendo al comprador los alquileres correspondientes a Noviembre y Diciembre de este
año y asimismo sera por cuenta del comprador el amillaramiento correspondiente a dichos meses.

59
10. Paz Tuason, reconoce haver recibido en este acto de Gregorio Araneta, Inc., la suma de Ciento
Noventa Mil Pesos (P190,000)como adelanto del precio de venta que Gregorio Araneta, Inc., tuviere
que pagar a Paz Tuason.

La cantidad que Paz Tuason recibe en este acto sera aplicadapor ella a saldar su deuda con Jose
Vidal, los amillaramientos, sobre el utilizado por Paz Tuason para otros fines.

11. Una vez determinados los lotes que Paz Tuason podra vendera Gregorio Araneta, Inc., Paz
Tuason otorgara una escritura deventa definitiva sobre dichos lotes a favor de Gregorio Araneta,
Inc.

Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por ciento del mismo al otorgarse
la escritura de venta definitiva descontandose de la cantidad que entonces se tenga que pagar de
adelanto de P190,000 que se entrega en virtud de esta escritura. El 10 por ciento remanente se
pagara a Paz Tuazon, una vez se haya cancelado la hipoteca que pesa actualmente sobre el
terreno.

No obstante la dispuesto en el parrafo 8, cualquier arrendatario que decida comprar el lote que
occupa con contrato de arrendamiento podra optar por pedir el otorgamiento inmediato a su favor
el acto de la escritura de venta definitiva pagando en el acto el 50 por ciento del precio (ademas
del 40 por ciento que debio incluir en su carta de aceptacion) y el remanente de 10 por ciento
inmediatemente despues de cancelarse la hipoteca que pesa sobre el terreno.

12. Si la mencionada cantidad de P190,000 excediere del 90 por ciento de la cantidad que
Gregorio Araneta, Inc., tuviere que vender a dicho comprador, el saldo sera pagado
inmediatamente por Paz Tuazon, tomandolo de las cantidades que reciba de los arrendatarios
como precio de venta.

In furtherance of this promise to buy and sell, letters were sent the lessees giving them until August 31,
1943, an option to buy the lots they occupied at the price and terms stated in said letters. Most of the
tenants who held contracts of lease took advantage of the opportunity thus extended and after
making the stipulated payments were giving their deeds of conveyance. These sales, as far as the
record would show, have been respected by the seller.

With the elimination of the lots sold or be sold to the tenants there remained unencumbered, except
for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which have an aggregate area of 14,810.20
square meters; and on December 2, 1943, Paz Tuason and Gregorio Araneta, Inc. executed with
regard to these lots an absolute deed of sale, the terms of which, except in two respects, were similar
to those of the sale to the lessees. This deed, copy of which is attached to the plaintiff's complaint as
Exhibit A, provided, among other things, as follows:

The aforesaid lots are being sold by he Vendor to the Vendee separately at the prices mentioned in
paragraph (6) of the aforesaid contract entitled "Promesa de Compra y Venta," making a total sum

60
of One Hundred Thirty-Nine Thousand Eighty-three pesos and Thirty-two centavos (P139,083.32),
ninety (90%) per cent of which amount, i.e., the sum of One Hundred Twenty-five Thousand One
Hundred Seventy-four Pesos and Ninety-nine centavos (P125,174.99), the Vendor acknowledges to
have received by virtue of the advance of One Hundred Ninety Thousand (P190,000) Pesos made by
the Vendee to the Vendor upon the execution of the aforesaid contract entitled "Promesa de
Compra y Venta". The balance of Sixty-Four Thousand Eight Hundred Twenty-five Pesos and One
centavo (P64,825.01) between the sum of P125,174.99, has been returned by the Vendor to the
Vendee, which amount the Vendee acknowledges to have received by these presents;

The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by virtue of four checks
issued by the Vendee against the Bank of the Philippine Islands, as follows:

No. C-286445 in favor of Paz Tuason de Paterno

P13,476.62

No. C-286444 in favor of the City Treasurer, Manila

3,373.38

No. C-286443 in favor of Jose Vidal

30,000.00

No. C-286442 in favor of Jose Vidal

143,150.00

Total

P190,000.00

The return of the sum of P64,825.01 was made by the Vendor to the Vendee in a liquidation which
reads as follows:

Hemos recibido de Da. Paz Tuason de Paterno la cantidad de Sesenta y Cuatro mil Ochocientos
Veinticinco Pesos y un centimo (P64,825.01) enconcepto de devolucion que nos hace del excesode
lo pagadoa ella de

P190,000.00

Menos el 90% de P139,083.32, importe de los lotes que vamos a comprar

125,174.99

61
 Exceso

64,825.01

Cheque BIF No. D-442988 de Simplicio del Rosario

21,984.20

Cheque PNB No. 177863-K de L.E. Dumas

21,688.60

Cheque PNB No. 267682-K de Alfonso Sycip

20,000.00

Cheque PNB No. 83940 de Josefina de Pabalan

4,847.96

Billetes recibidos de Alfonso Sycip

42.96

P68,563.21

Menos las comisiones de 5 % recibidas de Josefina de Pabalan

P538.60

L.E. Dumas

1,084.43

Angela S. Tuason

1,621.94

3,244.97

P65,318.24

62
Menos cheque BIF No. C-288642 a favor de Da. Paz Tuason de Paterno que le entregamos como
exceso

493.23

P64,825.01

Manila, Noviembre 2, 1943

GREGORIO ARANETA, INCORPORATED

Por;
(Fdo.) "JOSE ARANETA
Presidente

Recibido cheque No. C-288642 BIF-P493.23

Por:
(Fdo.) "M.J. GONZALEZ

In view of the foregoing liquidation, the vendor acknowledges fully and unconditionally, having
received the sum of P125,174.99 of the present legal currency and hereby expressly declares that she
will not hold the Vendee responsible for any loss that she might suffer due to the fact that two of the
checks paid to her by the Vendee were issued in favor of Jose Vidal and the latter has, up to the
present time, not yet collected the same.

The ten (10%) per cent balance of the purchase price not yet paid in the total sum of P13,908.33 will
be paid by the Vendee to the Vendor when the existing mortgage over the property sold by the
Vendor to the Vendee is duly cancelled in the office of the Register of Deeds, or sooner at the option
of the Vendee.

This Deed of Sale is executed by the Vendor free from all liens and encumbrances, with the only
exception of the existing lease contracts on parcels Nos. 1, 10, 11, and 16, which lease contracts will
expire on December 31, 1953, with the understanding, however, that this sale is being executed free
from any option or right on the part of the lessees to purchase the lots respectively leased by them.

It is therefore clearly understood that the Vendor will pay the existing mortgage on her property in
favor of Jose Vidal.

The liquidation of the amounts respectively due between the Vendor and the Vendee in connection
with the rents and real estate taxes as stipulated in paragraph (9) of the contract entitled "Promesa
de Compara y Venta" will be adjusted between the parties in a separate document.

Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to carry out their respective
obligations under the option to purchase exercised by them so that the rights of the lessee to

63
purchase the respective property leased by him is cancelled, the Vendor shall be bound to sell the
same to the herein Vendee, Gregorio Araneta, Incorporated, in conformity with the terms and
conditions provided in the aforesaid contract of "Promesa de Compra y Venta";

The documentary stamps to be affixed to this deed will be for the account of the Vendor while the
expenses for the registration of this document will be for the account of the Vendee.

The remaining area of the property of the Vendor subject to Transfer Certificates of Title Nos. 60471
and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the Consolidation of lots Nos. 20 and 117 of
plan II-4755, G.L.R.O. Record No. 7680.

Before the execution of the above deed, that is, on October 20, 1943, the day immediately following
the signing of the agreement to buy and sell, Paz Tuason had offered to Vidal the check for P143,150
mentioned in Exhibit A, in full settlement of her mortgage obligation, but the mortgagee had refused
to receive that check or to cancel the mortgage, contending that by the separate agreement
before mentioned payment of the mortgage was not to be effected totally or partially before the
end of four years from April, 1943.

Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce Enrile, commenced an
action against the mortgagee in October or the early paret of November 1943. the record of that
case was destroyed and no copy of the complaint was presented in evidence. Attached to the
complaint or deposited with the clerk of court by Attorney Ponce Enrile simultaneously with the
docketing of the suit were the check for P143,150 previously turned down by Vidal, another certified
check for P12,932.61, also drawn by Gregorio Araneta, Inc., in favor of Vidal, and one ordinary check
for P30,000 issued by Paz Tuazon. These three checks were supposed to cover the whole
indebtedness to Vidal including the principal and interest up to that time and the penalty provided in
the separate agreement.

But the action against Vidal never came on for trial and the record and the checks were destroyed
during the war operations in January or February, 1945; and neither was the case reconstituted
afterward. This failure of the suit for the cancellation of Vidal's mortgage, coupled with the
destruction of the checks tendered to the mortgagee, the nullification of the bank deposit on which
those checks had been drawn, and the tremendous rise of real estate value following the
termination of the war, gave occasion to the breaking off the schemes outlined in Exhibits 1 and A;
Paz Tuason after liberation repudiated them for the reasons to be hereafter set forth. The instant
action was the offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason to deliver to the
plaintiff a clear title to the lots described in Exhibit A free from all liens and encumbrances, and a
deed of cancellation of the mortgage to Vidal. Vidal came into the case in virtue of a summon
issued by order of the court, and filed a cross-claim against Paz Tuazon to foreclose his mortgage.

It should be stated that the outset that all the parties are in agreement that Vidal's loans are still
outstanding. Paz Tuason's counsel concede that the tender of payment to Vidal was legally
defective and did not operate to discharge the mortgage, while the plaintiff is apparently
uninterested in this feature of the case considering the matter one largely between the mortgagor

64
and the mortgagee, although to a certain degree this notion is incorrect. At any rate, the points of
discord between Paz Tuason and Vidal concern only the accrual of interest on the loans, Vidal's
claim to attorney's fees, and the application of the debt moratorium law which the debtor now
invokes. These matters will be taken up in the discussion of the controversy between Paz Tuason and
Jose Vidal.

The principal bone of contention between Gregorio Araneta, Inc., and Paz Tuason was the validity of
the deed of sale of Exhibit A on which the suit was predicated. The lower court's judgment was that
this contract was invalid and was so declared, "sin per juicio de que la demandada Paz Tuason de
Paterno pague a la entidad demandante todas las cantidades que habia estado recibiendo de
lareferida entidad demandante, en concepto de pago de losterrenos, en moneda corriente, segun
el cambio que debiaregir al tiempo de otorgarse la escritura segun la escalade "Ballentine",
descontando, sin embargo, de dichas cantidades cualesquiera que la demandante haya
estadorecibiendo como alquileres de los terrenos supuestamentevendidos a ella." The court based
its opinion that Exhibit 1. His Honor, Judge Sotero Rodas, agreedwith the defendant that under
paragraph 8 of Exhibit 1 there was to be no absolute sale to Gregorio Araneta, Inc., unless Vidal's
mortgage was cancelled.

In our opinion the trial court was in error in its interpretation of Exhibit 1. The contemplated execution
of an absolute deed of sale was not contingent on the cancellation of Vidal's mortgage. What
Exhibit 1 did provide (eleventh paragraph) was that such deed of absolute sale should be executed
"una vez determinado los lotes que Paz Tuason podra vender a Gregorio Araneta, Inc." The lots
which could be sold to Gregorio Araneta, Inc. were definitely known by October 31, 1943, which was
the expiry of the tenants' option to buy, and the lots included in the absolute of which the occupants'
option to buy lapsed unconditionally. Such deed as Exhibit A was then in a condition to be made.

Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to take care of it,
and the parties, it would appear, were confident that the suit against the mortgagee would
succeed. The only doubt in their minds was in the amount to which Vidal was entitled. The failure of
the court to try and decide that the case was not foreseen either.

This refutes, were think, the charge that there was undue rush on the part of the plaintiff to push
across the sale. The fact that simultaneously with Exhibit A similar deeds were given the lessees who
had elected to buy their leaseholds, which comprise an area about twice as big as the lots
described in Exhibit A, and the further fact that the sale to the lessees have never been questioned
and the proceeds thereof have been received by the defendant, should add to dispel any suspicion
of bad faith on the part of the plaintiff. If anyone was in a hurry it could have been the defendant.
The clear preponderance of the evidence that Paz Tuason was pressed for cash and that the
payment of the mortgage was only an incident, or a necessary means to effectuate the sale.
Otherwise she could have settled her mortgage obligation merely by selling a portion of her estate,
say, some of the lots leased to tenants who, except two who were in concentration camps, were
only too anxious to buy and own the lots on which their houses were built.

65
Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect liberty to make a
new agreement different from or even contrary to the provisions of that document. The validity of the
subsequent sale must of necessity depend on what it said and not on the provisions of the promise to
buy and sell.

It is as possible proof or fraud that the discrepancies between the two documents bear some
attention. It was alleged that Attorneys Salvador Araneta and J. Antonio Araneta who the defendant
said had been her attorneys and had drawn Exhibit A, and not informed or had misinformed her
about its contents; that being English, she had not read the deed of sale; that if she had not trusted
the said attorneys she would not have been so foolish as to affix her signature to a contract so one-
sided.

The evidence does not support the defendant. Except in two particulars, Exhibit A was a substantial
compliance with Exhibit 1 in furtherance of which Exhibit A was made. One departure was the
proviso that 10 per cent of the purchase price should be paid only after Vidal's mortgage should
have been cancelled. This provisional deduction was not onerous or unusual. It was not onerous or
unusual that the vendee should withhold a relatively small portion of the purchase price before all
the impediments to the final consummation of the sale had been removed. The tenants who had
bought their lots had been granted the privilege to deduct as much as 40 per cent of the stipulated
price pending discharge of the mortgage, although his percentage was later reduced to 10 as in the
case of Gregorio Araneta, Inc. It has also been that the validity of the sales to the tenants has not
been contested; that these sales embraced in the aggregate 24,245.40 square meters for
P260,916.68 as compared to 14,811.20 square meters sold to Gregorio Araneta, Inc. for P139,083.32;
that the seller has already received from the tenant purchasers 90 per cent of the purchase money.

There is good reason to believe that had Gregorio Araneta, Inc. not insisted on charging to the
defendant the loss of the checks deposited with the court, the sale in question would have gone the
smooth way of the sales to the tenants. Thus Dindo Gonzales, defendant's son, declared:

P. Despues de haberse presentado esta demanda, recuerda usted haber tenido conversacion con
Salvador Araneta acerca de este asunto?

R. Si Señor.

P. Usted fue quien se acerco al señor Salvador Araneta?

R. Si, señor.

P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor Salvador Araneta?

R. No creo que es propio que yo diga, por tratarse de mi madre.

P. En otras palabras, usted quiere decir que no quiere usted que se vuelva decir o repetir ante este
Honorable Juzgado lo que usted dijo al señor Salvador Araneta, pues, se trata de su madre?

66
R. No, señor.

P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir?

R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta, y yo le dije que es
una verguenza de que nosotros, en la familia tengamos que ir a la Corte por este, y tambien dije
que mi madre de por si quiere vender el terreno a ellos, porque mi madre quiere pagar al señor
Vidal, y que es una verguenza, siendo entre parientes, tener que venir por este; era lo que yo dije al
señor Salvador Araneta.

xxx xxx xxx

P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no comulgaba con ella (su
madre) en este asunto?

R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta, pero cuando me
dijo el señor La O y sus abogados que, encima de quitar la propiedad, todavia tendria ella que
pagar al señor Vidal, este no veso claro.

xxx xxx xxx

P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su testimonio, tanto, usted
como, su madre, esteban muy conformes en la venta, es asi?

R. Si, señor.

The other stipulation embodied in Exhibit A which had no counterpart in Exhibit 1 was that by which
Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks and which, as stated,
appeared to be at the root of the whole trouble between the plaintiff and the defendant.

The stipulation reads:

In view of the foregoing liquidation, the Vendor acknowledges fully and unconditionally, having
received the sum of P125,174.99 of the present legal currency and hereby expressly declares that she
will not hold the Vendee responsible for any loss that she might suffer due to the fact that two of the
checks paid to her by the Vendee were used in favor of Jose Vidal and the latter has, up to the
present time, not yet collected the same.

It was argued that no person in his or her right senses would knowingly have agreed to a covenant so
iniquitous and unreasonable.

In the light of all the circumstances, it is difficult to believe that the defendant was deceived into
signing Exhibit A, in spite of the provision of which she and her son complaint. Intelligent and well

67
educated who had been managing her affairs, she had an able attorney who was assisting her in
the suit against Vidal, a case which was instituted precisely to carry into effect Exhibit A or Exhibit 1,
and a son who is leading citizen and a business-man and knew the English language very well if she
did not. Dindo Gonzalez took active part in, if he was not the initiator of the negotiations that led to
the execution of Exhibit 1, of which he was an attesting witness besides. If the defendant signed
Exhibit A without being apprised of its import, it can hardly be conceived that she did not have her
attorney or her son read it to her afterward. The transaction involved the alienation of property then
already worth a fortune and now assessed by the defendant at several times higher. Doubts in
defendant's veracity are enhanced by the fact that she denied or at least pretended in her answer
to be ignorant of the existence of Exhibit A, and that only after she was confronted with the signed
copy of the document on the witness did she spring up the defense of fraud. It would look as if she
gambled on the chance that no signed copy of the deed had been saved from the war. She could
not have forgotten having signed so important a document even if she had not understood some of
its provisions.

From the unreasonableness and inequity of the aforequoted Exhibit A it is not to be presumed that
the defendant did not understand it. It was highly possible that she did not attach much importance
to it, convinced that Vidal could be forced to accept the checks and not foreseeing the fate that
lay in store for the case against the mortgagee.

Technical objections are made against the deed of sale.

First of these is that Jose Araneta, since deceased, was defendant's agent and at the same time the
president of Gregorio Araneta, Inc.

The trial court found that Jose Araneta was not Paz Tuason's agent or broker. This finding is contrary to
the clear weight of the evidence, although the point would be irrelevant, if the court were right in its
holding that Exhibit A was void on another ground, i.e., it was inconsistent with Exhibit 1.

Without taking into account defendant's Exhibit 7 and 8, which the court rejected and which, in our
opinion, should have been admitted, Exhibit 1 is decisive of the defendant's assertion. In paragraph 8
of Exhibit 1 Jose Araneta was referred to as defendant's agent or broker "who acts in this transaction"
and who as such was to receive a commission of 5 per cent, although the commission was to be
charged to the purchasers, while in paragraph 13 the defendant promised, in consideration of Jose
Araneta's services rendered to her, to assign to him all her right, title and interest to and in certain lots
not embraced in the sales to Gregorio Araneta, Inc. or the tenants.

However, the trial court hypothetically admitting the existence of the relation of principal and agent
between Paz Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio Araneta,
Inc. was the purchaser, and cited the well-known distinction between the corporation and its
stockholders. In other words, the court opined that the sale to Gregorio Araneta, Inc. was not a sale
to Jose Araneta the agent or broker.

68
The defendant would have the court ignore this distinction and apply to this case the other well-
known principle which is thus stated in 18 C.J.S. 380: "The courts, at law and in equity, will disregard
the fiction of corporate entity apart from the members of the corporation when it is attempted to be
used as a means of accomplishing a fraud or an illegal act.".

It will at once be noted that this principle does not fit in with the facts of the case at bar. Gregorio
Araneta, Inc. had long been organized and engaged in real estate business. The corporate entity
was not used to circumvent the law or perpetrate deception. There is no denying that Gregorio
Araneta, Inc. entered into the contract for itself and for its benefit as a corporation. The contract and
the roles of the parties who participated therein were exactly as they purported to be and were fully
revealed to the seller. There is no pretense, nor is there reason to suppose, that if Paz Tuason had
known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she would not have gone
ahead with the deal. From her point of view and from the point of view of public interest, it would
have made no difference, except for the brokerage fee, whether Gregorio Araneta, Inc. or Jose
Araneta was the purchaser. Under these circumstances the result of the suggested disregard of a
technicality would be, not to stop the commission of deceit by the purchaser but to pave the way for
the evasion of a legitimate and binding commitment buy the seller. The principle invoked by the
defendant is resorted to by the courts as a measure or protection against deceit and not to open the
door to deceit. "The courts," it has been said, "will not ignore the corporate entity in order to further
the perpetration of a fraud." (18 C.J.S. 381.)

The corporate theory aside, and granting for the nonce that Jose Araneta and Gregorio Araneta,
Inc. were identical and that the acts of one where the acts of the other, the relation between the
defendant and Jose Araneta did not fall within the purview of article 1459 of the Spanish Civil Code.1

Agency is defined in article 1709 in broad term, and we have not come across any commentary or
decision dealing directly with the precise meaning of agency as employed in article 1459. But in the
opinion of Manresa(10 Manresa 4th ed. 100), agent in the sense there used is one who accepts
another's representation to perform in his name certain acts of more or less transcendency, while
Scaevola (Vol. 23, p. 403) says that the agent's in capacity to buy his principal's property rests in the
fact that the agent and the principal form one juridicial person. In this connection Scaevola observes
that the fear that greed might get the better of the sentiments of loyalty and disinterestedness which
should animate an administrator or agent, is the reason underlying various classes of incapacity
enumerated in article 1459. And as American courts commenting on similar prohibition at common
law put it, the law does not trust human nature to resist the temptations likely to arise of antogonism
between the interest of the seller and the buyer.

So the ban of paragraph 2 of article 1459 connotes the idea of trust and confidence; and so where
the relationship does not involve considerations of good faith and integrity the prohibition should not
and does not apply. To come under the prohibition, the agent must be in a fiduciary with his
principal.

Tested by this standard, Jose Araneta was not an agent within the meaning of article 1459. By Exhibits
7 and 8 he was to be nothing more than a go-between or middleman between the defendant and

69
the purchaser, bringing them together to make the contract themselves. There was no confidence to
be betrayed. Jose Araneta was not authorize to make a binding contract for the defendant. He was
not to sell and he did not sell the defendant's property. He was to look for a buyer and the owner
herself was to make, and did make, the sale. He was not to fix the price of the sale because the price
had been already fixed in his commission. He was not to make the terms of payment because these,
too, were clearly specified in his commission. In fine, Jose Araneta was left no power or discretion
whatsoever, which he could abuse to his advantage and to the owner's prejudice.

Defendant's other ground for repudiating Exhibit A is that the law firm of Araneta & Araneta who
handled the preparation of that deed and represented by Gregorio Araneta, Inc. were her attorneys
also. On this point the trial court's opinion is likewise against the defendant.

Since attorney Ponce Enrile was the defendant's lawyer in the suit against Vidal, it was not likely that
she employed Atty. Salvador Araneta and J. Antonio Araneta as her attorneys in her dealings with
Gregorio Araneta, Inc., knowing, as she did, their identity with the buyer. If she had needed legal
counsels, in this transaction it seems certain that she would have availed herself of the services of Mr.
Ponce Enrile who was allegedly representing her in another case to pave the way for the sale.

The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew Exhibits 1 and A, undertook
to write the letters to the tenants and the deeds of sale to the latter, and charged the defendant the
corresponding fees for all this work, did not themselves prove that they were the seller's attorneys.
These letters and documents were wrapped up with the contemplated sale in which Gregorio
Araneta, Inc. was interested, and could very well have been written by Attorneys Araneta and
Araneta in furtherance of Gregorio Araneta's own interest. In collecting the fees from the defendant
they did what any other buyer could have appropriately done since all such expenses normally were
to be defrayed by the seller.

Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet they were not
forbidden to buy the property in question. Attorneys are only prohibited from buying their client's
property which is the subject of litigation. (Art. 1459, No. 5, Spanish Civil Code.) The questioned sale
was effected before the subject thereof became involved in the present action. There was already
at the time of the sale a litigation over this property between the defendant and Vidal, but Attys.
Salvador Araneta and J. Antonio Araneta were not her attorneys in that case.

From the pronouncement that Exhibit A is valid, however, it does not follow that the defendant
should be held liable for the loss of the certified checks attached to the complaint against Vidal or
deposited with the court, or of the funds against which they had been issued. The matter of who
should bear this loss does not depend upon the validity of the sale but on the extent and scope of
the clause hereinbefore quoted as applied to the facts of the present case.

The law and the evidence on this branch of the case revealed these facts, of some of which passing
mention has already been made.

70
The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by Gregorio Araneta, Inc.
and payable to Vidal, and were drawn against the Bank of the Philippines with which Gregorio
Araneta, Inc. had a deposit in the certification stated that they were to be "void if not presented for
payment date of acceptance" office (Bank) within 90 days from date of acceptance."

Under banking laws and practice, by the clarification" the funds represented by the check were
transferred from the credit of the maker to that of the payee or holder, and, for all intents and
purposes, the latter became the depositor of the drawee bank, with rights and duties of one such
relation." But the transfer of the corresponding funds from the credit of the depositor to that of that of
the payee had to be co-extensive with the life of the checks, which in the case was 90 days. If the
checks were not presented for payment within that period they became invalid and the funds were
automatically restored to the credit of the drawer though not as a current deposit but as special
deposit. This is the consensus of the evidence for both parties which does not materially differ on this
proposition.

The checks were never collected and the account against which they were drawn was not used or
claimed by Gregorio Araneta, Inc.; and since that account "was opened during the Japanese
occupation and in Japanese currency," the checks "became obsolete as the account subject
thereto is considered null and void in accordance with Executive Order No. 49 of the President of the
Philippines", according to the Bank.

Whether the Bank of the Philippines could lawfully limit the negotiability of certified checks to a
period less than the period provided by the Statute of Limitations does not seem material. The
limitation imposed by the Bank as to time would adversely affect the payee, Jose Vidal, who is not
trying to recover on the instruments but on the contrary rejected them from the outset, insisting that
the payment was premature. As far as Vidal was concerned, it was of no importance whether the
certification was or was not restricted. On the other hand, neither the plaintiff nor the defendant now
insists that Vidal should present, or should have presented, the checks for collection. They in fact
agree that the offer of those checks to Vidal did not, for technical reason, work to wipe out the
mortgage.

But as to Gregorio Araneta and Paz Tuason, the conditions specified in the certification and the
prevailing regulations of the Bank were the law of the case. Not only this, but they were aware of and
abided by those regulations and practice, as instanced by the fact that the parties presented
testimony to prove those regulations and practice. And that Gregorio Araneta, Inc. knew that Vidal
had not cashed the checks within 90 days is not, and could not successfully be denied.

In these circumstances, the stipulation in Exhibit A that the defendant or seller "shall not hold the
vendee responsible for any loss of these checks" was unconscionable, void and unenforceable in so
far as the said stipulation would stretch the defendant's liability for this checks beyond 90 days. It was
not in accord with law, equity or good conscience to hold a party responsible for something he or
she had no access to and could not make use of but which was under the absolute control and
disposition of the other party. To make Paz Tuason responsible for those checks after they expired
and when they were absolutely useless would be like holding an obligor to answer for the loss or

71
destruction of something which the obligee kept in its safe with no power given the obligor to protect
it or interfere with the obligee's possession.

To the extent that the contract Exhibit A would hold the vendor responsible for those checks after
they had lapsed, the said contract was without consideration. The checks having become obsolete,
the benefit in exchange for which the defendant had consented to be responsible for them had
vanished. The sole motivation on her part for the stipulation was the fact that by the checks the
mortgage might or was to be released. After 90 days the defendant stood to gain absolutely nothing
by them, which had become veritable scraps of paper, while the ownership of the deposit had
reverted to the plaintiff which alone could withdraw and make use of it.

What the plaintiff could and should have done if the disputed stipulation was to be kept alive was to
keep the funds accessible for the purpose of paying the mortgage, by writing new checks either to
Vidal or to the defendant, as was done with the check for P30,000, or placing the deposit at the
defendant's disposal. The check for P30,000 intended for the penalty previously had been issued in
the name of Vidal and certified, too, but by mutual agreement it was changed to an ordinary check
payable to Paz Tuason. Although that check was also deposited with the court and lost, its loss
undoubtedly was imputable to the defendant's account, and she did not seem to disown her liability
for it.

Let it be remembered that the idea of certifying the lost checks was all the plaintiff's. The plaintiff
would not trust the defendant and studiously so arranged matters that she could not by any
possibility put a finger on the money. For all the practical intents and purposes the plaintiff dealt
directly with the mortgagee and excluded the defendant from meddling in the manner of payment
to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc. was not a mere accommodator
in writing these checks. It was as much interested in the cancellation of the mortgage as Paz Tuason.

Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other than declaring that
the mortgage remained intact and subsisting. The amount to be paid Vidal was not named and the
question whether interest and attorney's fees were due was not passed upon. The motion for
reconsideration of the decision by Vidal's attorney's praying that Paz Tuason be sentenced to pay the
creditor P244,917.90 plus interest at the rate of 1 percent monthly from September 10, 1948 and that
the mortgaged property be ordered sold in case of default within 90 days, and another motion by
the defendant seeking specification of the amount she had to pay the mortgagee were summarily
denied by Judge Potenciano Pecson, to whom the motions were submitted, Judge Rodas by that
time having been appointed to the Court of Appeals.

All the facts and evidence on this subject are on the record, however, and we may just as well
determine from these facts and evidence the amount to which the mortgagee is entitled, instead of
remanding the case for new trial, if only to avoid further delay if the disposition of this case.

It is obvious that Vidal had a right to judgment for his credit and to foreclose the mortgage if the
credit was not paid.

72
There is no dispute as to the amount of the principal and there is agreement that the loans made in
1943, in Japanese war notes, should be computed under the Ballantyne conversion table. As has
been said, where the parties do not see eye-to-eye was in regard to the mortgagee's claim to
attorney's fees and interest from October, 1943, which was reached a considerable amount. It was
contended that, having offered to pay Vidal her debt in that month, the defendant was relieved
thereafter from paying such interest.

It is to be recalled that Paz Tuason deposited with the court three checks which were intended to
cover the principal and interest up to October, 1943, plus the penalty provided in the instrument
"Penalidad del Documento de Novacion de Esta Fecha." The mortgagor maintains that although
these checks may not have constituted a valid payment for the purpose of discharging the debt, yet
they did for the purpose of stopping the running of interest. The defendant draws attention to the
following citations:

An offer in writing to pay a particular sum of money or to deliver a written instrument or specific
personal property is, if rejected, equivalent to the actual production and tender of the money,
instrument or property. (Sec. 24, Rule 123.)

It is not accord with either the letter or the spirit of the law to impose upon the person affecting a
redemption of property, in addition to 12 per cent interest per annum up to the time of the offer to
redeem, a further payment of 6 per cent per annum from the date of the officer to redeem. (Fabros
vs. Villa Agustin, 18 Phil., 336.)

A tender by the debtor of the amount of this debt, if made in the proper manner, will suspend the
running of interest on the debt for the time of such tender. (30 Am. Jur., 42.)

In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold on execution to one
Tabliga. Within the period of redemption Fabros, to whom the land had been mortgaged by the
execution debtor, had offered to redeem the land from the execution creditor and purchaser at
public auction. The trial court ruled that the redemptioner was not obliged to pay the stipulated
interest of 12 per cent after he offered to redeem the property; nevertheless he was sentenced to
pay 6 per cent interest from the date of the offer.

This court on appeal held that "there is no reason for this other (6 per cent) interest, which appears to
be a penalty for delinquency while there was no delinquency." The court cited an earlier decision,
Martinez vs. Campbell, 10 Phil., 626, where this doctrine was laid down: "When the right of redemption
is exercised within the term fixed by section 465 of the Code of Civil Procedure, and an offer is made
of the amount due for the repurchase of the property to which said right refers, it is neither
reasonable nor just that the repurchaser should pay interest on the redemption money after the time
when he offered to repurchase and tendered the money therefor."

In the light of these decisions and law, the next query is; Did the mortgagor have the right under the
contract to pay the mortgage on October 20, 1943? The answer to this question requires an inquiry
into the provision of the "Penalidad del Documento de Novacion de Esta Fecha."

73
Vidal introduced oral evidence to the effect that he reserved unto himself in that agreement the
right "to accept or refuse the total payment of the loan outstanding . . ., if at the time of such offer of
payment he considered it advantageous to his interest." This was gist of Vidal's testimony and that of
Lucio M. Tiangco, one of Vidal's former attorneys who, as notary public, had authenticated the
document. Vidal's above testimony was ordered stricken out as hearsay, for Vidal was blind and,
according to him, only had his other lawyer read the document to him.

We are of the opinion that the court erred in excluding Vidal's statement. There is no reason to
suspect that Vidal's attorney did not correctly read the paper to him. The reading was a
contemporaneous incident of the writing and the circumstances under which the document was
read precluded every possibility of design, premeditation, or fabrication.

Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was based on recollection
which, with the lapse of time, was for from infallible. By contrast, the testimony of Attorneys Ponce
Enrile, Salvador Araneta, and J. Antonio Araneta does not suffer from such weakness and is entitled
to full faith and credit. The document was the subject of a close and concerted study on their part
with the object of finding the rights and obligations of the mortgagee and the mortgagor in the
premises and mapping out the course to be pursued. And the results of their study and deliberation
were translated into concrete action and embodied in a letter which has been preserved. In line with
the results of their study, action was instituted in court to compel acceptance by Vidal of the checks
consigned with the complaint, and before the suit was commenced, and with the document before
him, Atty. Ponce Enrile, in behalf of his client, wrote Vidal demanding that he accept the payment
and execute a deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile reminded Vidal
that the recital in the "Penalidad del Documento de Novacion de Esta Fecha" was "to the effect that
should the debtor wish to pay the debt before the expiration of the period the reinstated (two years)
such debtor would have to pay, in addition to interest due, the penalty of P30,000 — this is in addition
to the penalty clause of 10 per cent of the total amount due inserted in the document of mortgage
of January 20, 1943."

Atty. Ponce Enrile's concept of the agreement, formed after mature and careful reading of it, jibes
with the only possible reason for the insertion of the penalty provision. There was no reason for the
penalty unless it was for defendant's paying her debt before the end of the agreed period. It was to
Vidal's interest that the mortgage be not settled in the near future, first, because his money was
earning good interest and was guaranteed by a solid security, and second, which was more
important, he, in all probability, shared the common belief that Japanese war notes were headed for
a crash and that four years thence, judging by the trends of the war, the hostilities would be over.

To say, as Vidal says, that the debtor could not pay the mortgage within four years and, at the same
time, that there would be penalty if she paid after that period, would be a contradiction. Moreover,
adequate remedy was provided for failure to pay or after the expiration of the mortgage: increased
rate or interest, foreclosure of the mortgage, and attorney's fees.

74
It is therefore to be concluded that the defendant's offer to pay Vidal in October, 1943, was in
accordance with the parties' contract and terminated the debtor's obligation to pay interest. The
technical defects of the consignation had to do with the discharge of the mortgage, which is
conceded on all sides to be still in force because of the defects. But the matter of the suspension of
the running of interest on the loan stands of a different footing and is governed by different principles.
These principles regard reality rather than technicality, substance rather than form. Good faith of the
offer or and ability to make good the offer should in simple justice excuse the debtor from paying
interest after the offer was rejected. A debtor can not be considered delinquent who offered checks
backed by sufficient deposit or ready to pay cash if the creditor chose that means of payment.
Technical defects of the offer cannot be adduced to destroy its effects when the objection to
accept the payment was based on entirely different grounds. If the creditor had told the debtor that
he wanted cash or an ordinary check, which Vidal now seems to think Paz Tuason should have
tendered, certainly Vidal's wishes would have been fulfilled, gladly.

The plain truth was that the mortgagee bent all his efforts to put off the payment, and thanks to the
defects which he now, with obvious inconsistency, points out, the mortgage has not perished with
the checks.

Falling within the reasons for the stoppage of interest are attorney's fees. In fact there is less merit in
the claim for attorney's fees than in the claim for interest; for the creditor it was who by his refusal
brought upon himself this litigation, refusal which, as just shown, resulted greatly to his benefit.

Vidal, however, is entitled to the penalty, a point which the debtor seems to a grant. The suspension
of the running of the interest is premised on the thesis that the debt was considered paid as of the
date the offer to pay the principal was made. It is precisely the mortgagor's contention that he was
to pay said penalty if and when she paid the mortgage before the expiration of the four-year period
provided in the mortgage contract. This penalty was designed to take the place of the interest which
the creditor would be entitled to collect if the duration of the mortgage had not been cut short and
from which interest the debtor has been relieved. "In obligations with a penalty clause the penalty
shall substitute indemnity for damages and the payment of interest. . ." (Art. 1152, Civil Code of
Spain.).

To summarize, the following are our findings and decision:

The contract of sale Exhibit A was valid and enforceable, but the loss of the checks for P143,150 and
P12,932.61 and invalidation of the corresponding deposit is to be borne by the buyer. Gregorio
Araneta, Inc. the value of these checks as well as the several payments made by Paz Tuason to
Gregorio Araneta, Inc. shall be deducted from the sum of P190,000 which the buyer advanced to
the seller on the execution of Exhibit 1.

The buyer shall be entitled to the rents on the land which was the subject of the sale, rents which may
have been collected by Paz Tuason after the date of the sale.

75
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated interest up to
October 20,1943, plus the penalty of P30,000, provided that the loans obtained during the Japanese
occupation shall be reduced according to the Ballantyne scale of payment, and provided that the
date basis of the computation as to the penalty is the date of the filing of the suit against Vidal.

Paz Tuason shall pay the amount that shall have been found due under the contracts of mortgage
within 90 days from the time the court's judgment upon the liquidation shall have become final,
otherwise the property mortgaged shall be ordered sold provided by law.

Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is hereby declared subject
to said mortgage. Should Gregorio Araneta, Inc. be forced to pay the mortgage, it will be
subrogated to the right of the mortgagee.

This case will be remanded to the court of origin with instruction to hold a rehearing for the purpose
of liquidation as herein provided. The court also shall hear and decide all other controversies relative
to the liquidation which may have been overlooked at this decision, in a manner not inconsistent
with the above findings and judgment.

The mortgagor is not entitled to suspension of payment under the debt moratorium law or orders.
Among other reasons: the bulk of the debt was a pre-war obligation and the moratorium as to such
obligations has been abrogated unless the debtor has suffered war damages and has filed claim for
them; there is no allegation or proof that she has. In the second place, the debtor herself caused her
creditor to be brought into the case which resulted in the filing of the cross-claim to foreclose the
mortgage. In the third place, prompt settlement of the mortgage is necessary to the settlement of
the dispute and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for no other reason,
Paz Tuason would do well to forego the benefits of the moratorium law.

There shall be no special judgments as to costs of either instance.

Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador, JJ., concur.

RESOLUTION

December 22, 1952

TUASON, J.:

The motion for reconsideration of the plaintiff, Gregorio Araneta, Inc., and the defendant, Paz Tuason
de Paterno, are in large part devoted to the question, extensively discussed in the decision, of the
validity of the contract of sale Exhibit A. The arguments are not new and at least were given due
consideration in the deliberation and study of the case. We find no reason for disturbing our decision
on this phase of the case.

76
The plaintiff-appellant's alternative proposition — to wit: "Should this Honorable Court declare that the
purchase price was not paid and that plaintiff has to bear the loss due to the invalidation of the
occupation currency, its loss should be limited to: (a) the purchase price of P139,083.32 less
P47,825.70 which plaintiff paid and the defendant actually collected during the occupation, or the
sum of P92,233.32, or at most, (b) the purchase price of the lot in the sum of P139,083.32," — as well as
the alleged over-payment by the defendant-appellee, may be taken up in the liquidation under the
reservation in the judgment that "the court (below) shall hold a rehearing for the purpose of
liquidation as herein provided" and "shall also hear and decide all other controversies relative to the
liquidation which may have been overlooked in this decision, in the manner not inconsistent with the
above findings and judgment."

These payments and disbursement are matters of accounting which, not having been put directly in
issue or given due attention at the trial and in the appealed decision, can better be treshed out in
the proposed rehearing where each party will have an opportunity to put forward his views and
reasons, with supporting evidence if necessary, on how the various items in question should be
regarded and credited, in the light of our decision.

As to Jose Vidal's motion: There is nothing to add to or detract from what has been said in the
decision relative to the interest on the loans and attorney's fees. There are no substantial features of
the case that have not been weighed carefully in arriving at our conclusions. It is our considered
opinion that the decision is in accord with law, reason and equity.

The vehement protest that this court should not modify the conclusion of the lower court on interest
and attorney's fees is actually and entirely contrary to the cross-claimant's own suggestion in his brief.
From page 20 of his brief, we copy these passages:

We submit that this Honorable Court is in a position now to render judgment in the foreclosure of
mortgage suit as no further issue of fact need be acted upon by the trial court. Defendant Paz
Tuason has admitted the amount of capital due. That is a fact. She only requests that interest be
granted up to October 20,1943, and that the moratorium law be applied. Whether this is possible or
not is a legal question, which can be decided by this court. Unnecessary loss of time and expenses to
the parties herein will be avoided by this Honorable Court by rendering judgment in the foreclosure
of mortgage suit as follows:

xxx xxx xxx

In reality, the judgment did not adjudicate the foreclosure of the mortgage nor did it fix the amount
due on the mortgage. The pronouncement that the mortgage was in full force and effect was a
conclusion which the mortgagor did not and does not now question. There was therefore virtually no
decision that could be executed.

Vidal himself moved in the Court of First Instance for amendment of the decision alleging, correctly,
that "the court failed to act on the cross-claim of Jose Vidal dated April 22, 1947, where he

77
demanded foreclosure of the mortgage . . . ." That motion like Paz Tuason's motion to complete the
judgment, was summarily denied.

In strict accordance with the procedure, the case should have been remanded to the court of origin
for further proceedings in the form stated by Paz Tuason's counsel. Both the mortgagor and the
mortgagee agree on this. We did not follow the above course believing it best, in the interest of the
parties themselves and following Vidal's attorney's own suggestion, to decide the controversies
between Vidal and Paz Tuason upon the records and the briefs already submitted.

The three motions for reconsideration are denied.

Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur.

RESOLUTION

January 26, 1953

TUASON, J.:

In the second motion for reconsideration by defendant-appellee it is urged that the sale be resolved
for failure of plaintiff-appellant to pay the entire purchase price of the property sold.

Rescission of the contract, it is true, was alternative prayer in the cross-complaint, but the trial court
declared the sale void in accordance with the main contention of the defendant, and passed no
judgment on the matter of rescission. For this reason, and because rescission was not pressed on
appeal, we deemed unnecessary, if not uncalled for, any pronouncement touching this point.

In the second place, the nonpayment of a portion, albeit big portion, of the price was not, in our
opinion, such failure as would justify recission under Articles 1124 and 1505 et seq. of the Civil Code of
Spain, which was still in force when this case was tried. "The general rule is that recission will not be
permitted for a slight or casual breach of the contract, but only for such breaches as are so
substantial and fundamental as to defeat the object of the parties." (Song Fo & Co. vs. Hawaiian-
Philippine Co., 47 Phil., 821, 827.)

In the present case, the vendee did not fail or refuse to pay by plan or design, granting there was
failure or refusal to pay. As a matter of fact, the portion of the purchase price which is said not to
have been satisfied until now was actually received by checks by the vendor and deposited by her
with the court in the suit against Vidal, in accordance with the understanding if not express
agreement between vendor and vendee. The question of who should bear the loss of this amount,
the checks having been destroyed and the funds against which they were drawn having become of
no value, was one of the most bitterly debated issues, and in adjudging the vendee to be the party
to shoulder the said loss and ordering the said vendee to pay the amount to the vendor, this Court's
judgment was not, and was not intended to be, in the nature of an extension of time of payment. In

78
contemplation of the Civil Code there was no default, except possibly in connection with the
alleged overcharges by the vendee arising from honest mistakes of accounting, mistakes which, by
our decision, are to be corrected in a new trial thereby ordered.

The second motion for reconsideration is, therefore, denied.

Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador, JJ.,
concur.

16. Palileo v Cosio

EN BANC

G.R. No. L-7667 November 28, 1955

CHERIE PALILEO, plaintiff-appellee,

vs.
BEATRIZ COSIO, defendant-appellant.

Claro M. Recto for appellant.

Bengson, Villegas, Jr. and Villar for appellee.

BAUTISTA ANGELO, J.:

Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1)
the transaction entered into between them on December 18, 1951 be declared as one of loan, and
the document executed covering the transaction as one of equitable mortgage to secure the
payment of said loan; (2) the defendant be ordered to credit to the plaintiff with the necessary
amount from the sum received by the defendant from the Associated Insurance & Surety Co., Inc.
and to apply the same to the payment of plaintiff's obligation thus considering it as fully paid; and (3)
the defendant be ordered to pay to plaintiff the difference between the alleged indebtedness of
plaintiff and the sum received by defendant from the aforementioned insurance company, plus the
sum allegedly paid to defendant as interest on the alleged indebtedness.

On December 19, 1952, defendant filed her answer setting up as special defense that the transaction
entered into between the plaintiff and defendant is one of sale with option to repurchase but that
the period for repurchase had expired without plaintiff having returned the price agreed upon as a
result of which the ownership of the property had become consolidated in the defendant.
Defendant also set up certain counterclaims which involve a total amount of P4,900.

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On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked
by the parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the
defendant nor her counsel appeared, even if the latter had been notified of the postponement
almost a month earlier, and so the court received the evidence of the plaintiff. On January 18, 1954,
the court, having in view the evidence presented, rendered judgment granting the relief prayed for
in the complaint.

On February 2, 1954, the original counsel for the defendant was substituted and the new counsel
immediately moved that the judgment be set aside on the ground that, due to mistake or excusable
negligence, defendant was unable to present her evidence and the decision was contrary to law,
and this motion having been denied, defendant took the present appeal.

The important issue to be determined in this appeal is whether the lower court committed a grave
abuse of discretion in not reopening the case to give defendant an opportunity to present her
evidence considering that the failure of her original counsel to appear was due to mistake or
execusable negligence which ordinary prudence could not have guarded against.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said
counsel showed interest in the early disposal of this case by moving the court to have it set for trial.
The first date set was April 7, 1953, but no hearing was had on that date because plaintiff had moved
to postpone it. The case was next set for hearing on April 28, 1953, but on motion again of plaintiff,
the hearing was transferred to November 6, 1953. Then, upon petition of defendant, the trial had to
be moved to December 15, 1953, and because Atty. Guerrero could not appear on said date
because of a case he had in Cebu City, the hearing was postponed to January 18, 1954.

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was
appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so
sudden and unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private
cases or make any preparation at all. It is averred that "The days that followed his appointment were
very busy days for defendant's former counsel. There was an immediate need for clearing the
backlog of official business, including the reorganization of the Department of Foreign Affairs and our
Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in negotiations
of national importance like the Japanese reparations, and the revision of the trade agreement with
the United States, that, Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all
these unavoidable confusion that followed in the wake of Atty. Guerrero's sudden and unexpected
appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and
consequently, Atty. Guerrero and the defendant were unable to appear when the case was called
for trial." These reasons, — it is intimated, — constitute excusable negligence which ordinary
prudence could not have guarded against and should have been considered by the trial court as
sufficient justification to grant the petition of defendant for a rehearing.

It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of
mistake or excusable negligence is addressed to the sound discretion of the court (see Coombs vs.
Santos, 24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such

80
discretion is ordinarily not to be disturbed unless it is shown that the court has gravely abused such
discretion. (See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil.,
203; Manzanares vs. Moreta, 38 Phil., 821; Salva vs. Palacio and Leuterio, 90 Phil., 731.) In denying the
motion for reopening the trial court said: "After going over the same arguments, this Court is of the
opinion, and so holds that the decision of this Court of January 18, 1954 should not be disturbed."
Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he
was given almost one month notice before the date set for trial, we are persuaded to conclude that
the trial court did not abuse its discretion in refusing to reconsider its decision.

Coming now to the merits of the case, we note that the lower court made the following findings: On
December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the
following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a
month; (b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons
amounting to P4,550, plus the sum of P250 as interest for the first month; and (c) that after making the
above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.

Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is
more than the maximum interest authorized by law. To secure the payment of the aforesaid loan,
defendant required plaintiff to sign a document known as "Conditional Sale of Residential Building",
purporting to convey to defendant, with right to repurchase, a two-story building of strong materials
belonging to plaintiff. This document did not express the true intention of the parties which was
merely to place said property as security for the payment of the loan.

After the execution of the aforesaid document, defendant insured the building against fire with the
Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been
issued in the name of defendant. The building was partly destroyed by fire and, after proper
demand, defendant collected from the insurance company an indemnity of P13,107.00. Plaintiff
demanded from defendant that she be credited with the necessary amount to pay her obligation
out of the insurance proceeds but defendant refused to do so. And on the strength of these facts,
the court rendered decision the dispositive part of which reads as follows:

Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and
defendant, as shown in Exhibit A, an equitable mortgage to secure the payment of the sum of
P12,000 loaned by the defendant to plaintiff; ordering the defendant to credit the sum of P13,107
received by the defendant from the Associated Insurance & surety Co., Inc. to the payment of
plaintiff's obligation in the sum of P12,000.00 as stated in the complaint, thus considering the
agreement of December 18, 1951 between the herein plaintiff and defendant completely paid and
leaving still a balance in the sum of P1,107 from the insurance collected by defendant; that as
plaintiff had paid to the defendant the sum of P2,250.00 for nine months as interest on the sum of
P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction does not exceed
12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and overpaid the
sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to refund to
herein plaintiff, plus the balance of P1,107 representing the difference of the sum loan of P12,000 and

81
the collected insurance of P13,107 from the insurance company abovementioned to which the
herein plaintiff is entitled to receive, and to pay the costs.

The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of
P1,107 representing the difference of the loan of P12,000 and the sum of P13,107 collected by said
defendant from the insurance company notwithstanding the fact that it was not proven that the
insurance was taken for the benefit of the mortgagor?

Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an
insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a
mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and
for his own interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not
allowed to retain his claim against the mortgagor, but is passed by subrogation to the insurer to the
extent of the money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in another way, "the
mortgagee may insure his interest in the property independently of the mortgagor. In that event,
upon the destruction of the property the insurance money paid to the mortgagee will not inure to the
benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The
mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by
subrogation to the insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed.,
pp. 772-773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the
case mentioned, an insurance contract was taken out by the mortgagee upon his own interest, it
being stipulated that the proceeds would be paid to him only and when the case came up for
decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the
extent of his credit at the time of the loss. It was declared that the mortgaged had no right of action
against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)

It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate
interest at his own expense and for his own benefit, without any agreement with the mortgagor with
respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance
proceeds applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the
mortgagee "has still a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins.
Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins.
Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506;
Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority
view (See case note, 3 Lawyers' Report Annotated, new series, p. 79). "The general rule and the
weight of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under
the mortgage. This is put upon the analogy of the situation of the insurer to that of a surety." (Jones on
Mortgages, Vol. I, pp. 671-672.)

Considering the foregoing rules, it would appear that the lower court erred in declaring that the
proceeds of the insurance taken out by the defendant on the property mortgaged inured to the
benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference
between her indebtedness and the amount of insurance received by the defendant, for, in the light

82
of the majority rule we have above enunciated, the correct solution should be that the proceeds of
the insurance should be delivered to the defendant but that her claim against the plaintiff should be
considered assigned to the insurance company who is deemed subrogated to the rights of the
defendant to the extent of the money paid as indemnity.

Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court
as follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely
an equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds
of the insurance amounting to P13,107.00 was properly collected by defendant who is not required
to account for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be
deemed to have compensated the obligation of the plaintiff to the defendant, but bars the latter
from claiming its payment from the former; and (4) defendant shall pay to the plaintiff the sum of
P810.00 representing the overpayment made by plaintiff by way of interest on the loan. No
pronouncement as to costs.

Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L., JJ., concur.

17. Lopez and javellana v El Hogar Filipino

EN BANC

G.R. No. L-22678 January 12, 1925

BUENAVENTURA LOPEZ and ROSARIO JAVELONA, plaintiffs-appellants,

vs.
EL HOGAR FILIPINO, Sociedad Mutua de Construccion y Prestamos, defendant-appellant;
and REGISTRAR OF DEEDS OF OCCIDENTAL NEGROS, defendant-appellee.

Jose P. Melencio, Hilado and Hilado, and Francisco, Lualhati and Lopez for plaintiffs-appellants.
W.H. Lawrence, Montinola and Hontiveros, Antonio Sanz, and Fisher, DeWitt, Perkins and Brady for
defendant- appellant.
No appearance for appellee.

VILLAMOR, J.:

This litigation arose out a loan of P84,000 which the defendant El Hogar Filipino had made to the
spouses Buenaventura Lopez and Rosario Javelona on March 17, 1920. Beginning May 31, 1921, the
debtors failed to make the monthly payments stipulated in the contract; wherefore, the board of
directors of El Hogar Filipino, at the expiration of the three months of delinquency provided for in
clause 9 of the document, Exhibit 1, copied hereinafter declared the loan due and payable.

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The mortgaged properties were sold publicly in an extrajudicial sale and were purchased by El Hogar
Filipino. The debtors filed a complaint, praying: (a) For the annulment of the contract evidenced by
Exhibit 1, as being usurious; (b) for the annulment of the extrajudicial sale of the mortgaged
properties, as well as the cancellation of all registrations, annotations or recordations of the same
and of the certificates of title that may have been issued in that connection by the register of deeds;
(c) for the return of all the interest and fines paid by them; (d) for reasonable attorney's fees; and (e)
for any other equitable remedy and costs.

For answer to this complaint, the defendant El Hogar Filipino set up two cross-complaints, praying for
the reasons stated: (a) That the plaintiffs' complaint be dismissed with costs; (b) that El Hogar Filipino
be placed in possession of the properties in litigation; (c) as ancillary remedy, that the plaintiffs be
ordered to pay into the court within not less than three months the amount of P87,505.53, Philippine
currency, plus the agreed interest at 9% per annum from June 29, 1922, and the costs in accordance
with section 256 of the Code of Civil Procedure, as amended by Act No. 2640 of the Legislature,
failing which, that all the mortgaged properties, with all their improvements, choses in action, and
natural and civil fruits pending or accrued at the date of the maturity of the obligation, that is, on
June 29, 1922, be sold in order to pay the creditor El Hogar Filipino; and (d) that El Hogar Filipino be
granted any other remedy that may be just and equitable.

On account of its importance on the decision of this case, the contract of loan and mortgage,
Exhibit 1, is copied verbatim as follows:

MORTGAGE

This indenture made and entered into at the City of Manila, P.I., between El Hogar Filipino, Sociedad
Mutua de Construccion y Prestamos (The Philippine Mutual Home Building and Loan Association), a
corporation domiciled in the City of Manila, P. I. (hereinafter referred to as the "association),
represented herein by its president, Francisco Ortigas, by virtue of the powers conferred upon him by
the by-laws of the association and the resolution of the board of directors, adopted on the 22nd day
of January and on the 1st day of February, 1920, party of the first part, and the spouses Buenaventura
Lopez (husband) and Rosario Javelona (wife), property owners, of age, and residents of Iloilo, Iloilo,
P.I. (hereinafter referred to as "the debtors"), parties of the second part.

WITNESSETH:

That the spouses Buenaventura Lopez and Rosario Javelona, availing themselves of the rights
conferred upon them by the by-laws as shareholders of the association and being the absolute
owners of the real estate hereinafter described, have made application to the board of directors of
the association for a loan, which has been granted, subject to the following conditions:

First. The association hereby grants unto the spouses Buenaventura Lopez and Rosario Javelona a
loan of eighty-four thousand pesos (P84,000), Philippine currency, being the face value of the four

84
hundred twenty (420) shares of common Class A stock of the association subscribed for by the
debtors.

Second. The debtors acknowledge having received the said sum of eighty-four thousand pesos
(P84,000), which they promise to repay as follows:

They will pay to the treasurer of the association monthly, on or before the 5th day of every month, the
sum of one peso (P1) for each share of Class A stock subscribed for by them until the surrender or
cash value of said stock, as determined by the by-laws and regulations of the association now in
force, shall equal the said sum of eighty-four thousand pesos (P84,000), the amount of the loan by
them received from the association, or such lesser sum as the principal loan shall have been reduced
to by reason of payments made by the debtors in reduction thereof in accordance with the
conditions of paragraph three hereof; and as soon as the surrender value of said stock shall equal
the sum owed by reason of the loan herein granted said stock shall be surrendered and cancelled
and the value thereof applied by the association to the payment of the amount owed by the
debtors on said loan, and the president of the association shall execute in favor of the debtors the
necessary instruments of cancellation of the mortgage hereinafter created, the expenses of said
cancellation to be charged against the debtors.

Third. It is agreed that the debtors may make partial payments in reduction of this loan provided such
payments shall not be less than two hundred pesos (P200), or any multiple thereof; all payments
made hereunder shall be applied to the reduction of the principal of this loan on the last day of the
month in which the same shall be paid and the stipulated interest shall be proportionately reduced
from and after said date.

Fourth. The debtors agree that during the time they shall be indebted to the association, by reason of
the aforesaid loan, they will pay interest at the rate of 9 per cent per annum, from the 15th day of
March, 1920, said interest being payable monthly in advance at the offices of the association in the
City of Manila and at the same time that the installments on the 420 shares of Class A stock by them
subscribed for are payable.

Fifth. In the event of the failure of the debtors to pay the installments when due, as well as the interest
stipulated herein, on or before the 5th day of each month, commencing March, 1920, the debtors
agree to pay to the association, by way of fine for delinquency, the sum of three centavos for every
peso they may fail to pay, and a like sum for each month, or fraction thereof, which shall elapse until
the amount of their delinquencies shall have been satisfied.

Sixth. Notwithstanding the personal responsibility which shall arise from the failure of the debtors to
perform their obligations under this agreement, the debtors guarantee the repayment of the loan
herein granted, and the payment of the agreed monthly installments on the 420 shares of stock
subscribed for by them, as well as the payment of the stipulated interest and fines, and to that end
they hereby execute a first mortgage upon their real property which is described as follows:

(Description of property)

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Seventh. As additional security for the performance of the obligations herein contained, the debtors
pledge to the association the 420 shares of Class A stock of the association by them subscribed for
the face value of eighty-four thousand pesos (P84,000).

Eighth. The debtors hereby grant unto the manager of the association, whoever he may be, an
irrevocable power of attorney, in case they should fail for three successive months to pay their
agreed monthly installments upon the stock subscribed for by them, as well as the agreed interest, to
collect and receive the rents and profits of the mortgaged property and to apply them, or such part
thereof as may be necessary to the payment of the delinquent monthly installments; it being
understood that, should the manager of the association exercise the power here granted, he shall
return to the debtors any balance remaining in his hands after the payment of all delinquencies
specified in this paragraph.

Ninth. It is agreed that should the debtors fail, for three consecutive months, to pay the monthly
installments on the stock by them subscribed for, together with the stipulated interest on this loan,
and to perform any of their other obligations contained in the second, fourth, fifth, eleventh, twelfth,
thirteenth, sixteenth, seventeenth, and twenty-first paragraphs of this agreement, they shall lose the
benefit of the period granted to them in this agreement within which to repay to the association the
loan herein granted them and said loan shall then become due and payable, at the election of the
association, and the association may proceed to enforce its rights with respect to all of the securities
given by the debtors.

Tenth. The debtors hereby grant unto the manager of the association, whoever he may be, full and
irrevocable power of attorney in order that, in the event that the debt herein created shall remain
unpaid because of the failure of the debtors to fulfill any of the obligations required of them in the
second, fourth, fifth, eleventh, twelfth, thirteenth, sixteenth, seventeenth, and twenty-first paragraphs
... of this agreement, the association having, by resolution of its board of directors, previously
determined to exercise its right to declare the loan due and payable, and publication of notices for
three consecutive weeks in a newspaper of general circulation in this city having been made, he
(said manager) may proceed to sell at public auction, without court proceedings, in the presence of
any notary public or auctioneer selected by the board of directors, the real property herein
mortgaged, he being also authorized, under irrevocable power of attorney, to execute all necessary
instruments of sale in favor of the highest bidder at the sale; it being understood, nevertheless, that
said instruments of sale shall not issue until 30 days, from the date of sale, shall have expired; it being
understood, further, that if within said thirty days, from the date of sale, the debtors shall pay to the
association the entire debt owed by them on said date, including interest and costs of sale, less the
surrender value of their shares of stock, said sale shall be of no effect and the agent of the
association shall execute a cancellation of the mortgage herein created, the expenses of said
cancellation to be paid by the debtors.

Eleventh. The debtors agree not to sell or mortgage the property hereby mortgaged without the
consent of the association in writing, signed by the president or other person acting in his stead.

86
Twelfth. The debtors shall insure the buildings, now erected on the mortgaged premises, against fire in
such company and for such sum as the association may deem proper, the policies to be delivered to
the association duly indorsed by the debtors, it being expressly agreed that in case of loss the
association, through its manager, whoever he may be, shall be authorized to collect the insurance
money from the insurance company to be applied on the debt unless, by agreement with the
debtors, it shall be applied to the reconstruction of the building; it being further understood that if the
debtors shall fail to insure the property, the association may effect the insurance in whatever
company or companies it sees fit, charging the cost thereof to the debtors who agree to reimburse
the association immediately for all sums expended by it in insuring the property, together with interest
thereon at the rate of 15 per cent per annum from the date of such payment and until the same shall
be repaid by the debtors.

Thirteenth. It is stipulated that the debtors shall not create any incumbrance upon the mortgaged
property in favor of third persons or make any lease thereof which might be recordable nor make
any agreement in which rent for more than one month in advance is payable without first having
obtained the written consent of the association; it being understood that a breach of this covenant
shall cause the debt herein created to become immediately due and payable and the association
to be authorized to proceed at once to enforce payment thereof in the manner specified in
paragraph ten hereof.

Fourteenth. In the event that the association shall sell the mortgaged property for any of the causes
specified in this agreement and the proceeds of such sale shall exceed the total amount owed by
the debtors to the association for any and all causes, after deducting the surrender value of their
shares of stock, such excess shall be returned to the debtors within 15 days from the date of the
execution of the deed of conveyance in favor of the highest bidder at the sale.

Fifteenth. It is expressly agreed that the association may bid at any sale of the mortgaged property
and in the event the bid of the association shall be higher than that of any other bidder taking part in
the sale, the manager of the association, whoever he may be, is authorized to execute in favor of
the association, as the agent of the debtors, the necessary instruments of conveyance, in the
manner and form prescribed in paragraph ten of this agreement.

Sixteenth. The debtors shall pay all taxes now due or hereafter to become due upon the premises
herein mortgaged or the rents thereof and shall comply with all rules and regulations prescribed by
the health and other government authorities.

Seventeenth. The debtors shall keep the buildings now erected upon the mortgaged premises in
good order of repair during the life of this agreement and to the satisfaction of whatever architect
the association may employ to inspect the same, and to that end the debtors hereby grant unto the
association an irrevocable license to permit the agents of the association to enter upon the
mortgaged premises to inspect the same at such times as they may deem necessary; it being
understood that if the debtors shall fail to permit inspections of the property or to make the repairs
demanded by the association as agreed herein, they shall forfeit the right to the time given them
under this agreement within which to repay the loan granted them by this instrument, the loan shall

87
thereby become due and payable and the association may proceed to collect it in the manner
prescribed in paragraph ten hereof.

Eighteenth. It is expressly understood that should the premises herein mortgaged be destroyed by
earthquake, typhoon, fire, act of war, or in any other manner, while this contract is in force, or by
reason thereof it should suffer any damage or deterioration the repair of which will cost 20 per cent
or more of the value of the premises, the loan herein granted shall immediately become due and
payable to the association, which, at its election, is authorized to proceed to collect the same unless
the debtors shall, within 15 days after demand by the association, give security satisfactory to the
association, that the premises shall be rebuilt.

Nineteenth. It is further agreed that, in the event of the condemnation of the mortgaged premises,
any sum to which the debtors may become entitled by reason of said condemnation proceedings
shall be paid to the association to be applied to the payment of whatever sum may then be owing
to the association from the debtors unless, in the event that only a part of the premises is taken by
condemnation proceedings, it shall be agreed by the association and the debtors that the proceeds
of such partial condemnation shall be used in the improvement and rebuilding of the premises upon
the remaining portion of the land herein mortgaged; and for that purpose an irrevocable power of
attorney is hereby granted to the manager of the association, whoever he may be, to collect the
indemnity in any such condemnation proceedings from any person or persons who shall be obliged
to pay the same.

Twentieth. It is agreed that all payments required of the debtors under this agreement shall, at the
election of the association, be paid in gold coin of the United States at the rate of one gold dollar for
each two pesos, Philippine currency, owed by the debtors.

Twenty-first. It is further agreed that the debtors shall be obliged to show to the manager of the
association, whoever he may be, on or before the last day on which any taxes shall be due and
payable on the mortgaged premises, the receipts showing payment of said taxes, and any breach
of this agreement by the debtors shall authorize the association to proceed to enforce its rights as
provided in paragraph ten hereof; and in the event that the debtors shall fail to pay taxes the
association may pay them, all sums so paid by the association to be considered as a part of the
principal of the loan herein granted and to bear interest at the rate of 15 per cent until paid.

Twenty-second. All sums disbursed by the association on account of insurance premiums, taxes, or
other account of the debtors shall not only be considered as a part of this loan, increasing the
principal amount thereof, but the repayment thereof to the association shall be secured by the
mortgage herein created upon the real estate of the debtors and shall be due and payable in cash
to the association immediately after said disbursements shall have been declared payable in the
manner prescribed for the payment of the shares of stock subscribed for by the debtors.

In witness whereof the parties have hereunto set their hands, at the City of Manila, this 13th day of
March, 1920, the president of the association, Francisco Ortigas, signing for and in representation of
the association, by virtue of the powers vested in him by the by-laws and regulations of the

88
association in force on this date, and the debtor, (Mrs. Rosario Javelona, (signing) in Iloilo on the 17th
day of March, 1920.

(Sgd.) BUENAVENTURA LOPEZ

ROSARIO JAVELONA
FRANCISCO ORTIGAS

Witnesses:

At Manila. (Sgd.) FERNANDO HERNANDEZ

S. CHOFRE

At Iloilo. (Sgd.) MARIANO LOPEZ

F.C. BUENAFLOR

The parties submitted to the court an agreed statement of facts as follows:

STIPULATION

Now come the parties in the above entitled cause, and stipulate and agree that the following facts
are true:

1. Plaintiffs are husband and wife, of legal age, and residents of the municipality of Silay, Province of
Occidental Negros, Philippine Islands.

2. The defendant El Hogar Filipino is, and at all times herein mentioned was, a building and loan
association organized and existing as a domestic corporation under and by virtue of the Philippine
Corporation Law.

3. The defendant, Geronimo Paredes, is, and at all times herein mentioned was, the duly appointed,
qualified and acting register of deeds of the Province of Occidental Negros, Philippine Islands.

4. On or about March 13th, 1920, in the City of Manila, Philippine Islands, plaintiffs executed a
mortgage on real estate, a duplicate of which, marked Exhibit 1, is annexed to the original answer of
the said defendant, dated September 19, 1922; and at the time of the execution of said mortgage
the said defendant received from the Philippine National Bank, a former creditor of plaintiffs, the
certificate of title to the property described in said deed of mortgage.

5. The lands described in said deed of mortgage are all situated in the Province of Occidental
Negros, Philippine Islands.

6. The said mortgage was duly recorded in the office of the register of deeds of said province in
accordance with the requirements of existing law concerning the registration of mortgages on real
estates registered in accordance with the Land Registration Act.

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7. Exercising the right claimed by it under clause 10 of the said deed of mortgage (Exhibit 1), the
defendant El Hogar Filipino on or about the 29th day of June, 1922, after its board of directors had
taken advantage of the option to treat the debt as due and demandable, and after the publication
of notices in accordance with the provisions of said clause 10, caused each and everyone of the
parcels of land described in said deed of mortgage to be sold at public extrajudicial auction by a
licensed auctioneer, but without any judicial proceeding whatever.

8. At said public extrajudicial auction the defendant El Hogar Filipino was the only bidder, and all of
said parcels of land, with the improvements thereon, were adjudicated to said defendant by the
said licensed auctioneer for the sum of P87,505.53.

9. Thereupon said auctioneer executed a public document, certifying his proceedings in said sale
(offered in evidence as Exhibit 10 of El Hogar Filipino), and thirty days thereafter the manager of El
Hogar Filipino executed a deed of sale of said property to said El Hogar Filipino (a true copy of which
is in evidence herein as Exhibit 11 of El Hogar Filipino).

10. Thereafter, the defendant El Hogar Filipino filed for record in the office of the register of deeds of
the Province of Occidental Negros the originals of the deeds in evidence as Exhibit 10 and 11,
executed in favor of the said defendant, covering all the parcels of land described in the said deed
of sale and in the deed of mortgage hereinabove mentioned, which deed of sale was executed, as
above set forth, as the result of the said public extrajudicial auction sale, and at the same time it
presented to the registrar of deeds the owner's duplicate certificate of title to said parcels of land,
and demanded that the sale to El Hogar Filipino be registered, the certificate of title standing in the
name of plaintiffs cancelled, and the corresponding new certificate of title issued to El Hogar Filipino
in accordance with the said deed of sale, Exhibits 10 and 11.

11. The defendant registrar of deeds refused to record the deed of sale to El Hogar Filipino, to cancel
the certificate of title in the name of plaintiffs, and to issue a new certificate of title to El Hogar
Filipino, pending the final disposition of this case.

12. Plaintiffs herein were not shareholders of El Hogar Filipino prior to the execution by them of the
deed of mortgage, Exhibit 1.

13. No loan of its funds is made by El Hogar Filipino, except to shareholders.

14. Plaintiffs are now in possession of the properties described in the deed of mortgage, Exhibit 1, and
refuse to deliver the same to El Hogar Filipino.

15. As borrowers, plaintiffs undertook, and were required under the contract set forth in said deed of
mortgage, to pay each year P7,560, as interest at the rate of nine per centum per annum upon the
P84,000 mentioned in said deed, by monthly installments, and to continue making such payments
until the value of the said 420 shares, for which, as stated in Exhibit 1, they had subscribed, composed
of their monthly payments (including entrance fees) and their share in the profits, shall amount to

90
P200 per share, or the total value of P84,000, and when the said shares shall have reached the said
value, they were to be withdrawn, cancelled and appropriated by the corporation and the
mortgage cancelled.

16. The sum of P12,164.25 credited to plaintiffs as the value of their shares for the purpose of
determining the balance for the collection of which El Hogar Filipino caused the mortgaged property
to be sold at extrajudicial sale for the realization of the mortgage herein mentioned, was composed
of the sums paid by the said plaintiffs on account of their subscription to the shares and the dividends
earned, received and prorated to said shares.

17. On or about March 17, 1921, and April 29, 1920, Mr. Jose Reguera, a duly authorized agent of El
Hogar Filipino, entered into a supplementary agreement with plaintiffs, incorporated into his letters
written on behalf of El Hogar Filipino, as hereinafter set forth, it being understood that the letter of
April 29, 1920, although erroneously addressed to Gil Lopez, was really addressed to Buenaventura
Lopez, who received the same in an envelope properly addressed to him. Such letters are
respectively of the following tenor:

"Iloilo, April 29, 1920. Loan No. 917. Mr. Gil Lopez — Dear Sir: Confirming our verbal arrangement
concerning the payment of monthly dues and interest upon your loan, we notify you that in
accordance with said agreement you will make an annual payment of P12,600 on March 17, 1921,
and on the same date of each successive year, it being expressly understood and agreed that the
slightest delay or default in payment on such date of the complete annual installment will operate to
produce the rescission of this special concession, and the payment will be due and demandable
strictly in accordance with the conditions stipulated in the deed of mortgage, and in this case fines or
surcharges which may have accrued shall all be payable.

"Please sign at the foot your conformity, returning this letter and retaining the duplicate. Yours very
truly, El Hogar Filipino (Sgd.) J. Reguera, Agent, ("Accepted, (Sgd.) B.L.")."

"Iloilo, March 17, 1921. Mr. Buenaventura Lopez, Silay — Dear Sir: Please be informed that from the first
of this month the annual payment on your loan No. 921, as amortization and interest, is due,
amounting to the total of P12,600. As the payment should have been, but was not, made at the time
indicated, you are reminded of it in accordance with instructions from the head office, to the end
that the payment may be made with the least possible delay. Yours very truly, (Sgd.) J. Reguera,
Agent."

18. It is stipulated that the sum of P12,600 referred to in the letters above transcribed, is made up of
P5,040, as partial payments at the rate of P420 a month on account of 420 ordinary shares subscribed
for by plaintiffs, and the sum of P7,560, as annual interest upon the P84,000 mentioned in the deed of
mortgage at the rate of nine per centum per annum.

19. Plaintiffs failed to pay the taxes on the land described in the mortgage, Exhibit 1, for the years
1921 and 1922, for reasons not important in this case, but which are the subject-matter of another suit
against Miguel J. Ossorio and the Victorias Milling Company, now pending in this court, as a

91
consequence of which the land was declared confiscated; within the time allowed by law El Hogar
Filipino deposited in the provincial treasury of Occidental Negros the sum of P1,707.84, which sum
was accepted by the treasury upon the understanding that it would remain as a deposit while El
Hogar Filipino negotiated for the repurchase of the property.

20. Subject to the provisions of the law, all borrowing shareholders of El Hogar Filipino are required to
pay a premium of 16.67 per centum of the amount of the loan, which is fixed by the board of
directors.

21. Also subject to the provisions of the law, premiums collected from shareholders are considered by
El Hogar Filipino as a profit earned in the year in which the loan is made.

22. Also subject to the provisions of the law, the net profits earned by El Hogar Filipino, including
interest upon loans, premiums paid by borrowing shareholders, fines collected from shareholders for
delinquency in the payment of dues on shares or of interest, entrance fees, and other source, are
determined at the end of each year prorated to shareholders in proportion to their respective
participations in the total paid in capital, such participations consisting of the dues paid on account
of the par value of subscribed shares and the accumulated profits earned in preceding years.

23. As shown by Exhibit 1, plaintiffs subscribed for 420 ordinary shares of El Hogar Filipino, and
obligated themselves in the same manner as other holders of such shares, to pay P1 per month on
each share to the corporation until such time as the payments so made, plus the part of the profits of
the corporation pertaining to such shares, should equal the par value of P200 per share, the sum of
P5,040 being the total annual payment required of them as dues upon their 420 shares.

24. Plaintiffs, as shareholders, participated proportionately with other shareholders in the benefit
derived by El Hogar Filipino from the premium charged against plaintiffs for their loan secured by said
mortgage, and the profits derived from similar premiums paid by other borrowing shareholders.

25. The defendant El Hogar Filipino offers as documentary proof, in addition to that attached to the
deposition of the witness, Señor Lopez, the receipt dated March 17, 1920, No. 896, for the sum of P50,
as Exhibit 12; Receipt No. 1298, dated March 17, 1920, for the sum of P89.50, as Exhibit 13, Receipt No.
5232, dated March 17, 1920, as Exhibit 14; Receipt No. 1451, dated March 17, 1920, for the sum of
P1,554, as Exhibit 15; and Receipt No. 1064, dated March 17, 1920, for the sum of P14,000, as Exhibit
16. It is stipulated that said receipts, Exhibits Nos. 12, 13, 14, 15, and 16 were introduced by plaintiffs, in
whose possession they had been. Plaintiffs stated, in connection with the said receipts, Exhibits Nos.
12, 13, 14, 15 and 16, that the sums of money mentioned therein were paid by El Hogar Filipino for
their account, said sums having been deducted from the gross amount of the loan.

26. Plaintiffs reserve their objection to the materiality of the facts set forth in paragraph eighteen of
this stipulation, and contend that said facts are immaterial upon the ground that they do not relate
to any issue made by the pleadings herein.

Bacolod, Occidental Negros, January 31, 1923.

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MONTINOLA, MONTINOLA & HONTIVEROS
FISHER, DEWITT, PERKINS & BRADY

By (Sgd.) F.C. FISHER

Attorneys for the defendant El Hogar Filipino

HILADO & HILADO

(Sgd.) EMILIO Y. HILADO

Attorneys for Plaintiffs

(Sgd.) GERONIMO PAREDES

Register of Deeds of Occidental Negros

By (Sgd.) SIMEON BITANGA

Fiscal Delegado

On the same date the parties entered into an agreement as follows:

STIPULATION

It is hereby agreed that the amended complaint dated January 30, 1923, shall be understood as
presented nunc pro tunc instead of the amended complaint of December 18, 1922; that the answer
and cross-complaint of El Hogar Filipino of January 4, 1923, shall be taken as answer and cross-
complaint to the amended complaint of January 30, 1923; and that the replication of the plaintiffs
dated January 24, 1923, to the said answer and cross-complaint shall be deemed existing; and that
the answer of the register of deeds of January 31, 1923, shall be deemed as reproduced with respect
to the above mentioned pleadings, as amended, of the parties litigant.

Bacolod, January 31, 1923.

MONTINOLA, MONTINOLA & HONTIVEROS

FISHER, DEWITT, PERKINS & BRADY

By (Sgd.) F.C. FISHER

Attorneys for the defendant

HILADO & HILADO

By (Sgd.) EMILIO Y. HILADO

Attorneys for the plaintiffs

GERONIMO PAREDES

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Register of Deeds of Occidental Negros

By (Sgd.) SIMEON BITANGA

Deputy Fiscal

The defendant register of deeds filed an answer, adopting as his the allegations of the amended
complaint, dated January 30, 1923, and of the reply dated January 24, 1923, of the plaintiffs to the
cross-complaint of El Hogar Filipino.

The court a quo rendered a decision, (a) declaring the contract of mortgage Exhibit 1 null ab initio
and consequently clause 10 thereof also null and void; (b) annulling the extrajudicial sale of the
properties in litigation described in paragraph 3 of the amended complaint, and therefore declaring
null and void also all the acts documents made thereafter in accordance with clause 10 of the
contract, particularly the documents marked Exhibits 10 and 11 and all recordations and registrations
of those documents made by the register of deeds and all certificates of transfer issued by virtue
thereof in favor of El Hogar Filipino; (c) ordering El Hogar Filipino to return to the plaintiffs the sum of
P12,600 with legal interest from the date of the filing of the original complaint plus the sum of P5,000,
as attorney's fees; and (d) dismissing the two cross-complaints of El Hogar Filipino, with costs against
the defendant.

Defendant's counsel moved for a new trial on the ground that the evidence was not sufficient to
justify the decision and that the decision was contrary to law. With the objection of the plaintiffs, the
court by an order dated April 10, 1924, reconsidered its original decision, and summarizing the points
raised by the parties in their briefs, to wit: (a) Whether or not the contract contained in Exhibit 1 in
question was usurious; (b) whether or not the provision of clause 10 of Exhibit 1 was valid; and (c)
whether or not El Hogar Filipino, a corporation organized under the laws of these Islands, had the
right to recover the amount actually lent by virtue of Exhibit 1, rendered a decision declaring that the
contract contained in Exhibit 1 was usurious, that clause 10 of the said contract was null and void,
but set aside so much of its decision of August 14, 1923, as held that El Hogar Filipino had no right to
recover from the plaintiffs the amount of the loan; and by thus amending its decision, the court
ordered the plaintiffs, Buenaventura Lopez and Rosario Javelona, to return to the defendant El Hogar
Filipino the amount of P66,682 with legal interest from March 17, 1920, until fully paid.

Plaintiffs and defendant excepted to the amended decision. Plaintiffs prayed, furthermore, for a new
trial on the ground that the judgment was not supported by the evidence and that it was against the
law, which motion was denied by the court, and both parties perfected bills of exceptions and took
the case to this court.

Plaintiffs urge that the trial court erred: (a) In not holding that the mortgage transaction was void as
to both principal and interest; (b) in holding that plaintiffs must return to the defendant corporation
the sum of P66,682; (c) in allowing legal interest on the aforesaid sum from the date of the execution
of the mortgage; and (d) in overruling plaintiffs' motion for new trial.

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The questions raised by the plaintiffs-appellants are not new in this jurisdiction. In the case of Delgado
vs. Alonso Duque Valgona (44 Phil., 739), this court cited with approval the decision in the case of
Moncrief vs. Palmer (114 Atl., 181; 17 A. L. R., 119), in which it was held that the debtor seeking equity
must do equity by returning to the creditor the capital that he may have received. In discussing the
law applicable to the case, this court, among other things, said the following:

"The provisions of the Rhode Island statute with reference to usury are drastic. Chapter 434, Public
Laws 1909, amended by chapter 838, Public Laws 1912. The violation of the act is punishable as a
misdemeanor, every contract made in violation of it is void, and the borrower may recover in an
action at law, not only the interest, but any portion of the principal paid by him upon such usurious
contract. The complainant's solicitor has presented to us a very comprehensive and able argument
in support of his contention that equity should recognize the view of public policy emphatically
expressed in the legislative act, and should cancel the usurious and void contract. This argument
would have more persuasive force if the question were a new one. The settled and nearly universal
practice of courts of equity is opposed to the complainant's contention. The statutes of different
states have various provisions directed towards the prevention of the extortion and oppression of
usury. Whatever may be the method adopted by the legislature, however, although the legislative
provision may go to the limit of our statute and declare the contract void and unenforceable,
nevertheless courts of equity, in the absence of statute specifically constraining them to act
differently, have insisted upon the equitable principle that he "who seeks equity must do equity," and
have required the borrower, before he can be given the relief of cancellation of the contract, to
perform the moral obligation resting upon him, and pay or offer to pay the principal of the loan with
the legal interest."

Commenting upon the foregoing decision, Mr. Justice Street, who penned the decision of this court
in the Delgado vs. Alonso Duque Valgona case, supra, said:

The doctrine of that case we consider applicable here; and without expressing any opinion upon the
broader question whether capital lent upon a usurious contract can be recovered in an aggressive
action by the creditor, we are content to hold that when the debtor in a usurious contract sees fit, or
finds it necessary to apply to the court for equitable relief, he will, as a condition to the granting of
such relief, be required to restore what he received from the other party. In the present case both
parties are before the court in the attitude of suppliants, each asking relief from the contract in
question; and in order to avoid the possibility of further litigation, as well as to secure complete
justice, an order will be entered requiring the plaintiff, as a condition of the satisfaction of the
judgment in his favor, to reconvey to the defendant the same twelve parcels acquired by the
plaintiff from the defendant.

In the case of Go Chioco vs. Martinez (45 Phil., 256), this court held the following:

Under Act No. 2655, all usurious loan is void, but this does not mean that the debtor may keep the
principal received by him as loan, thus unjustly enriching himself to the damage of the creditor, but
that the creditor has no right of action for the recovery of the stipulated interest, although he may
use for the recovery of the principal loaned.

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In the course of the decision and after examining the several provisions of the Usury Law, we held
that: "... The law, in declaring usurious loans to be void, determines its effects and makes them to
consist in the reimbursement of the interest paid during the two years preceding the making of the
claim, the payment of attorney's fees and provides further for the institution of criminal action for the
imposition of the penalty fixed by the law. ..."

This doctrine was applied in the case of Gui Jong & Co. vs. Rivera and Avellar (45 Phil., 778) recently
decided by this court with the concurrence of all the justices who took part in its decision. In that
case, the defendant maintained that, inasmuch as the transaction was usurious and was therefore
void, he was relieved from all responsibility and that the plaintiff had no right to recover anything of
him. The court held: "Where a mortgagor admits that he got the money and owes it to the plaintiff,
he is not released from the payment of the debt because the transaction was usurious," and
"Although the interest was usurious, it did not operate as a payment or satisfaction of the original
loan, and this is specially true where no interest was ever paid."

In the course of the decision, the court aptly makes these remarks: "Upon what theory can the
defendant breach his own contract and rely upon its enforcement? Upon what legal principle can
he deny liability upon a contract which he repudiated and failed to perform? How and in what
manner has the defendant paid the amount of the original loan, which he admits having received?
Upon what legal or equitable principle can he defeat the payment of the amount of the original
loan for the reason that he failed and neglected to perform his own contract? By no fiction or rule of
law would the fact that the interest was usurious and was never paid by the defendant operate as a
payment or satisfaction of the original loan.

In any event, he should pay the plaintiff the amount which he justly owes him. That question was
squarely met and decided in the case of Aguilar vs. Rubiato and Gonzales Vila (40 Phil., 570), which
upon legal principle was followed in Delgado vs. Alonso Duque Valgona (44 Phil., 739), and which
was cited and approved in Go Chioco vs. Martinez (45 Phil., 256).

It was held in the case of Hodges vs. Gelbolinga (R.G. No. 21760, decided August 8, 1924),1 that the
trial court erred in holding the entire contract void and in dismissing the complaint, because the
interest was in excess of 24 per cent per annum. The court said: "... In the opinion in the case of Go
Chioco vs. Martinez (45 Phil., 256), the majority of this court held that, in an action upon a usurious
loan, the lender can recover the capital actually lent, together with interest thereon from the time of
the institution of his action. According to this doctrine, the contract is unenforcible only to the extent
of the stipulated usurious interest."

Thus it will be seen that the jurisprudence of this court on the question raised by plaintiffs' appeal is
decidedly to the effect that the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the
lender of his right to recover of the borrower the money actually loaned — this only in the case that
the interest collected is usurious. The law, as it is now, does not provide for the forfeiture of the capital
in favor of the debtor in usurious contracts and while we may believe it to be more convenient to
forfeit the capital, as a drastic measure to eradicate the evil of usury, we should not, however,

96
resolve a legal question by abiding by our opinion regarding its convenience, but should be guided
by what we understand is the intent of the law. There was a law (Act No. 2073), enacted by the
Philippine Commission in 1911, establishing the rate of legal interest and fixing the effect of usury in
the Moro Province, in the Mountain Province, and in the Provinces of Agusan and Nueva Vizcaya, of
which section 6 provides that "whenever it satisfactorily appears to a court that any bond, bill, note,
assurance, pledge, conveyance, contract, security, or evidence of debt has been taken or received
in violation of the provisions of this Act, the court shall declare the same to be void, and enjoin any
proceeding thereon, and shall order the same to be cancelled and given up." But the present law
(Act No. 2655, as amended by Act No. 2992) does not contain the same prohibitory provision as the
former law, and the silence of Act No. 2655 upon this point, in conjunction with the express prohibition
contained in Act No. 2073, shows that that prohibition was intentionally omitted from the present law
and that the Legislature, in so omitting such provision from the new law, expressly intended to open
the door of the courts to the creditor and allow him to claim the return of his capital.

The fact must specially be borne in mind that Commission Bill No. 217, introduced in 1914 by
Commissioner Martin, in its section 1, contained a provision to the effect that "any contract which
directly or indirectly called for the payment of interest in excess of 12 per cent per annum shall be null
and void, not only as to the interest, but also as to the capital invested." But such provision was
eliminated from the Usury Law, as finally passed by the Legislature on February 24, 1916. Not only this,
but in the explanatory statement of the same Act No. 2655, which repealed all other Acts
incompatible with its provisions, it was expressly said that in cases of violation of the Usury Law, a fine
equivalent to four times the excess of the interest collected, or a corresponding subsidiary
imprisonment in case of insolvency, would be better than, and preferable to, the forfeiture of the
capital. Is this not a conclusive proof that, in the enactment of the Usury Law, the Legislature did not
contemplate the forfeiture of the capital in usurious contracts?

Plaintiffs' attorney, however, argue vigorously upon the significance of the word "void" as used in
section 7 of the Usury Law, contending that usurious contracts, because expressly banned by the law
as absolutely null and void, should not be given any effect by the courts.

It must be observed, first of all, that the intention of the legislator must be ascertained, not from the
consideration of a single word or a particular phrase of the law, but from the context of the whole
law or from a portion thereof as compared with the whole. (25 R.C.L., p. 1007 and cases cited.) As
was said by Chief Justice Marshall in Pennington vs. Coxe (2 Cranch, 33; 2 Law. ed., 199), "that a law
is the best expositor of itself; that every part of an act is to be taken into view for the purpose of
discovering the mind of the legislature; and that the details of one part may contain regulations
restricting the extent of general expressions used in another part of the same act, are among those
plain rules laid down by common sense for the exposition of statutes which have been uniformly
acknowledged. ..."

We are in accord with plaintiffs' counsel that if the Legislature had used a clear and unambiguous
language, the law must be enforced according to its clear and evident intent. However, this is not so
with the case at bar. The Legislature contended itself with employing the word "void," a word very

97
frequently used with little precision to mean whatever is voidable or void, so that when it is used in a
law, the context of the law must be resorted to, before giving it its exact meaning.

The words "void" and "voidable" are not often used with exact discrimination; indeed in some books
there is great want of precision in the use of them and much confusion has resulted from the
looseness in the use of these words. The terms have frequently been used indiscriminately and what is
merely voidable is frequently called void. So often has the word "void" been used in the sense of
voidable that it may be said to have almost lost its primary meaning; so that when it is found in a
statute or judicial opinion, it is ordinarily necessary to resort to the context in order to determine
precisely what meaning is to be given to it. Indeed it is said that the term "void" is oftener used to
point out what may be avoided than to indicate a nullity. (40 Cyc., 214, 215.)

In the present case, what is the meaning of the word "void" as used in sections 7 and 8 of the Usury
Law? It will be noted that section 7 avoids all usurious contracts, but immediately after this provision, it
recognizes the validity of usurious negotiable instruments whenever acquired in good faith by a third
person; so that the usurious contract which is void is not absolutely void, but perfectly valid under
certain circumstances.

Again, section 8 makes void and of no effect whatever loans are payable in agricultural products
and seeds, unless the price of the products is fixed by referring to the current price thereof at the time
of the performance of the obligation; and according to section 10, the lender violating this law
should be compelled to return to the borrower an amount equivalent only to what he may have
received as interest. It results from the very context of the law, therefore, that the lawmaker in using
the word "void" did not intend that the transaction should be a complete nullity, but merely a nullity in
respect to the agreed interest.

This conclusion has been upheld by the majority of this court in the case of Go Chioco vs. Martinez,
supra. We then held that:

The other questions raised in this appeal refer to whether a debtor, who has paid usurious interest,
can recover the amount paid by him on account of the principal and whether the usurious creditor
has a right to recover the principal loaned, and not paid by the debtor. The resolution on these two
questions depends upon the interpretation of section 7 of Act No. 2655 which provides:

"All conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debt, and all
deposits of goods or other things, whereupon or whereby there shall be reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum or value for the loan or forbearance of
money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no
merely clerical error in the computation of interest, made without intent to evade any of the
provisions of this Act, shall render a contract void: And provided further, That nothing herein
contained shall be construed to prevent the purchase by an innocent purchaser of negotiable
mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has
been no intent on the part of said purchaser to evade the provisions of this Act and said purchase
was not a part of the original usurious transaction. In any case, however, the maker of said note shall

98
have the right to recover from said original holder the whole interest paid by him thereon and, in
case of litigation, also the costs and such attorney's fees as may be allowed by the court."

As may be seen, notwithstanding the provision as to the nullity of the usurious note, in case the same
is indorsed to an innocent third person, the innocent purchaser is entitled to collect the amount, with
interest, from the maker and the maker is entitled to recover from the original holder thereof only the
interest paid by him, and, in case of litigation, the costs and attorney's fees as may be allowed by the
court. Therefore, the only effect of the nullity of the note is the recovery of the interest paid by the
debtor, not the value of the note.

If, on account of the nullity of a usurious note, the original holder thereof, or the payee, has no right
to recover any amount upon said note, there is no reason why, in case the same is transferred to a
third person who acquires it in good faith and for a consideration, the payee should be benefited by
the amount collected by him from the transferee as payment of the note endorsed and not repay
the maker the value of the same. Likewise, if by virtue of such a nullity, nothing can be collected by
the holder of the note, there is no reason why the reimbursement of the interest should be limited to
the amount collected during the two years immediately preceding the date on which the action for
the recovery thereof was instituted, and should not include all the interest collected prior to said
period. And it is because the law limits the effect of the nullity to the reimbursement of the interest
paid during the period of two years preceding the filing of the complaint, which provision being of a
penal nature must be strictly construed so that it should not include the reimbursement of the
principal paid and the unpaid principal which is not provided in the law.

That the legislator did not have in mind that the usurious creditor should lose the capital loaned by
him is further made apparent by the provisions of section 8 of Act No. 2655 as amended by Act No.
2992. Said section reads thus:

"All loans under which payment is to be made in agricultural products or seed or in any other kind of
commodities shall also be null and void unless they provide that such products or seed or other
commodities shall be appraised at the time when the obligation falls due at the current local market
price: Provided, That unless otherwise stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract
advancing money to be repaid later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person or corporation having paid otherwise
shall be entitled in case action is brought within two years after such payment or delivery to recover
all the products or seed delivered as interest, or the value thereof, together with the costs and
attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be
construed to prevent the lender from taking interest for the money lent, provided such interest be not
in excess of the rates herein fixed."

Under this legal provision, in case of a usurious contract, by virtue of which payments are to be made
in agricultural products, seeds or other fruits, the debtor may recover from the usurious creditor only
what he might deliver as interest, which shows, in our opinion, that what he might have paid as
principal is not recoverable. Now, if it is held that in another kind of a usurious contract, the debtor

99
may recover not only the interest paid but also the principal, how can it be explained that by the
mere fact of the debt being payable in fruits, the debtor is not entitled to recover the principal which
he might have paid? The conclusion is inevitable that the nullity of a usurious loan provided in the law
means only that the lender cannot demand payment of the stipulated usurious interest.

Moreover, section 10 of Act No. 2655 as amended by Act No. 2992 provides:

"Without prejudice to the proper civil action, violations of this Act shall be subject to criminal
prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than fifty
pesos nor more than two hundred pesos or to imprisonment for not less than ten days nor more than
six months, or both, in the discretion of the court, and to return the entire sum received as interest
from the party aggrieved, and in case of nonpayment, to suffer subsidiary imprisonment at the rate
of one day for every two pesos: Provided, That in case of corporations, associations, societies or
companies the manager, administrator or gerente or the person who has charge of the
management or administration of the business shall be criminally responsible for any violation of this
Act."

As may be seen, this legal provision requires the restitution only of what might have been received by
the convicted usurer as interest. If the intention of the legislator was to confiscate the principal
loaned, he would not have limited himself to the statement that the interest collected must be
refunded.

In interpreting Act No. 2655, the fact must not be lost sight of that in August, 1911, the Philippine
Commission enacted Act No. 2073, which fixes and defines the legal rate of interest, declares the
effect of usury on contracts, and provides for other purposes in the Moro Province, Mountain
Province, and in the Provinces of Agusan and Nueva Vizcaya. Section 3 of this Act provides:

"SEC. 3. All bonds, bills, notes, assurances, conveyances, chattel mortgages, and all other contracts
and securities whatsoever, and all deposits of goods, or anything whatever, whereupon or whereby
there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of
any money, goods, or things in action, than is above prescribed, shall be void, except as to bona
fide purchasers of negotiable paper, as hereinafter provided, in good faith, for a valuable
consideration, before maturity: Provided, That no merely clerical error in the computation of interest,
made with no intent to avoid the provisions of this Act, shall render the contract usurious: And
provided further, That the payment of interest in advance for one year at a rate not to exceed
fifteen per centum per annum shall not be construed to constitute usury: And provided further, That
nothing herein shall be construed to prevent the purchase of negotiable mercantile paper, usurious
or otherwise, for a valuable consideration, by an innocent purchaser, free from all equities, at any
price, before the maturity of the same, when there has been no intent to evade the provisions of this
Act, or where said purchase has not been a part of the original usurious transaction. In any case,
however, where the original holder of a usurious note sells the same to an innocent purchaser, the
maker of said note or his representative shall have the right to recover back from the said original
holder the amount of principal and interest paid by him on said note."

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The phraseology of section 7 of Act No. 2655 is so similar to the language of section 3 of Act No. 2073
that it may well be said that Act No. 2655 was drafted after Act No. 2073 for the whole Philippines,
which Act (No. 2655) fixes the rate of interest on loans, declares the effect of receiving or collecting
usurious interest and provides for other purposes. A comparison of the terms of the laws above
quoted shows only one essential difference, and that is, that while section 3 of the former Act No.
2073 gives the debtor the right to recover not only the usurious interest but also the principal, section
7 of the later Act, that is, Act No. 2655, authorizes the debtor to recover only what he might have
paid. In view of this fact, there is no room for doubt that the Philippine Legislature, in enacting Act No.
2655, deemed the provision of section 3 of Act No. 2073 to be unjust as to the confiscation of the
principal and so it provided in Act No. 2655 that the debtor may recover only the interest paid,
attorney's fees and costs.

xxx xxx xxx

And, if we turn our attention on the Acts above cited, Nos. 2073 and 2655, it will be seen that section
6 of the former Act provides:

"Whenever it satisfactorily appears to a court that any bond, bill, note, assurance, pledge,
conveyance, contract, security, or evidence of debt has been taken or received in violation of the
provisions of this Act, the court shall declare the same to be void, and enjoin any proceeding
thereon, and shall order the same to be cancelled and given up."

This provision shows that under that law, it was expressly prohibited to maintain any action on usurious
contracts. Then there is no doubt that the creditor cannot institute any action for the recovery of the
capital or part of the capital loaned. Undoubtedly, the legislator, in enacting Act No. 2073, deemed
it reasonable that the creditor should lose the capital, because, aside from the fact that in that Act
no penalty was provided for against usury other than the loss of all the interest paid by the debtor in
case the usurious instrument was negotiated (sec. 3), and of the interest paid in the two years
preceding the filing of the complaint in all other cases (sec. 2); in said Act only one rate of interest
quite liberal was fixed, namely, 15 per cent per annum according to section 1 and building and loan
associations as well as pawn shops were exempted from every limitation according to section 7.

But the Act now in force, No. 2655, as amended by Act No. 2992, contains no such prohibitive
provision as that of the former Act No. 2073 and the silence of Act No. 2655 in this respect, in contra-
distinction with the express prohibition of Act No. 2073, shows that said prohibition was intentionally
omitted from the law now in force, and that the Legislature, in omitting such rule from the new law,
did not intend to bar the creditor from coming into court for the recovery of his capital. And the
reason for such an omission is clear if it is taken into account that Act No. 2655 made the situation of
the creditor quite difficult in these respects: (a) No creditor is exempt from the law (section 2); (b) the
maximum rates were fixed, which were to be applicable to building and loan associations and pawn
shops (section 4); (c) the general rate of interest was reduced to 12 per cent on loans with securities
of real properties and 14 per cent if there are no such securities (sections 2 and 3); (d) in case of
litigation, the judge shall sentence the creditor to pay attorney's fees to the debtor (sections 6 and 8);
(e) usury was made a crime and is punishable by a fine equal to the interest stipulated, or subsidiary

101
imprisonment in case of insolvency (section 10). We believe that these new penalties and restrictions
were inserted by the Legislature in lieu of the loss of the capital provided by Act No. 2073.

And the foregoing conclusion is fully sustained not only by the history of the Usury Law, but also by the
preamble of the law itself. By the history, because the bill of the Commission No. 217 prepared by
Commissioner Martin in 1914 in its section 1 contained a provision to the effect that "any contract
which directly or indirectly provides for the payment of any interest in excess of 12 per cent per
annum shall be null and void not only as to the interest but as to the principal invested," which
provision was eliminated from the Usury Law as it was finally passed by the Legislature. By the
preamble, because speaking of the necessity of the intervention of the prosecuting attorney in
actions resulting from the violation of the Usury Law, as well as of the penal sanction, said preamble
gives the following reasoning: "We believe it to be a sound proposition that the fiscal should intervene
in the actions arising from the violation of the proposed provisions set out in the original bill, because,
among other reasons, those poor persons unable to employ an attorney will be represented and thus
the law would not be a dead letter. But without the penal clause, it seems that such intervention is
not proper. But, why not insert such clause? We would not be the first and only nation which would
do such a thing. We are of the opinion that a fine equivalent to four times the amount in excess of
the interest charged or subsidiary imprisonment in case of insolvency, would be sufficient and better
than the forfeiture of the principal." Therefore, there can be no room for doubt that it was not the
intention of the Philippine Legislature to forfeit the principal in condemning usury by means of a law.

In support of this opinion, we may also cite the decision of the United States Supreme Court in the
case of McBroom vs. Scottish Mortgage & Land Investment Co. of New Mexico (153 U. S., 318 Law.
ed., 729), referring to the interpretation of the Usury Law of New Mexico, where it says that:

Was the contract between the parties void as to the amount loaned with legal interest thereon,
because it provided for, or in its execution involved, the payment of usurious interest? The plaintiff
insists that it was, and, consequently, that a cause of action accrued immediately upon the payment
of the bonus of $6,500 to the company's agent, or at least from the first payment of interest for a fixed
period. This question must first receive attention.

Of course, effect must be given to the intention of the legislature as manifested by the words of the
statute, interpreted according to their natural signification. And in ascertaining that intention all of its
provisions must be considered together. As said in Harris vs. Runnels (53 U.S., 12 How., 79, 84 [13; 901,
903]): "Before the rule can be applied in any case of a statute prohibiting or enjoining things to be
done, with a prohibition and a penalty, or a penalty only for doing a thing which it forbids, the statute
must be examined as a whole to find out whether or not the makers of it meant that a contract in
contravention of it should be void, or that it was not to be so. In other words, whatever may be the
structure of the statute in respect to prohibition and penalty, or penalty alone, that it is not to be
taken for granted that the legislature meant that contracts in contravention of it were to be void, in
the sense that they were not to be enforced in a court of justice." So, in Pratt vs. Short (79 N.Y., 437,
445; 35 Am. Rep., 531): "Prohibitory statute may itself point out the consequences of its violation; and
if on a consideration of the whole statute, it appears that the legislature intended to define such
consequences and to exclude any other penalty or forfeiture than such as is declared in the statute

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itself, no other will be enforced, and if an action can be maintained on the transaction of which the
prohibited transaction was a part, without sanctioning the illegality, such action will be entertained."
(See also Pangborn vs. Westlake, 36 Iowa, 546, 549, and authorities there cited.)

The statute of New Mexico does not declare a contract providing for usurious interest to be
absolutely void in respect to the amount loaned and legal interest thereon, but only imposes a fine
upon any person or corporation charging, collecting, or receiving a higher rate of interest than
twelve per cent per annum, and forfeits to the person, from whom such interest is collected or
received, or to his executors, administrators, or assigns, double the amount so collected or received
— the action to recover such penalty to be brought within three years after the cause of action
accrues. Construing sections 1736, 1737, and 1738 together, the statute does not prohibit the
recovery of the amount loaned with legal interest. No such consequence, as the forfeiture of the
principal and legal interest, is visited upon the lender. And that seems to be the view expressed by
the supreme court of the territory of New Mexico, when, construing the local statute, in Miligan vs.
Cromwell (3 N. M., 330), it said: "If it should not be legal to recover more than 12 per cent interest per
annum upon written contracts, the converse of that proposition would seem to follow as a necessary
consequence that it shall be lawful to recover on such contract 12 per cent interest per annum." It is
true that, by necessary implication, the contract is void as to any of interest stipulated to be paid, in
excess of the highest rate allowed by the statute. But as the statute only imposes a fine for charging,
collecting, or receiving usurious interest, and give to the borrower a right to recover double the
amount of such interest collected or received from him, the courts ought not to declare the contract
void as to principal and legal interest. That would add a penalty not prescribed by the statute.

Another argument advanced by counsel for plaintiffs, maintaining that the defendant El Hogar
Filipino cannot take anything under the contract of mortgage and loan, is that the defendant
corporation is without corporate power to enter into such kind of a contract, and therefore its act is
ultra vires. In their briefs as appellees plaintiffs allege that the loan made to them is an agricultural
loan, and the maximum interest allowed by Act No. 2655 for such a contract is 12 per cent per
annum. This law, however, does not make any distinction between loans whether agricultural, urban,
industrial, or commercial. All loans secured by mortgage upon real property, whether for agricultural
purposes, industrial, or commercial, or for the construction or acquisition of urban properties cannot
earn more than 12 per cent per annum interest, in accordance with the general rule established in
section 2 of the said law; but loan and building associations may charge up to 18 per cent per
annum interest in accordance with the exception contained in the same section.

Although not stated in so many words, we perceive from plaintiffs' brief that building and loan
associations cannot make loans except for the construction and acquisition of homes.

Aside from the fact that there is nothing in Exhibit 1 showing (nor did the plaintiffs show) that the loan
made was for agricultural purposes, the law, in describing building and loan associations, says:

All corporations whose capital stock is required or is permitted to be paid in by the stockholders in
regular, equal, periodical payments and whose purpose is to accumulate the savings of its
stockholders, to repay to said stockholders their accumulated savings and profits upon surrender of

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their stock, to encourage industry, frugality, and home building among its stockholders, and to loan
its funds and funds borrowed for the purpose to stockholders on the security of unencumbered real
estate and the pledge of shares of capital stock owned by the stockholders as collateral security,
shall be known as building and loan corporations, and the words "mutual building and loan
association" shall form part of the name of every such corporation. (Sec. 171, Act No. 1459.)

It will thus be seen that one of the principal purposes for which this kind of corporation is organized is
to lend its funds and funds borrowed for the purpose to stockholders on the security of
unencumbered real estate and the pledge of shares of capital stock owned by the stockholders as
additional security. What is the purpose mentioned by the law? According to the same section, the
purpose is (a) to accumulate the savings of its stockholders; (b) to repay to said stockholders their
accumulated savings and profits upon surrender of their stock; (c) to encourage industry, frugality
and home building among its stockholders.

In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995), this court said:

A building and loan association is an organization created for the purpose of accumulating a fund
by the weekly, monthly or yearly subscriptions or savings of its members, to assist them in building or
purchasing for themselves dwellings or real estate, by loaning to them the requisite money from the
funds of the society. To all particular intent it may be said to be to enable a number of associates to
have and invest their savings to mutual advantage, so that, from time to time, any individual among
them may receive, out of the accumulation of the pittances which each contributes periodically, a
sum, by way of loan, wherewith to build or pay for a home, and ultimately making it absolutely his
own by the payment of such small amounts from time to time. Building and loan associations are
institutions in modern society and are now recognized as important factors in the social and
economic development of the country. The controlling idea is the massing of the separate earnings
of wage-workers and the savings of persons of small means, in such a manner as to aid them in
procuring homes for themselves. It is the organization of thrift and self-help, a practical application of
the maxim that in "union there is strength."

It must be noted, however, that although the controlling idea in building and loan associations is that
of accumulating the separate earnings of wage-workers and the savings of persons of small means in
such a manner as to aid them in building up homes for themselves, this idea, nevertheless, is not
exclusive, because the law itself determines the various purposes which such associations may
pursue in their operations. The characteristic of these associations is the mutual benefit for its
members, as defined in the Rafferty case, supra.

Upon this point Sundheim in his work on Law of Building and Loan Associations, sections 5 and 7, has
the following to say:

All these names are misleading and convey no exact idea of what an association is. The name has
no legal or practical significance, except that, by usage, it has become descriptive of a peculiar
class of corporations with especial rights and powers defined by statute. Many associations to-day
do not use the word "building" in their corporate title, but style themselves "Savings and Loan

104
Associations," which is more descriptive and less misleading. The term "building and loan associations"
would seem to imply that they were engaged in the business of building. This was or is seldom true,
although in some jurisdictions they seem to have that power. The borrower may, if he so desires, build
a house with the money advanced, or he may use it in any trade or business. The association merely
loans or advances the money and the use to which it is put is none of its concern.

xxx xxx xxx

They are the most economically conducted financial institutions in the world, and have, despite this,
suffered the least financial loss. They have grown to such an extent to recent years that they no
longer restrict their money to the home buyer, but loan their money to the mere investor or dealer in
real estate. They are the holders of large mortgages secured upon farms, factories and other business
properties and rows of stores and dwellings. This is not an abuse of their powers or departure from
their main purposes, but only a natural and proper expansion along healthy and legitimate lines. All
legislation in recent years has been to enlarge and broaden their powers, not to confine and restrict
them. The courts have been liberal in the construction of these specially delegated powers, and, as a
result, they have grown and changed as conditions required. Judge Endlich, no doubt the greatest
authority on these institutions, well says: "It is indeed, to be noted that the legislature has attempted
no definition of what constitutes a building association. It has assumed that certain features and
methods are essential to it, and there is no room for doubt that without them no corporation,
whatever its label, can claim to be a building association. But it has not excluded the possibility that,
consistently with these essential features, the legitimate development of the business of these
associations may add other which, at the date of enactment, were not foreseen and against which,
therefore, it is not to be taken as implying any prohibition."

On the hypothesis that the loan in question is usurious, and leaving for the later discussion the
determination of the amount of the loan which is also the subject of the appeal of the defendant, it
is our opinion, in view of the foregoing, and so hold, that the errors assigned by the plaintiffs are
groundless and should be overruled.

Let us now consider the appeal of the defendant El Hogar Filipino from the judgment of the trial court
pronouncing the contract Exhibit 1 usurious and therefore void, as well as the power to sell contained
in clause 10 of the said contract.

Defendant assigns as errors committed by the court the following: (a) Its holding that the contract
Exhibit 1 is usurious and void; (b) its holding that the power to sell given in said contract Exhibit 1 is
void; (c) the computation of the principal of the loan evidenced by said contract Exhibit 1 at
P66,682; (d) the holding that the plaintiffs are entitled to recover P12,600 heretofore paid and P5,000,
attorney's fees, or any sum whatever, of the defendant El Hogar Filipino; (e) its failure to award
possession of the property in question to El Hogar Filipino under the allegations of its first cross-
complaint herein; and (f) the overruling of the motion for a new trial on the question of usury and the
validity of paragraph 10 of the contract Exhibit 1.

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It is proper to examine the manner of operation of loan and building associations, as prescribed by
the Corporation Law, for the purpose of determining whether the contract in question is really
usurious.

Section 182 of the Corporation Law, Act No. 1459, provides:

Every loan made by the corporation must be properly evidenced by note or other instrument in
writing and must be secured by a first mortgage ... on ... real estate and also by the pledge to the
corporation of shares of stock of the corporation the matured value of which shall at least equal the
amount loaned: . . .

As this section of the law is of a mandatory character and has not been either tacitly or expressly
repealed by Act No. 2655 or by any other Act, El Hogar Filipino was under the obligation to comply
with its provisions in making the loan now in question, and for this purpose, paragraph 7 was inserted
in Exhibit 1, to wit:

As additional security for the performance of the obligations herein contained, the debtors pledge to
the association the 420 shares of Class A stock of the association by them subscribed for of the
nominal face value of eighty-four thousand pesos. (P84,00).

As to the manner and time of paying the loan of P84,000, paragraph 2 of the said Exhibit 1 provides
that:

The debtors acknowledge having received the said sum of eighty-four thousand pesos (84,00), which
they promise to replay as follows:

They will pay to the treasurer of the association monthly, on or before the 5th day of every month, the
sum of one peso (P1) for each share of Class A stock subscribed for by them until the surrender or
cash value of said stock, as determined by the by-laws and regulations of the association now in
force, shall equal the said sum of eighty-four thousand pesos (P84,000), the amount of the loan by
them received from the association, or such lesser sum as the principal loan shall have been reduced
to by reason of payments made by the debtors in reduction thereof in accordance with the
conditions of paragraph three hereof; and as soon as the surrender value of said stock shall equal
the sum owed by reason of the loan herein granted said stock shall be surrendered and cancelled
and the value thereof applied by the association to the payment of the amount owed by the
debtors on said loan, and the president of the association shall execute in favor of the debtors the
necessary instruments of cancellation of the mortgage hereinafter created, the expense of said
cancellation to be charged against the debtors.

This paragraph or clause of the contract is likewise in accordance with section 174 of the Corporation
Law which reads as follows:

. . . The dues on each share of stock subscribed for by a stockholder shall continue to be paid by the
stockholder to the corporation until the share has been duly withdrawn, cancelled, or forfeited, or

106
until the shares has reached its matured value; that is to say, when the dues paid on each share and
the net earnings thereof, in accordance with the by-laws, shall amount to the par value of the share .
...

The par value of each share of stock is two hundred pesos, according to section 175 and, until the
same is fully paid, the dues cannot, according to the same section, be applied to any other
account, except to the completion of the payment of the shares of stock.

If the shares of stock were encumbered, this fact would not authorize the association to apply the
dues towards the reduction of the amount loaned because section 174 does not make any
discrimination about shares of stock of any kind, but on the contrary includes all shares that have not
reached their matured value.

Furthermore, section 180 further supports clearly this criterion when it provides that:

. . . Provided, however, That if shares pledged to the corporation as security for loans shall mature
before the loan is repaid the matured value may be paid to the holder in cash as in this section
provided or may be credited to the loan at the option of the board of directors.

If the dues on the shares pledged should be applied to the reduction of the capital loaned, then the
last quoted section would never have any application, for there would never be a case where the
"shares pledged ... shall mature before the loan is repaid."

Contrariwise, it might happen that the loan might be paid before the shares should have reached
their maturity value, if the borrower avails himself of the right granted him in paragraph 3 of Exhibit 1,
to wit:

It is agreed that the debtors may make partial payments in reduction of their loan, provided such
payments shall not be less than two hundred pesos (P200), or any multiple thereof.

All this simply shows that El Hogar Filipino has adopted this system of operating, not for the purpose of
evading the Usury Law, as held by the trial court, but because the Corporation Law, which came into
effect long before the enactment of the Usury Law, does not permit it to accept securities of real
estate, but must demand the pledge of shares of capital stock as additional security.

In the case of Martinez vs. Graño (42 Phil., 35) this court said:

It is a matter of common knowledge that a building and loan association, such as El Hogar Filipino,
upon making a loan, requires the borrower to become subscriber to a sufficient number of shares of
the stock of the association to amortize the loan upon maturity of the shares; and the borrower is
further required to make certain payments upon these shares contemporaneously with the payments
of the interest upon the loan, . . .

107
With these premises before us, which reveal the nerve of the case, let us now consider the most
important argument, affecting the peculiar way of operation of mutual building and loan
associations.

The trial court and the plaintiffs maintain that the monthly payment of P420 as dues, at P1 per share, is
a partial payment of the capital loaned; but, as paragraph 4 provides that while the borrowers are
indebted to the association they shall pay interest at the rate of 9 per cent per annum on the
amount of P84,000, it might happen that the debt might be reduced to an insignificant amount, but
nevertheless the debtors would still have to continue paying P7,560 as annual interest.

If the P420 of monthly dues had been applied from the beginning to the reduction of the amount of
the capital loaned, (a) it would have been violative of section 177 of the Corporation Law which
provides: "Payment of dues on shares of stock shall commence from the time that such shares were
issued;" (b) it would also violate the provisions of section 174 which reads: "... The dues on each share
of stock subscribed for by a stockholder shall continue to be paid by the stockholder to the
corporation until the share has been duly withdrawn, cancelled, or forfeited, ...;"(c) it would violate
section 182 of the same law because the loan would have been secured by real estate only, as
there cannot be additional security on shares of stock upon which no dues are paid; (d) the
subscription to the capital stock would have been nominal only, and thereby section 181 of the law
would have been infringed, which prohibits these associations from lending money except to
shareholders; (e) it would openly violate paragraph 2 of the contract Exhibit 1 which categorically
provides that such payments shall be for the shares of stock until the surrender or cash value of said
stock shall equal the sum of P84,000 and, as soon as the surrender value of said stock shall equal the
amount due, said stock shall be surrendered and cancelled and the value thereof shall be applied
to the payment of the amount owed by the debtors, etc.

If in accordance with the law and the contract Exhibit 1, the dues shall be applied to the payment of
the shares until they shall reach the amount of P48,000, all arguments predicated upon the
proposition that such dues must be applied to the reduction of the debt before reaching the amount
of P48,000) are inadmissible in sound logic.

The criterion of the court below upon this point is expressed in the following paragraphs:

In such a way although the payments made by the debtors in accordance with paragraph 2 and
other conditions of the contract were really actually applied to the original principal of the debt, the
latter would be reduced to such an extent that the maximum rate of interest allowed by law of 18
per cent per annum would be less than the fixed annual interest of P7,560, and still the debtors would
be bound to pay said interest of P7,560, etc. (Page 11, trial courts decision.)

Under clause 4 of the contract Exhibit 1, and clause 15 of the stipulation of facts, so long as there
remains any part, however insignificant, of the P84,000 which has been made to appear as the
amount of the loan, the borrowers are to pay interest at nine per centum per annum on the whole
P84,000. So that, for example, even though the value of the shares should reach P42,001, which is
applied to the loan, it would reduce the debt to P41,999, in any given year, but the borrowers would

108
have to pay interest at nine per centum per annum on P84,000, just the same, or P7,560. (Page 45,
appellees' brief.)

We are unable to accept the theory maintained in the above quoted paragraphs. Supposing for a
while that the shares of stock had attained a value of P42,001, this amount could not be applied to
the reduction of the loan without the consent of El Hogar Filipino, as it would allow one of the parties
to violate the contract without the consent of the other. But if El Hogar Filipino had consented to this,
we cannot see why it should follow that under the contract El Hogar Filipino could still collect interest
upon P84,000, because paragraph 3 of Exhibit 1 provides that:

It is agreed that the debtors may make partial payments in reduction of this loan provided such
payments shall not be less than two hundred pesos (P200), or any multiple thereof; all payments
made hereunder shall be applied in reduction of the principal of this loan on the last day of the
month in which the same shall be paid and the stipulated interest shall be proportionately reduced
from and after said date.

In such a case we presume that El Hogar Filipino, in order to be within the law, would require the
debtors to subscribe for shares of stock whose value will be equivalent to P41,990, the balance of the
debt, if the debtors were not willing to pay the said balance then and there.

On the other hand, the judgment appealed from makes the following findings of fact: That the
annual profits of El Hogar Filipino from all sources of revenue are liquidated at the end of every year
and are prorated to its shareholders in proportion to their respective participations, said participations
being the amount of their dues paid upon the subscribed shares of stock and of the accumulated
profits of previous years (par. 19), and that the sum of P12,164.25 credited to the plaintiffs as the value
of their shares in order to determine the balance unpaid for which El Hogar Filipino, in foreclosing the
mortgage, caused the extrajudicial sale of the property mortgaged herein, included the amount of
dues paid by the plaintiffs upon their shares of stock, as well as the dividends corresponding to said
shares of stock.

If the dues upon the shares of stock earn dividends, as found by the trial court and as agreed upon
by the parties, this runs counter to the proposition that interest must be reduced proportionately
every month. To state it more clearly, one of the same amount cannot be applied to the payment of
shares and at the same time to the reduction of the loan, neither can it earn dividends and at the
same time cause a reduction of interest. When the payment is applied to the value of the shares, it
has the effect of increasing the participation in the capital of the association of him who pays, and
naturally the compensation is the increased of his participation in the profits of the association; but
when it is applied to the reduction of the debt, its only effect is to reduce the amount of the
obligation and, consequently, it works a reduction of the interest.

All of this confusion could have been avoided if at the outset the debtors had been recognized as
being debtors and stockholders at the same time of the association. As such stockholders, they are
vested with all the rights and obligations of every stockholder with the only difference that they
cannot dispose of their shares because they are pledged to the association.

109
In the case of Freemansburg Building & Loan Assn. vs. Watts (199 Pa., 221; 48 Atl., 1075), it was held
that:

. . . In carrying out the plan on which building associations are organized and conducted, it is not
intended that a stockholder, who borrows of the association, will discharge the debt he incurs by
direct payments on account of it. He prays at stated periods the dues on his stock, the interest on the
money borrowed, and, when the premium bid for the loan has not been deducted, the installments
on it. When by the receipt of dues, interest, premiums and fines for nonpayments of dues, all of the
stock belongs, becomes full paid or matured, the value of his stock equals the amount of his debt,
and the transaction is then ended by the surrender of the stock by him and the cancellation of his
obligation by the association.

Frequently, the obligations taken by building associations from borrowing members very imperfectly
express the true relation of the parties to each other, as determined by the object in view and the
rules for the government of the association, but they should never be considered as establishing a
new relation at variance with the fundamental principles on which such associations are organized
and conducted, unless the language used will admit of no other construction. . . .

In Corpus Juris (volume 9, page 957), it is said that:

. . . He occupies the dual relation of borrower and stockholder, each of which is distinct from the
other. . . .

On page 978 it adds that:

Generally, a building and loan association loan is unpaid until final settlement or maturity of the
borrower's shares, . . .

And on page 979 we find that:

In the majority of jurisdictions, ... payments on stock are not ipso facto payments on the loan and do
not operate of themselves to extinguish it pro tanto, even though the stock has been assigned as
collateral. In a few jurisdictions, especially those which allow and require all payments to the
association to be applied on the loan, the rule is otherwise as to stock payments . . . .

If in other jurisdictions there can be any doubt about this point, that is not the case, however, in this
jurisdiction because Act No. 1459 is very clear upon this matter, and clearer yet are the provisions of
the contract Exhibit 1, to the effect that the monthly payments of P1 per share shall be applied
exclusively to the maturity value of the shares and that the amount of the loan would not be totally
paid (except by voluntary partial payments as provided by paragraph 3) until the surrender or cash
value of the shares shall be equal to, and shall cancel, the amount loaned.

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Lastly, Exhibit 3 shows that on the very day that the loan was made the following amount was
deducted:

Dues for three months upon shares subscribed for, P1,260.

This shows that with the consent of the plaintiffs the amount of the first three monthly payments were
applied to the payment of the shares and not to the reduction of the loan. Furthermore, plaintiffs
should have known that the following monthly payments would be applied to the same account, as
was covenanted in Exhibit 1 and, knowing it, they never made any protest.

If the solution of the case should hinge upon the provisions regulating the application of payments,
we would find article 1172 of the Civil Code providing that:

A person owing several debts of the same kind to a single creditor may declare, at the time of
making a payment, to which of them it is to be applied.

If the debtor should accept from the creditor a receipt which recites the application to be given the
payment, he cannot contest it, unless there should be ground for treating the contract as void.

From whatever point of view the case of the plaintiffs is considered, we find that it is neither
supported by the law, nor by the contract, nor by the subsequent acts of the plaintiffs; on the
contrary we believe that the application of the dues to the payment of the subscribed shares of
stock is in accordance with Act No. 1459 and with the contract Exhibit 1, and is not in violation of Act
No. 2655.

Another ground of the judgment of the lower court for holding the contract Exhibit 1 usurious, is that
accordance with paragraph 5, any default in the payment of the dues, or of the interest, has the
effect of imposing a fine upon the debtors of three centavos per month for each peso in arrears, and
the further penalty of 3 per cent per month thereon, equivalent to 36 per cent annum, that is, double
the maximum rate of 18 per cent permitted by section 2 Act No. 2655.

The 18 per cent fixed in section 2 of Act No. 2655 as the maximum rate of interest that may be
collected by building and loan associations must be understood to refer only to the amount loaned,
as otherwise it might be construed to authorize the collection of 18 per cent per year upon premiums,
18 per cent upon fines, and 18 per cent upon interest. It is unimportant that the rate of monthly fines
should exceed 18 per cent annum because what should not exceed 18 per cent per annum is the
sum total of the three items, "fines," "interest," and "premiums." If this is so, it is evident that the 18 per
cent does not refer to the monthly dues, but to the amount of the loan.

To what does the 36 per cent mentioned in the judgment refer? The judgment appealed from is
silent, but it undoubtedly refers to the interest that the debtors have been compelled to pay for their
delinquency, consisting of a fine of three centavos per month for each peso that they failed to pay,
and not to the dues because the fines thus imposed for delinquency are applicable alike to all
shareholders whether debtors of the association or not. The interest that plaintiffs must pay was fixed

111
at 9 per cent per annum upon the sum loaned; and supposing that the debtors are delinquent for
one full year, it would result that they would pay 36 per cent of 9 per cent of the principal which,
mathematically speaking, represents 3.24 per cent of the loan. In other words, supposing that the
debtor should pay the monthly interest, but with 12 fines, as each month's interest is only one-twelfth
part if 9 per cent per annum, that is, seventy-five hundredths of 1 per cent, it would result that the 12
fines would aggregate twenty-seven hundredths of 1 per cent per month, equivalent to 3.24 per cent
per annum. It will, thus, be seen that 36 per cent of the annual interest (P7,560) would be but 3.24 per
cent of the whole loan (P84,000).

The argument relative to the premium is expounded by the court as follows:

Furthermore, it appears that the rate of premium charged by El Hogar Filipino to the herein plaintiffs
was 16.67 per cent of the amount of the loan. This premium plus the 9 per cent interest of the first year
amounts to 25.67 per cent of the amount of the loan, which is in excess of the 18 per cent per annum
allowed by the Usury Law for premiums, interest, and fines.

If the contract had been entered into to last one year only, there would undoubtedly be a flagrant
violation of section 2 of Act No. 2655. But, as the contract did not have a fixed date of maturity, but
provided that it would become extinguished when the shares should reach their maturity value of
P84,000 and the experience of the years of existence of the defendant corporation justifies the
assumption that the term of the loan would be ten years approximately, the question that remains for
determination is whether or not the contract of loan for two or more years is usurious, when in
accordance therewith, the creditor may, in one year, collect more than the legal rate of interest.

Act No. 2655 limits the amount that may be charged for the use of money in proportion to the
amount of the loan and the length of the time of its use. In accordance with the present day
practice, the first element is based upon 100 units and is termed per centum, while the second is
based upon one year and is denoted by the phrase per annum. The prohibition is against collecting
in excess of the rate of many units per centum per annum, but there is nothing in the law fixing the
proportional part that may be collected each year. Twenty pesos paid for the use of one hundred
pesos in two years is equivalent to 10 per cent per annum, as evident as ten pesos is the payment for
the use of the same amount for one year.

In the case of Fowler vs. Equitable Trust Company (141 U.S., 384; 35 Law. ed., 786), where the
maximum legal rate of interest was 10 per cent, and the loan was for five years, with interest at the
maximum rate, and where 3 per cent per annum, that is, 15 per cent of the total, was deducted at
the time of making the loan, the balance of 7 per cent to be paid annually, the court held that the
collection of the said discount did not make the transaction usurious.

In the case of Pierce, Wright & Co. vs. Davey (43 Neb., 45; 61 N.W., 92), a promissory note for $1,750
was executed to cover a loan at 10 per cent per annum, the maximum rate of interest allowed, it
being agreed that the note would earn 7 per cent interest per annum, and the amount of $208.50
was deducted at the time of making the loan. It was held that the transaction was not usurious even
though the amount collected in the first year of the loan was far in excess of the maximum allowed

112
by law, for the reason that the rate for the whole time of the loan did not exceed the limit. The
analogy between the interest deducted in that case and the premium deducted in the case at bar
is very evident. If the intention of the lawmaker had been to prohibit the collection by inserting in the
law these or similar phrases: "6, 12, 14, or 18 per cent in any one year of the contract" instead of the "6
per cent per year, 12 per cent per year, 14 per cent per year, or 18 per cent per year, etc." that
appear in sections 1, 2, and 3 of the said law.

In the absence of a contrary provision, where the same interest is not paid each year, it would seem
the justice requires that the average interest be taken by dividing the sum total of the interest of all
the years by the number of years so as to obtain a right figure for comparison. Otherwise, the courts
will be forced to declare usurious a loan made for ten years, with real estate security, where it is
stipulated that the debtor shall pay 1 per cent interest during the first nine years and 12 ½ per cent
during the last year — which would be clearly unjust because the one-half of 1 per cent excess in the
last year is more than compensated by the 11 per cent less that he paid during the first nine years.

In the instant case, where the date of maturity was the date when the shares of stock should reach
their maturity value, assuming that the term of the contract would be ten years, it would result that in
that first year the amount collected would be 16.67 per cent premium plus 9 per cent interest,
making a total of 25.67 per cent, which is 7.67 per cent interest in excess of that allowed by law; but,
as in each of the nine succeeding years there would be collected only 9 per cent, the debtor would
at the end have paid in all 9 per cent less than the maximum allowed by law.

Regarding the return of the interest paid in advance, the final provision of section 6 of Act No. 2655 is
as follows:

Provided, however, That the creditor shall not be obliged to return the interest collected by him in
advance when the debtor shall have paid the obligation before it is due, . . . .

Act No. 2073, enacted by the Philippine Commission for the Moro Province, Mountain Province, and
the Provinces of Agusan and Nueva Vizcaya, and which undoubtedly was considered in the
preparation of Act No. 2655, provides in section 3 as follows:

. . . And provided further, That the payment of interest in advance for one year at a rate not to
exceed fifteen per centum per annum shall not be construed to constitute usury.

It must be noted that this provision was reenacted in Act No. 2655, but omitting therefrom the one-
year limit which clearly would make us think that interest may be collected in advance without that
limitation.

In the case of loans running several years the exaction of a part of the interest in advance for the full
period of the loan has been held not to render the loan usurious; but where a loan is to run for several
years, it has been held that to deduct in advance the highest rate of interest for the entire period of
the loan would constitute usury.

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. . . It would certainly seem that the exaction of the interest in advance for the entire period of a loan
which was to run for a long time would render the transaction usurious where such exaction would
absorb so much of the principal as to leave to the borrower very little of the amount agreed on to be
loaned. (29 Am. & Eng. Encyc. of Law, 492.)

Summarizing the foregoing, it may be said that the interest agreed upon in the contract Exhibit 1 is 9
per cent per annum plus one-tenth of the premium, that is, 1.667 per cent, making a total of 10.667
per cent per annum. Adding to this the 3.24 per cent fines already discussed, there is a maximum
total of 13.907 per cent per annum, which is far below the maximum rate of interest fixed by law.

It may happen, however, that the debtor in a contract of loan like the one before us, availing himself
of the right granted him in paragraph 3 of Exhibit 1 of making partial payments upon the loan, may,
because beneficial to his interests, pay the whole amount of the debt within the first year of the loan;
could it then be maintained that the lender has committed usury?

It is a fact that by virtue of paragraph 9, the violation by the debtor of his obligation might result in
the debt becoming at once due and payable — in this case also the rate of annual interest and
premium would exceed 18 per cent on account of the shortening of the time. In both cases,
however, the fact must be borne in mind that the resulting excessive interest is not the result of the
obligation of the contract but of acts and omissions wholly independent of the will of the lender.

Discounting promissory notes is very usual at the local banks. If in discounting a 90-day promissory
note the bank collects 2 ½ per cent interest in advance and on the following day the debtor. To suit
his convenience, insists on withdrawing the note from the bank, and the latter accepts its full
payment, could the debtor accuse the bank of violating the Usury Law, for having collected from
him 2 ½ per cent for a single day that he used the money, that is, 900 per cent interest per annum?

If this were sound logic, it would follow that the legal acts performed by the creditor could be made
illegal at the will of the debtor; that the interest collected, and which was not usurious at the time of
making the loan, could be turned usurious at the pleasure of the debtor, thus giving the latter an
easy and convenient way of ruining his creditors.

The amount of the premium is determined and based upon the faithful compliance with the
obligation and of the consequent running of the entire time of the loan and the reason for the
absence of a provision for the adjustment in case of the premature maturity of the obligation by
default of the debtor or on account of the convenience of cancelling the entire obligation before it
falls due is to give substantial inducement to the compliance of the contract and at the same time
establish an effective penalty for its violation. If the normal time of the loan were 10 years and the
maturity, for non-compliance of the provisions of the contract, takes place at end of five years, it
would result that the one-half of the earned premiums would have been granted by the contract of
loan and the other half would have constituted a penalty for the violation of the contract.

The test of usury in a contract is whether it would, if performed, result in securing a greater rate of
profit on the subject-matter than is allowed by law. . . . (Webb, Usury, sec. 29.)

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. . . It is on the assumption that contracts will be performed according to their stipulations by the
parties to them, and not upon the supposition that they will be violated, their legality should be
determined. It would be an anomaly to make the violation of a contract the test of its legality. . . .
(Crider vs. San Antonio Real Estate Building & Loan Assn., 13 Tex. Civ. App., 399; 37 S. W., 237.)

When an excessive rate of interest is made payable only in case of default in payment of the
principal, the higher rate is not for the use of money, but imposed as a penalty for nonperformance
of the contract. By his own act the debtor may relieve himself of the excessive payment. Whether
such penalty for the nonperformance of the contract is held enforceable or not, all authorities are
agreed that the contract is not usurious, but remains a valid and enforceable obligation against the
debtor. (39 Cyc., 953.)

Where a borrower has agreed to pay a rate of interest not forbidden by law, but has stipulated that,
in the event of his not making payment at the time specified, the obligation shall bear a higher rate
of interest, either from default or from the date of its execution, or that some specific sum shall be
paid in addition to the principal and interest contracted for, the increased rate is generally regarded
as a penalty and not within the usury laws. . . . (27 R.C.L., 232.)

It will be observed that the American cases, while holding that the penalties for violations are not
against the usury laws, the courts generally incline towards finding a way to relieve the debtor of
such a heavy burden. This tendency is based upon the repugnance of the common law towards the
imposition of fines. In the laws of this jurisdiction, however, there is no such policy and nowhere in Act
No. 2655 is there a provision preventing the stipulation and enforcement of a penalty in case of
violation of the contract. Indeed, section 6 clearly provides for such a penalty, permitting the lender
to retain the interest for the whole period of the contract, as advance payment, because it does not
distinguish between voluntary and compulsory payment.

The validity of such a penalty was expressly upheld by this court in the case of Go Chioco vs.
Martinez, supra, wherein it was held that "the parties to a contract of loan may validly agreed upon a
penalty in case the obligation is not fulfilled, besides the interest not prohibited by the Usury Law, is a
proposition generally admitted. . . .

In the case of Cissna Loan Co. vs. Gawley (87 Wash., 438; 151 Pac., 792; L.R.A. [1916 B], 807), the
defendants had taken a loan of a sum of money and executed a series of 96 promissory notes falling
due in successive months, the nominal value of each promissory note including interest at the legal
rate until their maturity. Each note contained a provision to the effect that default upon any of them
will result in the whole series becoming immediately due and payable. Defendants paid the first 21
notes, but failed to pay the others. Plaintiff filed an action for the recovery of the unpaid promissory
notes and for the foreclosure of the security, against which a defense of usury was pleaded. The
Supreme Court of the United States said:

Since, therefore, the interest reserved does not exceed the maximum statutory rate if paid according
to the terms of the contract of loan, it remains to inquire whether the accelerating clauses of the

115
contract render it usurious. The usual test for the existence of usury is, will the contract, if performed,
result in producing to the lender a rate of interest greater that the maximum rate permitted by the
statute, and was such result intended? And the courts generally hold that stipulations in the contract
to the effect that default in the payment of interest, or of an installment of the principal, shall
accelerate the maturity of the entire debt are not usurious, even though the contract, if enforced
according to the terms of the default, will result in giving the lender a rate of interest greater than the
maximum statutory rate. They regard the excessive rate after maturity as in the nature of liquidated
damages or penalties, to be enforced only to the extent that they are not unconscionable (citing
cases and other authorities).

xxx xxx xxx

Tested by these rules, the notes are not usurious for the reason assigned by the respondents
(defendants). The lender cannot, by the terms of the notes, exact from the borrowers, of his own
volition, a greater rate of interest than the maximum rate permitted by the statute. This right, if it
accrues to it at all, accrues by reason of the default of the borrowers, and this we hold, as we believe
with the weight of authority, cannot make a contract illegal which would otherwise be legal if
performed by the borrowers (quoting from Crider vs. San Antonio Real Estate Building & Loan Assn.,
supra).

But the trial court seems to have rested its decision in part on the fact that the notes were payable
before maturity at the option of the borrowers, at an advanced rate of interest which would render
them usurious if so paid. But we cannot think this fact justifies the conclusion that the notes are
usurious. Such a payment would be voluntary on the part of the borrowers. They were in no way
obligated to pay the loan before maturity. The agreement was thus in the nature of a penalty which
the lender exacted for the privilege of paying before maturity. Not being capable of enforcement
by him, it was not usurious. . . .

Other cases that are applicable may be found in the annotations on page 812, L.R.A., 1916 B,
following the case of Cissna Loan Co. vs. Gawley, supra, and in the annotations to Smithwick vs.
Whitley (28 L.R.A. [N.S.], 113).

The trial court, in deciding the motion for new trial presented by El Hogar Filipino, in connection with
the premium says: "In the first place, the court believes that a mutual building and loan association
has no right to charge interest for the amount of the premium that it collects upon granting a loan;
secondly, a transaction is evidently usurious where the defendant cannot in any way use the money
for which he paid interest, and interest is generally nothing more than the payment for the use of
money or a compensation for the forbearance of the creditor in the collection of his credit.

If interest paid by a debtor upon a sum of money that he has not received is usurious, the borrowers
in the present case could allege that they were not obliged to pay interest on the amount of money
that was deducted from the loan in accordance with Exhibit 3, which was used for the payment of
the deed and its registration, of the internal revenue stamps and interest pertaining to two months
and fourteen days, etc., and similarly, as El Hogar Filipino retained P38,047 plus P11.50 from the

116
amount of the loan in order to cancel a lien in favor of the National Bank upon the real estate
mortgaged to the former, the debtors likewise were not obliged to pay interest upon these amounts,
because they were sums of money which they did not use. It was forgotten that if the plaintiffs
desired to obtain a loan from El Hogar Filipino they had to pay first those same amounts of money
that were deducted from the loan. They could have paid them with their own money, in which case
they would have received the full amount of the loan, but they elected to have the lender pay said
amounts by deducting the same from the loan that they were negotiating. It cannot be said,
therefore, that said amounts were not used by the debtors.

Referring to the amounts appearing in Exhibit 3, that were deducted by El Hogar Filipino, we do not
believe that it can be said that the said amounts were not used by the plaintiffs, specially if we bear
in mind that the latter agreed to apply them to the payments that they had to make before they
could obtain the loan.

The stamps on the mortgage deed and on the shares of stock subscribed for by the plaintiffs
amounting to P14 and P84, respectively, were necessary expenses that did not benefit in the least
the defendant entity, as also the fees of P50.50 charged by the registrar of deeds, because these
three amounts went into the public treasury.

The expenses of appraisal and execution of the document amounting to P50 and P25, respectively,
are reasonable expenses incurred for the survey of the mortgaged lands and in proportion to the
amount of the loan.

The entrance fees charged by the association for the issuance of shares of stock, amounting to P420
at the rate of P1 per share, are permitted by section 176 of the Corporation Law and have absolutely
nothing to do with the loan, for such fees are paid by all shareholders, whether debtors of the
association or not. If the plaintiffs had taken out their shares of stock without borrowing money, or
had negotiated the loan five months afterwards, they would have had to pay just the same amount
of entrance fees.

With regard to the interest collected in advance, amounting to P294 for the fourteen days of the
month of March and P1,260 for the months of April and May, we have already said that Act No. 2655
expressly allows such collections in advance.

The dues for the subscribed shares of stock amounting to P420 for the month of March and P840 for
the months of April and May were paid by the plaintiffs as shareholders and not as debtors.

As to the premium of P14,000, — we have already dealt with it, — its collection is authorized by the
Corporation Law and this was recognized in paragraph 20 of the stipulation of facts.

Lastly, with regard to the amount retained by El Hogar Filipino paying plaintiffs' debt to the National
Bank, amounting to P38,047.99, plus P11.50 for interest, plaintiffs not only did not deny it, but on the
contrary have expressly admitted same.

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Now, section 184 of Act No. 1459 says:

The rate of interest on all loans may be fixed in the by-laws or may be prescribed from time to time by
the board of directors.

Let it be noted that the law does not say "net loans," that is, after deducting the premium, but merely
loans in general. And as section 181 of the same Corporation Law provides that: "... The premium
may be deducted from the amount of the loan or such proposition may be so deducted as may be
prescribed in the by-laws, ..." and El Hogar Filipino, exercising this right, deducted at once the whole
amount of the premium from the amount of the loan, it would seem clear that, in accordance with
the existing laws, building and loan associations may charge interest upon the gross amount of the
loan, that is, including premium, and, in harmony with these laws, this contract of loan was entered
into and the intent of the parties is evident that a nine per cent annum interest shall be paid upon
P84,000, the total amount of the loan, and not upon P66,682, as erroneously found by the trial court.
(Fitzgerald vs. Hennepin Country Catholic Building & Loan Assn., 56 Minn., 424; 57 W.W., 1066;
Montgomery Mutual Building & Loan Assn. vs. Robinson, 69 Ala., 413; Citizen's Mutual, etc., Assn. vs.
Webster, 25 Barb., 263; Vermont L. and T. Co. vs. Whithed, 2 N.D., 83; 49 W.W., 318.)

If EL Hogar Filipino could for a moment deviate from the system of operation imposed upon it by the
Corporation Law, and had given a loan of P70,000 to the plaintiffs charging therefor an annual
interest of 18 per cent only, the plaintiffs would pay for interest alone the sum of P12,600 per annum
and nobody would mark the transaction usurious. In that case, plaintiffs would have to pay the very
same P12,600 per year as agreed in the contract, Exhibit 1, until they can reduce the amount of the
loan and if they should not pay any part thereof during twenty-five years, after the lapse of so long a
period of time, they would still be owing the same P70,000.

The contract that is now attacked as usurious by the plaintiffs binds Lopez to pay P12,600 annually for
his loan, but gives him the benefit of applying P5,040 out of the P12,600 towards the payment of 420
shares of stock, so that when these attain their maturity value, the same would be applied to the
payment of the P84,000 debt. Computing the dividend of these shares at 10 per cent per annum,
which is the dividend declared for the last two years (sworn statement of Lutgardo Lopez, page 118,
B.E.), they would attain their maturity value at the end of 120 months, or if this were not exact, then
after 130 or 140 months. In other words, we might have to wait 10, 11, or 12 years, but at the end of
these periods, the debt would be extinguished.

If by charging the whole P12,600 as interest, El Hogar Filipino does not commit usury, we do not think it
can be reasonably maintained that, by giving the debtor the right to apply a part of that amount of
interest to the payment of the shares of stock, and thus enable him to extinguish his debt after 10 or
12 years, the lender commits usury.

As to the assignment of error with reference to the return to the plaintiffs of P12,600 paid by them as
interest and the recovery of P5,000 as attorneys' fees, we deem it necessary to make matter clear.

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The right to recover interest and attorneys' fees, given by section 6 of Act No. 2655, is not a natural
consequence following the stipulation of excessive interest, but springs from the actual and real
payment of said interest.

If a person makes a note, promising to return the principal plus 20 per cent interest, but actually pays
10 per cent only, only the note may be void under section 7, but the debtor cannot recover in whole
or in part the 10 per cent by him paid, because the right to recover interest, according to section 6, is
granted only to "any person or corporation who ... shall have paid or delivered a high rate or greater
sum or value than is hereinbefore allowed to be taken or received, . . . ."

In the present case, the record does not show that the plaintiffs had paid or delivered excessive
interest; so that, even if the loan were usurious, the adjudication is improper.

The defendant, lastly, assigns as errors of the court below the declaration of nullity to award to El
Hogar Filipino the possession of the property sold extrajudicially to it. In the case of El Hogar Filipino vs.
Paredes (45 Phil., 178), it was held that:

A stipulation in a mortgage of real property authorizing the mortgagee, upon default of the
mortgagor in the payment of the mortgage debt and after publication for three successive weeks in
a paper of general circulation, to expose the property to public sale and allowing the mortgagee to
become a bidder at such sale, is valid.

This doctrine was applied in the case at Descals vs. Handelsman (R.G. No. 22422, decided
September 30, 1924).2 In view thereof, we are of the opinion that the court a quo erred in holding
paragraph 10 of the contract, Exhibit 1, void, and in refusing to award possession to the defendant of
the mortgaged properties, which were sold to it.

The defendant, but principally the plaintiffs, have attached to their briefs numerous computation
tables of interest, which we believe it is unnecesary to examine exhaustively as in the resolution of this
court, the decisive point for determination is whether the facts herein proven show that the
defendant in the instant case has charged the plaintiffs usurious interest.

At the time of the execution of the contract, Exhibit 1, the following charges were deducted:

Premium (see Exhibit 16) P14,000.00

Interest, 14 days of March, 1920, at 9 per cent per annum (Exhibit 3) 294.00
Id. for April and May, 1920, charged in advance (Exhibit 3) 1,260.00
Total .....................................................
15,554.00
Payments made by debtors or debited to their account during life of loan:
Interest, June 1, 1920, to May 31, 1921 ........................................... P7,560.00
Exhibits 8 and 9 testimony of Lutgardo Lopez (page 8) and paragraphs 17 and 18 of agreement of
facts show that on March 21, 1921, Buenaventura Lopez and Miguel Osorio executed a promissory
note in favor of the company for the amount of P12,600, equivalent to the annual payment for the

119
period of from June 1, 1920, to May 31, 1921, that is, P7,560, interest at 9 per cent plus P5,040 as dues
on the shares.

Interest at 9 per cent from June 1, 1921, to May 31, 1922 (Exhibit 2)
.............................................................................................. P7,560.00
Id., 29 days of June, 1922 (Exhibit 2) ............................................... 609.00
Fines for interest of 12 months (Exhibit 2) ..................................... 1,474.20
Collections and charges made after signing the deed ....................................... P17,283.20
The sum of amounts collected at the time of signing the deed and the payments made by debtors or
amounts debited to their account during the life of the loan until the date when the properties were
sold on June 29, 1922 (Exhibit 10) .........................................................................................................

32,757.20
As the loan lasted 821 days and was P84,000, it is clear that defendant collected for premiums,
interest and fines the amount of P14,363.69 per annum, equivalent to 17.09 per cent, 18 per cent per
year upon P84,000 would be P15,120 or P756.31 more than what the defendant collected.

In the account we excluded fines charged for delay in the payment of dues upon the shares of
stock, since those fines were collected irrespective of the loan, but on account of the subscription to
the stock and delinquent shareholders, whether debtors of the company or not, are bound to pay
same. But even adding the amounts charged as dues by El Hogar Filipino (Exhibit 2)
......................................................................................................................

831.60
to the ............................................................................................................................. 32,757.20
the result would be a total of .....................................................................................
33,588.80
which, divided by 821 days, length of time of the loan, would give P14,728.34 per year, equivalent to
17.53 per cent on the P84,000 and 391.68 less than the maximum of P15,120 allowed by law.

In view of the foregoing, the judgment appealed from should be, as is hereby, reversed, hereby
declaring that the contract of loan and mortgage here in question is not usurious; that the value of
the loan is P84,000; that paragraph 10 of the contract of loan is valid and that the defendant has the
right to the possession of the properties sold to it in the extrajudicial sale; and that the plaintiffs have
no right to recover of the defendant the amount of P12,600 paid as interest, nor the amount of
P5,000, as attorneys' fees.

Without special pronouncement as to costs. So ordered.

Johnson, Street, and Romualdez, JJ., concur.

Avanceña, J., concurs in the result.

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18. Gui Jong and Co v Rivera

EN BANC

G.R. No. L-21310 March 6, 1924

GUI JONG & CO., Plaintiff-Appellant, vs. JOSE RIVERA and REGINA AVELLAR, Defendants-Appellants.

Powell and Hill and B. F. Borchardt for appellant.

Hilado and Hilado for appellees.

STATEMENT

March 25, 1920, the defendants executed a mortgage to the plaintiff on all the sugar cane planted
and sown during the agricultural years of 1920 and 1921 on the hacienda Santa Julia, situated in the
municipality of Himamaylan, Occidental Negros, estimated to yield 2,500 piculs of sugar
approximately, and upon ten different carabaos, which are specifically described in the mortgage.
Also one-half of a parcel of agricultural land in the sitio of Kabigtagan, municipality of Kabankalan,
Province of Occidental Negros, containing an area of thirty-two hectares, also specifically described.
The mortgage recites that it is executed as security for the payment to the plaintiff of the sum of
P8,000, with interest at the rate of 12 per cent per annum in the nature of a loan. Also that:

Fourth. The mortgagor is under obligation to consign to the mortgage 2,500 piculs of sugar
approximately of the crops mortgaged of the year 1920-1921 actually existing on the lands above
indicated, which crop shall be 2,500 piculs approximately.

Fifth. The debtor hereby binds himself to sell to the mortgagee all the sugar he may harvest up to the
amount of P8,000, with interest thereon; provided, that the purchase to be made by the creditor of
said sugar must be on the basis of P1.50 less for each picul than the price the same may have in the
Iloilo market on the date or dates of its arrival.

Sixth. All transportation expenses and internal revenue shall be for the account of the mortgagor." It
further provides that should the mortgagor violate any of the conditions, he should pay the further
sum of P500 as attorney's fees. The mortgagee was duly signed, witnessed, acknowledged and filed
for record.

For a breach of its conditions, the plaintiff commenced this action. Among other things, the
complaint alleges that between March 25, 1920, and April 15, 1921, plaintiff furnished the defendants
various sums of money and merchandise, on which the defendants agreed to pay interest at the
rate of 12 per cent per annum, the full amount of which with interest to April, 1921, is P18,166.79. An
itemized list of the items is attached to, and made a part of, the complaint. It is then alleged that
notwithstanding the provisions of the mortgage, the defendants delivered only 866.20 piculs of sugar
on February 14, 1921, the value of which was P6,265.92, for which defendants were duly credited;
that there is now due and owing from the defendants to the plaintiff the sum of P11,900.87, with

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interest from April 15, 1921, at the rate of 12 per cent per annum; that under the terms of the
contract, the plaintiff is entitled to recover P500 as attorney's fees, and prays judgment for the
respective amounts, "and for such other relief as the court may deem just and equitable."

For answer, the defendants made a general denial, and, as a special defense, "allege that the
contract and contracts upon which the suits is based are usurious in that the rate of interest is greater
than that allowed by law, that is to say, the same is in excess of 12 per cent and also because the
contracts called for payment of the alleged debt and loans in crops and there is no provision in said
contract and contracts that the said crops should be taken over by the plaintiff at their market
value," and they pray that the complaint be dismissed, the contract be declared null and void, and
for damages resulting from the attachment upon the property.

Upon such issues, the trial court found from the evidence that, under the terms and conditions of the
mortgage, the plaintiff had loaned and advanced to the defendant, Jose Rivera, money and
merchandise to the value of P18,166.79, upon which the defendant had only paid P6,265.92, the
agreed price of the 866.20 piculs of sugar, leaving a balance due and owing plaintiff of P11,900.87.

The court also found that all of the loan was usurious, with the exception of P3,500, and rendered
judgment for that amount, with interest on P1,500 at the rate of 12 per cent from April 28, 1920, and
legal interest on the remaining P2,000 from the date of the filing of the complaint, and absolved the
defendant Regina Avellar, upon the theory that it had not been proven that she had anything
whatever to do with Exhibits 1 and 2, covering the P3,500 transaction, and denied the right of the
plaintiff to recover attorney's fees. From this decision plaintiff appeals, specifying the following
assignments of error:

1. The court erred in rendering judgment condemning the defendant Jose Rivera to pay the plaintiff
only the sum of P3,500 instead of P11,900.87, the difference between the total amount advanced to
the defendants, P18,166.79, and the P6,265.92, value of the 866 piculs of sugar delivered by the
defendants to plaintiff.

2. The court erred in not allowing P500 to plaintiff as attorney's fees.

3. The court erred in deciding that the P1.50 less per picul to be paid by the plaintiff to the
defendants was in the form of interest, and consequently usurious.

4. The judgment of the lower court is contrary to the weight of the evidence.

5. The judgment of the lower court is contrary to law.

JOHNS, J.:

It will be noted that the appellant does not make any assignment of error as to the decision of the
court in absolving the defendant Regina Avellar. Neither is it discussed in its brief.

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 The mortgage was executed to secure the amount of the original loan of P8,000, and the trial court
found as a fact that all other amounts were advanced and loaned to the defendant Jose Rivera
upon the same conditions as those stated in the mortgage. It specifically provides that the P8,000
shall draw interest at the rate of 12 per cent per annum, and that the estimated crop of 2,500 piculs
of sugar shall be assigned to the mortgagee, and that the proceeds of sale shall be applied in
satisfaction of the debt. It further recites "that the purchase to be made by the creditor of sugar must
be on the basis of P1.50 less for each picul than the price the same may have in the Iloilo market on
the date or dates of its arrival." In other words, that Jose Rivera bound himself to deliver to the plaintiff
the amount of the crop estimated to be 2,500 piculs, and to sell it to plaintiff at P1.50 less than the
market price of sugar.

If the transaction had been carried out as agreed upon between the parties, the plaintiff would not
only have received 12 per cent interest on the amount of his loan, but in addition he would have
received the further sum of P3,750, the difference between the market price of the sugar and the
price which plaintiff was to pay for it. The plaintiff contends that he was to be paid the P1.50 per picul
for his commission and expenses in the handling and sale of the sugar. But the mortgage will not bear
that construction. It does not contain any provision of that nature. It is very apparent that the promise
of Jose Rivera to sell the sugar to plaintiff for P1.50 less than the market price, in addition to interest at
12 per cent per annum, was one of the inducements for the making of the loan.

We agree with the trial court that the mortgage upon its face should be construed as a usurios
transaction. It found that the total amount of plaintiff's claim was P18,166.79. But as pointed out in the
appellees' brief, that the complaint, or P1,394.34. Hence, it follows that, exclusive of interest, the
actual amount loaned to the defendant was P16,772.45. Deducting from this P6,265.92, the value of
the sugar delivered to plaintiff, it leaves a balance due and owing of P10,506.53, which, exclusive of
interest, is the amount which the trial court found was due and owing from Jose Rivera to the plaintiff.
As a matter of fact, there is no dispute about the amount. In legal effect, the defendant admits that
amount to be correct, but contends that because the transaction was usurious, it was void and,
therefore, he is released from all liability, and that plaintiff is not entitled to recover anything.

In other words, in legal effect, Jose Rivera admits that he got that amount of money and that he
owes it to the plaintiff, but because the transaction was usurious, that he is released from the debt,
and plaintiff cannot enforce his claim. That position is not tenable. If the defendant had paid the
debt and had complied with his contract, he would then be in a position to recover any usurious
interest which he paid. But, here, the defendant breached the contract and only delivered about
one-third of the amount of sugar which he agreed to deliver, and the court finds as a fact that,
exclusive of interest, there is now due and owing the plaintiff the sum of P10,506.53.

Upon what theory can the defendant breach his own contract and rely upon its enforcement?
Upon what legal principle can he deny liability upon a contract which he repudiated and failed to
perform? How and in what manner has the defendant paid the amount of the original loan, which
he admits having received? Upon what legal or equitable principle can he defeat the payment of
the amount of the original loan for the reason that he failed and neglected to perform his own
contract? By no fiction or rule of law would the fact that the interest was usurious and was never paid
by the defendant operate as a payment or satisfaction of the original loan.
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 In any event, he should pay the plaintiff the amount which he justly owes him. That question was
squarely met and decided in the case of Aguilar vs. Rubiato and Gonzalez Vila (40 Phil., 570), which
upon legal principle was followed in Delgado vs. Alonso Duque Valgona, decided by this court on
March 31, 1923, and reported in the Philippine Reports, vol. 44, page 739, and which was cited and
approved in Go Chioco vs. Martinez, decided by this court on October 17, 1923, p. 256, ante, where
the syllabus says:

2. USURIOUS LOAN; ACTION TO RECOVER PRINCIPAL. - Under Act No. 2655, all usurious loan is void, but
this does not mean that the debtor may keep the principal received by him as loan, thus unjustly
enriching himself to the damage of the creditor, but that the creditor has no right of action for the
recovery of the stipulated interest, although he may sue for the recovery of the principal loaned.

That is this case. Upon that decision the plaintiff is entitled to judgment for the full amount of its claim
against the defendant Jose Rivera.chanroblesvirtualawlibrary chanrobles virtual law library

The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and
against the defendant, Jose Rivera, for the sum of P10,506.53, with interest on P1,500 of that amount
at the rate of 12 per cent per annum from the 28th day of April, 1920, and with interest upon the
balance of that amount from April 19, 1921, the supposed date of the filing of the original complaint,
at the rate of 6 per cent per annum, and with costs in this and the lower court, but without attorney's
fees.

It further appearing that an attachment was issued and levied upon the property of the defendant
to secure plaintiff's claim, it is further ordered that the property so attached be sold to satisfy the
judgment. So ordered.

Johnson, Street, Malcolm, Avanceña, Ostrand and Romualdez, JJ., concur.

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19. Aguilar v Rubiato

FIRST DIVISION

[G.R. No. 14823. December 9, 1919. ]

HILARIA AGUILAR, Plaintiff-Appellant, v. JUAN RUBIATO, Defendant-Appellant, and MANUEL GONZALEZ

VILA, Defendant-Appellee.

Francisco A. Delgado for plaintiff and Appellant.

Abaya & Pamatmat for defendant and Appellant.

No appearance for Appellee.

SYLLABUS

1. CONTRACTS; NULLITY; FRAUD; INADEQUACY OF PRICE. — Where the inadequacy of the price in an
agreement is so great that the mind revolts at it and is such as a reasonable man would neither
directly nor indirectly be likely to consent to, a strong reason exists for annuling a contract.

2. ID.; ID.; ID.; ID. — R, the owner of land valued at P26,000, was induced through the connivance of
two or three other men to sign the second page of a power of attorney in favor of one of them, G,
which purported to authorize G to sell the property with right of repurchase for a sum not to exceed
P1,000. G sold the property to A for P800 under a pacto de retro. R having failed to pay the rent, A
endeavors to obtain possession of the land. Held: That the so-called power of attorney was a sham
document, and that R is only liable for the loan which he received.

3. ID.; USURY; INTEREST. — As interest at the rate of 60 per cent per annum is usurious, and as the loan
thus fails to name a lawful rate of interest, on and after the date when the Usury Law became
effective, a defendant would be liable for the legal rate of interest, which is 6 per cent per annum.

4. ID.; ID.; ID. — Under similar circumstances, a defendant would only be liable for interest at the legal
rate of 6 per cent per annum for a contract made prior to the enactment of a Usury Law. (See art.
1255 of the Civil Code.)

5. PLEADING AND PRACTICE; COMPLAINT; DISCREPANCY BETWEEN DEMAND AND ALLEGATIONS. —

"The demand in the complaint is no part of the statement of the cause of action, and does not give it
character. The facts alleged do this, and the plaintiff is entitled to so much relief as they warrant."
(Sutherland on Code Pleading, Vol. I, sec. 186; Code of Civil Procedure, sec. 126.)

DECISION

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MALCOLM, J. :

As certainly as may be ascertained, the facts of record in this case are believed to be the
following:chanrob1es virtual 1aw library

Juan Rubiato is a resident of the municipality of Nagcarlan, Province of Laguna, of somewhat

ordinary intelligence and astuteness. Early in the year 1915, he was the owner of various parcels of
land having a potential value of approximately P26,000. Rubiato was desirous of obtaining a loan of
not to exceed P1,000. Being in this state of mind, two men, Manuel Gonzalez Vila a procurador
judicial and one Gregorio Azucena, and possibly another, one Marto Encarnacion, came to the
house of Rubiato and there induced him to sign the second page of a power of attorney in favor of
Manuel Gonzalez Vila. This power of attorney, introduced in evidence as Exhibit A, reads as
follows:jgc:chanrobles.com.ph

"To all whom it may concern:jgc:chanrobles.com.ph

"I, Juan Rubiato e Isles, of age, married, a resident of the barrio of Rizal, municipality of Nagcarlan,
Province of Laguna, Philippine Islands, do hereby freely and voluntarily set forth the
following:jgc:chanrobles.com.ph

"First. That I own and possess the full and absolute dominion over eight parcels of land (planted with
about two thousand five hundred coconut trees) situated in the aforesaid barrio, municipality of
Nagcarlan, Province of Laguna, P. I.; that the description and boundaries of same are duly described
in the possessory title (dated the 15th day of January, 1896) (titulo posesorio) issued to me by the
former Spanish sovereignty; that same is inscribed in the register of property of said province under
numbers 141, 144, 146, 148, 150, 152, 154 and 156; that these facts are proven by the certificate,
written on the legal official papers numbered 0.153.826, 0.460.498, 0.455.683 and 0.460.459 and duly
authorized by registrar, Sr. Antonio Roura, . . .

"Second. That being unable, on account of illness, to go in person to Manila, I hereby declare that I
grant to Sr. Manuel Gonzalez Vila, a resident of the municipality of San Pablo, Province of Laguna, P.
I., any power whatever required by law to secure in said city a loan not exceeding one thousand
pesos (P1,000), Philippine currency; that he shall secure same in my name and representation; that
he may secure same either under the rate of interest and conditions considered most convenient
and beneficial for my interests, or under pacto de retro; that furthermore he has ample power to
execute, sign and ratify, as though he were myself, any writing necessary for the mortgage of my
land described in the aforementioned document; and that he holds this special power of attorney
over said lands to the end that same may be used as a guaranty of the loan to be secured.." . .

By reason of the power thus given, Manuel Gonzalez Vila on April 29, 1915, formulated the document
introduced in evidence as Exhibit C, by which the lands of Rubiato were sold to Hilaria Aguilar of
Manila, for the sum of P800, with right of repurchase within one year, Rubiato to remain in possession

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of the land as lessee and to pay P120 every three months as lease rent. Hilaria Aguilar never saw the
lands in question and did not know, until after she had consulted her attorney, exactly what her rights
were. Manuel Gonzalez Vila received from Hilaria Aguilar the P800 mentioned in Exhibit C as the
selling price of the land. Whether this money was then passed on to Juan Rubiato is uncertain,
although it is undeniable that Hilaria Aguilar has never been paid the money she advanced.

The one year mentioned in the pacto de retro having expired without Hilaria Aguilar having received
the principal nor any part of the lease rent, she began action against Juan Rubiato and Manuel
Gonzalez Vila to consolidate the eight parcels of land in her name. After due trial, the trial judge, the
Hon. Manuel Camus, rendered a decision in which he recited the facts somewhat, although not
exactly, as hereinbefore set forth. The court found that the power of attorney only authorized Manuel
Gonzalez Vila to obtain a loan subject to a mortgage, and not to sell the property. The judgment
handed down was to the effect that the plaintiff Hilaria Aguilar recover from the defendant Juan
Rubiato the sum of P800 with interest at the rate of 60 per cent per annum from April 29, 1915 until
May 1, 1916, and with interest at the rate of 12 per cent per annum from May 1, 1916, until the
payment of the principal, with the costs against the defendant. Both parties appealed.

The points raised by the plaintiff-appellant going as they do to the facts and these being as
hereinbefore stated, no lengthy discussion of plaintiff’s five assignments of error need be indulged in.
The issue is not precisely relative to an interpretation of the power of attorney. The court is under no
necessity of seizing on inexact language in order to hold that the document authorized a mortgage
and not a sale. The so-called power of attorney might indeed be construed as authorizing Vila to sell
the property of Rubiato. And it might indeed be construed under a conception similar to that of the
trial court’s as a loan guaranteed by a mortgage. But the controlling fact is, that the power of
attorney was in reality no power of attorney but a sham document.

In addition to the evidence, there is one very cogent reason which impels us to the conclusion that
Rubiato is only responsible to the plaintiff for a loan. It is — that the inadequacy of the price which
Vila obtained for the eight parcels of land belonging to Rubiato is so great that the mind revolts at it.
It is an agreement which a reasonable man would neither directly nor indirectly be likely to enter into
or to consent to. To hold that the power of attorney signed by Rubiato authorized Vila to enter into
the instant contract of sale would be equivalent to holding, if we may be permitted to use the
language of Lord Hardwicke, that "a man in his senses and not under delusion" would dispose of
lands worth P26,000 for P1,000, and would pay interest thereon at the rate of 60 per cent per annum.
(See 6 R. C. L., 679, 841.)

The members of this t after most particular and cautious consideration, having in view all the facts
and all the natural tendencies of mankind, consider that Rubiato is only responsible to the plaintiff for
the loan of P800.

The points advanced by defendant-appellant likewise necessitate only brief consideration. While
entertaining some doubt as to the justice of requiring Rubiato to pay back the amount of P800, we
do not feel authorized in disturbing this finding of the trial court. It may well be that Vila and his
partners, acting as middlemen, fabricated the document which Rubiato signed, secured the money

127
from Hilaria Aguilar, and then pocketed the same. Yet as minor details somewhat corroborative of
the result reached by the trial court, are the undeniable facts that Rubiato admitted his desire to
obtain a loan, that Hilaria Aguilar made such a loan, and that while the testimony of Vila is not overly
truthful, in this one respect we do have his forceful statement that the money was paid over to
Rubiato. That payment of the sum of P800 was not explicitly prayed for in the complaint, does not
deprive the court of power to render judgment for this amount, because it is a rule of good pleading
that "the demand in the complaint is no part of the statement of the cause of action, and does not
give it character. The facts alleged do this, and the plaintiff is entitled to so much relief as they
warrant." (Sutherland on Code Pleading, Vol. I, sec. 186; Code of Civil Procedure, sec. 126.)

The only remaining question which merits resolution, on which the plaintiff and defendants flatly
disagree, relates to the interest which should be allowed. The trial court, it will be remembered,
permitted the plaintiff to recover interest at the rate of 60 per cent per annum from April 29, 1915,
when the pacto de retro was formulated, until May 1, 1916, the date when the Usury Law, Act No.
2655, went into effect, and interest at the rate of 12 per cent per annum after that date. It is, of
course, true, as previously decided by this court in United States v. Constantino Tan Quingco Chua
([1919], 39 Phil., 552), that usury laws, such as that in force in the Philippines, are to be construed
prospectively and not retrospectively. As stated in the decision just cited, "The reason is, that if the
contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation, for this
would be tantamount to the impairment of the obligation of the contract." As we have held that the
defendant is under obligation to the plaintiff for a mere loan, as this loan fails to name a lawful rate of
interest, and as interest at the rate of 60 per cent per annum is unquestionably exorbitant and
usurious under the Usury Law, on and after the date when this law became effective, the defendant
would be liable for the legal rate of interest, which is 6 per cent per annum. We would even go
further and hold that he-would be liable only for such interest prior to the enactment of the Usury
Law. This we can do under the sanction of article 1255 of the Civil Code which condemns
agreements contrary to morals and public policy.

Judgment is affirmed, with the sole modification that the plaintiff shall only recover interest at the rate
of 6 per cent per annum on the sum of P800 from April 29, 1915 until paid, without special finding as
to costs in this instance. So ordered.

Arellano, C.J., Torres, Araullo, Street and Avanceña, JJ., concur.

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20. Go Chioco v Martinez

EN BANC

G.R. Nos. L-19864 and 19685 October 17, 1923

J. J. GO CHIOCO, plaintiff-appellant,
vs.
E. MARTINEZ, ET AL., defendants-appellees,

and

ORTIGA HERMANOS, plaintiffs-appellants,

vs.
J. J. GO CHIOCO, defendant-appellant-appellee.

Gibbs, McDonough and Johnson for Ortiga as appellant.

Araneta and Zaragoza for J. J. Go Chioco as appellant-appellee.
Gibbs and McDonough for Ortiga Hermanos as appellee.
Fisher, DeWitt, Perkins and Kincaid as amici curiae.

VILLAMOR, J.:

It appears from the record that on June 2, 1919, J. J. Go Chioco made a loan of P40,000 to Ortiga
Hermanos, and to that effect a promissory note, Exhibit 2, was executed, wherein Ortiga Hermanos,
Chan Lin Cun, and E. Martinez promised to pay, jointly and severally, said sum within three months
from the above mentioned date. On the same day, Ortiga Hermanos, together with Chan Lin Cun
and E. Martinez, signed another promissory note for the amount of P1,800 payable within three
months from said date, and on the same date Ortiga Hermanos, through their manager, E. Martinez,
delivered to J.J. Go Chioco check, Exhibit 1, drawn against the Bank of the Philippine Islands for the
amount of P1,800, which was cashed by said J. J. Go Chioco.

When the note became due and the makers could not pay it, the same was cancelled and another
note, Exhibit 3, was executed in the sum of P40,000 for the period of three months, which was signed,
as the former, by the defendants, Ortiga Hermanos, Chan Lin Cun, and E. Martinez. On the same
date another note was delivered by the same debtors in favor of J. J. Go Chioco for the sum of
P1,800 as well as a check payable to order, Exhibits 2-B, drawn against the Bank of the Philippine
Islands and signed by Ortiga Hermanos. Said check for the sum of P1,800 was cashed by the plaintiff,
J. J. Go Chioco.

When the second note because due the makers failed to pay it, and, for that reason, the note was
cancelled and Exhibit 4 executed and signed by the same parties. On the same date, that is, on
December 2, 1919, Ortiga Hermanos delivered to J. J. Go Chioco the note, Exhibit 4-A, for the sum of

129
P1,800 as well as the check Exhibit 3-B, drawn against the Bank of the Philippine Islands for the same
amount which was cashed by J. J. Go Chioco.

On March 2, 1920, when the last mentioned note became due, the defendants also failed to pay the
same and for that reason the note was again cancelled and another note executed and signed by
the same parties, making it appear that it should be paid within one month and, for that reason, the
other note, signed by the debtors, was for P600 only, as well as the amount of the check given by
Ortiga Hermanos, on March 1, 1920, drawn against the Philippine National Bank, which was cashed
by J. J. Go Chioco.

On April 2, 1920, the date upon which the last mentioned note should have been paid, the
defendants also failed to satisfy it and for this reason the note was again novated, stipulating that the
period would be for three months. On the same date the three debtors delivered their note, Exhibit 6-
A, for the amount of P1,800.

The debtors also failed to satisfy his debt within the period stipulated and, consequently, the note was
novated and on July the 2d, Exhibit 7 was signed by Ortiga Hermanos, Chan Lin Cun and E. Martinez,
which is another note for a period of three months. On the same date the same parties delivered
another note for the amount of P1,800 to J. J. Go Chioco, payable within three months and on the
following day, July 3, 1920, Ortiga Hermanos delivered to J. J. Go Chioco Exhibit 6-A against the Bank
of the Philippine Islands for the same amount of P1,800.

Again, the note was not paid at maturity and for that reason the same was novated on October 2,
1920, and signed by Ortiga Hermanos, Chan Lin Cun and E. Martinez, and on the same date Ortiga
Hermanos delivered to J. J. Go Chioco another promissory note for P1,800 and a check against the
China Bank Corporation for the same amount. When the last mentioned promissory note became
due and debtors being unable to meet it, a promissory note Exhibit A was again executed ands
signed by Ortiga Hermanos, Chan Lin Cun and E, Martinez in the sum of P40,000, in favor of J. J. Go
Chioco payable within three months from date.

The promissory note, Exhibit A, as inserted in the complaint, is as follows:

By these presents, three months from date we promise to pay to the order of Mr. J. J. Go Chioco the
sum of forty thousand pesos (P40,000), Philippine currency, value received in cash from said Go
Chioco for commercial transactions.

Manila, January 2, 1921.

(Sgd.) "ORTIGA HERMANOS "CHAN LIN CUN "E. MARTINEZ

Due April 2, 1921.

This promissory note was not novated at its maturity as the former ones; but it appears that on April 4,
1921, Ortigas Hermanos paid P5,000 and on May 20, 1921, P20,000, that is, a total sum of P254,000.

130
The refusal of Ortiga Hermanos to pay said promissory note in full gave rise to the complaint of J. J.
Go Chioco, filed on October 4, 1921, asking the court to render judgment against the defendants for
the amount of P15,000 with legal interest and costs.

The defendants E. Martinez and Chan Lin Cun filed a separate answer praying for the dismissal of the
complaint, with costs, the return of the sum of P5,857, which represents the interest paid on said
promissory note of P40,000 at the rate of 18 per cent per annum, and the payment of P1,500 as
attorney's fees.

The defendant Ortiga Hermanos answered the complaint praying that the promissory note for the
amount of P40,000 be declared null and void, for the reason that they had paid a usurious rate of
interest, namely, 18 per cent per annum; that they be absolved from the complaint and that
judgment in their favor be rendered for the amount of P1,500 as attorney's fees, with costs, and that
the plaintiff be ordered to return the sum of P25,000 paid on account of the principal.

Thereafter, the defendant Ortiga Hermanos, on November 9, 1921, filed another and separate
complaint against J. J. Go Chioco praying that a judgment be rendered in their favor for P11, 850
which represents in interest paid at the rate of 18 per cent per annum, plus P1,500 as attorney's fees,
with costs.

By agreement of parties, both cases were heard together, it having been stipulated between them
that the evidence adduced in either case will be considered in the other.

Honorable Judge Carlos Imperial, who heard the case, in a decision dated June 24, 1922, held:

(a) That the interest of 18 per cent per annum stipulated by the contending parties in these two
cases is null and usurious;

(b) That in accordance with the provisions of section 7 of Act No. 2655, the promissory note, Exhibit A,
executed by Ortiga Hermanos, Chan Lin Cun and E. Martinez, in the sum of P40,000 payable within
three months, and on which a usurious rate of interest of 18 per cent per annum had been paid, is
null and void, and that, as a result, the plaintiff J. J. Go Chioco has no right to recover the balance of
said promissory note which amounts to P15,000 from either Ortiga Hermanos or their sureties, Chan Lin
Cun and E. Martinez; and

(c) That J. J. Go Chioco should refund to Ortiga Hermanos, their manager, or their duly authorized
representative, the total amount of P11, 850 which represents the usurious interest collected from
December 2, 1919, to the date of the filing of the complaint, together with legal interest from
November 9, 1921, when Ortiga Hermanos filed their complaint, and said Go Chioco should likewise
pay Ortiga Hermanos, Chan Lin Cun and E. Martinez the sum of P3,000 as attorneys' fees of Messrs. A.
D. Gibbs and Thos D. Aitken, at the rate of P1,500 each, together with costs of both instances.

131
From this decision parties appealed, and the motion for new trial based on the ground that the
decision is contrary to the law and not justified by the evidence having been denied, both parties
brought said case to the Supreme Court by bill of exceptions.

The appellant J. J. Go Chioco assigned as errors of the trial court the following: (1) In finding that he
usurious interest upon the said promissory note of P40,000 has been paid from December 2, 1920, at
the rate of 18 per cent per annum, that is, the amount of P11,850 and in sentencing him to pay
Ortiga Hermanos said sum with legal interest thereon from the filing of the complaint of Ortiga
Hermanos; (2) in sentencing J.J. Go Chioco to pay the sum of P3,000 as attorney's fees of Messr. A.D.
Gibbs and Thos. D. Aitken at P1,500 each; (3) in not sentencing Ortiga Hermanos to pay the amount
of P15,000, with legal interest thereon from the filing of his complaint (Go Chioco's); and (4) in
sentencing J.J. Go Chioco to the payment of costs.

On the other hand, the appellant Ortiga Hermanos, alleges that the trial court committed an error in
overruling their counterclaim for the amount of P25,000 paid on account of the principal of a usurious
promissory note, and in not sentencing J.J. Go Chioco to pay said sum of P25,000.

The facts, as found by the trial court, necessary for a clear understanding of this case, briefly stated,
are as follows: (1) That the plaintiff made a loan to the defendant. Ortiga Hermanos of the sum of
P40,000 and that interest at the rate of 18 per cent per annum has been paid; (2) that the defendant
paid the plaintiff, as interest on said amount, including the payments in April and July, 1921, to wit,
P2,253.50 (P3.50 for stamps), from December 2, 1919, the total sum of P11,850, which, together with
the P1,500 as attorney's fees, constitutes the prayer of the defendants complaint. (3) that the
defendant Ortiga Hermanos paid the plaintiff, on two different occasions on account of said loan of
P40,000, the amount of P25,000 which was set out in his counterclaim; and (4) that according to the
complaint filed by J.J. Go Chioco of the sum of P40,000 loaned there still remains a balance of
P15,000 to be paid.

In view of the facts just stated and from the errors assigned by both parties, the questions to be
decided are: (1) Whether or not the defendant has paid the plaintiff a usurious rate of interest,
namely, 18 per cent annum upon the promissory note for the amount of P40,000; (2) whether or not
the debtor who has paid a usurious rate of interest can recover the amount paid on account of the
principal as well as the usurious interest paid, together with attorney's fees and cost; and (3) whether
or not the usurious creditor has a right to recover his capital loaned to and not paid by the debtor.

I. That J.J. Go Chioco has collected interest at the rate of 18 per cent per annum upon the amount
of P40,000 which he loaned to Ortiga Hermanos, may be inferred from the evidence and was so
found by the trial court.

J.J. Go Chioco himself admits having collected the amount mentioned in the promissory notes and
checks signed by Ortiga Hermanos in the amount of P1,800 each, but alleges that of that amount,
P400 was paid as penalty for failure to pay the promissory notes at their maturity. That is to say, of the
amount of P1,800 which represents the interest at 18 per cent per annum on the capital of P40,000 he
collected 4 per cent as penalty and 14 per cent as interest.

132
The trial court, in analyzing the testimony of the witness J.J. Go Chioco, states:

The explanations given by J.J. Go Chioco of said operations is undoubtedly ingenious, but in the
opinion of this court, is far from being satisfactory and acceptable. There is nothing in the record to
indicate, apart from his own testimony, that the parties have stipulated any penalty for failure to pay
at maturity any of the promissory notes executed, and the fact that all interest was collected by the
creditor in advance and before the promissory notes became due, shows conclusively that no
penalty was agreed upon by the parties. Indeed it would seem that no such penal clause was
necessary, since it was clearly stipulated that the sum loaned would earn a stipulated interest;
furthermore, if such an agreement had existed, there is no reason why same should not have
appeared in writing, either in the promissory note itself or in any other document disclosing such
contractual obligation. What appears clear and can be inferred from all the documentary evidence
adduced and of record is that, J.J. Go Chioco required and collected as interest upon the amount
of P40,000 he had loaned, profits amounting to 18 per cent which is in violation of section 3 of Act No.
2655 of the Philippine Legislature, which enjoins and prohibits any person from charging a rate of
interest in excess of 14 per cent per annum upon any loan not guaranteed in the manner provided
for in section 2 of the said Act.

After examining the evidence before us, we are unable to find anything which will warrant the
reversal or modification of the above conclusion arrived at by the trial court.

From the record it appears that the first promissory note should have become due within three
months, that is, on September 2, 1919. On the same date, June 2, 1919, Ortiga Hermanos signed a
promissory note for P1,800 which should likewise have become due on September 2, 1919, and at the
same time issued a check for the amount of P1,800 which was collected by J.J. go Chioco. This
operation was repeated several times every three months, with the exception of the promissory note
of March 2, 1920, for which a period of one month only was fixed. So it clear that whenever the note
for P40,000 was novated, Ortiga Hermanos signed a promissory note for P1,800, together with the
corresponding check, which was collected by the creditor J.J. Go Chioco. It is therefore evident that
Ortiga Hermanos paid J.J. Go Chioco in advance the interest at 18 per cent per annum upon the
loan of P40,000.

We hold that the contention of J.J. Go Chioco that he has only charged 14 per cent upon the loan
P40,000 as interest and 4 per cent as penalty for failure to pay the notes, is untenable. The checks
issued by Ortiga Hermanos and cashed by J.J. Go Chioco are negotiable instruments and they
represents an unconditional obligation to pay the amount therein stated of P1,800 which, if we take
into consideration the value of the loan, represents the interest at the rate of 18 per cent per annum.

In accordance with section 285 of the Code of Civil Procedure, the agreement to pay interest,
reduced to writing in the promissory notes for P1,800, is considered as containing all those terms
stipulated by the parties, and therefore there can be, between the parties and their representatives
or successors in interest, no evidence of the terms of the agreement other than the contents of the
writing, except in the following cases:

133
(1) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties, is put in issue by the pleadings;

(2) Where the validity of the agreement is the fact in dispute.

As far as the record goes, said promissory notes of P1,800 were not put in issue during the trial nor is
there any discussion as to their validity. Said notes recite a specific obligation and its language is not
subject to ambiguity. J.J. Go Chioco cannot, therefore, change, by his mere testimony, the terms of
said notes in the sense that part of the amount therein stated was collected as penalty.

Moreover, the fact that the interest in question was collected quarterly and in advance, with the
exception of one case wherein the interest was collected for one month, shows, in our opinion, that
the transaction was for the collection of interest, since you cannot charge or collect anything in
advance as penalty for failure to fulfill an obligation which was not yet enforceable.

That the parties to a contract of loan may validly agree upon a penalty in case the obligation is not
fulfilled, beside the interest not prohibited by the Usury Law, is a proposition generally admitted, but in
the case at bar, the alleged penalty, collected in advance before the maturity of the obligation, far
from fulfilling its object to compel the debtor to duly pay his obligation, is scheme to avert his
compliance with the Usury Law.

Supposing that the agreement, if there was any, to pay a penalty in case the promissory note, at its
maturity is not paid, is in substance similar to the agreement to pay attorney's fees, as the attorney for
J.J. Go Chioco alleges, such an agreement is however, subject to the limitation indicated in the case
of Bachrach Garage and Taxicab Company vs. Golingco (39 Phil., 912), quoted by counsel for J.J.
Go Chioco. In that case the court said:

The stipulation that in case of noncompliance the debtor shall pay a fixed amount for the fees of the
attorney who may be employed by the creditor for the purpose of enforcing compliance with the
obligation is not deemed to be an interest within the purview of Act No. 2655, and neither is the
computation fixed by said Act applicable thereto. It is not an indemnity for gain which cannot be
realized, but an amount which the creditor spends and which constitutes a loss really suffered by
reason of the noncompliance with the obligation.

When the amount stipulated for the attorney's fees is so exorbitant that it exceeds that which should
justly be paid for that purpose, the excess shall be considered as indirect or simulated interest,
according to the spirit of the law, and should therefore be subject to the computation. In the case at
bar, the 12 1/2 per cent to which the trial court reduced the 25 per cent stipulated represents, in our
opinion, the amount which the plaintiff was justly obliged to pay for his attorney's fees, and should not
be considered as interest in the computation of the latter.

But, in the case at bar, there is an unsurmountable difficulty which prevents us from considering as
penalty 4 per cent of the total 18 per cent paid by Ortiga Hermanos as interest, and that difficulty lies

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in the lack of evidence upon such alleged agreement as to the penalty. In the case of Bachrach
Garage and Taxicab Company vs. Golingco, supra, it appears from the promissory note itself, signed
by the defendant and his sureties, that in case the services of an attorney will be necessary for the
collection of said note, the defendant promised to pay to the holder of the same 25 per cent of the
principal and interest upon said note as attorney's fees; while in the case at bar there is no such
clause in the promissory note signed by Ortiga Hermanos. In that case, the plaintiff was compelled to
sue in order to collect his note, engaging the services of an attorney; while in the case at bar, the
plaintiff J. J. Go Chioco was compelled only to file a complaint on November, 1921, to recover from
Ortiga Hermanos the sum of P15,000, the balance of the original capital of P40,000, having collected,
as it was already said, interest in advance at the rate of 18 per cent from December 2, 1919, to
November 2, 1921. From the foregoing, we are of the opinion and so hold that Ortiga Hermanos paid
J.J. Go Chioco upon the loan of P40,000, interest at the rate of 18 per cent per annum which is in
violation of section 3 of Act No. 2655, that is, the Usury Law.

With this conclusion at which we arrive, it is evident that Ortiga Hermanos, having paid to J.J. Go
Chioco that amount of P11,850 as usurious interest from December 2, 1919, up to the filing of his
complaint, have, under section 6 of Act No. 2655, the right to recover said sum of P11,850 together
with P1,500 which the trial court granted them as attorney's fees of Mr. A.D. Gibbs and costs.

As to the attorney's fees, counsel for J.J. Go Chioco assigned as error of the trial court in granting
P1,500 to attorney Thos. D. Aitken, who represented the other defendants Chan Lin Cun and E.
Martinez. Counsel alleges that all of the amount representing interest was paid by Ortiga Hermanos,
and the sureties Chan Lin Cun and E. Martinez could not therefore successfully maintain an action to
recover any interest nor attorney's fees. We agree with this contention and it is our opinion that J.J.
Go Chioco is not bound to pay the attorney's fees of the sureties Chan Lin Cun and E. Martinez.
Therefore, the judgment appealed from should be modified in this respect, by deducting P1,500 from
the sum of 3,000 allowed by the trial court.

II and III. The other questions raised in this appeal refer to whether a debtor, who has paid usurious
interest, can recover the amount paid by him on account of the principal and whether the usurious
creditor has right to recover the principal loaned, and not paid by the debtor. The resolution on these
two questions depends upon the interpretation of section 7 of Act No. 2655 which provides:

All conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debt, and all
deposits of goods or other things, whereupon or whereby there shall be reserved, secured, taken, or
received directly or indirectly, a higher rate or greater sum or value for the loan or forbearance of
money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That no
merely clerical error in the computation of interest, made without intent to evade any of the
provisions of this Act, shall render a contract void: And provided further, That nothing herein
contained shall be construed to prevent the purchase by an innocent purchaser of negotiable
mercantile paper, usufurious or otherwise, valuable consideration before maturity, when there has
been no intent on the part of said purchaser to evade the provisions of this act and said purchase
was not a part of the original usurious transaction. In any case, however, the maker of said note shall

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have the right to recover from said original holder the whole interest paid by him thereon and, in
case of litigation, also the costs and such attorney's fees as may be allowed by the court.

As may be seen, notwithstanding the provision as to the nullity of the usurious note, in case the same
is endorsed to an innocent third person, the innocent purchaser is entitled to collect the amount, with
interest, from the maker and the maker is entitled to recover from the original holder thereof only the
interest by him, and, in case of litigation, the costs and attorney's fees as may be allowed by the
court. Therefore, the only effect of the nullity of the note is the recovery of the interest paid by the
debtor, not the value of the note.

If, on account of the nullity of a usurious note, the original holder thereof, or the payee, has no right
to recover any amount upon said note, there is no reason why, in case the same is transferred to a
third person who acquires it in good faith and for a consideration, the payee should be benefited by
the amount collected by him from the transferee as payment of the note endorsed and not repay
the maker the value of the same. Likewise, if by virtue of such a nullity, nothing can be collected by
the holder of the note, there is no reason why the reimbursement of the interest should be limited to
the amount collected during the two years immediately preceding the date on which the action for
the recovery thereof was instituted, and should not include all the interest collected prior to said
period. And it is because the law limits the effect of the nullity to the reimbursement of the interest
paid during the period of two years preceding the filing of the complaint, which provision being of a
penal nature must be strictly construed so that it should not include the reimbursement of the
principal paid and the unpaid principal which is not provided in law.

That the legislator did not have in mind that the usurious creditor should be lose the capital loaned by
him is further made apparent by the provisions of section 8 of Act No. 2655 as amended by Act No.
2992. Said section reads thus:

All loans under which payment is to be made in agricultural products or seed or in any other kind of
commodities shall also be null and void unless they provide that such products or seed or other
commodities shall be appraised at the time when the obligation falls due at the current local market
price: Provided, That unless otherwise stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence of not less than two witnesses, any contract
advancing money to be repaid later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person or corporation having paid otherwise
shall be entitled in case action is brought within two years after such payment or delivery to recover
all the products or seed delivered as interest, or the value thereof, together with the costs and
attorney's fees in such sum as may be allowed by the court. Nothing contained in this section shall be
construed to prevent the lender from taking interest for the money lent. provided such interest be not
in excess of the rates herein fixed.

Under this legal provision, in case of a usurious contract, by virtue of which payments are to be made
on agricultural products, seeds or other fruits, the debtor may recover from the usurious creditor only
what he might deliver as interest, which shows, in our opinion, that what he might have paid as
principal is not recoverable. Now, if it is held that in another kind of a usurious contract, the debtor

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may recover not only the interest paid but also the principal, how can it be explained that by the
mere fact of the debt being payable in fruits, the debtor is not entitled to recover the principal which
he might have paid? The conclusion is inevitable that the nullity of a usurious loan provided in the law
means only that the lender cannot demand payment of the stipulated usurious interest.

Moreover, section 10 of Act No. 2655 as amended by Act No. 2992 provides:

Without prejudice to the proper civil action, violations of this Act shall be subject to criminal
prosecution and the guilty person, upon conviction, be sentenced to a fine of not less than fifty pesos
nor more than two hundred pesos, or to imprisonment for not less than ten days nor more that six
months, or both, in the discretion of the court, and to return the entire sum received as interest from
the party aggrieved, and in case of nonpayment, to suffer subsidiary imprisonment at the rate of one
day for every two pesos: Provided, That in case of corporations, associations, societies or companies
the manager, administrator or gerente or the person who was has charge of the management or
administration of the business shall be criminally responsible for any violation of this Act.

As may be seen, this legal provision requires the restitution only of what might have been received by
the convicted usurer as interest. If the intention of the legislator was to confiscate the principal
loaned, he would not have limited himself to the statement that the interest collected must be
refunded.

In interpreting Act No. 2655, the fact must not be lost sight of that in August, 1911, the Philippine
Commission enacted Act No. 2073, which fixes and defines the legal rate of interest, declares the
effect of usury on contracts, and provides for other purposes in the Moro Province, Mountain
Province, and in the provinces of Agusan and Nueva Vizcaya. Section 3 of this Act provides:

Sec. 3. All bonds, bills, notes, assurances, conveyances, chattel mortgages, and all other contracts
and securities whatsoever, and all deposits of goods, or anything whatever, whereupon or whereby
there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of
any money, goods, or things in action, than is above prescribed, shall be void, except as to bona
fide purchasers of negotiable paper, as hereinafter provided, in good faith, for a valuable
consideration, before maturity: Provided, That no merely clerical error in the computation of interest,
made with no intent to avoid the provisions of this Act, shall render the contract usurious: And
provided further, That the payment of interest in advance for one year at a rate not to exceed
fifteen per centum per annum shall not be construed to constitute usury: And provided further, That
nothing herein shall be construed to prevent the purchase of negotiable mercantile paper, usurious
or otherwise, for a valuable consideration, by an innocent purchaser, free from all equities, at any
price, before the maturity of the same, when there has been no intent to evade the provisions of this
Act, or where said purchaser has not been a part of the original usurious transaction. In any case,
however, where the original holder of a usurious note sells the same to an innocent purchaser, the
maker of said note or his representative shall have the right to recover back from the said original
holder the amount of principal and interest paid by him on said note.

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The phraseology of section 7 of Act No. 2655 is so similar to the language of section 3 of Act No. 2073
that it may well be said that Act No. 2655 was drafted after Act No. 2073 for the whole Philippines,
which Act (No. 2655) fixes the rate of interest on loans, declares the effect of receiving or collecting
usurious interest and provides for other purposes. A comparison of the terms of the laws above
quoted shows only one essential difference, and that is, that while section 3 of the former Act No.
2073 gives the debtor the right to recover not only the usurious interest but also the principal, section
7 of the later Act, that is, Act No. 2655, authorizes the debtor to recover only what he might have
paid. In view of this fact, there is no room for doubt that the Philippines Legislature, in enacting Act
No. 2655, deemed the provision of section 3 of Act No. 2073 to be unjust as to the confiscation of the
principal and so it provided in Act No. 2655 that the debtor may recover only the interest paid,
attorney's fees and costs.

In the case of Delgado vs. Alonso Duque Valgona (44 Phil., 739), decided March 31, 1923, the
decision in the case of Moncrief vs. Palmer (114 Atl., 181; 17 A. L. R. 119, 120), is quoted with approval
wherein it was held that "he who seeks equity must do equity" by repaying the creditor the capital
which he might have received by virtue of the usurious contract. In discussing the law applicable to
the case, the court, among other things, said:

"The provision of the Rhode Island statue with reference to usury are drastic. Chapter 434, Public Laws
1909, amended by chapter 838, Public Laws 1912. The violation of the act is punishable as a
misdemeanor, every contract made in violation of it is void, and the borrower may recover in an
action at law, not only the interest, but any portion of the principal paid by him upon such usurious
contract. The complaint's solicitor has presented to us a very comprehensive and able argument in
support of his contention that equity should recognize the view of public policy emphatically
expressed in the legislative act, and should cancel the usurious and void contract. This argument
would have more persuasive force if the question were a new one. The settled and nearly universal
practice of courts of equity is opposed to the complainant's contention. The statutes of different
states have various provisions directed towards the prevention of the extortion and oppression of
usury. Whatever may be the method adopted by the legislature, however, although the legislative
provision may go to the limit of our statute and declare the contract void and unenforceable,
nevertheless courts of equity, in the absence of statute specifically constraining them to act
differently, have insisted upon the equitable principle that he "who seeks equity must do equity," and
have required the borrower, before he can be given the relief of cancellation of the contract, to
perform the moral obligation resting upon him, and pay or offer to pay the principal of the loan with
legal interest."

Commenting upon the former decision rendered in the case of Delgado vs. Alonso Duque Valgona,
supra, Mr. Justice Street who wrote the opinion of the court said:

The doctrine of that case we consider applicable here; and without expressing any opinion upon the
broader question whether capital lent upon a usurious contract can be recovered in an aggressive
action by the creditor, we are content to hold that when the debtor in a usurious contract see fit, or
finds it necessary to apply to the court for equitable relief, he will, as a condition to the granting of
such relief, be required to restore what he received from the other party. In the present case both

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parties are before the court in the attitude of suppliants, each asking for relief from the contract in
question; and in order to avoid the possibility of further litigation, as well as to secure complete
justice, an order will be entered requiring the plaintiff, as a condition of the satisfaction of the
judgment in his favor, to reconvey to the defendant the same twelve parcels acquired by the
plaintiff from the defendant.

The essential facts in that case are: On the first of February, 1918, Alonso Duque Valgona, the
defendant, sold certain lands to Luciano Delgado, the plaintiff, and to secure the payment of the
purchase price, Delgado executed, at the same time, a deed of mortgage in favor of the defendant
on the same lands and also on two other large parcels, of which the plaintiff was already the owner,
situated in the municipality of Tinambac, Province of Camarines Sur. The conditions of this mortgage,
so far as essentially pertaining to this case, are contained in clauses A to E, inclusive, of paragraph 2,
and which in substance are as follows: (a) The mortgagor (Delgado) promised to pay to the
mortgagee (Alonso Duque Valgona) the sum of P15,000 in one installment; (b) to secure the
payment of this amount the debtor executed a mortgage in favor of the creditor of fourteen parcels
of land described in paragraph one of said deed; (c) as long as the debt subsists, the debtor binds
himself to pay interest in the sum of P2,250 in two semi-annual installments of P1,175 each, which, as
may be observed, exceeds the other amount by P100; (d) the creditor gives the debtor the period of
twelve years from the date of the deed within which to pay the P5,000 above mentioned. Lastly, in
clause E, it is stipulated that if the debtor fails to pay within the twelve years, the creditor may, at the
expiration of this period, take possession of the lands mortgaged.

The mortgage in question having been held usurious, because it was found that the stipulated
interest exceeded 15 per cent per annum, the court rendered judgment in favor of the plaintiff, the
mortgagor, for the recovery of the usurious interest paid by him, that is, P2,625, with interest thereon,
plus P1,000 attorney's fees; and reversed the judgment appealed from in so far as the defendant was
adjudged entitled to recover the sum of P15,000, which was the amount of the mortgage deed, and
ordered the plaintiff, the usurious debtor, to return to the defendant creditor the twelve parcels of
land which were the subject matter of the sale, the price of which was secured by the mortgage,
thus the result being that if the creditor did not succeed in recovering the P15,000 which he had paid
to the debtor in lieu thereof he recovered the twelve parcels of land which were the consideration of
the mortgage.

In the case before us, we have J. J. Go Chioco claiming from Ortiga Hermanos the payment of
P15,000, the unpaid balance of the capital, loaned and Ortiga Hermanos in turn demanding from J.
J. Go Chioco the repayment of the usurious interest paid by him, plus attorney's fees and costs,
besides the P25,000 paid on account of the loan of P40,000.

In view of the fact that we are called upon to pass upon the claim of the creditor J. J. Go Chioco,
we are now compelled to render our opinion on the question whether or not a creditor has direct
action against the debtor for the recovery of the capital loaned upon a stipulation of usurious
interest. As is well known, usury is an act prohibited by law and to determine the rights and action of
the parties in interest, it is necessary to take into account the legal provisions applicable in each
jurisdiction.

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And, if we return our attention on the Acts above cited, Nos. 2073 and 2655, it will be seen that
section 6 of the former Act provides:

Whenever its satisfactorily appears to a court that any bond, bill, note, assurance, pledge,
conveyance, contract, security, or evidence of debt has been taken or received in violation of the
provisions of this Act, the court shall declare the same to be void, and enjoin any proceeding
thereon, and shall order the same to be cancelled any given up.

This provision shows that under the law, it was expressly prohibited to maintain any action on usurious
contracts. Then there is no doubt that the creditor cannot institute any action for the recovery of the
capital or part of the capital loaned. Undoubtedly, the legislator, in enacting Act No. 2073, deemed
it reasonable that the creditor should lose the capital, because, aside from the fact that in that Act
no penalty was provided for against usury other than the loss of all the interest paid by the debtor in
case the usurious instrument was negotiated (section 3), and of the interest paid in the two years
preceding the filing of the complaint in all other cases (section 2); in said Act only one rate of interest
quite liberal was fixed; namely, 15 per cent per annum according to section 1 and building and loan
associations as well as pawn shops were exempted from every limitation according to section 7.

But the Act now in force, No. 2655, as amended by Act No. 2992, contains no such prohibitive
provisions as that of the former Act No. 2073 and the silence of Act No. 2655 in this respect, in contra-
distinction with the express prohibition of Act No. 2073, shows that said prohibition was intentionally
omitted from the law now in force, and that the Legislature, in omitting such rule from the new law
did, not intend to bar the creditor from coming into court for the recovery of his capital. And the
reason for such an omission is clear if it is taken into account that Act No. 2655 made the situation of
the creditor quiet difficult in these respects: (a) No creditor is exempt from the law (section 2); (b) the
maximum rates were fixed, which were to be applicable to building and loan associations and pawn
shops (section 4); (c) the general rate of interest was reduced to 12 per cent on loans with securities
of real properties and 14 per cent if there are no such securities (sections 2 and 3); (d) in case of
litigation, the judge shall sentence the creditor to pay attorney's fees to the debtor (sections 6 and 8);
(e) usury was made a crime and is punishable by a fine equal to the interest stipulated, or subsidiary
imprisonment in case of insolvency (section 10). We believe that these new penalties and restrictions
were inserted by the Legislature in lieu of the loss of the capital provided by Act No. 2073.

And the foregoing conclusion is fully sustained not only by the history of the Usury Law, but also by the
preamble of the law itself. By the history, because the bill of the Commission No. 217 prepared by
Commissioner Martin in 1914 in its section 1 contained a provision to the effect that "any contract
which directly or indirectly provides for the payment of any interest in excess of 12 per cent per
annum shall be null and void not only as to the interest but as to the principal invested," which
provision was eliminated from the Usury Law as it was finally passed by the Legislature. By the
preamble, because speaking of the necessity of the intervention of the prosecuting attorney in
actions resulting from the violation of the Usury Law, as well as the penal sanction, said preamble
gives the following reasoning: "We believe it to be a sound proposition that the fiscal should intervene
in the actions arising from the violation of the proposed provisions set out in the original bill, because,

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among other reasons, poor persons unable to employ an attorney will be represented and thus the
law would not be a dead letter. But without the penal clause, it seems that such intervention is not
proper. But, why not insert such clause? We would not be the first and only nation which would do
such a thing. We are of the opinion that a fine equivalent to four times the amount in excess of the
interest charged or subsidiary imprisonment in case of insolvency, would be sufficient and better than
the forfeiture of the principal." Therefore, there can be no room for doubt that it was not the intention
of the Philippine Legislature to forfeit the principal in condemning usury by means of a law.

Page on Contracts, vol. 1, pages 757 et seq., in dealing with the effect of usurious executory
contracts, says:

A contract usurious in its nature will not be enforced by the courts. Whether such contract is illegal or
merely void is a difficult question to answer, as the exact effect of such contract depends on the
wording and construction of the statute by which such excessive rate of interest is forbidden. Such
statutes in terms, varying in different jurisdictions, provide with considerable exactness the effect of
such transactions; and the courts rarely feel authorized to apply thereto the common law principles
of illegal or void contracts, in addition to the express requirements of the statute. This rests upon the
familiar principal that were a statute creates a new right or offense and provides a specific remedy
or punishment, that remedy alone can apply. In some jurisdictions, apart from the question of the
right to recover the principal, which is hereafter discussed, it is held that the other provisions of an
inseverable usurious contract, such as a valid provision for attorney's fees, are themselves
enforceable if no other objection than that of usury exists thereto. Where this view obtains such
contracts are not illegal. Further, in some jurisdictions, collateral securities are enforced up to the
amount lawfully due. Where this view obtain such contracts cannot be classed as illegal, in the sense
in which the term is used at common law. Under usury statutes the principal loaned may be
recovered. The effect of the usury statutes is for the most part confined to the interest paid or agreed
to be paid. Under many statutes an agreement for usury causes a forfeiture of the entire interest,
leaving only the principal to be recovered.

Discussing, in another passage, the discharge of collateral securities, the same author adds:

. . . The provisions of certain statutes, however, make securities in contracts given on a usurious
consideration absolutely void, and require their cancellation without conditions. Under such statutes
an offer to repay the amount borrowed is not necessary in order to enable the debtor to have such
contracts or conveyances cancelled. In a suit by the debtor for cancellation, he may have the
amount paid in by him as usurious interest applied in payment of the principal, even if he could not
maintain a separate action in equity to recover it. If the creditor is seeking to enforce a usurious
contract, equity may in a proper case restrain him from enforcing it, without requiring the previous
payment of the amount due. Thus in an action by the creditor to enforce the usurious contract, the
debtor may interpose usury as a defense without paying or tendering the amount of the debt. If the
statute prevents recovery of interest on a usurious contract, the creditor can recover only the
amount actually loaned by him. (Carpenter vs. Lewis, 60 S.C., 23; 38 S. E., 244.)

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When the law provides that the penalty for usury is the confiscation of all the interest was stipulated,
the lender may, in an action based upon the contract, recover the amount actually lent or paid
without interest. (39 Cyc., 1007.)

In support of this proposition, the following doctrines are cited:

If the rate of interest, stipulated in writing, was higher than ten per cent, only the principal could be
recovered." (Alston vs. Brashears, 4 Ark., 422.)

Where it appears from the decree itself that a portion of the amount reported to be due by the
master is "tainted with usury," the same being admitted by complainants, it was error to allow any
sum whatever for interest, Chapter 4022 laws at Florida acts of 1891, providing that "only the actual
principal sum of such usurious contracts can be enforced either at law or in equity." (Lyle and Lyle vs.
Winn and Winn, 45 Fla., 419.)

Under the statue providing that in case of usury the defendant shall be entitled to costs, the plaintiff,
upon being allowed recovery for principal, less penalties, is not entitled to attorney's fee or costs.
(Libert vs. Unfried, 47 Wash. [Rem.], 186.)

By the laws of Mississippi (Stat. 25 June, 1822), where an usurious rate of interest has been stipulated,
the lender can recover only the principal. (Coxe vs. Rowley, 12 Robinson's Rep., 237.)

Under the Usury Act of 18754, the penalty for taking more than legal interest was a forfeiture of the
interest and the excess of interest. If it had already been paid it could be recovered by suit, or by
way of set-off against a suit for the principal, within the time allowed by that act, but in either event
— whether payment had been made or not — only interest (both legal and usurious) was forfeited,
and the lender had a right to recover the principal actually loaned. (Lanier vs. Cox, 65 Ga., 265.)

We believe that the doctrines laid down in the cases above cited are applicable in this jurisdiction as,
in fact, the Usury Law provides for the loss in favor of the debtor of the stipulated usurious interest
which might have been paid during the two years preceding the claim of the debtor.

But counsel for Ortiga Hermanos argues in support of his contention that they are entitled to recover
the P25,000 paid on account of the principal, that the consideration of the note is the payment of
interest at 18 per cent, and the contract being void on account of the illegality of the consideration,
application should be made in this case of articles 1305 and 1306 of the Civil Code.

The contention of counsel for Ortiga Hermanos in this respect is untenable. "Every statute is
understood to contain, by implication, if not by its express terms, all such provisions as may be
necessary to effectuate its object and purpose, or to make effective the rights, powers, privileges, or
jurisdiction which it grants, and also all such collateral and subsidiary consequences as may be fairly
and logically from its terms." (Black on Interpretation of Laws, page 62.) In our opinion, the Usury Act,
No. 2655, as amended by Act No. 2992, contains all that is necessary for the application of its
provisions. Section 1 of the Act fixes the interest of loans in default of agreement between the parties;

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sections 2, 3, and 4 fix the interest on certain loans and prohibit the collection of interest in excess of
the limitation fixed; section 5 regulates the collection of interest upon interest; sections 6, 7 and 8
determine the effects of the collection of a usurious interest and of loans wherein said interest was
stipulated or paid; section 9 requires the making of an oath in answers to a complaint for the
recovery of usurious interest; section 10 contains the repealing clause and section 12 fixes the date
on which the Act was to take effect. The law, in declaring usurious loans to be void, determines its
effects and makes them to consist in the reimbursement of the interest paid during the two years
preceding the making of the claim, the payment of attorney's fees and provides further for the
institution of criminal action for the imposition of the penalty fixed by the law. And with regards to the
capital lent, we have said in another part of this decision that the law did not intend to close the
courts to the creditor for relief in the recovery of his principal. In view thereof, we are of the opinion
and so hold, that articles 1305 and 1306 of the Civil Code are not applicable to the case at bar.

Furthermore, "it has been said that the law of usury is penal in its nature and therefore should be
strictly construed. Thus, while courts, under a statute, avoiding the entire contract for usury, will
uphold the defense according to the letter of the statute, they will grant affirmative relief, not
expressly given by such statute, only on payment of the money actually loaned and legal interest.
And this is because, while it is the duty of courts to give effect to the letter of statute against
oppression of the borrower, they will not extend the letter of the statute to relief oppresive of the
lender." (R. C. L. vol. 27, page 207.) And in fact to uphold the contention of Ortiga Hermanos would
be to permit a debtor to enrich himself with the money lent, to the prejudice of the creditor; it would
be to extend the effects of usurious loans to other matters not mentioned in the Law; it would be
increase the restrictions provided by the Legislature which is beyond the jurisdiction of the courts.

Having thus resolved the question which we have considered in this appeal, the errors assigned by
both appellants are consequently disposed of.

Therefore, the judgment appealed from is affirmed in so far as J. J. Go Chioco is sentenced to return
to Ortiga Hermanos the usurious interest paid during the two years preceding the claim; namely,
P11,850, the legal interest thereon, from November 9, 1921, the date of the filing of the complaint,
plus P1,500 as attorney's fees and the costs. And the same is reversed in so far as the defendants
Ortiga Hermanos and their sureties, Chan Lin Cu and E. Martinez are absolved from the payment of
the balance of the capital lent, which is P15,000, and in so far as J. J. Go Chioco is sentenced to pay
P1,500 as fees of the attorney for the defendant's sureties. And it is adjudged that Ortiga Hermanos
and their sureties should pay jointly to J. J. Go Chioco the sum of P15,000, the unpaid balance of the
capital lent, with legal interest thereon from October 4, 1921, when the complaint was filed. (Aguilar
vs. Rubiato and Gonzales Villa, 40 Phil., 570.) 1awph!l.net

Without special pronouncement as to the costs in this instance. So ordered.

Araullo, C.J., Avanceña, Johns and Romualdez, JJ., concur.

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21. Government of the Philippines Islands vSchenkel and Gonzales

EN BANC

G.R. No. L-41715 August 7, 1935

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
MARIANO CONDE, defendant-appellant.

Isabel Artacho-Ocampo for appellant.

Office of the Solicitor-General Hilado for appellee.

IMPERIAL, J.:

The Government of the Philippine Islands brought this action to recover from the defendant the
amount of a promissory note executed by him, together with the stipulated interest, and to foreclose
the mortgage constituted by said defendant on a real property to secure the obligation contracted
by him.

The defendant appealed from the judgment ordering him to pay to the plaintiff the sum of
P10,678.75 with interest thereon at eight per cent (8%) per annum, computed semi-annually, with
costs. It was provided in the same judgment that the defendant should make payment or deposit it
with the clerk of court within three (3) months and, in case of failure to do so, the mortgaged
property should be sold and the proceeds thereof applied to satisfy the judgment. The present
appeal was taken by the defendant to modify the judgment in so far as it orders him to pay
compound interest.

There is no question as to the existence of the debt and the defendant's default. the promissory note
incorporated with the mortgage deed which was duly registered in the registry of deeds, contains a
stipulation to the effect that the defendant would pay interest at the rate of eight percent (8%) per
annum, payable semi-annually, on the capital of P8,300 and on any other amount due and unpaid.
Pursuant to this stipulation, the plaintiff liquidated the defendant's account and charged him the
interest accrued semi-annually plus the interest on the interest so liquidated and the unpaid capital,
resulting in the amount stated in the judgment.

The defendant contends that to collect the interest accrued semi-annually plus the interest on said
interest at eight per cent (8%) per annum violates the Usury Law because the rate of interest so
charged would exceed twelve per cent (12%) per annum. This contention lacks merit because it is
well settled in this jurisdiction that when there is an express agreement to charge interest on interest,
such fact should not be taken into consideration in determining whether or not the stipulated interest
exceeds the limit prescribed by the Usury Law. (Government of the Philippine Islands vs. Schenkel and
Gonzales, 43 Phil., 616; Villaruel vs. Alvayda and Vicencio, 46 Phil., 277; Valdezco vs. Francisco, 52
Phil., 350.)

144
In the last case above cited, this court, passing upon the same question then raised, stated as
follows:

Defendant also contends in this instance that the transaction between her and plaintiff is usurious,
because interest was charged on interest due, so that if the former is added to the stipulated interest,
the sum would exceed the rate fixed by law. It is sufficient to state on this point that such interest
upon interest was collected on March 20, 1924, and defendant claims it only in her answer to this
case filed February 12, 1927. The law fixes the period of two years within which to claim the usurious
interest, and this period has already elapsed (Arevalo vs. Dimayuga, 49 Phil., 894). Furthermore, this
court has already held (Government of the Philippine Islands vs. Schenkel and Gonzales, 43 Phil., 616;
Villaruel vs. Alvayda and Vicencio 46 Phil., 277), that interest charged upon the stipulated interest, if
agreed upon, should not counted in determining whether the interest exceeds the legal rate or
not.1avvphil.ñet

The stipulation in question is contrary to no law, morals nor public order, and is perfectly valid and
binding (article 1255, Civil Code). And the obligations arising therefrom to perform them in
accordance with their stipulation (article 1091, Civil Code).

Finding no merit in any of the three assignments of error relied upon by the defendant, and the
appealed judgment being in accordance with law, it is affirmed in all its parts, with the costs of this
instance to the appellant. So ordered.

Malcolm, Villa-Real, Butte, and Goddard, JJ., concur.

22. Villaruel v Aluayda (error 404)

145
23. Cu Unjieng v mabalacat Sugar

SECOND DIVISION

[G.R. No. 45351. June 29, 1940.]

CU UNJIENG E HIJOS, Plaintiff-Appellee, v. THE MABALACAT SUGAR CO., ET AL., Defendants. THE
MABALACAT SUGAR CO., Appellant.

Isidro Vamenta for Appellant.

Duran & Lim and Pablo L. Meer for Appellee.

SYLLABUS

1. JUDGMENTS CONDITIONED UPON A CONTINGENCY; NULLITY. — The order of November 13, 1935,
was conditioned upon a contingency, namely, the outcome of the Berkenkotter case that was then
pending appeal in this court. It did not dispose definitely of the issue as to who should be awarded
the amount of P36,793 99 — whether the plaintiff-appellee or the defendant-appellant. The order
provided that the sum should be awarded to the appellee if Berkenkotter should win the case, or to
the appellant should Berkenkotter lose the case in this court. And this is not a final disposition of the
case. We have once held that orders or judgments of this kind, subject to the performance of a
condition precedent, are not final until the condition is performed. (Jaucian v. Querol, 38 Phil., 707,
715.) Before the condition is performed or the contingency has happened, the judgment is not
effective and is not capable of execution. In truth, such judgment contains no disposition at all and is
a mere anticipated statement of what the court shall do in the future when a particular event should
happen. For this reason, as a general rule, judgments of such kind, conditioned upon a contingency,
are held to be null and void. (33 C. J., 1196.) "A judgment must be definitive. By this is meant that the
decision itself must purport to decide finally the rights of the parties upon the issue submitted, by
specifically denying or granting the remedy sought by the action." (3 C. J., 1102). And when a
definitive judgment cannot thus be rendered because it depends upon a contingency, the proper
procedure is to render no judgment at all and defer the same until the contingency has passed.

2. INTERLOCUTORY OR PROVISIONAL ORDERS; VACATION OR ABANDONMENT. — It is a well-settled

rule that interlocutory or provisional orders are subject to vacation or amendment at any time before
final judgment is rendered or has become executory.

DECISION

MORAN, J.:

146
Judgment for the plaintiff, Cu Unjieng e Hijos, was rendered in a foreclosure suit instituted against the
defendant, the Mabalacat Sugar Company. A writ of execution was later issued and the mortgaged
property, consisting of a sugar central, ordered sold at public auction. At the sale, one B. H.
Berkenkotter, filed a third-party claim over certain machineries of the central, but a bond having
been filed by the plaintiff, the sheriff proceeded with the public auction, at which said plaintiff was
the highest bidder for P177,000. The sale was confirmed by the trial court, and, upon appeal to this
court, the order of confirmation was affirmed. On motion, the receiver in possession of the property
sold was caused to deliver the same to the plaintiff, and at that time the judgment debt, together
with interests thereon, amounted to P226,036.80.

In the meantime, Berkenkotter instituted a separate proceedings against plaintiff Cu Unjieng e Hijos
for the vindication of his claim over the machineries which constituted the subject matter of his third-
party claim. From an adverse decision of the trial court, he appealed to this Court. While
Berkenkotter’s appeal was pending, the Mabalacat Sugar Company presented, on October 11,1934,
a petition in the trial court, praying that it be declared entitled to the proceeds of the central during
the period of its receivership, aggregating P36,793.99. In this connection, it should be remembered
that the judgment debt at the time the property sold was delivered to the plaintiff, amounted to
P226,036.80, and that the mortgaged property was sold to the plaintiff for P177,000, leaving thus a
balance of P49,036.80. But the defendant contended that the sum of P177,000 offered by the plaintiff
at the auction sale was so offered for the mortgaged property with the exclusion of the machineries,
valued at P50,000, which were the subject matter of Berkenkotter’s third-party claim, and that should
Berkenkotter lose his appeal in this Court and the machineries thus claimed by him be declared
included in the property sold at public auction, plaintiff should be charged not only with the amount
of P177,000 but also with the sum of P50,000, or a total of P227,000 which covered the entire amount
of the judgment debt. Plaintiff opposed defendant’s claim, contending that the sum of P177,000 he
offered at the public auction was for the whole property mortgaged including the machineries
claimed by Berkenkotter, and that, therefore, he was entitled to a deficiency judgment to which the
net proceeds of the central during the period of its receivership should be applied. After due hearing,
the trial court issued its order of November 13, 1935, the pertinent portion of which is as
follows:chanrob1es virtual 1aw library

A quien debe adjudicarse dicho saldo? La parte demandante lo reclama en virtud de su derecho a
un deficiency judgment, y la parte demandada porque, segun ella, todo el credito de la
demandante ha sido pagada con la central, incluyendo su maquinaria y demas mejoras.

x x x

"Segun esto, dicho saldo de P36,733.99 . . . debe corresponder a la demandada si los demandantes
han ganado el litigio en Manila sobre ciertas partes de la maquinaria avaluadas en P50,000, porque,
entonces, habran cobrado todo su credito. De este efecto, cualquiera de ellas presentara una
copia certificada de la decision en dicho asunto."cralaw virtua1aw library

147
From this order, plaintiff announced its intention to appeal, but before perfecting his bill of
exceptions, he filed in the same court a petition, which was later amended, for a deficiency
judgment. Defendant opposed the petition, claiming that the question raised therein had already
been adjudged in the court’s order of November 13, 1935, above quoted. Later, the defendant, in
compliance with one of the directions contained in said order, presented an urgent motion, praying
that it be permitted to file a certified copy of the decision of the Supreme Court in the Berkenkotter’s
case. The trial court acceded to this motion, and on March 28, 1936, received the certified copy as
evidence. According to the decision thus presented in evidence, Berkenkotter lost his appeal in this
court. On May 29, 1936, the trial court overruled defendant’s opposition to plaintiff’s petition for a
deficiency judgment and adjudged said plaintiff entitled thereto, ordering, at the same time, that
the sum of P36,793.99 representing the net proceeds of the receivership and which has already been
turned over to the plaintiff, be applied to the judgment debt, and rendering a deficiency judgment
in the amount of P36,737.99, which was the last balance unpaid. This order is the subject of the
present appeal.

There are, therefore, two orders involved in this appeal, the first dated November 13, 1935, and the
second, May 29, 1936. Defendant-appellant contends that the second order is null and void, for it
has been rendered without jurisdiction, and that, even if it were valid, the same is erroneous. As to
the nullity of the second order, which was in effect a reversal of the first order, defendant’s
contention is predicated on the theory that the lower court has lost all jurisdiction to amend or
reverse the first order which had already become final and executory before the second order was
issued.

The order of November 13, 1935, was conditioned upon a contingency, namely, the outcome of the
Berkenkotter case that was then pending appeal in this Court. It did not dispose definitely of the issue
as to who should be awarded the amount of P36,793.99 — whether the plaintiff- appellee or the
defendant-appellant. The order provided that the sum should be awarded to the appellee if
Berkenkotter should win the case, or to the appellant should Berkenkotter lose the case in this Court.
And this is not a final disposition of the case. We have once held that orders or judgments of this kind,
subject to the performance of a condition precedent, are not final until the condition is performed.
(Jaucian v. Querol, 38 Phil., 707, 715.) Before the condition is performed or the contingency has
happened, the judgment is not effective and is not capable of execution. In truth, such judgment
contains no disposition at all and is a mere anticipated statement of what the court shall do in the
future when a particular event should happen. For this reason, as a general rule, judgments of such
kind, conditioned upon a contingency, are held to be null and void. (33 C. J., 1196.) "A judgment
must be definitive. By this is meant that the decision it- self must purport to decide finally the rights of
the parties upon the issue submitted, by specifically denying or granting the remedy sought by the
action." (33 C. J., 1102.) And when a definitive judgment cannot thus be rendered because it
depends upon a contingency, the proper procedure is to render no judgment at all and defer the
same until the contingency has passed.

The order of November 13, 1935, expressly directed the parties or any of them to introduce in court a
certified copy of the judgment which the Supreme Court shall render in the Berkenkotter case. This
requirement was proper, for only after such decision is rendered and a certified copy thereof

148
presented to the trial court could a final order be issued reciting how the contingency has happened
and setting definitely the rights of the parties in accordance therewith. But the certified copy was
presented in court on March 28, 1936, and no final order has as yet been issued thereon. There was,
therefore, nothing which could legally bar the issuance of the second order of May 29, 1936. It is a
well-settled rule that interlocutory or provisional orders are subject to vacation or amendment at any
time before final judgment is rendered or has become executory. We conclude that the second
order is valid.

As to whether or not in the execution made of the sugar central to the plaintiff-appellee, the
machineries claimed by Berkenkotter were included, we find in the record no sufficient ground to
disturb the conclusions of the lower court.

Order is affirmed, with costs against Appellant.

Diaz, Laurel, and Concepcion, JJ., concur.

AVANCEÑA, C.J. :chanrob1es virtual 1aw library

I concur in the result.

IMPERIAL, J.:

149