I. LOAN (General Provisions, Articles 1933-1934) 1922.
1922. One of the conditions of that contract of purchase was that on failure of the purchaser
• Tolentino v. Gonzales Sy Chiam, G.R. No. 26085, August 12, 1927 - EV
G.R. No. 26085             August 12, 1927
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,  vs. BENITO GONZALEZ
SY CHIAM, defendants-appellee.
Summary:
Appellants Tolentino and Manio purchased from Luzon Rice Mills Inc. a parcel of land with camarin
located in Tarlac for the price of P25,000, promising to pay therefor in three installments (1st
installment: P2,0000- due on or before the May 2; 2nd installment: P8,000-due on or before May 31,
1921; 3rd installment: P15,000 at 12 % interest- due on or about November 30, 1922.). One of the
conditions of that contract of purchase was that on failure of the purchaser (Tolentino and Manio) 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 1st and 2nd installments were paid accordingly.  recovering the property, together with damages for non compliance with the condition of the
Before the due date of the third installment ( or On the November 7, 1922) the representative of the
vendor of the property wrote a letter to Potenciana Manio, notifying the latter that if the balance of said
indebtedness was not paid on the agreed date, 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. 
Upon receiving the letter, the purchasers, Appellants Tolentino and Manio, 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 of their indebtedness on the purchase price of the property involved. Finally an application
was made to the defendant (Benito Gonzales Sy Cham) 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 the sum of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto
de retro of said property.
ISSUE: WON the contract is that of a mortgage?—NO (sale with pacto de retro)
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.
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.
In this case, 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."
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,
(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.
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
contract of purchase. The pertinent parts of said letter read as follows:
 
GOODLE TRANSLATE: Please note that if this account is not settled on the 30th of the current, we
will proceed judicially against you to claim the return of the dressing room and the damages and
losses caused to the company for its breach of the contract.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
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 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:
(GOOGLE TRANSLATE)
Know all hereby:
That we, the spouses Severino Tolentino and Potential Manio, both adults, residents in the
Municipality of Calumpit, Province of Bulacan, owners and passers-by in this City of Manila, on the
one hand, and on the other, Benito Gonzalez Sy Chiam, major old, married to Maria Santiago,
merchant and neighbors of this City of Manila.
 
WE MANIFEST AND WE DO:
First. That we, Severino Tolentino and Potential Manio, for and in consideration of the amount
of seventeen thousand five hundred pesos (P17,500) Philippine currency, which in this act
have received to our satisfaction of Don Benito Gonzalez Sy Chiam, we assign, sell and sell
We transfer in favor of said Don Benito Gonzalez Sy Chiam, his heirs and successors, a farm
that, according to the Certificate of Transfer of Title No. 40 issued by the Registrar of Titles of
the Province of Tarlac in favor of "Luzon Rice Mills Company Limited "that when incorporated
it is called Donomino and is called" Luzon Rice Mills Inc., "and that this corporation has
transferred us in absolute sale, it is described as follows:
 
A land (lot No. 1) with the existing improvements in it, located in the Municipality of Tarlac. Linda by
the O. and N. owned by Manuel Urquico; by E. owned by the Manila Railroad Co .; and by the S. with
a path. Starting from a point marked 1 in the plane, whose point is at N. 41 gds. 17 'E.859.42 m. from
the location marker No. 2 of the Land Office in Tarlac; and from said point 1 N. 81 gds. 31 'O., 77 m.
to point 2; from this point N. 4 gds. 22 'E .; 54.70 m. to point 3; from this point S. 86 gds. 17 'E .; 69.25
m. to point 4; from this point S. 2 gds. 42 'E., 61.48 m. the starting point; measuring a surface
extension of four thousand two hundred ten and six square meters (4,216) or so. All the named points
are marked on the plane and on the ground, points 1 and 2 are determined by PLS markers of 20 x
20 x 70 centimeters and points 3 and 4 by PLSBL cairns: the orientation followed is true, the magnetic
declination being 0 gds. 45 'E. and the measurement date, February 1, 1913.
 
Second. That it is a condition of this sale that if within the term of five (5) years counted from
December 1, 1922, we return to the said Don Benito Gonzalez Sy Chiam the said price of
seventeen thousand five hundred pesos (P17, 500) Mr. Benito Gonzalez and Chiam are obliged
to re-sell us the property described above; but if this period of five years elapses without
exercising the right of withdrawal that we have reserved, then this absolute and irrevocable
sale will remain.
 
Third. That during the expressed term of the withdrawal we will have the lease described above,
subject to the following conditions:
(a) The rent that we are obliged to pay for overdue monthly payments to Don Benito Gonzalez Sy
Chiam and at his address, was three hundred seventy-five pesos (P375) Filipino currency, each
month.
(b) The leasehold of the leased property shall be borne by said Don Benito Gonzalez Sy Chiam, as
well as the fire insurance premium, if he agrees to the aforementioned Mr. Benito Gonzalez Sy Chiam
to insure said estate.
(c) The non-payment of the rent stipulated here for two consecutive months will result in the
termination of this lease and the loss of the right of withdrawal we have reserved, as if the term for it
had naturally expired, being able by virtue of said Mr. Gonzalez Sy Chiam take possession of the
farm and evict it.
 
Room(Fourth???). That I, Benito Gonzalez Sy Chiam, in turn grant that I accept this deed in the
precise terms in which the spouses Severino Tolentino and Potential Manio leave it granted.
In testimony of all of which, we signed the present of our hand in Manila, in quadruplicate in Manila,
today to November 28, 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
ISSUE: WON the contract in question is that of a mortgage?—NO (sale with pacto de retro)
HELD: The contract was a sale with pacto de retro
RATIO:
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:
(GOOGLE TRANSLATE)
Second. That it is a condition of this sale that if within five (5) years from December 1, 1922, we return
to the said Don Benito Gonzales Sy Chiam the said price of seventeen thousand five hundred pesos
(P17, 500) Mr. Benito Gonzales Sy Chiam is obliged to backslide the farm described above; but if said
period of five (5) years elapses without exercising the right of withdrawal that we have reserved, then
this absolute and irrevocable sale will remain.
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:
(GOOGLE TRANSLATE) 
Third. That during the expressed term of the withdrawal we will have the lease described above,
subject to the following conditions:
(a) The rent that we are obliged to pay for overdue monthly payments to Don Benito Gonzalez Sy
Chiam and at his address will be three hundred seventy-five pesos (P375) Filipino currency, each
month.
(b) The leasehold of the leased property shall be borne by said Don Benito Gonzalez Sy Chiam, as
well as the fire insurance premium, if the aforementioned Mr. Benito Gonzalez Sy Chiam should
insure said property.
 
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.)
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.) The Chief Justice said in discussing that
1
question:
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:
'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.
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.
NOT RELATED:
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?
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 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."
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.
NOT RELATED: May the contract in the present case may be modified by parol evidence?—NO
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 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. .
• Saura Import & Export Co., Inc. v. Development Bank of the Phil., G.R. No. L-24968,  April 27, 1972
- YODH
G.R. No. L-24968 April 27, 1972 SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
 
SUMMARY: Saura Incorporated had a project in Mindanao for the manufacture of bags, carpets,
runners, drapes, and floor mattings out of the locally grown Kenaf plant. Hence, it purchased a jute
mill using a loan from the Prudential Bank and Trust Co. Thereafter, Saura also applied for a loan
from the Rehabilitation Finance Corporation (RFC), the predecessor of the DBP, in the amount of
₱500,000. In order to secure the RFC loan, Saura executed a mortgage over the factory building and
the land site thereof.
 
RFC approved of the loan. There were some complications regarding the co-makers of Saura but
these were eventually resolved. However, RFC issued Resolution No. 9083, requiring a certification
from the DENR that the raw materials needed for the operations are available in the vicinity of the
project and that there is a prospect of increased production of such raw materials.
 
However, Saura sent a letter to RFC expressing that a study had shown that kenaf would not be
growing much that year or the year after that. It requested that 68k of the loan be released for labor
and raw materials. The RFC denied such. Saura, seeing that it could not comply with the conditions of
RFC, instead asked for the cancellation of the mortgage.
 
Saura mortgaged the same property in favor of Prudential in order to secure its obligations with the
latter for its loan granted to Saura. Saura failed to pay such obligation and was sued therefor. Now,
Saura alleges that RFC (now DBP) breached its contract of loan, thereby preventing Saura from
completing or paying contractual commitments.
Issue: WON there was a perfected contract
 
SC: Yes. Art. 1954.  There was undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and
registered. But this fact alone falls short of resolving the basic claim that the DBP failed to fulfill
its obligation and that the plaintiff is therefore entitled to recover damages.
 
There was indeed a perfected contract. However, Since RFC approved the loan of Saura on the
premise that it would use locally-sourced kenaf, its conditions under Resolution No. 9308 were merely
for the implementation of the approved contract and was not a deviation thereof.
 
FACTS:
Saura Inc applied for a loan from the Rehabilitation Finance Corporation (Predecessor of DBP) in the
amount of ₱500,000 to be used as follows:
 
1.   P250,000.00 for the construction of a factory building (for the manufacture of
jute sacks);
2.   P240,900.00 to pay the balance of the purchase price of the jute mill
machinery and equipment; and
3.   P9,100.00 as additional working capital.
 
Before the loan with RFC, Saura had already purchased the jute mill on the strength of a letter of
credit extended by the Prudential Bank and Trust Co. To secure its release without first paying the
draft, Saura, Inc. executed a trust receipt in favor of Prudential.
 
On January 7, 1954, RFC issued Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land
site thereof, and the machinery and equipment to be installed. The terms of the resolution are:
 
That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase  price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
 
Before Saura was able to be notified of the resolution, it wrote a letter to the RFC, requesting a
modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which
was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-
maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia
Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.
 
Hence the RFC issued Resolution No. 736 instructing its board of governors to reexamine all the
aspects of the approved loan with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of jute mills, and to submit
his findings thereon at the next meeting of the Board.
 
Saura again wrote to the RFC, that China Engineers, Ltd. had again agreed to act as co-signer for the
loan, and asked that the necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145.
 
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.
 
However, F.R. Halling wrote to RFC, saying that they now consider the loan as cancelled as far as
they are concerned.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
RFC denied, saying that it is constrained to consider as cancelled the loan of P300,000.00 ... in view
of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan
[cancelled] insofar as they are concerned."
 
Saura responded to RFC, informing RFC that China Engineers, Ltd. "will at any time reinstate their
signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".
 
IMPORTANT: Hence, RFC issued Resolution No. 9083, restoring the loan amount to ₱500,000.
The resolution had the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials,
the Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
 
The reason for the certification from the DENR was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally available
raw materials."
 
Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of
bags from local raw materials. The project was a "Joint venture by and between the Mindanao
Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a
Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies;
out of 100% local raw materials, principal kenaf." Further, the venture "is the first serious attempt
in this country to use 100% locally grown raw materials notably kenaf which is presently grown
commercially in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to DBP, was the reason why RFC approved of the loan.
However, on January 21, 1955, Saura wrote a letter to the RFC, stating that according to a special  
study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates factory to be constructed would utilize locally grown raw materials, principally kenaf.
will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute  
mill;" and (3) asking that releases of the loan be made as follows: The imposition of the conditions in Resolution No. 9083 was by no means a deviation from the
  terms of the agreement, but rather a step in its implementation. There was nothing in said conditions
a) For the payment of the receipt for jute mill machineries with the Prudential Bank & that contradicted the terms laid down in RFC Resolution No. 145.
Trust Company P250,000.00  (For immediate release)  
b) For the purchase of materials and equip ment per attached list to enable the jute mill to operate When Saura wrote to the RFC on January 21, 1955, stating that local jute "will not be able in
182,413.91
c) For raw materials and labor 67,586.09
sufficient quantity this year or probably next year," and asking that out of the loan agreed upon
  the sum of P67,586.09 be released "for raw materials and labor,” Saura deviated from the contract.
RFC sent a reply:  
  When RFC turned down the request in its letter of January 25, 1955 the negotiations which had
This is with reference to your letter of January 21, 1955, regarding the release of your loan under been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously
consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if was in no position to comply with RFC's conditions. So instead of doing so and insisting that the
revived, are proposed to be made from time to time, subject to availability of funds towards the end that loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was
the sack factory shall be placed in actual operating status. We shall be able to act on your request for done on June 15, 1955. The action thus taken by both parties was in the nature of mutual
revised purpose and manner of releases upon re-appraisal of the securities offered for the loan. desistance or “Mutuo Disenso” – a mode of extinguishing obligations. It is a concept that derives
  from the principle that since mutual agreement can create a contract, mutual disagreement by the
With respect to our requirement that the Department of Agriculture and Natural Resources certify
that the raw materials needed are available in the immediate vicinity and that there is prospect of
parties can cause its extinguishment.
increased production thereof to provide adequately the requirements of the factory, we wish to reiterate  
that the basis of the original approval is to develop the manufacture of sacks on the basis of the  
locally available raw materials.
 
Your statement that you will have to rely on the importation of jute and your request that we give
you assurance that your company will be able to bring in sufficient jute materials as may be necessary
for the operation of your factory, would not be in line with our principle in approving the loan.
 
Hence, since Saura could not comply with the requirement, it did not pursue the matter. Instead, it
requested RFC to cancel the mortgage.On June 17, 1955 RFC executed the corresponding deed
of cancellation and delivered it to Ramon F. Saura.
 
The reason for the cancellation was to register a mortgage over the same property in favor of
Prudential Bank in order to secure the trust receipt from which it purchased the jute mill.
 
It appears that for failure to pay the said obligation, the Prudential Bank and Trust Co. sued Saura,
Inc.
 
Hence, Saura commenced the case against the DBP for the failure of RFC to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby preventing
Saura from completing or paying contractual commitments it had entered into, in connection with
its jute mill project.
 
TC ruled in favor of Saura. It held that there was a perfected contract of loan and that RFC (now
DBP) breached said contract.
 
ISSUE: WON there was a perfected contract
 
RULING: WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.
 
RATIO:
 
We hold that there was indeed a perfected consensual contract. Under Art. 1954, NCC:
 
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
 
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
But this
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered.
fact alone falls short of resolving the basic claim that the DBP failed to fulfill its obligation and
that the plaintiff is therefore entitled to recover damages.
• Garcia v. Thio, 518 SCRA 433, 2007 - MONA
G.R. No. 154878             March 16, 2007
CAROLYN M. GARCIA, Petitioner,  vs. RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.
 
SUMMARY:
Carolyn Garcia alleged that on February 24, 1995, Rica Marie Thio borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October
26, 1995. The amount of this loan was covered by a check.
On June 29, 1995, Thio again borrowed the amount of ₱500,000 at an agreed monthly interest of 4%,
the maturity date of which was on November 5, 1995. The amount of this loan was covered by a
second check.
à Both checks were received by respondent Thio from petitioner Garcia payable to the order of a
certain Marilou Santiago.
à For both loans, no promissory note was executed since they were close friends at the time. Thio
paid the stipulated monthly interest for both loans but on their maturity dates, she failed to pay the
principal amounts despite repeated demands. Hence, Garcia filed this complaint.
à Thio denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money.
 
ISSUE: WON WON there was a contract of loan between the parties and Thio shall be held liable –
YES
RULING:
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object
of the contract.  Upon delivery of the object of the contract of loan (in this case the money received by
the debtor when the checks were encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount.
Delivery is the act by which the res or substance thereof is placed within the actual or constructive
possession or control of another. Although respondent did not physically receive the proceeds of the
checks, these instruments were placed in her control and possession under an arrangement whereby
she actually re-lent the amounts to Santiago.
 
Several factors support this conclusion.
First, Thio admitted that petitioner did not personally know Santiago. It was highly improbable that
petitioner would grant two loans to a complete stranger without requiring as much as promissory
notes.
Second, Leticia Ruiz, a friend of both petitioner and respondent testified that respondent’s plan was
for petitioner to lend her money at a monthly interest rate of 3%, after which respondent would lend
the same amount to Santiago at a higher rate of 5% and realize a profit of 2%.
Third, According to respondent, she merely accommodated petitioner’s request for her to issue her
own checks to cover the interest payments since petitioner was not personally acquainted with
Santiago. She claimed, however, that Santiago would replace the checks with cash. Her explanation
is simply incredible. It is difficult to believe that respondent would put herself in a position where she
would be compelled to pay interest, from her own funds, for loans she allegedly did not contract.
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago’s) creditors.
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. The
presumption is that "evidence willfully suppressed would be adverse if produced."  [respondent] received money from [petitioner]. What is evident is the fact that [respondent] received
 
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest payable
except for the verbal agreement that the loans would earn 3% and 4% interest per month.
Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioner’s demand letter. From the finality of the
decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period
being deemed equivalent to a forbearance of credit.
 
FACTS:
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garcia a crossed check dated February 24, 1995 in the amount of US$100,000 payable to the
order of a certain Marilou Santiago.  Thereafter, petitioner received from respondent every
month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of
US$3,000 and ₱76,500 on July 26,  August 26, September 26 and October 26, 1995.
 
In June 1995, respondent received from petitioner another crossed check dated June 29, 1995
in the amount of ₱500,000, also payable to the order of Marilou Santiago. Consequently,
petitioner received from respondent the amount of ₱20,000 every month on August 5,
September 5, October 5 and November 5, 1995.
 
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and ₱500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a
complaint for sum of money and damages in the RTC of Makati City, Branch 58 against respondent,
seeking to collect the sums of US$100,000, with interest thereon at 3% a month from October 26,
1995 and ₱500,000, with interest thereon at 4% a month from November 5, 1995, plus attorney’s fees
and actual damages.
 
PETITIONER’S DEFENSE:
1. Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on
October 26, 1995. The amount of this loan was covered by the first check.
2. On June 29, 1995, respondent again borrowed the amount of ₱500,000 at an agreed monthly
interest of 4%, the maturity date of which was on November 5, 1995. The amount of this loan
was covered by the second check.
 
à For both loans, no promissory note was executed since petitioner and respondent were
close friends at the time. Respondent paid the stipulated monthly interest for both loans but
on their maturity dates, she failed to pay the principal amounts despite repeated demands.
 
RESPONDENT’S DEFENSE:
Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by
petitioner to give the crossed checks to Santiago. She issued the checks for ₱76,000 and
₱20,000 not as payment of interest but to accommodate petitioner’s request that respondent use her
own checks instead of Santiago’s.
 
RTC:  In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. It found that respondent borrowed
from petitioner the amounts of US$100,000 with monthly interest of 3% and ₱500,000 at a monthly interest of 4%:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from
October 26, 1995 until fully paid;
2. ₱500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. ₱100,000.00 as and for attorney’s fees; and
4. ₱50,000.00 as and for actual damages.
For lack of merit, [respondent’s] counterclaim is perforce dismissed. With costs against [respondent]. IT
IS SO ORDERED.
CA:  On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between the
parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the
order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of
₱500,000.00, again payable to the order of Marilou Santiago, both of which were issued by [petitioner].
The checks received by [respondent], being crossed, may not be encashed but only deposited in
the bank by the payee thereof, that is, by Marilou Santiago herself.
 
It must be noted that crossing a check has the following effects:
(a) the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once—to one who has an account with the bank;
(c) and the act of crossing the check serves as warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.
 
 Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the
payee in contemplation of law since the latter is not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as
an agent of Marilou Santiago with respect to the checks because she was merely facilitating the
transactions between the former and [petitioner]. With the foregoing circumstances, it may be fairly
inferred that there were really no contracts of loan that existed between the parties.
Hence this petition.
 
ISSUE: WON there was a contract of loan between the parties and therefore respondent shall be held
liable – YES
 
RULING: WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and
August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and
SET ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is
AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and ₱500,000 at 12% per annum interest from November 21, 1995 until the finality of the
decision. The total amount due as of the date of finality will earn interest of 12% perannum until fully
paid. The award of actual damages and attorney’s fees is deleted. SO ORDERED.
 
RATIO:  As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the CA (which
held that there were no contracts of loan between petitioner and respondent) and the RTC (which held that there
werecontracts of loan) are contradictory.
 
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of
the object of the contract.  The presumption is that "evidence willfully suppressed would be adverse if produced."
 
This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract.
Upon delivery of the object of the contract of loan (in this case the money received by the
debtor when the checks were encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount.
It is undisputed that the checks were delivered to respondent. However, these checks were crossed
and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the
main question to be answered is: who borrowed money from petitioner — respondent or Santiago?
Petitioner insists that it was upon respondent’s instruction that both checks were made
payable to Santiago. She maintains that it was also upon respondent’s instruction that both
checks were delivered to her (respondent) so that she could, in turn, deliver the same to
Santiago. Furthermore, she argues that once respondent received the checks, the latter had
possession and control of them such that she had the choice to either forward them to
Santiago (who was already her debtor), to retain them or to return them to petitioner.
 
We agree with petitioner.
Delivery is the act by which the res or substance thereof is placed within the actual or
constructive possession or control of another. Although respondent did not physically receive
the proceeds of the checks, these instruments were placed in her control and possession
under an arrangement whereby she actually re-lent the amounts to Santiago.
 
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as
much as promissory notes or any written acknowledgment of the debt considering that the amounts
involved were quite big. Respondent, on the other hand, already had transactions with Santiago at
that time.
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in
both parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her
money at a monthly interest rate of 3%, after which respondent would lend the same amount to
Santiago at a higher rate of 5% and realize a profit of 2%. This explained why respondent
instructed petitioner to make the checks payable to Santiago. Respondent has not shown any reason
why Ruiz’ testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of
₱76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the
₱500,000 loan, she also issued her own checks in the amount of ₱20,000 each for four months.
According to respondent, she merely accommodated petitioner’s request for her to issue her
own checks to cover the interest payments since petitioner was not personally acquainted
with Santiago. She claimed, however, that Santiago would replace the checks with cash. Her
explanation is simply incredible. It is difficult to believe that respondent would put herself in a
position where she would be compelled to pay interest, from her own funds, for loans she
allegedly did not contract. We declared in one case that:
 
In the assessment of the testimonies of witnesses, this Court is guided by the rule
that for evidence to be believed, it must not only proceed from the mouth of a
credible witness, but must be credible in itself such as the common experience of
mankind can approve as probable under the circumstances. We have no test of the
truth of human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is outside of
juridical cognizance.
 
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not
petitioner, who was listed as one of her (Santiago’s) creditors.
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.
Respondent was not able to overturn this presumption.
 
We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and ₱500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest
payable except for the verbal agreement that the loans would earn 3% and 4% interest per
month.
 
Article 1956 of the Civil Code provides that "[n]o interest shall be due unless it has been
expressly stipulated in writing."
 
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant
to Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
 
Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioner’s demand letter. From the finality of
the decision until it is fully paid, the amount due shall earn interest at 12% per annum, the
interim period being deemed equivalent to a forbearance of credi
The award of actual damages in the amount of ₱50,000 and ₱100,000 attorney’s fees is deleted since
the RTC decision did not explain the factual bases for these damages.
B. Simple Loan (Articles 1953-1961)
• BPI Investment Corporation v. Court of Appeals, G.R. No. 133632, February 15, 2002 - JESS
G.R. No. 133632. February 15, 2002. *
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and
ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
Topic: Simple Loan
Ponente: Quisumbing, J.
SUMMARY:
Petitioner: BPI Investment Corporation (BPIIC)
- Predecessor of petitioner BPIIC: Ayala Investment and Development Corporation (AIDC)
Respondent: ALS Management & Development Corporation
Roa obtained a loan at an interest rate of 16 ¼ % per annum from AIDC, for the construction of a
house on his lot, this house & lot were mortgaged to AIDC to secure the loan; Roa sold the house &
lot to private respondents ALS and Litonjua for P850,000 wherein the latter paid P350K cash and
assumed P500K balance of Roa’s indebtedness with AIDC.
AIDC was not willing to extend the old interest rate to ALS and Litonjua and porposed to grant them
new loan of P500K to be applied to Roa’s debt and secured by the same property:
-        Interest rate of 20% per annum
-        Service fee of 1% per annum on the outstanding principal balance
-        Payable within 10 years in equal monthly amortization of P9,996.58
-        Penalty interest at the rate of 21% per annum per day from the date the amortization
became due & payable
March 31 1981 - ALS and Litonjua executed a mortgage deed with provision that payment of monthly
amortization shall commence on May 1 1981; ALS and Litonjua updated Roa’s arrearages by paying
BPIIC which reduced Roa’s principal balance
 
Sept 13 1982 – BPIIC released ALS & Litonjua P7,146.87 purporting to be what was left of their loan
after full payment of Roa’s loan.
 
June 1984 – BPIIC instituted foreclosure proceedings against ALS & Litonjua on the ground that they
failed to pay mortgage indebtedness from May 1 1981 to June 30 1984 (amounted to P475,585.31);
hence, on Feb 28 1985, ALS & Litonjua filed Civil Case against BPIIC.
 
ISSUES:
(1) WON contract of loan is a consensual contract in the light of the rule laid down in Bonnevie vs. CA
(NO. CONTRACT OF LOAN IS A REAL CONTRACT)
(2) WON BPI should be held liable for moral & exemplary damages and attorney’s fees in the fact of
irregular payments made by ALS and opposed to the rule laid down in SSS v. CA
(NO, but award of nominal damages & atty’s fees should be given to PRs)
SC:
Petitioner BPIIC contends: CA erred in ruling that because a simple loan is perfected upon delivery of
the object of contract, the loan contract in this case was perfected only on Sept 13 1982 because
contract of loan is consensual and is perfected at the time the contract of mortgage is executed
hence, contract was perfected on March 31 1981, when BPIIC issued cancellation of mortgage of
Roa’s loan.
Private respondents ALS & Litonjua contend: Based on Art 1934 of CC, a simple loan is perfected
upon delivery of the object of the contract, hence a real contract – in this case, even though the loan
contract was signed on March 31 1981, it was perfected only on Sept 13 1982, when the full loan was
released to them.
SC agreed with ALS & Litonjua, a loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract.
Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract
falls under the 1 clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple
st
loan
 
A perfected consensual contract can give rise to an action for damages. However, said contract
does not constitute the real contract of loan which requires the delivery of the object of the contract for
its perfection and which gives rise to obligations only on the part of the borrower.
6
- In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the 2 release of the loan. Following
nd
the intentions of the parties on the commencement of the monthly amortization, as found by the CA,
private respondents’ obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract.
7
Contract of loan involves a reciprocal obligation, wherein the obligation/ promise of each party is
the consideration for that of the other.
- The promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua
shall pay the monthly amortization commencing on May 1, 1981, 1 month after the supposed release
of the loan. BPIIC could only demand for the payment of the monthly amortization after September
13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in
computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not May 1, 1981.
- BPIIC not in bad faith; private respondents themselves admitted that they were irregular in payment
of monthly amortization. Hence, ruled out the award of moral & exemplary damages.
- BPIIC was negligent in relying merely on the entries found in deed of mortgage, without checking
and adjusting records on the amount actually released to private respondents and date when it was
released. Hence, award of nominal damages should be given; award of attorney’s fees sustained.
 
FACTS:
This petition for certiorari assails the decision dated Feb 28, 1997, of the CA and its resolution dated April 21, 1998,
in CA-G.R. CV No. 38887.
- The appellate court affirmed the judgment of the RTC of Pasig City, Branch 151, in (a) Civil Case No. 11831,
for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private
respondents ALS Management and Development Corporation and Antonio K. Litonjua, consolidated with (b) Civil
1
Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
- The TC had held that private respondents were not in default in the payment of their monthly amortization,
hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded
private respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for
attorney’s fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature .
- Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa.
-        Said house and lot were mortgaged to AIDC to secure the loan.
- Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua
for P850,000.
-        They paid P350,000 in cash and assumed the P500,000 balance of Roa’s
indebtedness with AIDC. The latter, however, was not willing to extend the old interest
rate to private respondents and proposed to grant them a new loan of P500,000 to be
applied to Roa’s debt and secured by the same property, at an interest rate of 20% per
annum and service fee of 1% per annum on the outstanding principal balance payable
within 10 years in equal monthly amortization of P9,996.58 and penalty interest at the rate
of 21% per annum per day from the date the amortization became due and payable.
- Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall commence on
May 1, 1981.
 
- On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of
P190,601.35.
-        This reduced Roa’s principal balance to P457,204.90 which, in turn, was liquidated
when BPIIC applied thereto the proceeds of private respondents’ loan of P500,000.
 
- On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be
what was left of their loan after full payment of Roa’s loan.
- In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984,
amounted to P475,585.31. A notice of sheriff ’s sale was published on August 13, 1984.
 
- On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC.
-        They alleged, among others, that they were not in arrears in their payment, but in
fact made an overpayment as of June 30, 1984.
-        They maintained that they should not be made to pay amortization before the actual
release of the P500,000 loan in August and September 1982.
-        Further, out of the P500,000 loan, only the total amount of P464,351.77 was released
to private respondents. Hence, applying the effects of legal compensation, the balance of
P35,648.23 should be applied to the initial monthly amortization for the loan.
 
TC: Judgment rendered in favor of private respondents (ALS & Litonjua)
[Aug 31 1988]
 
On August 31, 1988, the TC rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K. Litonjua and
against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations at
P9,283.83 for 10 years or 120 months. The amortization schedule attached as Annex “A” to the “Deed of Mortgage” is correspondingly
reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a newspaper
of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following sums:
1.    P300,000 for and as moral damages;
2.    P50,000 as and for exemplary damages;
3.    P50,000 as and for attorney’s fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED. 2
 
- Both parties appealed to the CA
CA: Dismissed private respondents’ appeal for non-payment of docket fees
[Feb 28 1997]
- Affirmed TC
- CA reasoned that a simple loan is perfected only upon the delivery of the object of the
contract.
-        The contract of loan between BPIIC and ALS & Litonjua was perfected only on Sept
13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as can be inferred from
the stipulations in the contract. This, despite the express agreement of the parties that
payment shall commence on May 1, 1981. From October 1982 to June 1984, the total
amortization due was only P194,960.43.
-        Evidence showed that private respondents had an overpayment, because as of June
1984, they already paid a total amount of P201,791.96.
-        Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and
cause the publication in newspapers concerning private respondents’ delinquency in the
payment of their loan.
-        This fact constituted sufficient ground for moral damages in favor of private
respondents.
Petitioner BPIIC filed MR but was denied.
ISSUES:
(1) WON contract of loan is a consensual contract in the light of the rule laid down in Bonnevie vs. CA
(NO. CONTRACT OF LOAN IS A REAL CONTRACT)
 
(2) WON BPI should be held liable for moral & exemplary damages and attorney’s fees in the fact of
irregular payments made by ALS and opposed to the rule laid down in SSS v. CA (NO, but award of
nominal damages & attorney’s fees should be given to PRs)
 
HELD: CA decision affirmed with modification.
WHEREFORE, the decision dated February 28, 1997, of the CA and its resolution dated April 21, 1998, are
AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in
favor of private respondents is DELETED, but the award to them of attorney’s fees in the amount of P50,000 is
UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs
against petitioner.
SO ORDERED.
 
RULING:
 
1 ISSUE:
ST
 
Petitioner’s contentions:
- The CA erred in ruling that because a simple loan is perfected upon the delivery of the object of the
contract, the loan contract in this case was perfected only on September 13, 1982.
- Petitioner claims that a contract of loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is executed conformably with our ruling in
Bonnevie v. Court of Appeals, 125 SCRA 122.
-        In the present case, the loan contract was perfected on March 31, 1981, the date when
the mortgage deed was executed, hence, the amortization and interests on the loan should
be computed from said date.
- Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of
mortgage of Frank Roa’s loan. This finds support in the registration on March 31, 1981 of the Deed of
Absolute Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS
executing the Mortgage Deed in favor of BPIIC.
- Moreover, petitioner claims, the delay in the release of the loan should be attributed to private
respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were required to
reduce Frank Roa’s loan below said amount. According to petitioner, private respondents were only
able to do so in August 1982.
Private respondents’ contentions:
- In their comment, private respondents assert that based on Article 1934 of the CC, a simple loan is
4
perfected upon the delivery of the object of the contract, hence a real contract.
-        In this case, even though the loan contract was signed on March 31, 1981, it was
perfected only on September 13, 1982, when the full loan was released to private
respondents. They submit that petitioner misread Bonnevie. To give meaning to Article
1934, according to private respondents, Bonnevie must be construed to mean that the
contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself
was only perfected upon the delivery of the full loan to private respondents on September
13, 1982.
- Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took
place. According to private respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other party.
-        In this case, the consideration for BPIIC in entering into the loan contract is the
promise of private respondents to pay the monthly amortization. For the latter, it is the
promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him. Therefore, private respondents conclude, they did not incur in delay
when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan
contract.
SC:
We agree with private respondents.
- A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract.   5
- Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the 1 clause of Article 1934, Civil Code. It is an accepted promise to
st
deliver something by way of simple loan.
- In Saura Import and Export Co. Inc. vs. DBP: petitioner applied for a loan of P500,000 with
respondent bank. The latter approved the application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered. However, because of acts attributable to
petitioner, the loan was not released. Later, petitioner instituted an action for damages.
 
Private respondents:
- Counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted
on the payment of amortization on the loan even before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to conform to the actual amount of loan
released, and it immediately initiated foreclosure proceedings when private respondents failed to
make timely payment.
SC:
- But as admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages. 11

-        We recognized in this case, a perfected consensual contract which under normal  

circumstances could have made the bank liable for not releasing the loan. However, since
the fault was attributable to petitioner therein, the court did not award it damages.
 
- A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the delivery of the
- However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given in recognition of
their rights which were violated by BPIIC. For this purpose, the amount of P25,000 is sufficient.
12

object of the contract for its perfection and which gives rise to obligations only on the part of the - Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled
borrower. 6
to litigate, we sustain the award of P50,000 in favor of private respondents as attorney’s fees.
 
- In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the 2 release of the loan. Following
nd

the intentions of the parties on the commencement of the monthly amortization, as found by the CA,
private respondents’ obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract. 7

 
- We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. 8

As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981,
one month after the supposed release of the loan.
It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a 9

party has performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.
- Consequently, petitioner could only demand for the payment of the monthly amortization after
September 13, 1982 for it was only then when it complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.
 
- Other points raised by petitioner in connection with the 1 issue, such as the date of actual release of
st

the loan and whether private respondents were the cause of the delay in the release of the loan, are
factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule
that only questions of law can be raised in a petition for review under Rule 45 of the Rules of Court, 10

factual matters need not tarry us now. On these points we are bound by the findings of the
appellate and trial courts.
 
2 ISSUE:
nd

 
Petitioner’s contention:
- It should not be held liable for moral and exemplary damages for it did not act maliciously when it
initiated the foreclosure proceedings. It merely exercised its right under the mortgage contract
because private respondents were irregular in their monthly amortization. It invoked our ruling in
Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the CA “the negligence of
the appellant is not so gross as to warrant moral and temperate damages,” except that, said Court reduced
those damages by only P5,000 instead of eliminating them. Neither can we agree with the findings of both the
Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief
that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration clause in the
contract. The filing alone of the foreclosure application should not be a ground for an award of moral damages
in the same way that a clearly unfounded civil action is not among the grounds for moral damages.
• Naguiat v. Court of Appeals, G.R. No. 118375, October 3, 2003 - ALVIN
G.R. No. 118375. Oct. 3, 2003
CELESTINA T. NAGUIAT, petitioner, vs. CA and AURORA QUEAÑO, respondents.
 
Summary:  Queaño applied with Naguiat for a loan in the amount of ₱200K, which Naguiat granted.
Naguiat indorsed and issued 2 checks to Queaño ₱95K and issued another check for ₱95K to the
order of Queaño. The proceeds of these checks were to constitute the loan granted by Naguiat to
Queaño.
 
To secure the loan, Queaño executed a Deed of Real Estate Mortgage in favor of Naguiat, which was
later notarized. Queaño issued to Naguiat a Security Bank and Trust Company check for the amount
of ₱200K, but upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds.
 
Queaño received a letter from Naguiat’s lawyer, demanding settlement of the loan. Shortly thereafter,
Queaño told Naguiat that she did not receive the proceeds of the loan, adding that the checks were
retained by Ruebenfeldt, who was Naguiat’s agent. Hence, Naguiat applied for the extrajudicial
foreclosure of the mortgage with the Sheriff who then scheduled the foreclosure sale. 3 days before
the scheduled sale, Queaño filed the case before the RTC seeking the annulment of the mortgage
deed. The RTC and CA declared the Deed of Real Estate Mortgage null and void.
 
Did Queaño actually received the loan proceeds which were supposed to be covered by the two
checks Naguiat had issued or indorsed?
 
No. Against the common finding of the courts below, Naguiat vigorously insists that Queaño received
the loan proceeds. She cites the rule that a public document enjoys the presumption of validity and
truthfulness of its contents. The CA, however, is correct in ruling that the presumption of truthfulness
of the recitals in a public document was defeated by the clear and convincing evidence.
 
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or
endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the
perfection of the contract of loan. For the Civil Code provides that the delivery of bills of exchange and
mercantile documents such as checks shall produce the effect of payment only when they have been
cashed. It is only after the checks have produced the effect of payment that the contract of loan may
be deemed perfected. Art. 1934 of the Civil Code provides: "An accepted promise to deliver something by
way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the contract."
 
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of
the object of the contract. In this case, the objects of the contract are the loan proceeds which
Queaño would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If
indeed the checks were encashed or deposited, Naguiat would have certainly presented the
corresponding documentary evidence, such as the returned checks and the pertinent bank records.
Since Naguiat presented no such proof, it follows that the checks were not encashed or credited to
Queaño’s account.
 
TINGA, J.:
Facts: Queaño applied with Naguiat for a loan in the amount of ₱200,000, which Naguiat
granted. On 11 Aug. 1980, Naguiat indorsed to Queaño Associated Bank Check No. 090990
(dated 11 Aug. 1980) for the amount of ₱95,000, which was earlier issued to Naguiat by the
Corporate Resources Financing Corporation. She also issued her own Filmanbank Check No.
065314, to the order of Queaño, also dated 11 Aug. 1980 and for the amount of ₱95,000. The
proceeds of these checks were to constitute the loan granted by Naguiat to Queaño.
 
To secure the loan, Queaño executed a Deed of Real Estate Mortgage dated Aug. 11, 1980 in
favor of Naguiat, and surrendered to the latter the owner’s duplicates of the titles covering the
mortgaged properties. On the same day, the mortgage deed was notarized, and Queaño issued
to Naguiat a promissory note for the amount of ₱200,000, with interest at 12% per annum,
payable on 11 Sep. 1980. Queaño also issued a Security Bank and Trust Company check,
postdated 11 Sep. 1980, for the amount of ₱200,000 and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds. On the following day, 12 Sep. 1980, Queaño requested Security Bank to
stop payment of her postdated check, but the bank rejected the request pursuant to its policy
not to honor such requests if the check is drawn against insufficient funds.
 
On 16 Oct. 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the
loan. Shortly thereafter, Queaño and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At
the meeting, Queaño told Naguiat that she did not receive the proceeds of the loan, adding
that the checks were retained by Ruebenfeldt, who purportedly was Naguiat’s agent.
 
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal
Province, who then scheduled the foreclosure sale on 14 Aug. 1981. 3 days before the
scheduled sale, Queaño filed the case before the Pasay City RTC, seeking the annulment of
the mortgage deed. The TC eventually stopped the auction sale.
 
RTC: On 8 Mar. 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage
null and void, and ordering Naguiat to return to Queaño the owner’s duplicates of her titles to
the mortgaged lots. Naguiat appealed the decision before the CA, making no less than eleven
assignments of error.
 
CA: The CA promulgated the decision now assailed before us that affirmed in toto the RTC
decision. Hence, the present petition.
 
Naguiat claims that being a notarial instrument or public document, the mortgage deed enjoys the
presumption that the recitals therein are true. Naguiat also questions the admissibility of various
representations and pronouncements of Ruebenfeldt, invoking the rule on the non-binding effect of
the admissions of third persons.
 
Issue: WON Queaño had actually received the loan proceeds which were supposed to be covered by
the two checks Naguiat had issued or indorsed.
 
Held:
The resolution of the issues presented before this Court by Naguiat involves the determination of facts, a
function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs appeal by
certiorari, only questions of law may be raised as the SC is not a trier of facts. The resolution of factual issues is the
function of lower courts, whose findings on these matters are received with respect and are in fact generally binding
on the SC. A question of law which the Court may pass upon must not involve an examination of the probative value
of the evidence presented by the litigants. There is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises
as to the truth or the falsehood of alleged facts.
 
Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the
lower courts. But Naguiat’s case does not fall under any of the exceptions. In any event, both the decisions
of the appellate and TCs are supported by the evidence on record and the applicable laws.
 
Against the common finding of the courts below, Naguiat vigorously insists that Queaño
received the loan proceeds. Capitalizing on the status of the mortgage deed as a public
document, she cites the rule that a public document enjoys the presumption of validity and
truthfulness of its contents. The CA, however, is correct in ruling that the presumption of
truthfulness of the recitals in a public document was defeated by the clear and convincing
evidence in this case that pointed to the absence of consideration. This Court has held that the
presumption of truthfulness engendered by notarized documents is rebuttable, yielding as it
does to clear and convincing evidence to the contrary, as in this case.
 
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she
issued or endorsed were actually encashed or deposited. The mere issuance of the checks did
not result in the perfection of the contract of loan. For the Civil Code provides that the delivery
of bills of exchange and mercantile documents such as checks shall produce the effect of
payment only when they have been cashed. It is only after the checks have produced the
effect of payment that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code
provides:
 "An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but
the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract."
 
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the
delivery of the object of the contract. In this case, the objects of the contract are the loan
proceeds which Queaño would enjoy only upon the encashment of the checks signed or
indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have
certainly presented the corresponding documentary evidence, such as the returned checks
and the pertinent bank records. Since Naguiat presented no such proof, it follows that the
checks were not encashed or credited to Queaño’s account.
 
Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the
ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The CA rejected
the argument, holding that since Ruebenfeldt was an authorized representative or agent of Naguiat the
situation falls under a recognized exception to the rule. Still, Naguiat insists that Ruebenfeldt was not her
agent.
 
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by the CA, Ruebenfeldt was not a stranger or an
unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the checks she issued or
indorsed to Queaño, pending delivery by the latter of additional collateral. Ruebenfeldt served as agent of
Naguiat on the loan application of Queaño’s friend, Marilou Farralese, and it was in connection with that
transaction that Queaño came to know Naguiat.23 It was also Ruebenfeldt who accompanied Queaño in her
meeting with Naguiat and on that occasion, on her own and without Queaño asking for it, Reubenfeldt actually drew
a check for the sum of ₱220,000.00 payable to Naguiat, to cover for Queaño’s alleged liability to Naguiat under the
loan agreement.24
 
The CA recognized the existence of an "agency by estoppel citing Article 1873 of the Civil Code.26
Apparently, it considered that at the very least, as a consequence of the interaction between Naguiat and
Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing
to correct Queaño’s impression. In that situation, the rule is clear. One who clothes another with apparent
authority as his agent, and holds him out to the public as such, cannot be permitted to deny the authority of such
person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith, and in the
honest belief that he is what he appears to be.27 The CA is correct in invoking the said rule on agency by estoppel.
 
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in the
face of the fact that the checks issued or indorsed to Queaño were never encashed or deposited to her
account of Naguiat.
 
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit
and the borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage
which is supposed to secure the loan is null and void. The consideration of the mortgage contract is the
same as that of the principal contract from which it receives life, and without which it cannot exist as an
independent contract. A mortgage contract being a mere accessory contract, its validity would depend on
the validity of the loan secured by it.
 
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.
 

 
• Cebu International Finance Corporation v. Court of Appeals, G.R. No. 123031, October 12, 1999 -
RINA
G.R. No. 123031 October 12, 1999
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF
APPEALS, VICENTE ALEGRE, respondents.
QUISUMBING, J.:
SUMMARY:
Vicente Alegre invested with CIFC P500,000.00 pesos in cash. CIFC issued a promissory note
to mature on May 27, 1991. 
CIFC issued BPI Check No. 513397 in favor of Alegre as proceeds of his matured investment
plus interest. The CHECK was drawn from CIFC’s current account number 0011-0803-59,
maintained with the BPI, main branch at Makati City. Alegre’s wife deposited the CHECK with
RCBC, in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the
"Check (is) Subject of an Investigation." BPI took custody of the CHECK pending an
investigation of several counterfeit checks drawn against CIFC's aforestated checking account.
Alegre notified CIFC of the dishonored CHECK and demanded that he be paid in cash. CIFC
refused. Alegre made a formal demand for the payment of his money market placement.  CIFC
promised to replace the CHECK but required an impossible condition that the original must first
be surrendered. Alegre filed a complaint for recovery of a sum of money against CIFC. When
BPI deducted the full amount of the forged checks, including that issued to Alegre, CIFC sued
BPI for collection. The parties then entered into a compromise agreement to the effect that BPI
will debit the amount of the check issued to Alegre from CIFC’s current account representing
payment/discharge and that BPI will have no more liability in case CIFC is adjudged liable to
Alegre. BPI encashed and deducted the said amount from the account of CIFC, but the proceed
as well as the check remained in BPI’s custody, pursuant to the compromise agreement.  The collection suit alleged that BPI unlawfully deducted from CIFC's checking account,
ISSUE: W/N there is a contract of loan between Alegre and CIFC (NO)
There is a contract of loan between Alegre and CIFC
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. Alegre accepted the CHECK, instead of requiring
payment in money. Yet, when he presented it to RCBC for encashment, the same was
dishonored by non-acceptance, with BPI's annotation: "Check (is) subject of an investigation."
These facts were testified to by BPI's manager. Under these circumstances, and after the notice
of dishonor, the holder has an immediate right of recourse against the drawer, and
consequently could immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which
is the legal tender or, by the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment.
Philippine Airlines, Inc. vs. Court of Appeals: Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. A check is not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3.)
FACTS:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in
money market operations.
Vicente Alegre invested with CIFC P500,000.00 pesos in cash. CIFC issued a promissory
note to mature on May 27, 1991. The note for P516,238.67 covered Alegre’s placement plus
interest at 20.5% for 32 days.
CIFC issued BPI Check No. 513397 (CHECK) for P514,390.94 in favor of Alegre as
proceeds of his matured investment plus interest. The CHECK was drawn from CIFC’s
current account number 0011-0803-59, maintained with the BPI, main branch at Makati
City.
Mrs. Alegre deposited the CHECK with RCBC, in Puerto Princesa, Palawan. BPI
dishonored the CHECK with the annotation, that the "Check (is) Subject of an
Investigation." BPI took custody of the CHECK pending an investigation of several
counterfeit checks drawn against CIFC's aforestated checking account. BPI used the check to
trace the perpetrators of the forgery.
Alegre notified CIFC of the dishonored CHECK and demanded that he be paid in cash.
CIFC refused, and instructed Alegre to wait for its ongoing bank reconciliation with BPI.
Thereafter, Alegre made a formal demand for the payment of his money market
placement. In turn, CIFC promised to replace the CHECK but required an impossible
condition that the original must first be surrendered.
Alegre filed a complaint for recovery of a sum of money against CIFC with the RTC-Makati,
Branch 132. CIFC sought to recover its lost funds and formally filed against BPI a
separate civil action for collection of a sum of money with the RTC-Makati, Branch 147.
counterfeit checks amounting to P1,724,364.58. The action included the prayer to collect the
amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
In response to Alegre's complaint, CIFC filed a motion for leave of court to file a third-party
complaint against BPI. BPI was impleaded by CIFC to enforce a right, for contribution and
indemnity, with respect to Alegre's claim. CIFC asserted that the CHECK it issued in favor of
Alegre was genuine, valid and sufficiently funded.
TC: granted CIFC's motion. BPI moved to dismiss the third-party complaint on the ground of
pendency of another action with RTC-Makati, Branch 147. Acting on the motion, the trial court
dismissed the third-party complaint on November 4, 1992, after finding that the third-party
complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with
RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Vito Arieta, Bank Manager of BPI, testified
that the bank, indeed, dishonored the CHECK, retained the original copy and forwarded only
a certified true copy to RCBC. When Arieta was recalled, he testified that on July 16, 1993, BPI
encashed and deducted the said amount from the account of CIFC, but the proceeds, as
well as the CHECK remained in BPI's custody. The bank's move was in accordance with the
Compromise Agreement it entered with CIFC in RTC-Makati, Branch 147. The compromise
agreement, which was submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P20,000
litigation expenses as full and final settlement of all of plaintiff's claims as contained in the
Amended Complaint dated September 10, 1992. The aforementioned amount shall be credited
to plaintiff's current account No. 0011-0803-59 maintained at defendant's Main Branch upon
execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P514,390.94 from the aforesaid current
account representing payment/discharge of BPI Check No. 513397 payable to Vicente
Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from
the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant:
otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may however
set-up the defense of payment/discharge stipulated in par. 2 above.
On July 27, 1993, BPI filed a separate collection suit against Vicente Alegre with the RTC-
Makati, Branch 62. The complaint alleged that Alegre connived with certain Lina A. Pena and
Lita A. Anda and forged several checks of BPI's client, CIFC. The total amount of counterfeit
checks was P1,724,364.58. BPI prevented the encashment of some checks amounting to
P295,775.07. BPI admitted that the CHECK, payable to Vicente Alegre for P514,390.94, was
deducted from BPI's claim, hence, the balance of the loss incurred by BPI was P914,198.57,
plus costs of suit for P20,000.00. The records are silent on the outcome of this case.
RTC-Makati, Branch 132: rendered judgment in favor of Vicente Alegre. CA affirmed the
decision of the trial court.
ISSUES:
1. W/N Article 1249 of the NCC applies in the present case (YES)
2. W/N there is a contract of loan between Alegre and CIFC (NO)
3. W/N "BPI check no. 513397" was validly discharged; (NO)
4. W/N the dismissal of the third-party complaint of petitioner against BPI by reason of lis
pendens was proper (YES)
RULING: WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
Article 1249 should be applied in this case
Petitioner: contends that the provisions of the Negotiable Instruments Law (NIL) are the
pertinent laws to govern its money market transaction with Alegre, and not paragraph 2 of
Article 1249 of the Civil Code. Petitioner stresses that it had already been discharged from the
liability of paying the value of the CHECK due to the following circumstances:
1) There was "ACCEPTANCE" of the subject check by BPI, the drawee bank, as defined under
the Negotiable Instruments Law, and therefore, BPI became primarily liable for the payment of
the check, and consequently, the drawer, herein petitioner, was discharged from its liability
thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioner's
account amounted to and/or constituted a discharge of the drawer's (petitioner's) liability under
the instrument/subject check.
Petitioner cites Section 137 of the Negotiable Instruments Law, which states: Liability of drawee
retaining or destroying bill — Where a drawee to whom a bill is delivered for acceptance
destroys the same, or refuses within twenty-four hours after such delivery or such other period
as the holder may allow, to return the bill accepted or non-accepted to the Holder, he will be
deemed to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for
the payment of the CHECK. Consequently, when BPI offset the value of CHECK against the
losses from the forged checks allegedly committed by Alegre, the check was deemed paid.
Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the "payment of debts." It provides that:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency, which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Considering the nature of a money market transaction, the above-quoted provision should
be applied in the present controversy.
Perez vs. Court of Appeals: a money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly
with each other but through a middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a borrower through a middleman or
dealer.
There is a contract of loan between Alegre and CIFC
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. Alegre accepted the CHECK, instead of requiring
payment in money. Yet, when he presented it to RCBC for encashment, the same was
dishonored by non-acceptance, with BPI's annotation: "Check (is) subject of an investigation."
These facts were testified to by BPI's manager. Under these circumstances, and after the notice
of dishonor, the holder has an immediate right of recourse against the drawer, and
consequently could immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which
is the legal tender or, by the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment.
Philippine Airlines, Inc. vs. Court of Appeals: Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. A check is not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3.)
The deduction of the amount of the check from CFIC’s account does not ipso facto
operate as a discharge/payment
Although the value of the CHECK was deducted from the funds of CIFC, it was not delivered to
the payee Alegre. Instead, BPI offset the amount against the losses it incurred from forgeries of
CIFC checks, allegedly committed by Alegre. The confiscation of the value of the check was
agreed upon by CIFC and BPI. The parties intended to amicably settle the collection suit filed by
CIFC with the RTC-Makati, Branch 147, by entering into a compromise agreement, which
reads:
2. Thereupon, defendant shall debit the sum of P514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise stated,
the defendant shall not be liable to the plaintiff. Plaintiff however set-up the defense of
payment/discharge stipulated in par. 2 above.
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid
a litigation or put an end to one already commenced. It is an agreement between two or
more persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by
mutual consent in the manner which they agree on, and which everyone of them prefers in the
hope of gaining, balanced by the danger of losing. The compromise agreement could not bind a
party who did not sign the compromise agreement nor avail of its benefits. Thus, the
stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a
party thereto. His money could not be the subject of an agreement between CIFC and
BPI. Although Alegre's money was in custody of the bank, the bank's possession of it
was not in the concept of an owner. BPI cannot validly appropriate the money as its own. The
codal admonition on this issue is clear:
Art. 1317 — No one may contract in the name of another without being authorized by the latter,
or unless he has by law a right to represent him.
As between the third party claim filed by the petitioner against BPI in Civil Case No. 92-515 and
petitioner's ancillary claim against the bank in Civil Case No. 92-1940, there is identity of parties
as well as identity of rights asserted, and that any judgment that may be rendered in one case
will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that "In case plaintiff
is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor
of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated,
the defendant shall not be liable to the plaintiff." Clearly, this stipulation expressed that CIFC
had already abandoned any further claim against BPI with respect to the value of BPI
Check No. 513397. To ask this Court to allow BPI to be a party in the case at bar, would
amount to res judicata and would violate terms of the compromise agreement between
CIFC and BPI. The general rule is that a compromise has upon the parties the effect and
authority of res judicata, with respect to the matter definitely stated therein, or which by
implication from its terms should be deemed to have been included therein. This holds true
even if the agreement has not been judicially approved.

A Contract entered into in the name of another by one who has no authority or legal .
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is
revoked by the other contracting party.

BPI's confiscation of Alegre's money constitutes garnishment without the parties going
through a valid proceeding in court. Garnishment is an attachment by means of which the
plaintiff seeks to subject to his claim the property of the defendant in the hands of a third person
or money owed to such third person or a garnishee to the defendant. The garnishment
procedure must be upon proper order of RTC-Makati, Branch 62, the court who had
jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not yet
tendered a valid payment of its obligation to Alegre. Tender of payment involves a positive
and unconditional act by the obligor of offering legal tender currency as payment to the obligee
for the former's obligation and demanding that the latter accept the same. Tender of payment
cannot be presumed by a mere inference from surrounding circumstances.

The dismissal of the third-party complaint of petitioner against BPI by reason of lis
pendens was proper

For litis pendentia to be a ground for the dismissal of an action, the following requisites
must concur: (a) identity of parties or at least such as to represent the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same
acts; and (c) the identity in the two cases should be such that the judgment which may be
rendered in one would, regardless of which party is successful, amount to res judicata in the
other.
The trial court's ruling states, thus:

A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court and
the Third Party Complaint in the instant case would readily show that the parties are not only
identical but also the cause of action being asserted, which is the recovery of the value of BPI
Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the
rights asserted and relief prayed for, the reliefs being founded on the facts, are identical.

WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint is
hereby ordered dismissed on ground of lis pendens.
• BPI Family Bank v. Franco, 538 SCRA 184, 2007 - VAL
G.R. No. 123498               November 23, 2007
BPI FAMILY BANK, Petitioner, vs. AMADO FRANCO and COURT OF APPEALS, Respondents.
NACHURA, J.:
SUMMARY: Tevesteco opened a savings and current account with BPI-FB while FMIC also opened a
time deposit account with the same branch of BPI-FB with a deposit of ₱100,000,000.00, to mature
one year. Franco opened 3 accounts, namely, a current, savings, and time deposit, with BPI-FB. The
4 5 6
total amount of ₱2,000,000.00 used to open these accounts is traceable to a check issued by
Tevesteco. In turn, the funding for the ₱2,000,000.00 check was part of the ₱80,000,000.00 debited
by BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s current account pursuant to
an Authority to Debit purportedly signed by FMIC’s officers. It appears, however, that the signatures of
FMIC’s officers on the Authority to Debit were forged. BPI-FB instructed Jesus Arangorin to debit
10
Franco’s savings and current accounts for the amounts remaining therein. However, Franco’s time
11
deposit account could not be debited due to the capacity limitations of BPI-FB’s computer. In the
meantime, 2 checks drawn by Franco against his BPI-FB current account were dishonored upon
13
presentment for payment, and stamped with a notation "account under garnishment." Apparently,
Franco’s current account was garnished by virtue of an Order of Attachment issued by the Makati
RTC in Civil Case No. 89-4996, which had been filed by BPI-FB against Franco et al., to recover the
14
₱37,455,410.54 representing Tevesteco’s total withdrawals from its account.
ISSUES: Who has a better right to the deposits in Franco’s accounts? (Franco); W/N Franco is
entitled to interest in his current account (YES) 
SC: There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but
not as a legal consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s
account. BPI-FB conveniently forgets that the deposit of money in banks is governed by the
Civil Code provisions on simple loan or mutuum. As there is a debtor-creditor relationship
36
between a bank and its depositor, BPI-FB ultimately acquired ownership of Franco’s deposits,
but such ownership is coupled with a corresponding obligation to pay him an equal amount on
demand. Although BPI-FB owns the deposits in Franco’s accounts, it cannot prevent him from
37
demanding payment of BPI-FB’s obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when Franco issued checks
drawn against his current account, he had every right as creditor to expect that those checks
would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicion that the funds therein were proceeds of the multi-million peso
scam Franco was allegedly involved in. To grant BPI-FB, or any bank for that matter, the right
to take whatever action it pleases on deposits which it supposes are derived from shady
transactions, would open the floodgates of public distrust in the banking industry.
The argument is tenuous. We agree with the succinct holding of the appellate court in this respect.
The Manila RTC’s order to pay interests on Franco’s current account arose from BPI-FB’s
unjustified refusal to comply with its obligation to pay Franco pursuant to their contract of
mutuum. In other words, from the time BPI-FB refused Franco’s demand for the release of the
deposits in his current account, specifically, from May 17, 1990, interest at the rate of 12%
began to accrue thereon. 39
 
FACTS: This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family
Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals,
some of whom opened and maintained separate accounts with BPI-FB, San Francisco del Monte
(SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings
and current account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro
Investment Corporation (FMIC) also opened a time deposit account with the same branch of
BPI-FB with a deposit of ₱100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened 3 accounts, namely, a current, savings, and
4 5
time deposit, with BPI-FB. The current and savings accounts were respectively funded with an initial
6
deposit of ₱500,000.00 each, while the time deposit account had ₱1,000,000.00 with a maturity date
of August 31, 1990. The total amount of ₱2,000,000.00 used to open these accounts is traceable
to a check issued by Tevesteco allegedly in consideration of Franco’s introduction of Eladio
Teves, who was looking for a conduit bank to facilitate Tevesteco’s business transactions, to
7
Jaime Sebastian, who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for the
₱2,000,000.00 check was part of the ₱80,000,000.00 debited by BPI-FB from FMIC’s time
deposit account and credited to Tevesteco’s current account pursuant to an Authority to Debit
purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were forged. 8
On September 4, 1989, Antonio Ong, upon being shown the Authority to Debit, personally
9
declared his signature therein to be a forgery. Unfortunately, Tevesteco had already effected
several withdrawals from its current account (to which had been credited the ₱80,000,000.00
covered by the forged Authority to Debit) amounting to ₱37,455,410.54, including the
₱2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s forgery claim,
BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin to debit
10
12
Franco’s savings and current accounts for the amounts remaining therein. However, Franco’s
11
time deposit account could not be debited due to the capacity limitations of BPI-FB’s
computer.
In the meantime, 2 checks drawn by Franco against his BPI-FB current account were
13
dishonored upon presentment for payment, and stamped with a notation "account under
garnishment." Apparently, Franco’s current account was garnished by virtue of an Order of
Attachment issued by the Makati RTC in Civil Case No. 89-4996 (Makati Case), which had been
filed by BPI-FB against Franco et al., to recover the ₱37,455,410.54 representing Tevesteco’s
14
total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB
prior to Franco’s receipt of notice that his accounts were under garnishment. In fact, at the
15
time the Notice of Garnishment dated September 27, 1989 was served on BPI-FB, Franco had
yet to be impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint
in Civil Case No. 89-4996, that Franco was impleaded in the Makati case. Immediately, upon
16
receipt of such copy, Franco filed a Motion to Discharge Attachment which the Makati RTC
granted on May 16, 1990. The Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the funds in his savings and current
accounts. Jesus Arangorin, BPI-FB’s new manager, could not forthwith comply with the
demand as the funds, as previously stated, had already been debited because of FMIC’s
forgery claim. As such, BPI-FB’s computer at the SFDM Branch indicated that the current
account record was "not on file."
With respect to Franco’s savings account, it appears that Franco agreed to an arrangement, as a
favor to Sebastian, whereby ₱400,000.00 from his savings account was temporarily transferred
to Domingo Quiaoit’s savings account, subject to its immediate return upon issuance of a
certificate of deposit which Quiaoit needed in connection with his visa application at the
Taiwan Embassy. As part of the arrangement, Sebastian retained custody of Quiaoit’s savings
account passbook to ensure that no withdrawal would be effected therefrom, and to preserve
Franco’s deposits.
3
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount
of ₱63,189.00 from the remaining balance of the time deposit account representing advance
interest paid to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00 debited
from its account.17The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v.
First Metro Investment Corporation, we upheld the finding of the courts below that BPI-FB failed to
18
exercise the degree of diligence required by the nature of its obligation to treat the accounts of
its depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the debited
amount in its time deposit. It was ordered to pay ₱65,332,321.99 plus interest at 17% per annum
from August 29, 1989 until fully restored. In turn, the 17% shall itself earn interest at 12% from
October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et al.),
recipients of a ₱500,000.00 check proceeding from the ₱80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
20
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura, we ruled that BPI-FB had no right to freeze Buenaventura, et al.’s accounts and
21
adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the
perpetrators of the multi-million peso scam. In the criminal case, Franco, along with the other
22
accused, except for Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as
defined and penalized under Article 351, par. 2(a) of the Revised Penal Code. However, the civil 23
case remains under litigation and the respective rights and liabilities of the parties have yet to be
24
adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his accounts
and release his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the
subject suit. In his complaint, Franco prayed for the following reliefs: (1) the interest on the
remaining balance of his current account which was eventually released to him on October
25
31, 1991; (2) the balance on his savings account, plus interest thereon; (3) the advance
26
interest paid to him which had been deducted when he pre-terminated his time deposit
27
account; and (4) the payment of actual, moral and exemplary damages, as well as attorney’s
fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of
Franco and refusing to release his deposits, claiming that it had a better right to the amounts
which consisted of part of the money allegedly fraudulently withdrawn from it by Tevesteco
and ending up in Franco’s accounts. BPI-FB asseverated that the claimed consideration of
₱2,000,000.00 for the introduction facilitated by Franco between George Daantos and Eladio
Teves, on the one hand, and Jaime Sebastian, on the other, spoke volumes of Franco’s
participation in the fraudulent transaction.
RTC: WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and against [BPI-FB], ordering
the latter to pay to the former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of ₱450,000.00 from May 18, 1990 to October 31,
1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account as of May 18, 1990, together with the interest
thereon in accordance with the bank’s guidelines on the payment therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
CA: WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] ₱63,189.00 representing the interest deducted from the time deposit of plaintiff-appellant. ₱200,000.00 as moral damages and
₱100,000.00 as exemplary damages, deleting the award of nominal damages (in view of the award of moral and exemplary damages)
and increasing the award of attorney’s fees from ₱30,000.00 to ₱75,000.00.
CONTENTIONS OF BPI-FB: CA erred when it ruled that: (1) Franco had a better right to the deposits
in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2) Franco is
entitled to interest on his current account; (3) Franco can recover the ₱400,000.00 deposit in Quiaoit’s
savings account; (4) the dishonor of Franco’s checks was not legally in order; (5) BPI-FB is liable for
interest on Franco’s time deposit, and for moral and exemplary damages; and (6) BPI-FB’s counter-
claim has no factual and legal anchor.
ISSUES:
1.  Who has a better right to the deposits in Franco’s accounts? (Franco)
2.  W/N Franco is entitled to interest in his current account (YES)  deposits to Tevesteco’s account. BPI-FB conveniently forgets that the deposit of money in
3.      W/N Franco can recover the ₱400,000.00 deposit in Quiaoit’s savings account (YES)
4.      W/N the dishonor of Franco’s checks was legally in order (NO)
5.      W/N BPI-FB is liable for moral and exemplary damages (NO
6.      W/N BPI-FB’s counter-claim shall be dismissed (YES)
RULING: WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November 29, 1995 is
AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit and of moral and exemplary damages is
DELETED.
19
RATIO: We are in full accord with the common ruling of the lower courts that BPI-FB cannot
unilaterally freeze Franco’s accounts and preclude him from withdrawing his deposits. However,
contrary to the appellate court’s ruling, we hold that Franco is not entitled to unearned interest on the
time deposit as well as to moral and exemplary damages.
ISSUE: Who has a better right to the deposits in Franco’s accounts?
BPI-FB urges us that the legal consequence of FMIC’s forgery claim is that the money transferred by
BPI-FB to Tevesteco is its own, and considering that it was able to recover possession of the same
when the money was redeposited by Franco, it had the right to set up its ownership thereon and
freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where X’s
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of
the TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code,
which provides:
Article 559. The possession of movable property acquired in good faith is equivalent
to a title. Nevertheless, one who has lost any movable or has been unlawfully
deprived thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner cannot obtain its
return without reimbursing the price paid therefor.
SC: BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article 559
of the Civil Code pertains to a specific or determinate thing. A determinate or specific thing is
30
one that is individualized and can be identified or distinguished from others of the same kind. 31
In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as
a movable, is generic and fungible. The quality of being fungible depends upon the possibility
32
of the property, because of its nature or the will of the parties, being substituted by others of
the same kind, not having a distinct individuality.
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership
of the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from
FMIC’s account and credited to Tevesteco’s, and subsequently traced to Franco’s account. In fact,
this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money
itself which passed from one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership, and this 34
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of
exchange, without other evidence of its title. Money, which had passed through various
35
transactions in the general course of banking business, even if of traceable origin, is no
exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-
FB’s illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.
(RELATED TO THE TOPIC!) There is no doubt that BPI-FB owns the deposited monies in the
accounts of Franco, but not as a legal consequence of its unauthorized transfer of FMIC’s
banks is governed by the Civil Code provisions on simple loan or mutuum. As there is a 36
debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately acquired
ownership of Franco’s deposits, but such ownership is coupled with a corresponding
obligation to pay him an equal amount on demand. Although BPI-FB owns the deposits in
37
Franco’s accounts, it cannot prevent him from demanding payment of BPI-FB’s obligation by
drawing checks against his current account, or asking for the release of the funds in his
savings account. Thus, when Franco issued checks drawn against his current account, he had
every right as creditor to expect that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicion that the funds therein were proceeds of the multi-million peso
scam Franco was allegedly involved in. To grant BPI-FB, or any bank for that matter, the right
to take whatever action it pleases on deposits which it supposes are derived from shady
transactions, would open the floodgates of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals continues to resonate,
38
thus:
The banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of business and commerce,
banks have become an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and, most of all, confidence. Thus, even the humble
wage-earner has not hesitated to entrust his life’s savings to the bank of his choice,
knowing that they will be safe in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest checking account for security
and convenience in the settling of his monthly bills and the payment of ordinary expenses. x
x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever directs. A blunder on the part of the
bank, such as the dishonor of the check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit and in
the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift
liability thereon to Franco and the other payees of checks issued by Tevesteco, or prevent
withdrawals from their respective accounts without the appropriate court writ or a favorable
final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the
signature in the Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s to
Tevesteco’s account, when FMIC’s account was a time deposit and it had already paid
advance interest to FMIC. Considering that there is as yet no indubitable evidence establishing
Franco’s participation in the forgery, he remains an innocent party. As between him and BPI-FB, the
latter, which made possible the present predicament, must bear the resulting loss or inconvenience.
ISSUE: Liability for interest on Franco’s current account,
BPI-FB argues that its non-compliance with the Makati RTC’s Order Lifting the Order of Attachment
and the legal consequences thereof, is a matter that ought to be taken up in that court.
(RELATED TO THE TOPIC!) The argument is tenuous. We agree with the succinct holding of the
appellate court in this respect. The Manila RTC’s order to pay interests on Franco’s current
account arose from BPI-FB’s unjustified refusal to comply with its obligation to pay Franco
pursuant to their contract of mutuum. In other words, from the time BPI-FB refused Franco’s
demand for the release of the deposits in his current account, specifically, from May 17, 1990,
interest at the rate of 12% began to accrue thereon. 39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-
FB’s non-compliance with the Order Lifting the Order of Attachment. However, such authority does
not preclude the Manila RTC from ruling on BPI-FB’s liability to Franco for payment of interest
based on its continued and unjustified refusal to perform a contractual obligation upon
demand. After all, this was the core issue raised by Franco in his complaint before the Manila
RTC.
ISSUE: Award to Franco of the deposits in Quiaoit’s account
We find no reason to depart from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are
actually owned by Franco who simply accommodated Jaime Sebastian’s request to
temporarily transfer ₱400,000.00 from Franco’s savings account to Quiaoit’s account. His 40
testimony cannot be characterized as hearsay as the records reveal that he had personal
knowledge of the arrangement made between Franco, Sebastian and himself. 41
BPI-FB makes capital of Franco’s belated allegation relative to this particular arrangement. It insists
that the transaction with Quiaoit was not specifically alleged in Franco’s complaint before the Manila
RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue given its
extensive cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence.— When issues
not raised by the pleadings are tried with the express or implied consent of the parties, they
shall be treated in all respects as if they had been raised in the pleadings. Such
amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at any time,
even after judgment; but failure to amend does not affect the result of the trial of these
issues. If evidence is objected to at the trial on the ground that it is now within the issues
made by the pleadings, the court may allow the pleadings to be amended and shall do so
with liberality if the presentation of the merits of the action and the ends of substantial
justice will be subserved thereby. The court may grant a continuance to enable the
amendment to be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the ₱400,000.00
begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of
the funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Franco’s action
for the recovery of his deposits appropriately covers the deposits in Quiaoit’s account.
ISSUE: Whether or not the dishonor of Franco’s checks was legally in order
Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco’s checks
respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTC’s
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied
for the writ of attachment before the Makati RTC, it need not be served with the Notice of
Garnishment before it could place Franco’s accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent ploy to
circumvent Section 4, Rule 13 of the Rules of Court. It should be noted that the strict
42
requirement on service of court papers upon the parties affected is designed to comply with
the elementary requisites of due process. Franco was entitled, as a matter of right, to notice, if
the requirements of due process are to be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days after the two checks he issued were
dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was premature for BPI-FB to
freeze Franco’s accounts without even awaiting service of the Makati RTC’s Notice of
Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be
made without including in the main suit the owner of the property attached by virtue thereof.
Section 5, Rule 13 of the Rules of Court specifically provides that "no levy or attachment pursuant to
the writ issued x x x shall be enforced unless it is preceded, or contemporaneously accompanied, by
service of summons, together with a copy of the complaint, the application for attachment, on the
defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to
acquire jurisdiction over the person of Franco when BPI-FB garnished his accounts. 43
Effectively, therefore, the Makati RTC had no authority yet to bind the deposits of Franco
through the writ of attachment, and consequently, there was no legal basis for BPI-FB to
dishonor the checks issued by Franco.
ISSUE: Whether or not BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Franco’s time deposit account, and for moral as well as exemplary damages
SC: We find it proper to reinstate the ruling of the trial court, and allow only the recovery of nominal
damages in the amount of ₱10,000.00. However, we retain the CA’s award of ₱75,000.00 as
unfreeze the deposits of Franco despite the Makati RTC’s Order Lifting the Order of
Attachment and Quiaoit’s unwavering assertion that the ₱400,000.00 was part of Franco’s
savings account. This refusal constrained Franco to incur expenses and litigate for almost two
(2) decades in order to protect his interests and recover his deposits. Therefore, this Court
deems it just and equitable to grant Franco ₱75,000.00 as attorney’s fees. The award is
reasonable in view of the complexity of the issues and the time it has taken for this case to be
resolved.56

attorney’s fees.
In granting Franco’s prayer for interest on his time deposit account and for moral and exemplary ISSUE: Dismissal of BPI-FB’s counter-claim
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to SC: we uphold the Manila RTC’s ruling, as affirmed by the CA, that BPI-FB is not entitled to
Franco; (2) misleadingly claimed that Franco’s deposits were under garnishment; (3) misrepresented recover ₱3,800,000.00 as actual damages. BPI-FB’s alleged loss of profit as a result of
that Franco’s current account was not on file; and (4) refused to return the ₱400,000.00 despite the Franco’s suit is, as already pointed out, of its own making. Accordingly, the denial of its
fact that the ostensible owner, Quiaoit, wanted the amount returned to Franco. counter-claim is in order.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted  
in good faith is liable shall be those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen or could have reasonable
foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.
(Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out
of malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article
2201 and should not be held liable for all damages now being imputed to it for its breach of
obligation. For the same reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud. We have held
44

that it is a breach of a known duty through some motive of interest or ill will. In the instant case, we
45

cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found,
there was no denial whatsoever by BPI-FB of the existence of the accounts. The computer-
generated document which indicated that the current account was "not on file" resulted from
the prior debit by BPI-FB of the deposits. The remedy of freezing the account, or the
garnishment, or even the outright refusal to honor any transaction thereon was resorted to
solely for the purpose of holding on to the funds as a security for its intended court action, 46

and with no other goal but to ensure the integrity of the accounts.

We have had occasion to hold that in the absence of fraud or bad faith, moral damages cannot be
47

awarded; and that the adverse result of an action does not per se make the action wrongful, or the
party liable for it. One may err, but error alone is not a ground for granting such damages. 48

An award of moral damages contemplates the existence of the following requisites: (1) there must be
an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must
be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is
predicated on any of the cases stated in Article 2219 of the Civil Code. 49

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code, upon which to base his claim for moral damages.
50

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under
Article 2220 of the Civil Code for breach of contract. 51

We also deny the claim for exemplary damages. Franco should show that he is entitled to
moral, temperate, or compensatory damages before the court may even consider the question
of whether exemplary damages should be awarded to him. As there is no basis for the award
52

of moral damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate, we, however, find that Franco
53

is entitled to reasonable attorney’s fees for having been compelled to go to court in order to
assert his right. Thus, we affirm the CA’s grant of ₱75,000.00 as attorney’s fees.

Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest, or when the court deems it just and equitable. In the case at bench, BPI-FB refused to
54 55
• People v. Puig and Porras, 563 SCRA 564, 2008 - PIA
G.R. Nos. 173654-765             August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner, vs. TERESITA PUIG and ROMEO PORRAS,
respondents.
SUMMARY: Puig and Pugas work as cashier and bookkeeper, respectively in the Rural Bank of
Pototan Inc. in Iloilo where 112 cases of Qualified Theft were filed against them after allegedly taking
P15,000 to the prejudice of the bank. The trial court did not find the existence of probable cause to
issue a warrant of arrest for Qualified Theft due to the absence of the element of taking without the
consent of the owners since it was the depositors who filed the case and not the bank, as well as
absence of allegation of dependence, guardianship or vigilance between the respondents and the
offended party that would have created a high degree of confidence and so dismissed the case.
Petitioner contend that depositors who place their money with the bank are considered creditors of
the bank and that the bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank. Respondents raised only procedural issues. 
ISSUE: WON respondents are guilty of Qualified Theft (YES)
The SC held that in a long line of cases involving Qualified Theft, it has firmly established the nature
of possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. Allegations in the
Information that such employees acted with grave abuse of confidence, to the damage and prejudice
of the Bank, without particularly referring to it as owner of the money deposits, as sufficient to make
out a case of Qualified Theft. As regards the respondents who were employed as Cashier and
Bookkeeper of the Bank in this case, there is even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of confidence. In fact, the Information which alleged
grave abuse of confidence by accused herein is even more precise, as this is exactly the requirement
of the law in qualifying the crime of Theft.  money taken by respondents as belonging to the bank.
In summary, the Bank acquires ownership of the money deposited by its clients; and the employees
of the Bank, who are entrusted with the possession of money of the Bank due to the confidence
reposed in them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the
essential elements constituting the crime of Qualified Theft.
FACTS: Iloilo Provincial Prosecutor’s Office filed before RTC Iloilo, 112 cases of Qualified Theft
against Teresita Puig and Romeo Porras who were the Cashier and Bookkeeper, respectively,
of Rural Bank of Pototan, Inc.  Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the
The allegations in the Informations filed before the RTC were uniform and pro-forma, except for the
amounts, date and time of commission, to wit:
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of
Iloilo, Philippines, and within the jurisdiction of this Honorable Court, above-named
[respondents], conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan,
Iloilo, without the knowledge and/or consent of the management of the Bank and with intent
of gain, did then and there willfully, unlawfully and feloniously take, steal and carry away the
sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage
and prejudice of the said bank in the aforesaid amount.
Trial Court did not find the existence of probable cause that would have necessitated the
issuance of a warrant of arrest based on the following grounds:
(1) the element of ‘taking without the consent of the owners’ was missing on the ground that
it is the depositors-clients, and not the Bank, which filed the complaint in these cases, who
are the owners of the money allegedly taken by respondents and hence, are the real
parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or
vigilance between the respondents and the offended party that would have created a high
degree of confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push
through would be violative of the right of the respondents under Section 14(2), Article III of the
1987 Constitution which states that in all criminal prosecutions, the accused shall enjoy the
right to be informed of the nature and cause of the accusation against him. Following Section 6,
Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases and refused to
issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration was filed by the petitioner. On 9 June 2006, an Order denying
petitioner’s Motion for Reconsideration was issued by the RTC. 
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the
sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE
THE ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
PETITIONER’S CONTENTIONS:
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January
2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed with Criminal Cases
No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "a
person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."
Thus, it posits that the depositors who place their money with the bank are considered creditors
of the bank. The bank acquires ownership of the money deposited by its clients, making the
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified
theft, citing that a perusal of the Informations will show that they specifically allege that the
respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and
that they took various amounts of money with grave abuse of confidence, and without the knowledge
and consent of the bank, to the damage and prejudice of the bank.
PUIG AND PORRES: They challenge the petition on the ground that a Petition for Review on
issuance of a warrant of arrest presupposes evaluation of facts and circumstances, which is not
proper under said Rule. They further claim that the DOJ, through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari, considering that the incident was indorsed by
the DOJ.
ISSUE: WON the respondents are guilty of qualified theft (YES)
HELD: WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal
Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of
Arrest issue against herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of
Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054 to
05-3165, inclusive, with reasonable dispatch. No pronouncement as to costs.
RATIO: We find merit in the petition.
PROBABLE CAUSE
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations
and, therefore, because of this defect, there is no basis for the existence of probable cause which will
justify the issuance of the warrant of arrest. Petitioner assails the dismissal contending that the
Informations for Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance
of grave abuse of confidence; and (b) the element of taking, with intent to gain and without the
consent of the owner, which is the Bank.

In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts
constituting the qualifying circumstance of grave abuse of confidence and the element of taking
without the consent of the owner, since the owner of the money is not the Bank, but the depositors
therein. He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a high
degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts
constitutive of the elements of the offense charged. This, therefore, makes the issue of sufficiency of
the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed
as follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties next higher by two
degrees than those respectively specified in the next preceding article, if committed by a domestic
servant, or with grave abuse of confidence, or if the property stolen is motor vehicle, mail matter or
large cattle or consists of coconuts taken from the premises of a plantation, fish taken from a fishpond
or fishery or if property is taken on the occasion of fire, earthquake, typhoon, volcanic eruption, or any
other calamity, vehicular accident or civil disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of another’s
property without violence or intimidation against persons or force upon things. The elements of the
crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor
of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia,
that the information must state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the
offense and the qualifying and aggravating circumstances must be stated in ordinary and
concise language and not necessarily in the language used in the statute but in terms
sufficient to enable a person of common understanding to know what offense is being
charged as well as its qualifying and aggravating circumstances and for the court to
pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of
common understanding to know the charge against him, and the court to render judgment properly.
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse
of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo,
without the knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is
very clear not only from the express provisions of the law, but from established jurisprudence. The
relationship between banks and depositors has been held to be that of creditor and debtor. Articles
1953 and 1980 of the New Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such employees acted with
grave abuse of confidence, to the damage and prejudice of the Bank, without particularly
referring to it as owner of the money deposits, as sufficient to make out a case of Qualified
Theft. 
For a graphic illustration, we cite Roque v. People, where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca,
province of Pampanga, Philippines and within the jurisdiction of his Honorable Court, the
above-named accused ASUNCION GALANG ROQUE, being then employed as teller of the
Basa Air Base Savings and Loan Association Inc. (BABSLA) with office address at Basa Air
Base, Floridablanca, Pampanga, and as such was authorized and reposed with the
responsibility to receive and collect capital contributions from its member/contributors of
said corporation, and having collected and received in her capacity as teller of the BABSLA
the sum of TEN THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with
grave abuse of confidence and without the knowledge and consent of said corporation, did
then and there willfully, unlawfully and feloniously take, steal and carry away the amount of
P10,000.00, Philippine currency, by making it appear that a certain depositor by the name
of Antonio Salazar withdrew from his Savings Account No. 1359, when in truth and in fact
said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the damage and
prejudice of BABSLA in the total amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the
teller’s possession due to the confidence reposed on the teller, the felony of qualified theft
would be committed.7
Also in People v. Sison, the Branch Operations Officer was convicted of the crime of Qualified Theft
based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and
February 13, 1992, both dates inclusive, in the City of Manila, Philippines, the said accused
did then and there wilfully, unlawfully and feloniously, with intent of gain and without the
knowledge and consent of the owner thereof, take, steal and carry away the following, to
wit:
Cash money amounting to P6,000,00 in different denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by
its Branch Manager, HELEN U. FARGAS, to the damage and prejudice of the said owner in the
aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence and Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case
unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he had may be, to relieve the respondents from the pain of going through a trial once it is ascertained that no
free access to the place where the said amount of money was kept. probable cause exists to form a sufficient belief as to the guilt of the respondents, conversely, it is also
equally imperative upon the judge to proceed with the case upon a showing that there is a prima facie
The judgment of conviction elaborated thus: case against the respondents.
The crime perpetuated by appellant against his employer, the Philippine Commercial and
Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime
had he not been holding the position of Luneta Branch Operation Officer which gave him
not only sole access to the bank vault. The management of the PCIB reposed its trust and
confidence in the appellant as its Luneta Branch Operation Officer, and it was this trust and
confidence which he exploited to enrich himself to the damage and prejudice of PCIB.

People v. Locson, in addition to People v. Sison: The money in this case was in the
possession of the defendant as receiving teller of the bank, and the possession of the
defendant was the possession of the Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use without the
consent of the Bank, there was taking as contemplated in the crime of Qualified Theft.

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of
the respondents; that the crime was committed with grave abuse of confidence, with intent to gain and
without the knowledge and consent of the Bank, without necessarily stating the phrase being
assiduously insisted upon by respondents, "of a relation by reason of dependence, guardianship or
vigilance, between the respondents and the offended party that has created a high degree of
confidence between them, which respondents abused," and without employing the word "owner" in
lieu of the "Bank" were considered to have satisfied the test of sufficiency of allegations.

As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this
case, there is even no reason to quibble on the allegation in the Informations that they acted
with grave abuse of confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the requirement of the
law in qualifying the crime of Theft.

In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to
the confidence reposed in them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of Qualified Theft.

On the theory of the defense that the DOJ is the principal party who may file the instant petition, the
ruling in Mobilia Products, Inc. v. Hajime Umezawa is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private
complainant or the offended party is limited to the civil liability arising therefrom. Hence, if a
criminal case is dismissed by the trial court or if there is an acquittal, a reconsideration of
the order of dismissal or acquittal may be undertaken, whenever legally feasible, insofar as
the criminal aspect thereof is concerned and may be made only by the public prosecutor; or
in the case of an appeal, by the State only, through the OSG.

On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in
appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised,14 and
herein petitioner certainly raised a question of law.

As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at
the records of the preliminary investigation conducted will show that, indeed, probable cause exists
for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the
judge shall issue a warrant of arrest only upon a finding of probable cause after personally evaluating
the resolution of the prosecutor and its supporting evidence. Soliven v. Makasiar, as reiterated in
Allado v. Diokno, explained that probable cause for the issuance of a warrant of arrest is the
existence of such facts and circumstances that would lead a reasonably discreet and prudent person
to believe that an offense has been committed by the person sought to be arrested. The records
reasonably indicate that the respondents may have, indeed, committed the offense charged.
• BPI v. Spouses Yu, 610 SCRA 412, 2010 - EV
G.R. No. 184122               January 20, 2010
BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner,  vs. SPS. NORMAN AND ANGELINA YU
and TUANSON BUILDERS CORPORATION represented by PRES. NORMAN YU, Respondents.
Summary:
Respondents Sps Yu and Tuanson Builders borrowed various sums totaling ₱75 million from Far East
Bank and Trust Company. For collateral, they executed real estate mortgages over several of their
properties. In 1999, unable to pay their loans, Sps Yu and Tuanson Builders requested a loan
restructuring, which the bank, now merged with BPI, granted. By this time, Sps Yu’s loan balance
stood at ₱33,400,000.00. The restructured loan used the same collaterals.
Despite the restructuring, however, Sps Yu still had difficulties paying their loan. They asked BPI to
release some of the mortgaged lands since their total appraised value far exceeded the amount of the
remaining debt. When BPI ignored their request, Sps Yu withheld payments on their amortizations.
Thus, BPI extrajudicially foreclosed the mortgaged properties.
Sps Yu filed a complaint before the RTC against BPI for recovery of alleged excessive penalty
charges, attorney’s fees, and foreclosure expenses that the bank caused to be incorporated in the
price of the auctioned properties.
Sps Yu, contended among others, that the bank imposed excessive penalty charges and interests:
over ₱5 million in penalty charges computed at 36% per annum. In addition, BPI collected a 14%
yearly interest on the principal, bringing the combined penalty charges and interest to 50% of the
principal per annum.
Both the RTC and CA deleted the penalty charges for non compliance of the Truth in Lending Act
Section 4 of the Truth in Lending Act states that:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
xxx
(6) the finance charge expressed in terms of pesos and centavos; and
xxx
ISSUE:  WON the RTC and the CA correctly deleted the penalty charges because of BPI’s alleged
failure to comply with the Truth in Lending Act? —NO
Penalty charge, which is liquidated damages resulting from a breach, falls under item (6) or finance
charge. A finance charge "represents the amount to be paid by the debtor incident to the extension of
credit." The lender may provide for a penalty clause so long as the amount or rate of the charge and
the conditions under which it is to be paid are disclosed to the borrower before he enters into the
credit agreement.
In this case, although BPI failed to state the penalty charges in the disclosure statement, the
promissory note that the Yus signed, on the same date as the disclosure statement, contained a
penalty clause that said: "I/We jointly and severally, promise to further pay a late payment charge on
any overdue amount herein at the rate of 3% per month." The promissory note is an acknowledgment
of a debt and commitment to repay it on the date and under the conditions that the parties agreed on.
It is a valid contract absent proof of acts which might have vitiated consent.
The question is whether or not the reference to the penalty charges in the promissory note constitutes
substantial compliance with the disclosure requirement of the Truth in Lending Act. The SC cited
cases in which the court declared valid the penalty charges that were stipulated in the promissory
notes. In this case, the promissory notes signed by Sps Yu contained data, including penalty charges,
required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the
Truth in Lending Act that contravenes its goal.
Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable and
iniquitous. Considering that BPI had already received over ₱2.7 million in interest and that it seeks to
impose the penalty charge of 3% per month or 36% per annum on the total amount due—principal
plus interest, with interest not paid when due added to and becoming part of the principal and also
bearing interest at the same rate—the Court finds the ruling of the RTC in its original decision
reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per month is imposed.
FACTS:
Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson Trading, and
Tuanson Builders Corporation (Tuanson Builders) borrowed various sums totaling ₱75 million
from Far East Bank and Trust Company. For collateral, they executed real estate mortgages
over several of their properties, including certain lands in Legazpi City owned by Tuanson
Trading. In 1999, unable to pay their loans, the Yus and Tuanson Builders requested a loan
restructuring, which the bank, now merged with Bank of the Philippine Islands (BPI), granted.
By this time, the Yus’ loan balance stood at ₱33,400,000.00. The restructured loan used the
same collaterals, with the exception of Transfer Certificate of Title 40247 that secured a loan of
₱1,600,000.
Despite the restructuring, however, the Yus still had difficulties paying their loan. They asked
BPI to release some of the mortgaged lands since their total appraised value far exceeded the
amount of the remaining debt. When BPI ignored their request, the Yus withheld payments on
their amortizations. Thus, BPI extrajudicially foreclosed the mortgaged properties in Legazpi
City and in Pili, Camarines Sur. But the Yus sought by court action against BPI and the winning
bidder, Magnacraft Development Corporation (Magnacraft), the annulment of the foreclosure sale.
In the course of the proceedings, however, the Yus and Magnacraft entered into a compromise
agreement that affirmed the latter’s ownership of three out of the 10 parcels of land that were
auctioned. By virtue of this agreement, the court dismissed the complaint against Magnacraft, without
prejudice to the Yus filing a new one against BPI.
On October 24, 2003 the Yus filed their new complaint before the RTC of Legazpi City against
BPI for recovery of alleged excessive penalty charges, attorney’s fees, and foreclosure
expenses that the bank caused to be incorporated in the price of the auctioned properties.
In its answer, BPI essentially admitted the foreclosure of the mortgaged properties for
₱39,055,254.95, broken down as follows: ₱33,283,758.73 as principal debt; ₱2,110,282.78 as
interest; and ₱3,661,213.46 as penalty charges. BPI qualified that the total of ₱39,055,254.95
corresponded only to the Yus’ debt as of date of filing of the petition. The notice of the auction
sale said that the total was "inclusive of interest, penalty charges, attorney’s fee and expenses
of this foreclosure."
BPI further admitted that its bid of ₱45,090,566.41 for all the auctioned properties was broken
down as follows:
Principal ₱32,188,723.07
Interest 2,763,088.93
Penalty Charges 5,568.649.09
Sub-total…………… ₱40,520,461.09
Add: 10% Attorney’s Fees 4,052,046.11
Litigation Expenses &
446,726.74
Interest
Cost of Publication & Interest 71,332.47
TOTAL……………. ₱45,090,566.41
BPI also admitted that Magnacraft submitted the highest and winning bid of ₱45,500,000.00. The 2. Reducing the attorney’s fees to 1% of the principal and interest;
sheriff turned over this amount to BPI. According to BPI, it in turn remitted to the Clerk of Court the 3. Upholding the reasonableness of the foreclosure expenses and cost of publication, both with
₱409,433.59 difference between its bid price and that of Magnacraft’s.  Although the proceeds of the interests;
sale exceeded the ₱39,055,254.95 stated in the notice of sale by ₱6,035,311.46, the bid amount 4. Reiterating the turnover by the Clerk of Court to the Yus of the excess in the bid price;
increased because it now included litigation expenses and attorney’s fees as well as interests and 5. Deleting the Yus’ claim for moral damages they having waived it;
penalties as recomputed. 6. Denying the Yus’ claim for attorney’s fees for lack of basis; and
7. Dismissing BPI’s counterclaim for moral and exemplary damages and for attorney’s fees for lack of
BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili, Camarines merit considering that summary judgment has been rendered in favor of the Yus.
Sur that secured a remaining debt of ₱5,562,000. BPI made the lone bid of ₱1,701,934.09.
BPI appealed the decision to the CA. 
The Yus had three causes of action against BPI.
First. The bank imposed excessive penalty charges and interests: over ₱5 million in penalty CA: rendered judgment affirming the RTC decision in all respects. And when BPI asked for
charges computed at 36% per annum compared to the 12% per annum that the Court fixed in reconsideration, the CA denied it, hence, the bank’s recourse to this Court.
the cases of State Investment House, Inc. v. Court of Appeals and Ruiz v. Court of Appeals. In
addition, BPI collected a 14% yearly interest on the principal, bringing the combined penalty ISSUE:
charges and interest to 50% of the principal per annum.
Second. BPI also imposed a charge of ₱4,052,046.11 in attorney’s fees, the equivalent of 10% of the
1. WON the case presented no genuine issues of fact such as to warrant a summary judgment by the
principal, interest, and penalty charges.
RTC?—YES
Third. BPI did not provide documents to support its claim for foreclosure expenses of ₱446,726.74
2. WON the RTC and the CA correctly deleted the penalty charges because of BPI’s alleged
and cost of publication of ₱518,059.21.
failure to comply with the Truth in Lending Act? —NO
3. WON the RTC and the CA correctly reduced the attorney’s fees to 1% of the judgment debt? —-
As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to claim YES
more than the amount stated in its published notices. Consequently, it must turn over the excess bid
of ₱6,035,311.46.
HELD:  CA decision affirmed subject to the restoration of the penalty charge of 12% per annum or 1%
per month of the amount due computed from date of nonpayment or November 25, 2001.
After pre-trial, the Yus moved for summary judgment, pointing out that based on the answer, the
common exhibits of the parties, and the answer to the written interrogatories to the sheriff, no genuine
RATIO
issues of fact exist in the case. The Yus waived their claim for moral damages so the RTC can
dispose of the case through a summary judgment.
1. Summary judgment is proper
A summary judgment is apt when the essential facts of the case are uncontested or the parties do not
RTC: Initially, the RTC granted only a partial summary judgment. It reduced the penalty charge of
raise any genuine issue of fact. Here, to resolve the issue of the excessive charges allegedly
36% per annum to 12% per annum until the debt would have been fully paid but maintained the
incorporated into the auction bid price, the RTC simply had to look at a) the pleadings of the parties;
attorney’s fees as reasonable considering that BPI already waived the ₱1,761,511.36 that formed part
b) the loan agreements, the promissory note, and the real estate mortgages between them; c) the
of the attorney’s fees and reduced the rate of attorney’s fees it collected from 25% to 10% of the
foreclosure and bidding documents; and d) the admissions and other disclosures between the parties
amount due. The RTC ruled that facts necessary to resolve the issues on penalties and fees had
during pre-trial. Since the parties admitted not only the existence, authenticity, and genuine execution
been admitted by the parties thus dispensing with the need to receive evidence.
of these documents but also what they stated, the trial court did not need to hold a trial for the
reception of the evidence of the parties.
Still, the RTC held that it needed to receive evidence for the resolution of the issues of (1) whether or
not the foreclosure and publication expenses were justified; (2) whether or not the foreclosure of the
BPI contends that a summary judgment was not proper given the following issues that the parties
lot in Pili, Camarines Sur, was valid given that the proceeds of the foreclosure of the properties in
raised: 1) whether or not the loan agreements between them were valid and enforceable; 2) whether
Legazpi City sufficiently covered the debt; and (3) whether or not BPI was entitled to its counterclaim
or not the Yus have a cause of action against BPI; 3) whether or not the Yus are proper parties in
for attorney’s fees, moral damages, and exemplary damages.
interest; 4) whether or not the Yus are estopped from questioning the foreclosure proceeding after
entering into a compromise agreement with Magnacraft; 5) whether or not the penalty charges and
The Yus moved for partial reconsideration. They argued that, since BPI did not mark in evidence any fees and expenses of litigation and publication are excessive; and 6) whether or not BPI violated the
document in support of the foreclosure expenses it claimed, it may be assumed that the bank had no Truth in Lending Act.
evidence to prove such expenses. As regards their right to the pro-rating of their debt among the
mortgaged properties, the Yus pointed out that BPI did not dispute the fact that the proceeds of the
But these are issues that could be readily resolved based on the facts established by the pleadings
sale of the properties in Legazpi City fully satisfied the debt. Thus, the court could already resolve
and the admissions of the parties. Indeed, BPI has failed to name any document or item of fact that it
without trial the issue of whether or not the foreclosure of the Pili property was valid.
would have wanted to adduce at the trial of the case. A trial would have been such a great waste of
time and resources.
Further, the Yus sought reconsideration of the reduction of penalty charges and the allowance
of the attorney’s fees. They claimed that the penalty charges should be deleted for violation of
2. The penalty charge of 12% per annum or 1% per month is imposed.
Republic Act (R.A.) 3765 or the Truth in Lending Act. BPI’s disclosure did not state the rate of
Both the RTC and CA decisions cited BPI’s alleged violation of the Truth in Lending Act and
penalties on late amortizations. Also, the Yus asked the court to reduce the attorney’s fees
the ruling of the Court in New Sampaguita Builders Construction, Inc. v. Philippine National
from 10% to 1% of the amount due. 
Bank to justify their deletion of the penalty charges. Section 4 of the Truth in Lending Act
states that:
RTC: reconsidered its earlier decision and rendered a summary judgment:
1. Deleting the penalty charges imposed by BPI for non-compliance with the Truth in Lending
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
Act;
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same may
following information: likewise be equitably reduced. The CA correctly affirmed the RTC Order to reduce it from 10% to 1%
(1) the cash price or delivered price of the property or service to be acquired; based on the following reasons: (1) attorney’s fee is not essential to the cost of borrowing, but a mere
(2) the amounts, if any, to be credited as down payment and/or trade-in; incident of collection; (2) 1% is just and adequate because BPI had already charged foreclosure
(3) the difference between the amounts set forth under clauses (1) and (2); expenses; (3) attorney’s fee of 10% of the total amount due is onerous considering the rote effort that
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with goes into extrajudicial foreclosures.
the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

Penalty charge, which is liquidated damages resulting from a breach, falls under item (6) or
finance charge. A finance charge "represents the amount to be paid by the debtor incident to
the extension of credit." The lender may provide for a penalty clause so long as the amount or
rate of the charge and the conditions under which it is to be paid are disclosed to the borrower
before he enters into the credit agreement.

In this case, although BPI failed to state the penalty charges in the disclosure statement, the
promissory note that the Yus signed, on the same date as the disclosure statement, contained
a penalty clause that said: "I/We jointly and severally, promise to further pay a late payment
charge on any overdue amount herein at the rate of 3% per month." The promissory note is an
acknowledgment of a debt and commitment to repay it on the date and under the conditions
that the parties agreed on. It is a valid contract absent proof of acts which might have vitiated
consent.

The question is whether or not the reference to the penalty charges in the promissory note
constitutes substantial compliance with the disclosure requirement of the Truth in Lending
Act. The RTC and CA relied on the ruling in New Sampaguita as authority that the non-disclosure of
the penalty charge renders its imposition illegal. But New Sampaguita is not attended by the same
circumstances. What New Sampaguita disallowed, because it was not mentioned either in the
disclosure statement or in the promissory note, was the unilateral increase in the rates of penalty
charges that the creditor imposed on the borrower. Here, however, it is not shown that BPI increased
the rate of penalty charge that it collected from the Yus. 

The ruling that is more in point is that laid down in The Consolidated Bank and Trust
Corporation v. Court of Appeals, a case cited in New Sampaguita. The Consolidated Bank ruling
declared valid the penalty charges that were stipulated in the promissory notes. What the
Court disallowed in that case was the collection of a handling charge that the promissory
notes did not contain.

The Court has affirmed that financial charges are amply disclosed if stated in the promissory
note in the case of Development Bank of the Philippines v. Arcilla, Jr. The Court there said,
"Under Circular 158 of the Central Bank, the lender is required to include the information required by
R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged
and signed by the borrower. In addition, the contract or document shall specify additional charges, if
any, which will be collected in case certain stipulations in the contract are not met by the debtor." In
this case, the promissory notes signed by the Yus contained data, including penalty charges,
required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation
of the Truth in Lending Act that contravenes its goal.

Nonetheless, the courts have authority to reduce penalty charges when these are
unreasonable and iniquitous. Considering that BPI had already received over ₱2.7 million in
interest and that it seeks to impose the penalty charge of 3% per month or 36% per annum on
the total amount due—principal plus interest, with interest not paid when due added to and
becoming part of the principal and also bearing interest at the same rate—the Court finds the
ruling of the RTC in its original decision reasonable and fair. Thus, the penalty charge of 12%
per annum or 1% per month is imposed.

3. The CA correctly affirmed the RTC Order to reduce it from 10% to 1%

• Pantaleon v. American Express, 629 SCRA 276, 2010 - MARKO
G.R. No. 174269               May 8, 2009
POLO S. PANTALEON, Petitioner, vs. AMERICAN EXPRESS INTERNATIONAL, INC.,
Respondent.
Topic: Simple Loan (Arts. 1953-1961)
 
Summary: Petitioner Atty. Pantaleon and his family went to Amsterdam in October 1991. There, they
joined an escorted tour where they arrived at the Coster Diamond House. The group was led to the
store’s showroom to allow them to select items for purchase. Mrs. Pantaleon wanted to buy an
approximately 2.5 karat diamond, pendant and a chain, all of which totalled US$13,826.00. To pay for
these purchases, Pantaleon presented his American Express credit card together with his passport to
the Coster sales clerk.  normal role as creditor to the cardholder, such delay would not have been in the acceptance of the
However, the store clerk informed Pantaleon that his AmexCard had not yet been approved. The tour
bus was about to leave, waiting for Pantaleon. Because of the delay, Pantaleon asked the store clerk
to cancel the sale. The store manager asked to wait a few more minutes. After 15 minutes, the store
manager informed Pantaleon that respondent AMEX had demanded bank references. Pantaleon
supplied the names of his depositary banks. 45 minutes after Pantaleon had presented his
AmexCard, and 30 minutes after the tour group was supposed to have left the store, Coster decided
to release the items even without respondent’s approval of the purchase. The tour group was irate
because the city tour had to be canceled due to lack of remaining time. Mrs. Pantaleon ended up
weeping, while her husband had to take a tranquilizer to calm his nerves.  Thereafter, the Pantaleon
family proceeded to the US before returning to Manila on 12 November 1992. While in the US,
Pantaleon continued to use his Amex card, several times without hassle or delay, but with two other
incidents similar to the Amsterdam brouhaha. Pantaleon purchased golf equipment amounting to US
$1,475.00 using his AmEx card, but he cancelled his credit card purchase and borrowed money
instead from a friend, after more than 30 minutes had transpired without the purchase having been
approved. Another incident is when Pantaleon used the card to purchase children’s shoes worth
$87.00 at a store in Boston, and it took 20 minutes before this transaction was approved by
respondent.
Pantaleon sent a letter to respondent Amex demanding for an apology for the “inconvenience,
humiliation and embarrassment he and his family thereby suffered" for respondent’s refusal to provide
credit authorization. The respondent replied that the delay in authorizing the purchase from Coster
was attributable to the circumstance that the charged purchase of US $13,826.00 "was out of the
usual charge purchase pattern established."
 
Thus, Pantaleon filed an action for damages against Amex. RTC ruled in favor of Pantaleon and
awarded damages, but the CA reversed it. Hence, the present case. On the premise that there was
an obligation on the part of respondent "to approve or disapprove with dispatch the charge purchase,
the Petitioner argues that the failure to timely approve or disapprove the purchase constituted mora
solvendi on the part of respondent in the performance of its obligation. For its part, respondent
characterizes the depiction by petitioner of its obligation to him as "to approve purchases
instantaneously or in a matter of seconds."
 
The main issue is WON respondent had committed breach of its obligations to Pantaleon.
 
The SC granted the petition.
MORA SOLVENDI – Petitioner’s perspective MORA ACCIPENDI – Respondent’s perspective
Requisites: Requisites:
1. the obligation is demandable and liquidated; 1. an offer of performance by the debtor who has
2. debtor delays performance; and the required capacity;
3. the creditor judicially or extrajudicially 2. the offer must be to comply with the prestation
requires the debtor’s performance as it should be performed; and
3. the creditor refuses the performance without just
cause
Credit Card Company(Amex) is the Credit Card Company(Amex) is the
debtor/obligor creditor/obligee
 
SC: Generally, the relationship between a credit card provider and its card holders is that of creditor-
debtor, with the card company as the creditor extending loans and credit to the card holder, who as
debtor is obliged to repay the creditor. This relationship already takes exception to the general rule
that as between a bank and its depositors, the bank is deemed as the debtor while the depositor is
considered as the creditor.
 
Ultimately, petitioner’s perspective appears more sensible than if we were to still regard respondent
as the creditor in the context of this cause of action. If there was delay on the part of respondent in its
performance of the debtor’s obligation (i.e., the repayment of the debt), but it would be delay in the
extension of the credit in the first place. Such delay would not fall under mora accipiendi, which
contemplates that the obligation of the debtor, such as the actual purchases on credit, has already
been constituted. Herein, the establishment of the debt itself (purchases on credit of the jewelry) had
not yet been perfected, as it remained pending the approval or consent of the respondent credit card
company.
As held by the RTC, the tardiness on the part of respondent in acting on petitioner’s purchase at
Coster did constitute culpable delay on its part in complying with its obligation to act promptly on its
customer’s purchase request, whether such action be favorable or unfavourable.
 
In this case, both parties have testified that normal approval time for purchases was a matter of
seconds. Plaintiff testified that his personal experience with the use of the card was that except for the
three charge purchases subject of this case, approvals of his charge purchases were always obtained
in a matter of seconds. Defendant’s credit authorizer Edgardo Jaurique likewise testified that on
normal occasions, the normal approval time for charges would be 3 to 4 seconds.
The Court was convinced that respondent’s delay constitute[s] breach of its contractual obligation to
act on petitioner’s use of the card abroad "with special handling." The culpable failure of respondent
herein is not the failure to timely approve petitioner’s purchase, but the more elemental failure to
timely act on the same, whether favorably or unfavorably. Even assuming that respondent’s credit
authorizers did not have sufficient basis on hand to make a judgment, there’s no reason why
respondent could not have promptly informed petitioner the reason for the delay, and duly advised
him that resolving the same could take some time. In that way, petitioner would have had informed
basis on whether or not to pursue the transaction at Coster, given the attending circumstances.
Instead, petitioner was left uncomfortably dangling in the chilly autumn winds in a foreign land and
soon forced to confront the wrath of foreign folk.
 
Additional:
·        Was respondent in bad faith? Yes. In Amsterdam, respondent consumed more than one
hour to simply go over plaintiff’s past credit history with defendant, his payment record and
his credit and bank references, when all such data are already stored and readily available
from its computer.
·        What’s the basis for the award of damages?  Not simply because respondent incurred
delay, but because the delay, for which culpability lies under Article 1170, led to the
particular injuries under Article 2217 of the Civil Code for which moral damages are
remunerative. The somewhat unusual attending circumstances to the purchase at Coster –
that there was a deadline for the completion of that purchase by petitioner before any delay
would redound to the injury of his several traveling companions – gave rise to the moral
shock, mental anguish, serious anxiety, wounded feelings and social humiliation sustained
by the petitioner.
 
Facts:
TINGA, J.
The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son
Adrian Roberto, joined an escorted tour of Western Europe organized by Trafalgar Tours of
Europe, Ltd., in October of 1991. The tour group arrived in Amsterdam in the afternoon of 25
October 1991, the second to the last day of the tour. As the group had arrived late in the city, they
failed to engage in any sight-seeing. Instead, it was agreed upon that they would start early the next
day to see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster Diamond House in
Amsterdam around 10 minutes before 9:00 a.m. The group had agreed that the visit to Coster should
end by 9:30 a.m. to allow enough time to take in a guided city tour of Amsterdam. The group was
ushered into Coster shortly before 9:00 a.m., and listened to a lecture on the art of diamond polishing
that lasted for around ten minutes. Afterwards, the group was led to the store’s showroom to
allow them to select items for purchase. Mrs. Pantaleon had already planned to purchase even
before the tour began a 2.5 karat diamond brilliant cut, and she found a diamond close enough
in approximation that she decided to buy. Mrs. Pantaleon also selected for purchase a pendant
and a chain, all of which totaled U.S. $13,826.00.
 
To pay for these purchases, Pantaleon presented his American Express credit card together
with his passport to the Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes
before the tour group was slated to depart from the store. The sales clerk took the card’s imprint, and
asked Pantaleon to sign the charge slip. The charge purchase was then referred electronically to
respondent’s Amsterdam office at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been
approved. His son, who had already boarded the tour bus, soon returned to Coster and
informed the other members of the Pantaleon family that the entire tour group was waiting for
them. As it was already 9:40 a.m., and he was already worried about further inconveniencing the
tour group, Pantaleon asked the store clerk to cancel the sale. The store manager though
asked plaintiff to wait a few more minutes. After 15 minutes, the store manager informed
Pantaleon that respondent had demanded bank references. Pantaleon supplied the names of
his depositary banks, then instructed his daughter to return to the bus and apologize to the
tour group for the delay.
 
At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and 30
minutes after the tour group was supposed to have left the store, Coster decided to release the
items even without respondent’s approval of the purchase. The spouses Pantaleon returned to
the bus. It is alleged that their offers of apology were met by their tourmates with stony silence.
The tour group’s visible irritation was aggravated when the tour guide announced that the city tour of
Amsterdam was to be canceled due to lack of remaining time, as they had to catch a 3:00 p.m. ferry
at Calais, Belgium to London. Mrs. Pantaleon ended up weeping, while her husband had to take
a tranquilizer to calm his nerves.
 
It later emerged that Pantaleon’s purchase was first transmitted for approval to respondent’s
Amsterdam office at 9:20 a.m., Amsterdam time, then referred to respondent’s Manila office at 9:33
a.m, then finally approved at 10:19 a.m., Amsterdam time. The Approval Code was transmitted to
respondent’s Amsterdam office at 10:38 a.m., several minutes after petitioner had already left Coster,
and 78 minutes from the time the purchases were electronically transmitted by the jewelry store to
respondent’s Amsterdam office.
 
After the star-crossed tour had ended, the Pantaleon family proceeded to the United States
before returning to Manila on 12 November 1992. While in the United States, Pantaleon
continued to use his AmEx card, several times without hassle or delay, but with two other
incidents similar to the Amsterdam brouhaha. On 30 October 1991, Pantaleon purchased golf
equipment amounting to US $1,475.00 using his AmEx card, but he cancelled his credit card
purchase and borrowed money instead from a friend, after more than 30 minutes had
transpired without the purchase having been approved. On 3 November 1991, Pantaleon used
the card to purchase children’s shoes worth $87.00 at a store in Boston, and it took 20 minutes
before this transaction was approved by respondent.
On March 4, 1992, after coming back to Manila, Pantaleon sent a letter demanding an apology for
the “inconvenience, humiliation and embarrassment he and his family thereby suffered" for
respondent’s refusal to provide credit authorization for the aforementioned purchases”.  In
response, respondent sent a letter, stating among others that the delay in authorizing the purchase
from Coster was attributable to the circumstance that the charged purchase of US $13,826.00
"was out of the usual charge purchase pattern established."
Since respondent refused to accede to Pantaleon’s demand for an apology, the aggrieved cardholder
instituted an action for damages with the RTC of Makati City, Branch 145. Pantaleon prayed that he
be awarded ₱2,000,000.00, as moral damages; ₱500,000.00, as exemplary damages; ₱100,000.00,
as attorney’s fees; and ₱50,000.00 as litigation expenses.
 
RTC: Rendered a decision in favor of Pantaleon, awarding him P500K as moral damages, P300K as
exemplary damages, P100K as attorney’s fees, and P85,233.01 as expenses of litigation.
CA: Reversed the award of damages in favor of Pantaleon, holding that respondent had not breached
its obligations to petitioner. Hence, the present case.
ISSUE: WON respondent had committed breach of its obligations to Pantaleon - YES.
RULING: Petition is GRANTED. Decision of the CA is REVERSED and SET ASIDE. Decision of the
RTC of Makati is REINSTATED.
 
RATIO:
The RTC had concluded, based on the testimonial representations of Pantaleon and respondent’s
credit authorizer, Edgardo Jaurigue, that the normal approval time for purchases was "a matter
of seconds." Based on that standard, respondent had been in clear delay with respect to the
three subject transactions. As it appears, the CA conceded that there had been delay on the part
of respondent in approving the purchases.
 
CA: First, the appellate court ruled that the delay was not attended by bad faith, malice, or gross
negligence. Second, it ruled that respondent "had exercised diligent efforts to effect the approval" of
the purchases, which were "not in accordance with the charge pattern" petitioner had established for
himself, as exemplified by the fact that at Coster, he was "making his very first single charge purchase
of US$13,826," and "the record of [petitioner]’s past spending with [respondent] at the time does not
favorably support his ability to pay for such purchase."
 
On the premise that there was an obligation on the part of respondent "to approve or disapprove with
dispatch the charge purchase," petitioner argues that the failure to timely approve or disapprove
the purchase constituted mora solvendi on the part of respondent in the performance of its
obligation. For its part, respondent characterizes the depiction by petitioner of its obligation to him as
"to approve purchases instantaneously or in a matter of seconds."
 
(RELATED TO TOPIC[simple loan]):
Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default
are that the obligation is demandable and liquidated; the debtor delays performance; and the
creditor judicially or extrajudicially requires the debtor’s performance. Petitioner asserts that the
Court of Appeals had wrongly applied the principle of mora accipiendi, which relates to delay on the
part of the obligee in accepting the performance of the obligation by the obligor. The requisites of
mora accipiendi are: an offer of performance by the debtor who has the required capacity; the offer
must be to comply with the prestation as it should be performed; and the creditor refuses the
performance without just cause. The error of the appellate court, argues petitioner, is in relying on the
invocation by respondent of "just cause" for the delay, since while just cause is determinative of mora
accipiendi, it is not so with the case of mora solvendi.
 
MORA SOLVENDI – Petitioner’s perspective MORA ACCIPENDI – Respondent’s perspective
 Requisites: Requisites:
1. the obligation is demandable and liquidated; 1. an offer of performance by the debtor who has
2. debtor delays performance; and the required capacity;
3. the creditor judicially or extrajudicially 2. the offer must be to comply with the prestation
requires the debtor’s performance as it should be performed; and
3. the creditor refuses the performance without just
cause
We can see the possible source of confusion as to which type of mora to appreciate. Generally, the
relationship between a credit card provider and its card holders is that of creditor-debtor, with
the card company as the creditor extending loans and credit to the card holder, who as debtor
is obliged to repay the creditor. This relationship already takes exception to the general rule that
as between a bank and its depositors, the bank is deemed as the debtor while the depositor is
considered as the creditor. Petitioner is asking us, not baselessly, to again shift perspectives and
again see the credit card company as the debtor/obligor, insofar as it has the obligation to the
customer as creditor/obligee to act promptly on its purchases on credit.
 
Ultimately, petitioner’s perspective appears more sensible than if we were to still regard respondent
as the creditor in the context of this cause of action. If there was delay on the part of respondent in
its normal role as creditor to the cardholder, such delay would not have been in the
acceptance of the performance of the debtor’s obligation (i.e., the repayment of the debt), but
it would be delay in the extension of the credit in the first place. Such delay would not fall under
mora accipiendi, which contemplates that the obligation of the debtor, such as the actual purchases
on credit, has already been constituted. Herein, the establishment of the debt itself (purchases on
credit of the jewelry) had not yet been perfected, as it remained pending the approval or
consent of the respondent credit card company.
 
Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first recognize
that there was indeed an obligation on the part of respondent to act on petitioner’s purchases with
"timely dispatch," or for the purposes of this case, within a period significantly less than the one hour it
apparently took before the purchase at Coster was finally approved.
 
The findings of the trial court, to our mind, amply established that the tardiness on the part of
respondent in acting on petitioner’s purchase at Coster did constitute culpable delay on its
part in complying with its obligation to act promptly on its customer’s purchase request,
whether such action be favorable or unfavorable. We quote the trial court, thus:
 
1 Issue:
st
As to the first issue, both parties have testified that normal approval time for purchases was a matter
of seconds.
Plaintiff testified that his personal experience with the use of the card was that except for the three
charge purchases subject of this case, approvals of his charge purchases were always obtained
in a matter of seconds. Defendant’s credit authorizer Edgardo Jaurique likewise testified that on
normal occasions, the normal approval time for charges would be 3 to 4 seconds.
 
Both parties likewise presented evidence that the processing and approval of plaintiff’s charge
purchase at the Coster Diamond House was way beyond the normal approval time of a "matter of
seconds".
 
Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and by the
time he had to leave the store at 10:05 a.m., no approval had yet been received. In fact, the Credit
Authorization System (CAS) record of defendant at Phoenix Amex shows that defendant’s
Amsterdam office received the request to approve plaintiff’s charge purchase at 9:20 a.m.,
Amsterdam time or 01:20, Phoenix time, and that the defendant relayed its approval to Coster at
10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one hour and [18]
minutes. And even then, the approval was conditional as it directed in computerese [sic] "Positive
Identification of Card holder necessary further charges require bank information due to high exposure.
By Jack Manila."
The delay in the processing is apparent to be undue as shown from the frantic successive queries of
Amexco Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen. Advise how long
will this take?" They were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix.
Manila Amexco could be unaware of the need for speed in resolving the charge purchase referred to
it, yet it sat on its hand, unconcerned.
 
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows how
Amexco Netherlands viewed the delay as unusually frustrating. In sequence expressed in Phoenix
time from 01:20 when the charge purchased was referred for authorization, defendants own record
shows:
01:22 – the authorization is referred to Manila Amexco
01:32 – Netherlands gives information that the identification of the cardmember has been presented
and he is buying jewelries worth US $13,826.
01:33 – Netherlands asks "How long will this take?"
02:08 – Netherlands is still asking "How long will this take?"
 
The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to
act on his use of the card abroad "with special handling."
 
xxx
Notwithstanding the popular notion that credit card purchases are approved "within seconds," there
really is no strict, legally determinative point of demarcation on how long must it take for a credit card
company to approve or disapprove a customer’s purchase, much less one specifically contracted
upon by the parties. Yet this is one of those instances when "you’d know it when you’d see it," and
one hour appears to be an awfully long, patently unreasonable length of time to approve or
disapprove a credit card purchase. It is long enough time for the customer to walk to a bank a
kilometer away, withdraw money over the counter, and return to the store.
Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the purchase "in
timely dispatch," and not "to approve the purchase instantaneously or within seconds." Certainly, had
respondent disapproved petitioner’s purchase "within seconds" or within a timely manner,
this particular action would have never seen the light of day. Petitioner and his family would have
returned to the bus without delay – internally humiliated perhaps over the rejection of his card – yet
spared the shame of being held accountable by newly-made friends for making them miss the chance
to tour the city of Amsterdam.
 
We do not wish do dispute that respondent has the right, if not the obligation, to verify whether the
credit it is extending upon on a particular purchase was indeed contracted by the cardholder, and that
the cardholder is within his means to make such transaction. 
The culpable failure of respondent herein is not the failure to timely approve petitioner’s
purchase, but the more elemental failure to timely act on the same, whether favorably or
unfavorably. Even assuming that respondent’s credit authorizers did not have sufficient basis
on hand to make a judgment, we see no reason why respondent could not have promptly
informed petitioner the reason for the delay, and duly advised him that resolving the same
could take some time. In that way, petitioner would have had informed basis on whether or not
to pursue the transaction at Coster, given the attending circumstances. Instead, petitioner was
left uncomfortably dangling in the chilly autumn winds in a foreign land and soon forced to
confront the wrath of foreign folk.
 
Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in bad
faith, and the court should find that under the circumstances, such damages are due. The findings of
the trial court are ample in establishing the bad faith and unjustified neglect of respondent,
attributable in particular to the "dilly-dallying" of respondent’s Manila credit authorizer,
Edgardo Jaurique. Wrote the trial court:
 
While it is true that the Card membership Agreement, which defendant prepared, is silent as to the
amount of time it should take defendant to grant authorization for a charge purchase, defendant
acknowledged that the normal time for approval should only be three to four seconds.
Specially so with cards used abroad which requires "special handling", meaning with priority.
Otherwise, the object of credit or charge cards would be lost; it would be so inconvenient to use that
buyers and consumers would be better off carrying bundles of currency or traveller’s checks, which
can be delivered and accepted quickly. Such right was not accorded to plaintiff in the instances
complained off for reasons known only to defendant at that time. This, to the Court’s mind,
amounts to a wanton and deliberate refusal to comply with its contractual obligations, or at
least abuse of its rights, under the contract.
 
xxx
The delay committed by defendant was clearly attended by unjustified neglect and bad faith, since it
alleges to have consumed more than one hour to simply go over plaintiff’s past credit history
with defendant, his payment record and his credit and bank references, when all such data are
already stored and readily available from its computer. This Court also takes note of the fact that
there is nothing in plaintiff’s billing history that would warrant the imprudent suspension of action by
defendant in processing the purchase.
 
Mr. Jaurique testified that there were no outstanding account or "delinquencies" in plaintiff’s account.
It should be emphasized that the reason why petitioner is entitled to damages is not simply
because respondent incurred delay, but because the delay, for which culpability lies under
Article 1170, led to the particular injuries under Article 2217 of the Civil Code for which moral
damages are remunerative. Moral damages do not avail to soothe the plaints of the simply
impatient, so this decision should not be cause for relief for those who time the length of their credit
card transactions with a stopwatch. The somewhat unusual attending circumstances to the
purchase at Coster – that there was a deadline for the completion of that purchase by
petitioner before any delay would redound to the injury of his several traveling companions –
gave rise to the moral shock, mental anguish, serious anxiety, wounded feelings and social
humiliation sustained by the petitioner, as concluded by the RTC. Those circumstances are fairly
unusual, and should not give rise to a general entitlement for damages under a more mundane set of
facts.
 
We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hard-
and-fast rule in determining what would be a fair and reasonable amount of moral damages, since
each case must be governed by its own peculiar facts, however, it must be commensurate to the loss
or injury suffered. Petitioner’s original prayer for ₱5,000,000.00 for moral damages is excessive under
the circumstances, and the amount awarded by the trial court of ₱500,000.00 in moral damages more
seemly.1avvphi1
Likewise, we deem exemplary damages available under the circumstances, and the amount of
₱300,000.00 appropriate. There is similarly no cause though to disturb the determined award of
₱100,000.00 as attorney’s fees, and ₱85,233.01 as expenses of litigation.
C. Interest and The Usury Law (Act No. 2655, as amended)
• De la Paz v. L&J Development Company, 734 SCRA 364, 2014 - YODH
G.R. No. 183360 September 8, 2014 ROLANDO C. DE LA PAZ,* Petitioner, vs. L & J
DEVELOPMENT COMPANY, Respondent.
 
SUMMARY: Rolando Dela Paz loaned ₱350,000 in favor of L&J Dev’t Co. The loan had no maturity
date and had an interest rate of 6% per month or ₱21,000 per month. L&J made payments for over 2
years but eventually, L&J failed to make payments. Its outstanding debt to Rolando was at ₱772,000.
 
It turned out that Rolando was convinced by Atty. Salonga, president of L&J, that the loan need not be
reduced in writing. Rolando further testified that it was Salonga who insisted on the 6% per month
interest.
 
L&J alleged that the loan was unconscionable and was not reduced in writing. Hence, it prayed that
the interest rate be lowered to 12% per annum.
 
The RTC ruled in favor of Rolando. The CA reversed, holding that the Civil Code mandates that
interest must be reduced to writing in order that loans may provide for interest.
 
Issue: WON the 6% monthly interest was valid.
 
SC: No.Two conditions are required for an interest to be due and payable: (1) express stipulation for
the payment of interest; and (2) the agreement to pay interest is reduced in writing. Hence, although
L&J agreed to pay interest, since the same was not reduced to writing, no interest is due.
The SC also held that Atty. Salonga is not in bad faith. Rolando should have been more prudent in
dealing with a complete stranger. He could have demanded that the contract be reduced to writing.
He failed to do so.
 
SC also held that L&J cannot be held in estoppel, considering the principle that "estoppel cannot give
validity to an act that is prohibited by law or one that is against public policy."
 
Finally, even though the Usury Law is legally non-existent since the Central Bank Circular No. 905,
s.1982 suspended the law’s application, the Courts may still reduce an interest rate if, from the
circumstances, the court finds that the interest rate is excessive, iniquitous, unconscionable and
exorbitant.
 
FACTS: Rolando De La Paz (Rolando) loaned ₱350,000 in favor of respondent L&J Development
Company (L&J).  Atty. Esteban Salonga (Atty. Salonga) was L&J’s President and General Manager.
The loan had no specified maturity date and had a 6% Monthly interest Rate. Hence, L&J would pay
Rolando ₱21,000 per month as interest for the loan.
 
From December 2000 to August 2003, L&J paid Rolando a total of ₱576,000.007 representing
interest charges. However, L&J failed to pay despite repeated demands.
 
Hence, Rolando filed a case for collection of sum of money with damages against L&J. Rolando
alleged, among others, that L&J’s debts of January 2005, inclusive of the monthly interest, stood
at ₱772,000.00; that the 6% monthly interest was upon Atty. Salonga’s suggestion; and, that the
latter tricked him into parting with his money without the loan transaction being reduced into
writing.
In their defense, L&J claimed that the failure to pay the loan was due to a fortuitous event, that is, the
financial difficulties brought about by the economic crisis. They further argued that Rolando cannot
enforce the 6% monthly interest for being unconscionable and shocking to the morals. Hence,
the payments already made should be applied to the ₱350,000.00 principal loan.
 
Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When
Nilo told him that Atty. Salonga and L&J needed money to finish their projects, he agreed to lend
them money. He personally met with Atty. Salonga and their meeting was cordial.
Rolando said that when L&J was in the process of borrowing the ₱350,000.00 from him, it was Arlene
San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions thereof.
Furthermore, it was not he who demanded for the 6% monthly interest. It was L&J and Atty.
Salonga, through Arlene, who insisted on paying the said interest as they asserted that the loan
was only a short-term one.
 
MTC upheld the 6% monthly interest.  The MTC ratiocinated that since L&J agreed thereto and
voluntarily paid the interest at such rate from 2000 to 2003, it is already estopped from impugning
the same. However, the MTC reduced the interest rate to 12% per annum based on equity.
 
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. On appeal to the RTC,
L&J proposed the following computation for the interest:
 
Hence, the 12% per annum legal interest should have been applied from the time of the constitution of the obligation. At
12% per annum interest rate, it asserted that the amount of interestit ought to pay from December 2000 to March 2003
and from April 2003 to August 2003, only amounts to ₱105,000.00. If this amount is deducted from the total interest
paymentsalready made, which is ₱576,000.00, the amount of ₱471,000.00 appears to have beenpaid over and above
what is due. Applying the rule on compensation, the principal loan of ₱350,000.00 should be set-off against the
₱471,000.00, resulting in the complete payment of the principal loan.
 
RTC affirmed the MTC decision.
 
The CA reversed the decisions. It held that since the parties failed to stipulate in writing the imposition
of interest, no interest shall be due thereon pursuant to Article 1956 of the Civil Code.
The CA further held that even if payment of interest has been stipulated in writing, the 6% monthly
interest is still outrightly illegal and unconscionable because it is contrary to morals, if not
against the law. Being void, this cannot be ratified and may be set up by the debtor as defense. For
these reasons, Rolando cannot collect any interest even if L&J offered to pay interest. Consequently,
Rolando has to return all the interest payments of ₱576,000.00 to L&J.
 
ISSUE: WON the 6% Monthly Interest was valid (NO)
 
RULING: WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R.
SP No. 100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is
ordered to pay respondent L&J Development Company the amount of ,₱226,000.00, plus interest of
6o/o per annum from the finality of this Decision until fully paid.
 
RATIO:
LACK OF WRITTEN STIPULATION
 
“Article 1956. No interest shall be due unless it has been expressly stipulated in writing.”
 
Jurisprudence on the matter also holds that for interest to be due and payable, two conditions
must concur:
a)       express stipulation for the payment of interest; and
b)      the agreement to pay interest is reduced in writing.
 
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no
interest is due. The collection of interest without any stipulation in writing is prohibited by law.
BAD FAITH OF ATTY. SALONGA
 
Rolando blames Atty. Salonga for the lack of a written document, claiming that said lawyer used
his legal knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty.
Salonga. It was Salonga who convinced Rolando that the contract need not be reduced to writing.
 
SC Disagreed.
 
First, despite the lack of a document stipulating the payment of interest, L&J nevertheless  
devotedly paid interests on the loan. It only stopped when it suffered from financial difficulties. CONCLUSION (ORDERS)
   
Second, regardless of Atty. Salonga’s profession, Rolando who is an architect and an educated The CA thus correctly adjudged that the excess interest payments made by L&J should be applied to
man himself could have been a more reasonably prudent person under the circumstances. its principal loan. As computed by the CA, Rolando is bound to return the excess payment of
  ₱226,000.00 to L&J following the principle of solutio indebiti.
Finally, Rolando admitted that he had no prior communication with Atty. Salonga. Despite Atty.  
Salonga being a complete stranger, he immediately trusted him and lent his company However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013,36 the
₱350,000.00, a significant amount. interest imposed by the CA must be accordingly modified. The ₱226,000.00 which Rolando is ordered
  to pay L&J shall earn an interest of 6% per annumfrom the finality of this Decision.
Moreover, as the creditor, he could have requested or required that all the terms and conditions
of the loan agreement, which include the payment of interest, be put down in writing to ensure that
he and L&J are on the same page.
 
L&J NOT IN ESTOPPEL
 
Rolando argues that L&J is estopped considering that it has been paying Rolando interest at
such rate for more than two and a half years. In fact, in its pleadings before the MeTCand the RTC,
L&J merely prayed for the reduction of interest from 6% monthly to 1% monthly or 12% per annum.
 
SC Disagreed. In Ching v. Nicdao, the daily payments of the debtor to the lender were
considered as payment of the principal amount of the loan because Article 1956 was not
complied with. This was notwithstanding the debtor’s admission that the payments made were
for the interests due. The Court categorically stated therein that "[e]stoppel cannot give validity to
an act that is prohibited by law or one thatis against public policy."
 
ON USURY
 
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a
loan is unconscionable, regardless of who between the parties proposed the rate.
 
However, Usury is legally non-existent, in view of Central Bank Circular No. 905, S.1982 which
suspended the Usury Law. Even so, not all interest rates levied upon loans are permitted by the
courts as they have the power to equitably reduce unreasonable interest rates.
 
SC cited Trade & Investment Development Corporation of the Philippines v. Roblett Industrial
Construction Corporation:
 
“While the Court recognizes the right of the parties to enter into contracts and who are expected to
comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if
they are unconscionable and the Court is allowed to temper interest rates when necessary. In
exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous and unconscionable in one case,
may be just in another. x x x
 
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per month
and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for
being contrary to morals, if not against the law. The Court, however, stresses that these rates shall be
invalidated and shall be reduced only in cases where the terms of the loans are open-ended , and
where the interest rates are applied for an indefinite period. Hence, the imposition of a specific sum
of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not considered unconscionable.30
 
In the case at bench, there is no specified period as to the payment of the loan. Hence, levying
6% monthly or 72% interest per annum is "definitely outrageous and inordinate."
 
The situation that it was the debtor who insisted on the interest rate will not exempt Rolando
from a ruling that the rate is void.
 
SC Cited Asian Cathay Finance and Leasing Corporation v. Gravador,
 
"the imposition of an unconscionable rate of interest on a money debt , even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man." Indeed, "voluntariness does not make
the stipulation on [an unconscionable] interest valid."
• Jadenil v. Salas, G.R. No. 47878, July 24, 1942 - MONA
G.R. No. L-47878             July 24, 1942
GIL JARDENIL, plaintiff-appellant,  vs. HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS),
defendant-appellee.
MORAN, J.
 
Summary: Mr. Hepti Solas mortgaged a parcel of land to Mr. Jardenil in exchange for a loan of
P2,400. The mortgage deed states that “Mr. Solas agrees to pay Mr. Jardenil on or before March 31,
1934, with the interest of said sum at the rate of 12% per year from the date until the day of its
expiration, that is, March 31, 1934.”
 
ISSUE: WON SOLAS is bound to pay the stipulated interest only up to the date of maturity as fixed in
the promissory note or up to the date payment is effected – ONLY UP TO DATE OF MATURITY
FIXED IN PROMISSORY NOTE
RULING: Solas has clearly agreed to pay interest only up to the date of maturity, or until March 31,
1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor
would continue to pay interest, we cannot in law, indulge in any presumption as to such interest;
otherwise, we would be imposing upon the debtor an obligation that the parties have not chosen to
agree upon.
Article 1755 of the Civil Code provides that "interest shall be due only when it has been
expressly stipulated."
When a party sues on a written contract and no attempt is made to show any vice therein, he cannot
be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the
law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied
by what their own notions of justice or equity may dictate. Plaintiff is, therefore, entitled only to the
stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March 31, 1934.
And it being a fact that extra judicial demands have been made which we may assume to have been
so made on the expiration of the year of grace, he shall be entitled to legal interest upon the principal
and the accrued interest from April 1, 1935, until full payment.
 
FACTS: (Ganito lang yung facts. Wala talagang RTC/CA ruling sa full case)
This is an action for foreclosure of mortgage.
The only question raised in this appeal is: Is SOLAS bound to pay the stipulated interest only
up to the date of maturity as fixed in the promissory note, or up to the date payment is
effected? This question is, in our opinion controlled by the express stipulation of the parties.
 
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS (P2,4000.00), moneda
filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil
novecientos treintaicuarto (1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde
fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la
presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y
causahabientes, la parcela de terreno descrita en el parrafo primero (1.º) de esta escritura.
Google Translate:
That in consideration of said sum still payable of TWO THOUSAND FOUR HUNDRED
PESOS (P2,400.00), Philippine currency, that Mr. Hepti Solas agrees to pay Mr. Jardenil
on or before the thirty-first day (March 31) of nineteen hundred thirty-four (1934), with
the interest of said sum at the rate of twelve percent (12%) per year from the date
until the day of its expiration, that is, thirty-one (March 31) of nineteen hundred and
thirty-four (1934), for hereby, Mr. Hepti Solas assigns and transfers, by way of first
mortgage, in favor of Mr. Jardenil, his heirs and successors, the parcel of land
described in the first paragraph (1st) of this deed.
ISSUE: Is SOLAS bound to pay the stipulated interest only up to the date of maturity as fixed in the
promissory note, or up to the date payment is effected? – Only up to the date of maturity as fixed
in the promissory note
RULING: Thus modified judgment is affirmed, with costs against appellant.
RATIO:
Defendant-appellee (Solas) has clearly agreed to pay interest only up to the date of maturity, or
until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-
payment, the debtor would continue to pay interest, we cannot in law, indulge in any
presumption as to such interest; otherwise, we would be imposing upon the debtor an
obligation that the parties have not chosen to agree upon.
 
Article 1755 of the Civil Code provides that "interest shall be due only when it has been
expressly stipulated."
 
A writing must be interpreted according to the legal meaning of its language (section 286, Act
No. 190, now section 58, Rule 123), and only when the wording of the written instrument
appears to be contrary to the evident intention of the parties that such intention must prevail.
(Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms employed by
the parties thereto are at war with their evident intent. On the contrary the act of the mortgage of
granting to the mortgagor on the same date of execution of the deed of mortgage, an
extension of one year from the date of maturity within which to make payment, without making
any mention of any interest which the mortgagor should pay during the additional period,
indicates that the true intention of the parties was that no interest should be paid during the
period of grace. What reason the parties may have therefor, we need not here seek to explore.
 
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to
express their agreement, for if such mistake existed, plaintiff (Jardenil) would have
undoubtedly adduced evidence to establish it and asked that the deed be reformed
accordingly, under the parcel-evidence rule.
 
We hold therefore, that as the contract is clear and unmistakable and the terms employed therein
have not been shown to belie or otherwise fail to express the true intention of the parties and that the
deed has not been assailed on the ground of mutual mistake which would require its reformation ,
same should be given its full force and effect. When a party sues on a written contract and no
attempt is made to show any vice therein, he cannot be allowed to lay any claim more than
what its clear stipulations accord. His omission, to which the law attaches a definite warning
as an in the instant case, cannot by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.
 
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2,
400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands
have been made which we may assume to have been so made on the expiration of the year of
grace, he shall be entitled to legal interest upon the principal and the accrued interest from
April 1, 1935, until full payment.
 
Separate Opinions
PARAS, J., dissenting:
Under the facts stated in the decision of the majority, I come to the conclusion that interest at the
rate of 12 per cent per annum should be paid up to the date of payment of the whole
indebtedness is made. Payment of such interest is expressly stipulated. True, it is stated in the
mortgage contract that interest was to be paid up to March 31, 1934, but this date was inserted
merely because it was the date of maturity. The extension note is silent as regards interest,
but its payment is clearly implied from the nature of the transaction which is only a renewal of
the obligation. In my opinion, the ruling of the majority is anomalous and at war with common
practice and everyday business usage.
• Cu Unjieng e Hijos v. Mabalacat Sugar, Co., G.R. No. 23644, October 4, 1930. - JESS
 [ No. 32644 . October 4, 1930 ]
Cu UNJIENG E HIJOS , plaintiff and appellee, vs. THE MABALACAT SUGAR Co. ET
AL., Defendants. THE MABALACAT SUGAR Co. , appellant.
Topic: Interest & The Usury Law (Act 2655, as amended)
Ponente: Street, J.
 
SUMMARY:
 
Plaintiff Cu Unjieng e Hijos filed this action for the purpose of recovering from Mabalacat Sugar
Company an indebtedness amounting to more than P163,000 with interest, and to foreclose a
mortgage given by debtor to secure the same, as well as to recover stipulated attorney’s fee and sum
of P1,206 paid by plaintiff for insurance upon the mortgaged property; Suiliong & Co., Inc. (surety of
Mabalacat) and Philippine National Bank (with interest as 2 mortgagee of land covered by
nd
mortgage to plaintiff) were joined as defendant.
 
Mabalacat Sugar Company appealed from the judgment [di ko maintindihan kasi Spanish siya -
see full Facts below for the orig Spanish decision]
 
SC:
1. WON the action was prematurely started (No) - [baka lang itanong, mas related ung 2 issue]
nd
Mortgage executed by Mabalacat Sugar Company:
Paragraph 5 - Non-compliance on the part of the mortgage debtor with any of the obligations
assumed in virtue of this contract will cause the entire debt to become due and give occasion
for the foreclosure of the mortgage.
- (As provided under paragraph 5 of mortgage contract)
Debtor party failed to comply with the obligation, therefore creditor was justified in treating the entire
mortgage debt as having been accelerated by such failure of debtor in paying installments/
 
- It appears, however, than on/ about Oct 20 1928, mortgage creditor, Cu unjieng e Hijos, agreed to
extend the time for payment of mortgage indebtedness until June 30 1929, with certain interim
payments to be made upon specified dates prior to the contemplated final liquidation of the whole
indebtedness.
- But the debtor party failed to make the interim payments due on Feb 25, 1929, March 25, 1929,
and April 25, 1929, and failed altogether to pay the balance due, according to the terms of this
extension, on June 30, 1929
 
- Debtor party: Notwithstanding the failure of the debtor to comply with the terms of this extension, it is
insisted for the appellant that this agreement for the extension of the time of payment had the
effect of abrogating the stipulation of the original contract with respect to the acceleration of
the maturity of the debt by non-compliance with the terms of the mortgage
- SC: The agreement to extend the time of payment was voluntary and without consideration so far as
the creditor is concerned; and the failure of the debtor to comply with the terms of the extension
justified the creditor in treating it as of no effect.
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
- On the propriety of interest charges made by plaintiff in estimating the amount of the indebtedness:
2 clause of mortgage contract:
nd
- Interest should be calculated upon indebtedness at the rate of 12% per annum
2 clause of mortgage contract (different paragraph) - [In Spanish – translated into English]
nd
"Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly,
at the end of each month."
 
SC:
- It is well settled that, under article 1109 of the CC, as well as under section 5 of the Usury Law (Act
No. 2655), the parties may stipulate that interest shall be compounded; and rests for the
computation of compound interest can certainly be made monthly, as well as quarterly, semiannually,
or annually. But in the absence of express stipulation for the accumulation of compound interest,
no interest can be collected upon interest until the debt is judicially claimed, and then the rate
at which interest upon accrued interest must be computed is fixed at 6 % per annum
 
- In the present case, however, the language which we have quoted above does not justify the
charging of interest upon interest, so far as interest on the capital is concerned. The provision
quoted merely requires the debtor to pay interest monthly at the end of each month, such
interest to be computed upon the capital of the loan not already paid. Clearly this provision does
not justify the charging of compound interest upon the interest accruing upon the capital
monthly.
It is true that in subsections (a), (&) and (c) of article IV of the mortgage, it is stipulated that the
interest can be thus computed upon sums which the creditor would have to pay out
(a) to maintain insurance upon the mortgaged property,
(b) to pay the land tax upon the same property, and
(c) upon disbursements that might be made by the mortgagee to maintain the property in good
condition.
- But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing
upon the capital of the debt.
 
- The TC was of the opinion that Interest could be so charged, because of the Exhibit 1 of the
Mabalacat Sugar Company, which the court considered as an interpretation by the parties to the
contract and a recognition by the debtor of the propriety of compounding the interest earned by the
capital.
-        But the exhibit referred to is merely a receipt showing that the sum of P256.28 was,
on March 19, 1928, paid by the debtor to the plaintiff as interest upon interest.
But where interest is improperly charged, at an unlawful rate, the mere voluntary payment of it
to the creditor by the debtor is not binding . Such payment, in the case before us, was
usurious, being in excess of 12 % which is allowed to be charged, under section 2 of the Usury
Law, when a debt is secured by mortgage upon real property.
The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon interest can
be accumulated in the manner adopted by the creditor in this case.
 
 
FACTS:
- This action was instituted in the CFI of Pampanga by Cu Unjieng e Hijos, for the purpose of
recovering from the Mabalacat Sugar Company an indebtedness amounting to more than P163,000,
with interest, and to foreclose a mortgage given by the debtor to secure the same, as well as to
recover stipulated attorney's fee and the sum of P1,206, paid by the plaintiff for insurance upon the
mortgaged property, with incidental relief.
 
- In the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the Mabalacat Sugar
Company, and as having a third mortgage on the mortgaged property.
- The Philippine National Bank was also joined by reason of its interest as second mortgagee of the
land covered by the mortgage to the plaintiff
After the cause had been brought to issue by the answers of the several defendants, the cause
was heard and judgment rendered, the dispositive portion of the decision being as follows:
[[ HAHA BAKA GUSTO NYO LANG BASAHIN ]]
"Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a pagar a la
demandante la suma de P163,534.73, con sus intereses de 12 por ciento al año, compuestos mensualmente desde
el 1.° de mayo de 1929. También se le condena a pagar a dicha demandante la suma de P2,412 por las primas de
seguros abonadas por ésta, con sus intereses de 12 por ciento al año, compuestos también mensualmente desde el
15 de mayo de 1928, más la de P7,500 por honorarios de abogados y las costas del juicio. Y si esta deuda no se
pagare dentro del plazo de tres meses, se ejecutarán los bienes hipotecados de acuerdo con la ley.
"Si del producto de la venta hubiese algún remanente, éste se destinará al pago del crédito del Banco
Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al año desde el 7 de junio de 1929, sin perjuicio
de la orden de ejecución que pudiera expedirse en el asunto No. 26435 del Juzgado de Primera Instancia de

Manila.
"Se condena además a The Mabalacat Sugar Company al pago de la suma de P3,205.78 reclamada por
Siuliong & Co., con sus intereses de 9 por ciento al año desde el 29 de julio de 1926 hasta su completo pago,
ordenándola que rinda cuentas del azúcar por ella producido y pague la comisión correspondiente bajo la base de 5
por ciento de su valor, descontándose, desde luego, las cantidades ya pagadas.
"Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc."
 
- From this judgment the defendant, the Mabalacat Sugar Company, appealed.
ISSUES:
1. WON the action was prematurely started (No)
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
WON the payment was usurious (Yes, being in excess of 12% which is allowed to be charged,
under Sec 2 of Usury Law)
3. WON the attorney’s fees allowed by court in accordance with stipulation in the mortgage was
excessive (No)
4. WON the TC erred in not permitting an amendment to be filed by debtor to its answer (No)
 
HELD:
From what has been stated, it follows that the appealed judgment must be modified by deducting
the sum of P1,136.12 from the principal debt, so that the amount of said indebtedness shall be
P162,398,61, with interest at 12% per annum, from May 1, 1929.
- In other respects the judgment will be affirmed, and it is so ordered, with costs against the appellant.
 
RULING:
 
1. WON the action was prematurely started (No)
 
- In this connection we note that the mortgage executed by the Mabalacat Sugar Company contains,
in paragraph 5, a provision to the effect that non-compliance on the part of the mortgage debtor with
any of the obligations assumed in virtue of this contract will cause the entire debt to become due and
give occasion for the foreclosure of the mortgage.
- The debtor party failed to comply with the obligation, imposed upon it in the mortgage, to pay
the mortgage debt in the stipulated installments at the time specified in the contract. It results that the
creditor was justified in treating the entire mortgage debt as having been accelerated by such failure
of the debtor in paying the installments.
- It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e
Hijos, agreed to extend the time for payment of the mortgage indebtedness until June 30, 1929,
with certain interim payments to be made upon specified dates prior to the contemplated final
liquidation of the whole indebtedness. But the debtor party failed to make the interim payments
due on February 25, 1929, March 25, 1929, and April 25, 1929, and failed altogether to pay the
balance due, according to the terms of this extension, on June 30, 1929. Notwithstanding the failure
of the debtor to comply with the terms of this extension, it is insisted for the appellant that this
agreement for the extension of the time of payment had the effect of abrogating the stipulation
of the original contract with respect to the acceleration of the maturity of the debt by non-
compliance with the terms of the mortgage. As the trial court pointed out, this contention is
untenable.
The agreement to extend the time of payment was voluntary and without consideration so far as the
creditor is concerned; and the failure of the debtor to comply with the terms of the extension justified
the creditor in treating it as of no effect.
- The first error is therefore without merit.
 
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
 
The second error is directed to the propriety of the interest charges made by the plaintiff in estimating the amount of
the indebtedness.
- In this connection we note that, under the 2 clause of the mortgage, interest should be calculated
nd
upon the indebtedness at the rate of 12% per annum.
 
In the same clause, but in a separate paragraph, there is another provision with respect to the
payment of interest expressed in Spanish in the following words:
"Los intereses serán pagados mensualmente a fin de cada mes, computados teniendo en cuenta
el capital del préstamo aún no pagado."
Translated into English this provision reads substantially as follows:
 
"Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly, at the
end of each month."
 
 
- It is well settled that, under article 1109 of the CC, as well as under section 5 of the Usury
Law (Act No. 2655), the parties may stipulate that interest shall be compounded; and rests for
the computation of compound interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express stipulation for the accumulation of
compound interest, no interest can be collected upon interest until the debt is judicially
claimed, and then the rate at which interest upon accrued interest must be computed is fixed
at 6 % per annum
- In the present case, however, the language which we have quoted above does not justify the
charging of interest upon interest, so far as interest on the capital is concerned. The provision
quoted merely requires the debtor to pay interest monthly at the end of each month, such
interest to be computed upon the capital of the loan not already paid. Clearly this provision does
not justify the charging of compound interest upon the interest accruing upon the capital
monthly.
It is true that in subsections (a), (&) and (c) of article IV of the mortgage, it is stipulated that the
interest can be thus computed upon sums which the creditor would have to pay out
(a) to maintain insurance upon the mortgaged property,
(b) to pay the land tax upon the same property, and
(c) upon disbursements that might be made by the mortgagee to maintain the property in good
condition.
- But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing
upon the capital of the debt.
- The TC was of the opinion that Interest could be so charged, because of the Exhibit 1 of the
Mabalacat Sugar Company, which the court considered as an interpretation by the parties to the
contract and a recognition by the debtor of the propriety of compounding the interest earned by the
capital.
-        But the exhibit referred to is merely a receipt showing that the sum of P256.28 was,
on March 19, 1928, paid by the debtor to the plaintiff as interest upon interest.
But where interest is improperly charged, at an unlawful rate, the mere voluntary payment of it
to the creditor by the debtor is not binding. Such payment, in the case before us, was
usurious, being in excess of 12 % which is allowed to be charged, under section 2 of the Usury
Law, when a debt is secured by mortgage upon real property.
The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon interest can
be accumulated in the manner adopted by the creditor in this case.
 
- The point here ruled is in exact conformity with the decision of this court in Bachrach Garage and
Taxicab Co. vs. Golingco, where this court held that interest cannot be allowed in the absence of
stipulation, or in default thereof, except when the debt is judicially claimed; and when the debt is
judicially claimed, the interest upon the interest can only be computed at the rate of 6% per annum
 
- It results that the appellant's 2 assignment of error is well taken, and the compound interest must
nd
be eliminated from the judgment.
 
With respect to the amount improperly charged, we accept the estimate submitted by the
president and manager of the Mabalacat Sugar Company, who says that the amount improperly
included in the computation made by the plaintiff's bookkeeper is P879.84, in addition to the amount
of P256.28 covered by Exhibit 1 of the Mabalacat Sugar Company.
- But the plaintiff creditor had the right to charge interest, in the manner adopted by it, upon
insurance premiums which it had paid out; and if any discrepancy of importance is discoverable by
the plaintiff in the result here reached, it will be at liberty to submit a revised computation in this court,
upon motion for reconsideration, wherein interest shall be computed in accordance with this opinion,
that is to say, that no accumulation of interest will be permitted at monthly intervals, as regards
the capital of the debt, but such unpaid interest shall draw interest at the rate of 6 % from the date of
the institution of the action.
 
3. WON the attorney’s fees allowed by court in accordance with stipulation in the mortgage was
excessive (No)
 
- In the 3 assignment of error the appellant complains, as excessive, of the attorney's fees allowed by
rd

the court in accordance with stipulation in the mortgage.

- The allowance made on the principal debt was around 4%, and about the same upon the fee
allowed to the bank.
Under the circumstances we think the debtor has no just cause for complaint upon this score.
 
4. WON the TC erred in not permitting an amendment to be filed by debtor to its answer (No)
 
- The 4 assignment of error complains of the failure of the trial court to permit an amendment to be
th

filed by the debtor to its answer, the application therefor having been made on the day when the
cause had been set for trial, with notice that the period was non-extendible.
- The point was a matter in the discretion of the court, and no abuse of discretion is shown. 
• GSIS v. Court of Appeals, G.R. No. L-52478, October 30, 1986 - ALVIN
G.R. No. L-52478. Oct. 30, 1986
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant, vs. HONORABLE
CA, NEMENCIO R. MEDINA and JOSEFINA G. MEDINA, respondents-appellants.
Coronel Law Office for private respondents.
Alberto C. Lerma collaborating counsel for private respondents
Summary: The Medinas applied for a loan of P600k with GSIS. Only P350k was approved and it was
subjected to the following conditions:  approved the restoration of the amount of P350,000.00 (P295,000.00 + P55,000.00) originally
 That the interest rate is  9% per annum compounded monthly;  approved by the GSIS. This P350,000.00 loan was denominated by the GSIS as Account No. 31055.
 That it is repayable in 10 years at a monthly amortization of P4,433.65 including principal
and interest, and
 That any installment or amortization that remains due and unpaid shall bear interest at the
rate of 9%/12% per month.
 
The amount was further reduced to P295k. They executed a promissory note and a real estate
mortgage after accepting the reduced amount. Upon request, the amount was restored to P350k. The
Medinas executed an amendment of the mortgage. The Medinas later on defaulted in payment and
the mortgage was foreclosed. The Medinas now claim that the amendment of the real estate
mortgage did not contain provisions regarding the compounding of interest contained in the first
mortgage contract. Hence, there was overpayment on their part since the amended mortgage
superseded the first mortgage.
Did the amendment of the real estate mortgage superseded the mortgage contract particularly with
respect to compounding of interest?
No. First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity of
the previous mortgage contract. Second, nowhere in the aforesaid Amendment did the parties
manifest their intention to supersede the original contract. On the contrary in the WHEREAS clauses,
the existence of the previous mortgage contract was fully recognized and the fact that the same was
just being amended as to amount and amortization is fully established as to obviate any doubt. Third,
the Amendment of REM does not embody the act of conveyancing the subject properties by way of
mortgage. In fact, the intention of the parties to be bound by the unaffected provisions of the
mortgage contract expressed in unmistakable language is clearly evident in the last provision of the
Amendment of REM.
 
Are the interest rates on the loan accounts of the Medinas usurious?
 
No, it has already been settled that the Usury Law applies only to interest by way of compensation for
the use or forbearance of money. Interest by way of damages is governed by Article 2209 of the Civil
Code which provides that “If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon.”
 
In the Bachrach case, the SC ruled that the Civil Code permits the agreement upon a penalty apart
from the interest. Should there be such an agreement, the penalty does not include the interest, and
as such the two are different and distinct things which may be demanded separately . Reiterating the
same principle in the case of Equitable Banking Corp, where this Court held that the stipulation about
payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by
law.
Based on the finding that the GSIS had the legal right to impose an interest 9% per annum,
compounded monthly, on the loans of the Medinas and an interest of 9%/12% per annum on all due
and unpaid amortizations or installments, there is no question that the Medinas failed to settle their
accounts with the GSIS which as computed by the latter reached an outstanding balance of
P630,130.55 and that the GSIS had a perfect right to foreclose the mortgage.
 
PARAS, J.:
Facts:
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G. Medina (Medinas
for short) applied with the herein petitioner GSIS for a loan of P600,000. The GSIS Board of
Trustees, in its Resolution of Dec. 20, 1961, approved under Resolution No. 5041 only the
amount of P350,000, subject to the following conditions: that the rate of interest shall be 9%
per annum compounded monthly; repayable in 10 years at a monthly amortization of P4,433.65
including principal and interest, and that any installment or amortization that remains due and
unpaid shall bear interest at the rate of 9%/12% per month. The Office of the Economic
Coordinator, in a 2nd Indorsement dated Mar. 26, 1962, further reduced the approved amount to
P295,000.00. On Apr. 4, 1962, the Medinas accepting the reduced amount, executed a
promissory note and a real estate mortgage in favor of GSIS. On May 29, 1962, the GSIS, and
on June 6, 1962, the Office of the Economic Coordinator, upon request of the Medinas, both
 
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment of Real Estate Mortgage,
the pertinent portion of which reads:
 
WHEREAS, on the 4th day of Apr., 1962, the Mortgagor executed signed and delivered a real estate mortgage to
and in favor of the Mortgagee on real estate properties located in the City of Manila, ... to secure payment to the
mortgages of a loan of Two Hundred Ninety Five Thousand Pesos (P295,000.00) Philippine Currency, granted by
the mortgagee to the Mortgagors, ...;
 
WHEREAS, the parties herein have agreed as they hereby agree to increase the aforementioned loan from Two
Hundred Ninety Five Thousand Pesos (P295,000.00) to Three Hundred Fifty Thousand Pesos (P350,000.00),
Philippine Currency;
 
NOW, THEREFORE, for and in consideration of the foregoing premises, the aforementioned parties have
amended and by these presents do hereby amend the said mortgage dated Apr. 4, 1962, mentioned in the second
paragraph hereof by increasing the loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to Three
Hundred Fifty Thousand Pesos (P350,000.00) subject to this additional condition.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including principal and interest.
 
It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of the said
real estate mortgage dated Apr. 4, 1962 insofar as they are not inconsistent herewith, are hereby confirmed,
ratified and continued in full force and effect and that the parties thereto agree that this amendment be an integral
part of said real estate mortgage.
 
Upon application by the Medinas, the GSIS Board of Trustees adopted Resolution No. 121 on
Jan. 18, 1963, as amended by Resolution No. 348 dated Feb. 25, 1963, approving an additional
loan of P230,000.00 in favor of the Medinas on the security of the same mortgaged properties
and the additional properties covered by TCT Nos. 49234, 49235 and 49236, to bear interest at 9%
per annum compounded monthly and repayable in ten years. This additional loan of P230,000.00 was
denominated by the GSIS as Account No. 31442.
 
On Mar. 18, 1963, the Economic Coordinator thru the Auditor General interposed no objection
thereto, subject to the conditions of Resolution No. 121 as amended by Resolution No. 348 of the
GSIS.
 
Beginning 1965, the Medinas having defaulted in the payment of the monthly amortization on
their loan, the GSIS imposed 9%/12% interest on an installments due and unpaid. In 1967, the
Medinas began defaulting in the payment of fire insurance premiums.
 
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in the aggregate
amount of P575,652.42 as of Apr. 18, 1974, and demanded payment within 7 days from notice
thereof, otherwise, it would foreclose the mortgage.
On Apr. 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage with the Sheriff of
the City of Manila. On June 30, 1975, the Medinas filed with the CFI of Manila a complaint,
praying, among other things, that a restraining order or writ of preliminary injunction be
issued to prevent the GSIS and the Sheriff of the City of Manila from proceeding with the extra-
judicial foreclosure of their mortgaged properties. However, in view of Section 2 of PD 385, no
restraining order or writ of preliminary injunction was issued by the TC. On Apr. 25, 1975, the
Medinas made a last partial payment in the amount of P209,662.80.
 
Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, the real properties of the
Medinas covered by TCTs No. 32231, 43527, 51394, 58626, 60534, 63304, 67550, 67551 and
67552 of the Registry of Property of the City of Manila were sold at public auction to the GSIS as
the highest bidder for the total amount of P440,080.00 on Jan. 12, 1976, and the corresponding
Certificate of Sale was executed by the Sheriff of Manila on Jan. 27, 1976 (CFI Decision, pp. 212-213;
Rollo, p. 79).
 
On Jan. 30, 1976, the Medinas filed an Amended Complaint with the TC, praying for (a) the
declaration of nullity of their two real estate mortgage contracts with the GSIS as well as of the
extra-judicial foreclosure proceedings; and (b) the refund of excess payments, plus damages
and attorney's fees
 
TC: On Mar. 19, 1976, the GSIS filed its Amended Answer. After trial, the TC rendered a Decision
dated Jan. 21, 1977, the pertinent dispositive portion of which reads:
 
WHEREFORE, judgment is hereby rendered declaring the extra-judicial foreclosure conducted by the Sheriff
of Manila of real estate mortgage contracts executed by plaintiffs on Apr. 4, 1962, as amended on July 6, 1962,
and Feb. 17, 1963, null and void and the Sheriff's Certificate of Sale dated Jan. 27, 1976, in favor of the GSIS of
no legal force and effect; and directing plaintiffs to pay the GSIS the sum of P1,611.12 in full payment of their
obligation to the latter with interest of 9% per annum from Dec. 11, 1975, until fully paid.
 
CA: Dissatisfied with the said judgment, both parties appealed with the CA. The CA, in a
Decision promulgated on Jan. 18, 1980, ruled in favor of the Medinas —
 
WHEREFORE, the defendant GSIS is ordered to reimburse the amount of P9,580.00 as overpayment and to pay
plaintiffs P3,000.00 and Pl,000.00 as attorney's fees and litigation expenses, respectively. With these
modifications, the judgment appealed from is AFFIRMED in all other respects, with costs against defendant
GSIS."
Hence this petition.
 
SC Part I: The Second Division of this Court, in a Resolution dated Apr. 25, 1980, resolved to
deny the petition for lack of merit.
 
Petitioner filed on June 26, 1980 a MR dated June 17, 1980, of the above-stated Resolution and
respondents in a Resolution dated July 9, 1980, were required to comment thereon which comment
they filed on Aug. 6, 1980.
 
The petition was given due course in the Resolution dated July 6, 1981. Petitioner filed its brief on
Nov. 26, 1981; while private respondents filed their brief on Jan. 27, 1982, and the case was
considered submitted for decision in the Resolution of July 19, 1982.
 
Issues:
1. WON the amendment of real estate mortgage superseded the mortgage contract dated apr. 4,
1962, particularly with respect to compounding of interest; (NO)
2. WON the CA erred in sustaining the respondent-appellee spouses medina's claim or overpayment,
by crediting the fire insurance proceeds in the sum of p11,152.02 to the total payment made by said
spouses as of dec. 11, 1975; (YES)
3. WON the interest rates on the loan accounts of respondent-appellee spouses are usurious; (NO)
4. WON CA erred in affirming the annulment of the subject extrajudicial foreclosure and sheriff's
certificate of sale; (YES)
5. WON GSIS is liable for attorney's fees, expenses of litigation and costs. (NO)
 
Held:
The petition is impressed with merit.
 
1. There is no dispute as to the facts of the case. By agreement of the parties the issues in this case
are limited to the loan of P350,000.00 denominated as Account No. 31055subject of the Amendment
of Real Mortgage dated July 6, 1962, the interpretation of which is the major issue in this case.
GSIS claims that the amendment of the real estate mortgage did not supersede the original
mortgage contract dated Apr. 4, 1962 which was being amended only with respect to the
amount secured thereby, and the amount of monthly amortizations. All other provisions of
aforesaid mortgage contract including that on compounding of interest were deemed rewritten
and thus binding on and enforceable against the respondent spouses.
 
Accordingly, payments made by the Medinas in the total amount of P991,845.53 was applied as
follows: the amount of P600,495.51 to Account No. 31055, P466,965.31 of which to interest and
P133,530.20 to principal and P390,845.66 to Account No. 31442, P230,774.29 to interest and
P159,971.37 to principal.
 
On the other hand, the Medinas maintain that there is no express stipulation on compounded
interest in the amendment of mortgage contract of July 6, 1962 so that the compounded
interest stipulation in the original mortgage contract of Apr. 4, 1962 which has been
superseded cannot be enforced in the later mortgage.
 
Hence the Medinas claim an overpayment in Account No. 31055. The application of their total
payment in the amount of P991,845.53 as computed by the TC and by the CA is as follows:
 
... It appearing and so the parties admit in their own exhibits that as of Dec. 11, 1975, plaintiffs had paid a total of
P991,241.17 excluding fire insurance, P532,038.00 of said amount should have been applied to the full payment
of Acct. No. 31055 and the balance of P459,203.17 applied to the payment of Acct. No. 31442.
 
According to the computation of the GSIS the total amounts, collected on Acct. No. 31442 as of Dec.
11, 1975 total P390,745.66 thus leaving an unpaid balance of P70,028.63. The total amount plaintiffs
should pay on said account should therefore be P460,774.29. Deduct this amount from P459,163.17
which has been shown to be the difference between the total payments made by plaintiffs to the
G.S.I.S. as of Dec. 11, 1975 and the amount said plaintiffs should pay under their Acct. No. 31055,
there remains an outstanding balance of P1,611.12. This amount represents the balance of the
obligation of the plaintiffs to the G.S.I.S. on Acct. No. 31442 as of Dec. 11, 1975."
To recapitulate, the difference in the computation lies in the inclusion of the compounded
interest as demanded by the GSIS on the one hand and the exclusion thereof, as insisted by
the Medinas on the other.
 
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are
clear and leave no doubt as to the intention of the contracting parties, the literal meaning of
the stipulations shall control but when the words appear contrary to the evident intention of
the parties, the latter shall prevail over, the former. In order to judge the intention of the
parties, their contemporaneous and subsequent acts shall be principally considered.
 
There appears no ambiguity whatsoever in the terms and conditions of the amendment of the
mortgage contract herein quoted earlier. On the contrary, an opposite conclusion cannot be
otherwise but absurd.
 
As correctly stated by the GSIS in its brief, a careful perusal of the title, preamble and body of
the Amendment of Real Estate Mortgage dated July 6, 1962, taking into account the prior,
contemporaneous, and subsequent acts of the parties, ineluctably shows that said
Amendment was never intended to completely supersede the mortgage contract dated Apr. 4,
1962.
 
First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity
of the previous mortgage contract. Second, nowhere in the aforesaid Amendment did the
parties manifest their intention to supersede the original contract. On the contrary in the
WHEREAS clauses, the existence of the previous mortgage contract was fully recognized and the
fact that the same was just being amended as to amount and amortization is fully established as to
obviate any doubt. Third, the Amendment of Real Estate Mortgage dated July 6, 1962 does not
embody the act of conveyancing the subject properties by way of mortgage. In fact the intention
of the parties to be bound by the unaffected provisions of the mortgage contract of Apr. 4, 1962
expressed in unmistakable language is clearly evident in the last provision of the Amendment of Real
Estate Mortgage dated July 6, 1962 which reads:
It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of the said
real estate mortgage dated Apr. 4, 1962, insofar as they are not inconsistent herewith, are hereby confirmed,
ratified and continued to be in full force and effect, and that the parties hereto agree that the amendment be an
integral part of said real estate mortgage.
 
A review of prior, contemporaneous, and subsequent acts supports the conclusion that both
contracts are fully subsisting insofar as the latter is not inconsistent with the former. The fact
is the GSIS, as a matter of policy, imposes uniform terms and conditions for all its real estate loans, PREMISES CONSIDERED, the decision of the CA, in CA-G.R. No. 62541-R Medina, et al. v.
particularly with respect to compounding of interest. As shown in the case at bar, the original Government Service Insurance System et al., is hereby REVERSED and SET ASIDE, and a new one
mortgage contract embodies the same terms and conditions as in the additional loan is hereby RENDERED, affirming the validity of the extra-judicial foreclosure of the real estate
denominated as Account No. 31442 while the amendment carries the provision that it shall be mortgages of the respondent-appellee spouses Medina dated Apr. 4, 1962, as amended on July 6,
subject to the same terms and conditions as the real estate mortgage of Apr. 4, 1962 except as 1962, and Feb. 17, 1963.
to amount and amortization.
 
Furthermore, it would be contrary to human experience and to ordinary practice for the
mortgagee to impose less onerous conditions on an increased loan by the deletion of
compound interest exacted on a lesser loan.
 
II
There is an obvious error in the ruling of the CA in its Decision dated Jan. 18, 1980, which reads:
 
... We agree that plaintiff should be credited with P11,152.02 of the fire insurance proceeds as the same is
admitted in paragraph (4) of its Answer and should be added to their payments. (par. 13).
 
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
 
That they (GSIS) specifically deny the allegations in Paragraph 11, the truth being that plaintiffs are not entitled to
a credit of P19,381.07 as fire insurance proceeds since they were only entitled to, and were credited with, the
amount of P11,152.02 as proceeds of their fire insurance policy.
 
As can be gleaned from the foregoing, petitioner-appellant GSIS had already credited the amount of P11,152.02.
Thus, when the CA made the aforequoted ruling, it was actually doubly crediting the amount of P11,152.02 which
had been previously credited by petitioner-appellant GSIS.
 
III.
As to whether or not the interest rates on the loan accounts of the Medinas are usurious, it has
already been settled that the Usury Law applies only to interest by way of compensation for
the use or forbearance of money. Interest by way of damages is governed by Article 2209 of
the Civil Code of the Philippines which provides:
 
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon,...
 
In the Bachrach case (supra) the SC ruled that the Civil Code permits the agreement upon a
penalty apart from the interest. Should there be such an agreement, the penalty does not
include the interest, and as such the two are different and distinct things which may be
demanded separately. Reiterating the same principle in the later case of Equitable Banking
Corp. (supra), where this Court held that the stipulation about payment of such additional rate
partakes of the nature of a penalty clause, which is sanctioned by law.
 
IV.
Based on the finding that the GSIS had the legal right to impose an interest 9% per annum,
compounded monthly, on the loans of the Medinas and an interest of 9%/12% per annum on all due
and unpaid amortizations or installments, there is no question that the Medinas failed to settle their
accounts with the GSIS which as computed by the latter reached an outstanding balance of
P630,130.55 as of Apr. 12, 1975 and that the GSIS had a perfect right to foreclose the mortgage.
 
In the same manner, there is obvious error in invalidating the extra-judicial foreclosure on the
basis of a typographical error in the Sheriff's Certificate of Sale which stated that the mortgage
was foreclosed on May 17, 1963 instead of Feb. 17, 1963.
 
There is merit in GSIS' contention that the Sheriff's Certificate of Sale is merely provisional in
character and is not intended to operate as an absolute transfer of the subject property, but
merely to Identify the property, to show the price paid and the date when the right of
redemption expires (Section 27, Rule 39, Rules of Court, Francisco, The Revised Rules of Court,
1972 Vol., IV-B, Part I, p. 681). Hence the date of the foreclosed mortgage is not even a material
content of the said Certificate. (Rollo, p. 174).
 
V.
• Ligutan v. Court of Appeals, G.R. No. 138677, February 12, 2002 - RINA
G.R. No. 138677               February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF
APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
VITUG, J.:
SUMMARY: Tolomeo Ligutan and Leonidas dela Llana obtained a loan from Security Bank and
Trust Company. They executed a promissory note binding themselves, jointly and severally, to
pay the sum borrowed with an interest of 15.189% per annum upon maturity and to pay a
penalty of 5% every month on the outstanding principal and interest in case of default. They
agreed to pay 10% of the total amount due by way of attorney’s fees if the matter were
indorsed to a lawyer for collection or if a suit were instituted to enforce payment . The obligation
matured on 8 September 1981; the bank, however, granted an extension but only up until 29
December 1981. Despite several demands, petitioners failed to settle the debt. The bank sent a
final demand letter to petitioners informing them that they had five days within which to make full
payment. Since petitioners still defaulted, the bank filed with the RTC of Makati a complaint for
recovery of the due amount.
ISSUE: W/N the stipulated percentages are excessive, manifestly exorbitant, iniquitous and
unconscionable (NO)
The 5% penalty clause should not be reduced
A penalty clause, expressly recognized by law, is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages
caused by the breach. Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been
partly or irregularly complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the application of which, by
and large, is addressed to the sound discretion of the court.
The stipulated penalty might likewise be reduced when a partial or irregular performance
is made by the debtor. The stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor, when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.
The CA has reduced the penalty interest from 5% a month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the repeated acts of breach by petitioners of
their contractual obligation, the Court sees no cogent ground to modify the ruling of the
appellate court.
The 15.189% interest does not appear as being that excessive
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue
that has not been raised and ventilated before the courts below. In any event, the interest
stipulation, on its face, does not appear as being that excessive. The essence or rationale for
the payment of interest, quite often referred to as cost of money, is not exactly the same as that
of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest , if
there is an agreement to that effect, the two being distinct concepts which may
separately be demanded. What may justify a court in not allowing the creditor to impose
full surcharges and penalties, may not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of
the banking business and the core of a bank's existence.
The award of 10% of the total amount of indebtedness by way of attorney’s fees is
reasonable
Bearing in mind that the rate of attorney’s fees has been agreed to by the parties and intended
to answer not only for litigation expenses but also for collection efforts as well, the Court deems
the award of 10% attorney’s fees to be reasonable.
FACTS:
Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of P120,000.00
from Security Bank and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the outstanding principal
and interest in case of default. Petitioners agreed to pay 10% of the total amount due by
way of attorney’s fees if the matter were indorsed to a lawyer for collection or if a suit
were instituted to enforce payment. The obligation matured on 8 September 1981; the bank,
however, granted an extension but only up until 29 December 1981.
Despite several demands, petitioners failed to settle the debt which amounted to P114,416.10.
On 30 September 1982, the bank sent a final demand letter to petitioners informing them that
they had five days within which to make full payment. Since petitioners still defaulted on their
obligation, the bank filed with the RTC of Makati a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and
rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the
case reset on two consecutive occasions. In view of the absence of petitioners and their
counsel on the third hearing date, the bank moved, and the trial court resolved, to consider the
case submitted for decision.
Two years later, petitioners filed a MR of the order of the trial court declaring them as having
waived their right to present evidence and prayed that they be allowed to prove their case.
RTC: denied the motion and rendered its decision in favor of the plaintiff and against the defendants.
CA: affirmed the judgment of the trial court except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783.
Not fully satisfied with the decision of the appellate court, both parties filed their respective motions for
reconsideration. Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable.  The bank asked that the payment of interest and penalty be commenced not from
the date of filing of complaint but from the time of default as so stipulated in the contract of the parties.
CA Resolution: "We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with
interest thereon must commence not on the date of filing of the complaint as we have previously held
in our decision but on the date when the obligation became due.
"Considering that defendants-appellants partially complied with their obligation under the promissory
note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will
finally settle their obligation, it is our view and we so hold that in the interest of justice and public
policy, a penalty of 3% per month or 36% per annum would suffice.
Petitioners filed an omnibus motion for reconsideration and to admit newly discovered evidence,
alleging that while the case was pending before the trial court, Tolomeo Ligutan and his wife
Bienvenida executed a real estate mortgage to secure the existing indebtedness of Ligutan and dela
Llana with the bank. Petitioners contended that the execution of the real estate mortgage had the
effect of novating the contract. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit them
with the proceeds of the sale.
CA denied the omnibus motion for reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for reconsideration cannot be entertained under Section 2,
Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the newly-discovered evidence being
invoked by petitioners had actually been known to them when the case was brought on appeal and
when the first motion for reconsideration was filed.
ISSUES:
1.      W/N the stipulated percentages are excessive, manifestly exorbitant, iniquitous and
unconscionable (NO)
2.  W/N the execution of the real estate mortgage as security for the existing loan would
have resulted in the extinguishment of the original contract of loan because of
novation (NO)
RULING: WHEREFORE, the petition is DENIED.
The 5% penalty clause should not be reduced
A penalty clause, expressly recognized by law, is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages
caused by the breach. Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been
partly or irregularly complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the application of which, by
and large, is addressed to the sound discretion of the court.
Rizal Commercial Banking Corp. vs. Court of Appeals: the Court has tempered the penalty
charges after taking into account the debtor’s pitiful situation and its offer to settle the entire
obligation with the creditor bank.
The stipulated penalty might likewise be reduced when a partial or irregular performance
is made by the debtor. The stipulated penalty might even be deleted such as when there has
been substantial performance in good faith by the obligor, when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.
The CA has reduced the penalty interest from 5% a month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the repeated acts of breach by petitioners of
their contractual obligation, the Court sees no cogent ground to modify the ruling of the
appellate court.
The 15.189% interest does not appear as being that excessive
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue
that has not been raised and ventilated before the courts below. In any event, the interest
stipulation, on its face, does not appear as being that excessive. The essence or rationale for
the payment of interest, quite often referred to as cost of money, is not exactly the same as that
of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest , if
there is an agreement to that effect, the two being distinct concepts which may
separately be demanded. What may justify a court in not allowing the creditor to impose
full surcharges and penalties, may not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of
the banking business and the core of a bank's existence.
The award of 10% of the total amount of indebtedness by way of attorney’s fees is
reasonable
Bearing in mind that the rate of attorney’s fees has been agreed to by the parties and intended
to answer not only for litigation expenses but also for collection efforts as well, the Court deems
the award of 10% attorney’s fees to be reasonable.
The CA did not err in rejecting petitioner’s call for a new trial/ admit newly discovered
evidence
As the appellate court so held in its resolution of 14 May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration
of a judgment or final resolution by the same party shall be entertained. Considering that the instant
motion is already a second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newly-discovered
evidence being invoked by defendants-appellants have actually been existent when the case was
brought on appeal to this court as well as when the first motion for reconsideration was filed. Hence, it
is quite surprising why defendants-appellants raised the alleged newly-discovered evidence only at
this stage when they could have done so in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not contingent upon the
averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore
presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off
indefinitely, depending on the party’s ingenuousness or cleverness in conceiving and formulating
'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the
rights of the movant for reconsideration."
The execution of the real estate mortgage as security for the existing loan would not
have resulted in the extinguishment of the original contract of loan because of novation
Petitioners acknowledge that the real estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing loan agreement between the
petitioners and the bank. Respondent bank has correctly postulated that the mortgage is
but an accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all
the parties to the new contract; third, the extinguishment of the obligation; and fourth, the
validity of the new one.
In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligation
be on every point incompatible with each other. An obligation to pay a sum of money is not
extinctively novated by a new instrument which merely changes the terms of payment or adding
compatible covenants or where the old contract is merely supplemented by the new one. When
not expressed, incompatibility is required so as to ensure that the parties have indeed intended
such novation despite their failure to express it in categorical terms. The incompatibility
should take place in any of the essential elements of the obligation, i.e., (1) the juridical
relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio
to agency, or from a mortgage to antichresis, or from a sale to one of loan; (2) the object or
principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such
as the substitution of a debtor or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to the new obligation.
• Siga-an v. Villanueva, 576 SCRA 696, 2009 – VAL
G.R. No. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner, vs. ALICIA VILLANUEVA, Respondent.
CHICO-NAZARIO, J.:
 
SUMMARY: Respondent Alicia Villanueva filed a complaint for sum of money against petitioner
Sebastian Siga-an. Villanueva claimed that Siga-an offered to loan her the amount of ₱540,000.00.
Since she needed capital for her business transactions, she accepted Siga-an’s proposal. The loan
agreement was not reduced in writing and there was no stipulation as to the payment of interest for
the loan. Villanueva issued a check worth ₱500,000.00 to Siga-an as partial payment of the loan.
Then Villanueva issued another check in the amount of ₱200,000.00 to petitioner as payment of the
remaining balance of the loan. Siga-an told her that since she paid a total amount of ₱700,000.00 for
the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00 would be applied as interest for
the loan. Not satisfied with the amount applied as interest, Siga-an pestered her to pay additional
interest and threatened to block or disapprove her transactions with the PNO if she would not comply
with his demand. As all her transactions with the PNO were subject to the approval of Siga-an as
comptroller of the PNO, Villanueva paid additional amounts in cash and checks as interests for the
loan. She asked Siga-an for receipt for the payments but he told her that it was not necessary as
there was mutual trust and confidence between them. According to Villanueva’s computation, the total
amount she paid to Siga-an for the loan and interest accumulated to ₱1,200,000.00.
1) W/N INTEREST WAS DUE TO PETITIONER (NO); 2) W/N PRINCIPLE OF SOLUTIO INDEBITI IS
APPLICABLE (YES)
 
SC: Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue
of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is
demanded.
 
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing
provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is prohibited by law.
 
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither
was there convincing proof of written agreement between the two regarding the payment of interest.
Respondent testified that although she accepted petitioner’s offer of loan amounting to ₱540,000.00,
there was, nonetheless, no verbal or written agreement for her to pay interest on the loan.
 
There are instances in which an interest may be imposed even in the absence of express stipulation,
verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the
obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of
12% per annum may be imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall
earn legal interest from the time it is judicially demanded, although the obligation may be silent on this
point.
All the same, the interest under these two instances may be imposed only as a penalty or damages
for breach of contractual obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only to compensatory interest and not
to monetary interest. The case at bar involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the
loan because there was no written agreement as regards payment of interest.
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. The
quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another. The principle of solutio indebitiapplies where (1) a payment is
made when there exists no binding relation between the payor, who has no duty to pay, and the
person who received the payment; and (2) the payment is made through mistake, and not through
liberality or some other cause. We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.
 
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to
make such payment because there was no express stipulation in writing to that effect. There was no
binding relation between petitioner and respondent as regards the payment of interest. The payment
was clearly a mistake. Since petitioner received something when there was no right to demand it, he
has an obligation to return it.
 
FACTS: On 30 March 1998, respondent Alicia Villanueva filed a complaint for sum of money
5
against petitioner Sebastian Siga-an before the Las Pinas City RTC. Respondent alleged that she
was a businesswoman engaged in supplying office materials and equipment to the Philippine Navy
Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and
offered to loan her the amount of ₱540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioner’s proposal. The loan agreement was not
reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. 6
 
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial
payment of the loan. On 31 October 1993, she issued another check in the amount of
₱200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told her
that since she paid a total amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess
amount of ₱160,000.00 would be applied as interest for the loan. Not satisfied with the amount
applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to
block or disapprove her transactions with the PNO if she would not comply with his demand.
As all her transactions with the PNO were subject to the approval of petitioner as comptroller
of the PNO, and fearing that petitioner might block or unduly influence the payment of her
vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but petitioner told her
that it was not necessary as there was mutual trust and confidence between them. According
to her computation, the total amount she paid to petitioner for the loan and interest
accumulated to ₱1,200,000.00. 7
 
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan
despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between her and petitioner
regarding payment of interest. Since she paid petitioner a total amount of ₱1,200,000.00 for the
₱540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment
to petitioner, she sent a demand letter to petitioner asking for the return of the excess amount
of ₱660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement. 8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
₱660,000.00 plus legal interest from the time of demand; (2) ₱300,000.00 as moral damages; (3)
₱50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of ₱660,000.00 as
attorney’s fees.
9
ANSWER OF PETITIONER: he offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she needed money to finance her
business venture with the PNO. At first, he was reluctant to deal with respondent, because the
latter had a spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in
full.11
 
Subsequently, respondent again asked him to give her a loan. As respondent had been able to
pay the previous loan in full, he agreed to grant her another loan. Later, respondent requested
him to restructure the payment of the loan because she could not give full payment on the due
date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of
the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute
a promissory note wherein she would acknowledge her obligation to him, inclusive of interest,
and that she would issue several postdated checks to guarantee the payment of her
obligation. Upon his approval of respondent’s request for restructuring of the loan,
respondent executed a promissory note dated 12 September 1994 wherein she admitted
having borrowed an amount of ₱1,240,000.00, inclusive of interest, from petitioner and that she
would pay said amount in March 1995. Respondent also issued to him six postdated checks
amounting to ₱1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he
presented the six checks for encashment but only one check was honored. He demanded that
respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for
Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases
were assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC). 12
 
Petitioner insisted that there was no overpayment because respondent admitted in the latter’s
promissory note that her monetary obligation as of 12 September 1994 amounted to
₱1,240,000.00 inclusive of interests. He argued that respondent was already estopped from
complaining that she should not have paid any interest, because she was given several times to settle
her obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free. Based on the foregoing averments, he asked the
RTC to dismiss respondent’s complaint.
 
RTC: respondent made an overpayment of her loan obligation to petitioner and that the latter should refund the excess
amount to the former. It ratiocinated that respondent’s obligation was only to pay the loaned amount of ₱540,000.00, and that the
alleged interests due should not be included in the computation of respondent’s total monetary debt because there was no agreement
between them regarding payment of interest. It concluded that since respondent made an excess payment to petitioner in the amount of
₱660,000.00 through mistake, petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti. The
13
RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced by respondent.
Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorney’s fees and costs of
suit.
CA: affirmed in toto the RTC Decision
 
ISSUE:  1) W/N INTEREST WAS DUE TO PETITIONER (NO); 2) W/N PRINCIPLE OF SOLUTIO
INDEBITI IS APPLICABLE (YES)
 
RULING: WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December
2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable
amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (₱335,000.00); (2) the
amount of ₱300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
(₱150,000.00); (3) an interest of 6% per annum is imposed on the ₱335,000.00, on the damages awarded and on
the attorney’s fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of
this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.
 
RATIO: (1 ISSUE: W/N INTEREST WAS DUE TO PETITIONER) Interest is a compensation fixed
ST
by the parties for the use or forbearance of money. This is referred to as monetary interest.
Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is
called compensatory interest. The right to interest arises only by virtue of a contract or by
18
virtue of damages for delay or failure to pay the principal loan on which interest is demanded. 19
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no
20
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from
the foregoing provision, payment of monetary interest is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the payment of
interest was reduced in writing. The concurrence of the two conditions is required for the
payment of monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law. 21
 
It appears that petitioner and respondent did not agree on the payment of interest for the loan.
Neither was there convincing proof of written agreement between the two regarding the
payment of interest. Respondent testified that although she accepted petitioner’s offer of loan
amounting to ₱540,000.00, there was, nonetheless, no verbal or written agreement for her to
pay interest on the loan. 22
 
Petitioner presented a handwritten promissory note dated 12 September 1994 wherein 23
respondent purportedly admitted owing petitioner "capital and interest." Respondent,
however, explained that it was petitioner who made a promissory note and she was told to
copy it in her own handwriting; that all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her
transactions with the PNO if she would not pay interest; that being unaware of the law on
interest and fearing that petitioner would make good of his threats if she would not obey his
instruction to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner as alleged
proof of their written agreement on interest. Petitioner did not rebut the foregoing testimony.
24
It is evident that respondent did not really consent to the payment of interest for the loan and
that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot be
gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.
 
CONTENTION OF PETITIONER: both the RTC and the CA found that he and respondent agreed
on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly
admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against
respondent; that despite such judicial admission by respondent, the RTC and the CA, citing
Article 1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil Code should
not be absolute, and an exception to the application of such provision should be made when
the borrower admits that a specific rate of interest was agreed upon as in the present case;
and that it would be unfair to allow respondent to pay only the loan when the latter very well knew and
even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on
the loan. 25
 
SC: We have carefully examined the RTC Decision and found that the RTC did not make a ruling
therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for
the loan. The RTC clearly stated that although petitioner and respondent entered into a valid
oral contract of loan amounting to ₱540,000.00, they, nonetheless, never intended the payment
of interest thereon. While the CA mentioned in its Decision that it concurred in the RTC’s ruling that
26
petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this as
merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals
ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that factual
findings of the trial court deserve great weight and respect especially when affirmed by the appellate
court. We found no compelling reason to disturb the ruling of both courts.
27
 
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases
that they had agreed on the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified that after paying the total amount of
loan, petitioner ordered her to pay interest. Respondent did not categorically declare in the
28
same case that she and petitioner made an express stipulation in writing as regards payment
of interest at the rate of 7%. As earlier discussed, monetary interest is due only if there was an
express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on
the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
  in the five criminal cases. Further, the MeTC found that respondent made an overpayment of
All the same, the interest under these two instances may be imposed only as a penalty or damages the loan by reason of the interest which the latter paid to petitioner. 39

for breach of contractual obligations. It cannot be charged as a compensation for the use or
forbearance of money. In other words, the two instances apply only to compensatory interest and
not to monetary interest. The case at bar involves petitioner’s claim for monetary interest.
29
 
Further, said compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was
due on the loan because there was no written agreement as regards payment of interest.
 
(2 ISSUE: W/N PRINCIPLE OF SOLUTIO INDEBITI IS APPLICABLE) Apropos the second assigned
ND
 
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner refused to return the amount paid as
interest despite her repeated demands. Hence, the award of moral damages is justified.
However, its corresponding amount of ₱300,000.00, as fixed by the RTC and the Court of
Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according to the circumstances of

each case. This discretion is limited by the principle that the amount awarded should not be palpably
error, petitioner argues that the principle of solutio indebiti does not apply to the instant case. Thus, he
excessive as to indicate that it was the result of prejudice or corruption on the part of the trial court.40

cannot be compelled to return the alleged excess amount paid by respondent as interest. 30

To our mind, the amount of ₱150,000.00 as moral damages is fair, reasonable, and
  proportionate to the injury suffered by respondent.
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no  
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
provides that if something is received when there is no right to demand it, and it was unduly
oppressively when he pestered respondent to pay interest and threatened to block her
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
transactions with the PNO if she would not pay interest. This forced respondent to pay interest
relationship is created under a quasi-contract whereby the payor becomes the creditor who
despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The
then has the right to demand the return of payment made by mistake, and the person who has
amount of ₱50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so
no right to receive such payment becomes obligated to return the same. The quasi-contract of
as to deter petitioner and other lenders from committing similar and other serious
solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
wrongdoings. 41

the expense of another. The principle of solutio indebitiapplies where (1) a payment is made
31

when there exists no binding relation between the payor, who has no duty to pay, and the
person who received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause. We have held that the principle of solutio indebiti
32
 
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or
equitable justification for awarding the same. In the case under consideration, the RTC stated in its
42

applies in case of erroneous payment of undue interest. 33 Decision that the award of attorney’s fees equivalent to 25% of the amount paid as interest by
respondent to petitioner is reasonable and moderate considering the extent of work rendered
  by respondent’s lawyer in the instant case and the fact that it dragged on for several years. 43

It was duly established that respondent paid interest to petitioner. Respondent was under no
Further, respondent testified that she agreed to compensate her lawyer handling the instant
duty to make such payment because there was no express stipulation in writing to that effect.
case such amount. The award, therefore, of attorney’s fees and its amount equivalent to 25%
44

There was no binding relation between petitioner and respondent as regards the payment of
interest. The payment was clearly a mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
 
MONETARY AND DAMAGES TO BE IMPOSED
Records show that respondent received a loan amounting to ₱540,000.00 from petitioner.
Respondent issued two checks with a total worth of ₱700,000.00 in favor of petitioner as payment of
of the amount paid as interest by respondent to petitioner is proper.
 
Finally, the RTC and the CA imposed a 12% rate of legal interest on the amount refundable to
respondent computed from 3 March 1998 until its full payment. This is erroneous.
34  
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an obligation, not constituting
45

the loan. These checks were subsequently encashed by petitioner. Obviously, there was an excess
35 36
of ₱160,000.00 in the payment for the loan. Petitioner claims that the excess of ₱160,000.00 serves
as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent
also paid cash in the total amount of ₱175,000.00 to petitioner as interest. Although no receipts
37
reflecting the same were presented because petitioner refused to issue such to respondent,
petitioner, nonetheless, admitted in his Reply-Affidavit in the Batas Pambansa Blg. 22 cases that
38
respondent paid him a total amount of ₱175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant fact may be
given in evidence against him. Aside from the amounts of ₱160,000.00 and ₱175,000.00 paid as
interest, no other proof of additional payment as interest was presented by respondent. Since we
a loan or forbearance of money is breached, an interest on the amount of damages awarded may be
imposed at the rate of 6% per annum. We further declared that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest, whether it is
a loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and
not from a loan or forbearance of money. Thus, an interest of 6% per annum should be
imposed on the amount to be refunded as well as on the damages awarded and on the
attorney’s fees, to be computed from the time of the extra-judicial demand on 3 March 1998, 46

have previously found that petitioner is not entitled to payment of interest and that the up to the finality of this Decision. In addition, the interest shall become 12% per annum from
principle of solutio indebiti applies to the instant case, petitioner should return to respondent the finality of this Decision up to its satisfaction.
the excess amount of ₱160,000.00 and ₱175,000.00 or the total amount of ₱335,000.00.  
Accordingly, the reimbursable amount to respondent fixed by the RTC and the CA should be  
reduced from ₱660,000.00 to ₱335,000.00.
 
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22
against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondent’s
conviction therein does not affect our ruling in the instant case. The two checks, subject
matter of this case, totaling ₱700,000.00 which respondent claimed as payment of the
₱540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced
• Tan v. Court of Appeals, G.R. No. 116285, October 19, 2001 - PIA
G.R. No. 116285            October 19, 2001
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.
SUMMARY: Antonio Tan obtained 2 loans from CCP in the amount of P2M each evidenced by two
promissory notes where he defaulted after a few partial payments but had the loans restructured
(another promissory note was executed for this) in the amount of P3.4M payable in 5 installments. He
again failed to pay any installment on the restructured loan and sent a letter to CCP to propose a
mode of payment involving payment of 20% of the principal amount upon agreement by CCP and
payment of the balance in 36 installments. CCP wrote a letter demanding for full payment within 10
days of receipt and filed a complaint for collection of a sum of money after Tan failed to pay. Tan had
the defense that the loans were made in the name of a friend and that he could not locate said friend
and further proposed another mode of payment for the restructured which CCP disagreed to. The
present petition concerns Tan’s argument that there are no contractual and legal bases for the
imposition of the penalty, interest on the penalty and attorney’s fees. 
The SC held Art 1226 concerns the imposition of penalty. Article 1226 of the New Civil Code provides
that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
In the case at bar, the promissory note expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured
loan. The stipulated 14% per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the other
hand, the stipulated 2% per month penalty is in the form of penalty charge which is separate and
distinct from the monetary interest on the principal of the loan.
There is also a legal basis for the imposition of interest on the penalty charge. The compounding of
the penalty or compensatory interest is sanctioned by and allowed pursuant to the provision of Article
1959 of the New Civil Code considering that: there is an express stipulation in the promissory note
permitting the compounding of interest in the 5th paragraph: "Any interest which may be due if not
paid shall be added to the total amount when due and shall become part thereof, the whole amount to
bear interest at the maximum rate allowed by law.” Therefore, any penalty interest not paid, when
due, shall earn the legal interest of twelve percent (12%) per annum, in the absence of express
stipulation on the specific rate of interest, as in the case at bar.  validity of the same.
There is also no basis to petitioner’s stance that the penalty should be reduced to 10% of the unpaid
debt. There appears to be a justification for a reduction of the penalty charge but not necessarily to
10%of the unpaid balance. A reduction of the penalty charge from two percent (2%) per month on the
total amount due, compounded monthly, until paid can indeed be justified under Article 1229 of the
New Civil Code.  deleting the award for exemplary damages and reducing the amount of awarded attorney’s fees to
FACTS: On May 14, 1978 and July 6, 1978, Antonio Tan obtained 2 loans each in the principal
amount of P2,000,000 (P4M total) from Cultural Center of the Philippines evidenced by 2
promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. He defaulted
but after a few partial payments he had the loans restructured by CCP, and petitioner
accordingly executed a promissory note on August 31, 1979 in the amount of P3,411,421
payable in 5  installments. Tan failed to pay any installment on the said restructured loan, the
last installment falling due on December 31, 1980. In a letter, he requested and proposed to CCP a
mode of paying the restructured loan:  Hence, this petition anchored on the following assigned errors:
(a) 20% of the principal amount of the loan upon the respondent giving its conformity to his
proposal; and  IMPRIMATUR TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED
(b) the balance on the principal obligation payable in 36 equal monthly installments until
fully paid.
On October 20, 1983, he again sent a letter to respondent CCP requesting for a moratorium on
his loan obligation until the following year allegedly due to a substantial deduction in the
volume of his business and on account of the peso devaluation. No favorable response was
made to said letters. Instead, CCP, through counsel, wrote a letter dated May 30, 1984 to the
petitioner demanding full payment, within ten (10) days from receipt of said letter, of the
restructured loan which as of then amounted to P6,088,735.03.
On August 29, 1984, CCP filed in the RTC of Manila a complaint for collection of a sum of
money against the Tan after the latter failed to settle his said restructured loan obligation. Tan
interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly
asked for his help to obtain a loan from CCP. He claimed that he has not been able to locate
Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a
Manifestation wherein he proposed to settle his indebtedness to respondent CCP by
proposing to make a down payment of P140,000 and to issue 12 checks every beginning of the
year to cover installment payments for one year, and every year thereafter until the balance is fully
paid. However, CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.
RTC: in favor of CCP, ordered Tan to pay his outstanding account plus damages and attorney’s fees. 
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant,
ordering defendant to pay plaintiff, the amount of P7,996,314.67, representing defendant’s
outstanding account as of August 28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
The trial court gave 5 reasons in ruling in favor of CCP: 
1. gave little weight to Tan’s contention that the loan was merely for the accommodation of
Wilson Lucmen for the reason that the defense propounded was not credible in itself. 
2. Assuming, arguendo, that the petitioner did not personally benefit from the said loan, he
should have filed a third party complaint against Wilson Lucmen, the alleged
accommodated party but he did not. 
3. for 3 times Tan offered to settle his loan obligation with respondent CCP. 
4. Tan may not avoid his liability to pay his obligation under the promissory note which he
must comply with in good faith pursuant to Article 1159 of the New Civil Code. 
5. Tan is estopped from denying his liability or loan obligation to the private respondent.
Tan appealed the decision to the CA insofar as it charged interest, surcharges, attorney’s fees
and exemplary damages against the petitioner. In his appeal, he asked for the reduction of the
penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court that
he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the
CA: affirmed the decision of the trial court saying Tan’s claim for modification on the basis of
alleged partial or irregular performance, there being none, cannot be sustained. His offer or tender of
payment cannot be deemed as a partial or irregular performance of the contract, not a single centavo
appears to have been paid by the defendant. However, they modified the decision of the trial court by
5%, by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a
government lawyer, We believe the award of 25% as attorney’s fees and P500,000 as
exemplary damages is out of proportion to the actual damage caused by the non-
performance of the contract and is excessive, unconscionable and iniquitous.
CA denied the petitioner’s motion for reconsideration of the said decision.
I. THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS
INTEREST ON SURCHARGES.
II. THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION
OF INTEREST FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED
 TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE
COMMISSION ON AUDIT AND THE OFFICE OF THE PRESIDENT.
III. THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF
ATTORNEY’S FEES AND IN REDUCING PENALTIES.
TAN: does not question his liability for his restructured loan under the promissory note. The first
question to be resolved in the case at bar is whether there are contractual and legal bases for the
imposition of the penalty, interest on the penalty and attorney’s fees. He imputes error on the
part of the CA in not totally eliminating the award of attorney’s fees and in not reducing the penalties
considering that the petitioner, contrary to the appellate court’s findings, has allegedly made partial
payments on the loan. And if penalty is to be awarded, he is asking for the non-imposition of interest
on the surcharges inasmuch as the compounding of interest on surcharges is not provided in the
promissory note. He takes exception to the computation of CCP whereby the interest, surcharge and
the principal were added together and that on the total sum interest was imposed. He also claims that
there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil
Code is devoid of any provision allowing the imposition of interest on surcharges.
ISSUE:  or compensatory interest without violating the provisions of Article 1959 of the New Civil Code,
HELD: WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due,
compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.
RATIO: We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides
that:
In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.
In the case at bar, the promissory note expressly provides for the imposition of both interest
and penalties in case of default on the part of the petitioner in the payment of the subject
restructured loan. The pertinent portion of the promissory note imposing interest and penalties
provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER
OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR
HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine
Currency,
With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until
paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of
any portion of it when due, I/We jointly and severally agree to pay additional penalty
charges at the rate of TWO per cent (2%) per month on the total amount due until paid,
payable and computed monthly. Default of payment of this note or any portion thereof when
due shall render all other installments and all existing promissory notes made by us in favor
of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.  ruling in the said case is not applicable to the case at bar inasmuch as our ruling on the issue of
The stipulated 14% per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the
other hand, the stipulated 2% per month penalty is in the form of penalty charge which is
separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms.  should be respected.
Government Service Insurance System v. Court of Appeals:  
The New Civil Code permits an agreement upon a penalty apart from the monetary interest.
If the parties stipulate this kind of agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct from each other and may be
demanded separately. Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went
on to state that such a stipulation about payment of an additional interest rate partakes of
the nature of a penalty clause which is sanctioned by law, more particularly under Article
2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the
time of default by the petitioner. There is no doubt that the petitioner is liable for both the
stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest. 
Having clarified the same, the next issue to be resolved is whether interest may accrue on the penalty
which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
TAN: there is no legal basis for the imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary interest but not the charging of
interest on penalty. He claims that since there is no law that allows imposition of interest on
penalties, the penalties should not earn interest. But as we have already explained, penalty
clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the
penalty or compensatory interest is sanctioned by and allowed pursuant to the provision of
Article 1959 of the New Civil Code considering that:
1. there is an express stipulation in the promissory note permitting the compounding of
interest in the 5th paragraph: "Any interest which may be due if not paid shall be added to
the total amount when due and shall become part thereof, the whole amount to bear
interest at the maximum rate allowed by law.”
Therefore, any penalty interest not paid, when due, shall earn the legal interest of
twelve percent (12%) per annum, in the absence of express stipulation on the
specific rate of interest, as in the case at bar.
2. Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent upon this
point." In the instant case, interest likewise began to run on the penalty interest upon
the filing of the complaint in court by CCP (August 29, 1984). Hence, the courts a quo
did not err in ruling that the petitioner is bound to pay the interest on the total amount of the
principal, the monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based
allegedly on the case of National Power Corporation v. National Merchandising Corporation,
wherein we ruled that the imposition of interest on the damages from the filing of the complaint is
unjust where the litigation was prolonged for 25 years through no fault of the defendant. However, the
interest in that NPC case was based on equitable considerations and on the fact that the said case
lasted for 25 years "through no fault of the defendant." In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual stipulation in the promissory note whereby the
petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan
at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law
between the parties and does not appear to be inequitable or unjust, the said written stipulation
The private respondent’s Statement of Account shows the following breakdown of the petitioner’s
indebtedness as of August 28, 1986:

Principal  P2,838,454.68
Interest  P 576,167.89
Surcharge P4,581,692.10
TOTAL P7,996,314.67
The said statement of account also shows that the above amounts stated therein are net of the partial
payments amounting to a total of P452,561 which were made during the period from May 13, 1983 to
September 30, 1983. The petitioner now seeks the reduction of the penalty due to the said partial
payments. The principal amount of the promissory note was P3,411,421 when the loan was
restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured
loan has been reduced to P2,838,454.68. Thus, petitioner contends that reduction of the penalty
is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge
shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable." Petitioner insists that the penalty
should be reduced to 10% of the unpaid debt in accordance with Bachrach Motor Company v.
Espiritu.
There appears to be a justification for a reduction of the penalty charge but not necessarily to
10%of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has
made partial payments which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly, until paid can indeed
be justified under Article 1229 of the New Civil Code.
Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private
respondent’s reneging on its promise, his liability to pay the interest and surcharge on the loan has
not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the
private respondent’s promise to assist the petitioners in applying for relief therefrom through the
Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the
petitioner is not part of the formally offered documentary evidence of either party in the trial court.
That letter cannot be considered evidence pursuant to Rule 132, Section 34 of the Rules of Court
which provides that: "The court shall consider no evidence which has not been formally offered xxx."
Besides, the said letter does not contain any categorical agreement on the part of respondent CCP
that the payment of the interest and surcharge on the loan is deemed suspended while his appeal for
condonation of the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to
inform the Commission on Audit and the Office of the President of his application for condonation of
interest and surcharge. It was incumbent upon the petitioner to bring his administrative appeal for
condonation of interest and penalty charges to the attention of the said government offices.
On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial
court’s award of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount
due.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the
total amount due to be unconscionable inasmuch as the same appeared to have been compounded
monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the 2%
penalty charge per month on the total amount due, compounded monthly, for 21 years since his
default in 1980, we find it fair and equitable to reduce the penalty charge to a straight 12% per annum
on the total amount due starting August 28, 1986, the date of the last Statement of Account. We also
took into consideration the offers of Tan to enter into a compromise for the settlement of his debt by
presenting proposed payment schemes to respondent CCP. The said offers at compromise also
showed his good faith despite difficulty in complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of
its money collectible from the petitioner.

The petitioner also imputes error on the part of the appellate court for not declaring the suspension of
the running of the interest during that period when the respondent allegedly failed to assist the
petitioner in applying for relief from liability. In this connection, the petitioner referred to the private
respondent’s letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
With reference to your appeal for condonation of interest and surcharge, we wish to inform
you that the center will assist you in applying for relief of liability through the Commission on
Audit and Office of the President 

While your application is being processed and awaiting approval, the center will be
accepting your proposed payment scheme with the downpayment of P160,000 and monthly
remittances of P60,000

The petitioner alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become conditional, that is
dependent on a future and uncertain event which consists of whether the petitioner’s request for
condonation of interest and surcharge would be recommended by the Commission on Audit and the
Office of the President to the House of Representatives for approval as required under Section 36 of