BANK OF THE PHILIPPINE ISLANDS vs.
TARCILA FERNANDEZ, DALMIRO CA ruled that as a co-depositor and a solidary creditor of joint "AND/OR" accounts, BPI did not enjoy the
SIAN G.R. No. 173134. September 2, 2015
FACTS: The present case arose from Tarcila Fernandez's claim to her proportionate share in the proceeds of
four joint AND/OR accounts that the petitioner BPI released to her estranged husband Manuel G.
Fernandez without the presentation of the requisite certificates of deposit. In 1991, Tarcila with her husband,
Manuel and their children Monique Fernandez and Marco Fernandez, opened AND/OR time deposit accounts
with BPI issued in their names subject to the following conditions:
"xxx xxx xxx
2. Pre-termination of deposits prior to maturity shall be subject to discretion of
BPI and if pre-termination is allowed, it is subject to an interest
penalty to be determined on the date of pre-termination;
3. Endorsement and presentation of the Certificate of Deposit is necessary for
the renewal or termination of the deposit"
Subsequently, Tarcila went to BPI to pre-terminate these joint AND/OR accounts and brought with her
certificates of time deposit and the passbook, and presented them to the bank. BPI, however, refused the
requested pre-termination despite Tarcila's presentation of the covering certificates. Instead, BPI insisted on
contacting Manuel, alleging in this regard that this is an integral part of its standard operating procedure.
Shortly after Tarcila left the branch, Manuel arrived and requested the pre-termination of the joint AND/OR
accounts claiming lost certificates. BPI this time acceded to the pre-termination requests and requested him
to accomplish BPI's pro-forma affidavit of loss.
In place of the actual certificates of deposit, Manuel submitted BPI's pro-forma affidavit of loss and an
Indemnity Agreement discharging BPI from any liability in connection with the pre-termination. Notably, none
of the co-depositors were contacted in carrying out these transactions.
The proceeds released to Manuel were funneled to Sian's newly opened account with BPI . Immediately
thereafter, Capistrano requested Sian to sign blank withdrawal slips, which Manuel used to withdraw the
funds from Sian's newly opened account. Sian's account, after its use, was closed on the same day.
Tarcila never received her proportionate share of the pre-terminated deposits, prompting her to demand from
BPI the amounts due her as a co-depositor in the joint AND/OR accounts. When her demands remained
unheeded, Tarcila initiated a complaint for damages with the RTC.
In her complaint, Tarcila alleged that BPI's payments to Manuel of the pre-terminated deposits were invalid
with respect to her share. She argued that BPI was in bad faith for allowing the pre-termination of the time
deposits based on Manuel's affidavit of loss when the bank had actual knowledge that the certificates of
deposit were in her possession.
In its answer, BPI alleged that the accounts contained conjugal funds that Manuel exclusively funded. BPI
further argued that Tarcila could not ask for her share of the pre-terminated deposits because her share in
the conjugal property is considered inchoate until its dissolution. BPI further denied refusing Tarcila's request
for pre-termination as it processed her request but she left the branch before BPI could even contact Manuel.
RTC opined that the AND/OR nature of the accounts indicate an active solidarity that thus entitled any of the
account holders to demand from BPI payment of their proceeds. Since Tarcila made the first demand upon
BPI, payments should have been made to her under Article 1214 of the Civil Code, which provides:
"Art. 1214. The debtor may pay any one of the solidary creditors; but if
any demand, judicial or extrajudicial, has been made by one of them, payment
should be made to him."
prerogative to determine the source of the deposited funds and to refuse payment to Tarcila on this
basis. CA also found that BPI had acted in bad faith in allowing Manuel to pre-terminate the certificates
of deposits and in facilitating the swift funneling of the funds to Sian's account, which allowed Manuel to
withdraw them. The CA noted that the transactions were accomplished in one sitting for the purpose of
misleading anyone who would try to trace Manuel's deposit accounts.
It believes that the CA should have relied on the conjugal partnership of gains provision in view of the
existing marriage between the spouses. Accordingly, BPI argues that Tarcila could not have suffered any
damage from its payment of the proceeds to Manuel inasmuch as the proceeds of the pre-terminated
accounts formed part of the conjugal partnership of gains.
BPI likewise claims that it did not breach its obligations under the certificates of deposit.
RULING:
BPI breached its obligation under the certificates of deposit.
A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a
sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the
depositor, or to some other person or his order, whereby the relation of debtor and creditor between the
bank and the depositor is created. In particular, the certificates of deposit contain provisions on the
amount of interest, period of maturity, and manner of termination. Specifically, they stressed that
endorsement and presentation of the certificate of deposit is indispensable to their termination. In other
words, the accounts may only be terminated upon endorsement and presentation of the certificates of
deposit. Without the requisite presentation of the certificates of deposit, BPI may not terminate them.
BPI thus may only terminate the certificates of deposit after it has diligently completed two
steps. First, it must ensure the identity of the account holder. Second, BPI must demand the surrender
of the certificates of deposit.
This is the essence of the contract entered into by the parties which serves as an accountability measure
to other co-depositors. By requiring the presentation of the certificates prior to termination, the other
depositors may rely on the fact that their investments in the interest-yielding accounts may not be
indiscriminately withdrawn by any of their co-depositors. This protective mechanism likewise benefits the
bank, which shields it from liability upon showing that it released the funds in good faith to an account
holder who possesses the certificates. Without the presentation of the certificates of deposit, BPI may
not validly terminate the certificates of deposit.
With these considerations in mind, we find that BPI substantially breached its obligations to the
prejudice of Tarcila. BPI allowed the termination of the accounts without demanding the surrender of the
certificates of deposits, in the ordinary course of business. Worse, BPI even had actual knowledge that
the certificates of deposit were in Tarcila's possession and yet it chose to release the proceeds to Manuel
on the basis of a falsified affidavit of loss, in gross violation of the terms of the deposit agreements.
As we have stressed in the case of FEBTC v. Querimit:
". . . A bank acts at its peril when it pays deposits evidenced by a
certificate of deposit, without its production and surrender after proper
indorsement. As a rule, one who pleads payment has the burden of proving it.
Even where the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to
prove payment. The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment. . . . Petitioner should not have
paid respondent's husband or any third party without requiring the surrender of
the certificates of deposit."
BPI tried to muddle the issue by claiming that the funds subject of the deposits were conjugal in
character. This contention, however, is misleading. The principal issue involved in the present case is
BPI's breach of its obligations under the express terms of the certificates of deposit and the consequent
damage that Tarcila suffered as a co-depositor because of BPI's acts.
Notably, BPI effectively deprived Tarcila and the other co-depositors of their share in the
proceeds of the certificates of deposits. As the CA noted in the assailed Decision, the series of transactions
were accomplished in one sitting for the purpose of misleading anyone who would try to trace the
proceeds of [Manuel]'s deposit accounts. 38 As the court a quo likewise observed:
"Aside from the affidavit of loss, the bank required [Manuel] to execute an
Indemnity Agreement. Hence, on September 26, 1991, [Manuel] returned to the
bank. This time, Dalmiro Sian, his son-in-law, Atty. Hector Rodriguez, his lawyer, and
two NBI agents were with him. There, the bank required him and Sian to sign an
Indemnity Agreement whereby they undertook "to hold the bank free and harmless
from all liabilities arising from said [pre-termination]." The agreement was prepared
by one of the officers of the bank. At the same time, Sian was told to open a new
account under his name. The opening of a new account N. 3305-0539-44 in the
name of Sian was facilitated. The proceeds of the four deposit accounts were then
transferred or deposited to this new account in the name of Sian. . . .Sian also signed
two blank withdrawal slips. With the use of these withdrawal slips, [Manuel]
Fernandez withdrew all the proceeds deposited under the name of Sian. Shortly
thereafter, account no. 3305-0539-44 was closed.”
It appears that BPI connived with Manuel to allow him to divest his co-depositors of their share
in proceeds. Worse, it cooperated with Manuel in trying to conceal this fraudulent conduct by making it
appear that the funds were withdrawn from another account.
The CA correctly ruled that BPI is guilty of bad faith.
We affirm the CA and the trial court's findings that BPI was guilty of bad faith in these
transactions. Bad faith imports a dishonest purpose and conscious wrongdoing. 40 It means a breach of a
known duty through some motive or interest or ill will. 41
A review of the records of the case show ample evidence supporting BPI's bad faith, as shown
by the clear bias it had against Tarcila. As the CA observed:
"The bias and bad faith on the part of [BPI]'s officers become readily
apparent in the face of the fact that [BPI]'s officers did not require the presentation
of the certificates of deposit from [Manuel] but even assisted and facilitated the pre-
termination transaction by the latter on the basis of a mere pro-forma and defective
affidavit of loss, which the bank itself supplied, despite the fact that [BPI]'s officers
were fully aware that the certificates were not lost but in the possession of [Tarcila].
Moreover, given the fact that said affidavit of loss was executed by [Manuel] just a
few minutes after [Tarcila] had presented the certificates of deposit to [BPI], it taxes
one's credulity to say that [BPI] believed in good faith that the certificates were
indeed lost." 42
Similarly, the trial court observed:
"It is quite alarming to note the eagerness and haste by which the
defendant bank accommodated [Manuel]'s request for the pre-termination of the
questioned account deposits and the subsequent release to him of the full proceeds
thereof, to the exclusion of the [Tarcila]. The prejudice of the officers of [BPI]
against the [Tarcila] is very apparent. Elma Capistrano, branch manager,
categorically testified that [Tarcila] is a client of the bank only in name; and that she
does not consider [Tarcila] as a primary depositor to the account because the source
of the money being deposited and being transacted was [Manuel]." 43
BPI argues that it merely took precautionary steps when it insisted on contacting Manuel as a
form of standard operating procedure. This assertion, however, is belied by BPI's own witness. During her
testimony, Capistrano narrated:
"xxx xxx xxx
Q: Can you tell us why it was necessary for the branch to get in touch with Mr.
Manuel Fernandez?
A: Because he is the one that handles and is in control of all the money deposited
in the branch 44
xxx xxx xxx
Q: I heard you mentioned the word "primary depositor" does that mean that Mrs.
Tarcila Fernandez is not a primary depositor?
A: Personally, I do not really consider her as the primary depositor to the
account because the source of the money being deposited and being
transacted was Mr. Manuel Fernandez. 45
xxx xxx xxx
Q: Were you the one who recommended that Mr. Manuel Fernandez prepare this
affidavit of loss?
A: That is the usual things that we tell our clients if the original of the certificates
of deposits (sic) or passbook or checkbooks are missing.
Q: But is it not a fact that earlier a few minutes before Mr. Fernandez came, you
were aware that the certificates were not actually missing but were in
the possession of Mrs. [Tarcila] Fernandez, is it not?
A: Yes Sir.
Q: And yet when this affidavit of loss was later prepared and presented to you, did
you give due course to this affidavit of loss? Did you accept the truth of
the contents of this affidavit of loss?
A: Because it is Mr. [Manuel] Fernandez who is in possession of all the certificates,
and if he is missing it, I believed that it is really missing." 46
The records thus abound with evidence that BPI clearly favored Manuel. BPI considered
Manuel as the primary depositor despite the clear import of the nature of their AND/OR account,
which permits either or any of the co-depositors to transact with BPI, upon the surrender of the
certificates of deposit. Worse, BPI facilitated the scheme in order to allow Manuel to obtain the
proceeds and conceal any evidence of wrongdoing.
BPI did not only fail to exercise that degree of diligence required by the nature of its
business, it also exercised its functions with bad faith and manifest partiality against Tarcila. The bank
even recognized an affidavit of loss whose allegations, the bank knew, were false. This aspect of the
transactions opens up other issues that we do not here decide because they are outside the scope of
the case before us. cSEDTC
One aspect is criminal in nature because Manuel swore to a falsity and the act was with the
knowing participation of bank officers. The other issue is administrative in character as these bank
officers betrayed the trust reposed in them by the bank. We mention all these because these are
disturbing acts to observe in a banking institution as large as the BPI.
BPI is sternly reminded that the business of banks is impressed with public interest. The
fiduciary nature of their relationship with their depositors requires it to treat the accounts of its clients
with the highest degree of integrity, care and respect. In the present case, the manner by which BPI
treated Tarcila also transgresses the general banking law 47 and Article 19 of the Civil Code, which
directs every person, in the exercise of his rights, "to give everyone his due, and observe honesty and
good faith."
BPI could not invoke the Indemnity Agreement.
 BPI assails the CA's declaration voiding the Indemnity Agreement that would allow it to hold
Sian liable for the withdrawn deposits. 48 It argues that Sian's allegation of vitiation of consent should not
be recognized as it is based solely on the presence of Manuel's lawyer and two (2) alleged NBI
Agents. 49 BPI thus claims that "mere presence" of law enforcement officers cannot be reasonably
equated as imminent threat.50
This particular issue involves a factual determination of vitiated consent, which is a question of
fact and one which is not generally appropriate in a petition for review on certiorari under Rule 45. We,
however, are not precluded from again examining the evidence introduced and considered with respect to
this factual issue where the CA's finding of vitiated consent is both speculative and mistaken. 51
We agree with BPI's observation on this point that there is nothing in the records that even
remotely resembles vitiation of consent. In order that intimidation may vitiate consent, it is essential that
the intimidation was the moving cause for giving consent. 52 Moreover, the threatened act must be unjust
or unlawfu1. 53 In addition, the threat must be real or serious, and must produce well-grounded fear from
the fact that the person making the threat has the necessary means or ability to inflict the threat. 54
Nothing in the records supports this conclusion. In fact, we find it difficult to believe that the
presence of Manuel, his lawyer, and two (2) NBI agents could amount to intimidation in the absence of any
act or threatened injury on Sian. If he did sign the Indemnity Agreement with reluctance, vitiation of
consent is still negated, as we held in Vales v. Villa: 55
"There must, then, be a distinction to be made between a case where a
person gives his consent reluctantly and even against his good sense and judgment,
and where he, in reality, gives no consent at all, as where he executes a contract or
performs an act against his will under a pressure which he cannot resist. It is clear
that one acts as voluntarily and independently in the eye of the law when he acts
reluctantly and with hesitation as when he acts spontaneously and joyously. Legally
speaking he acts as voluntarily and freely when he acts wholly against his better
sense and judgment as when he acts in conformity with them. Between the two acts
there is no difference in law. But when his sense, judgment, and his will rebel and he
refuses absolutely to act as requested, but is nevertheless overcome by force or
intimidation to such an extent that he becomes a mere automation and
acts mechanically only, a new element enters, namely, a disappearance of the
personality of the actor. He ceases to exist as an independent entity with faculties
and judgment, and in his place is substituted another — the one exercising the force
or making use of intimidation. While his hand signs, the will which moves it is
another's. While a contract is made, it has, in reality and in law, only one party to it;
and, there being only one party, the one using the force or the intimidation, it is
unenforceable for lack of a second party.
From these considerations it is clear that every case of alleged intimidation
must be examined to determine within which class it falls. If it is within the first class
it is not duress in law, if it falls in the second, it is."
This notwithstanding, we hold that BPI may still not invoke the provisions of the Indemnity
Agreement on the basis of in pari delicto — it was equally at fault. In pari delicto is a legal doctrine resting
on the theory that courts will not aid parties who base their cause of action on their own immoral or illegal
acts. 56 When two parties, acting together, commit an illegal or wrongful act, the party held responsible
for the act cannot recover from the other, because both have been equally culpable and the damage
resulted from their joint offense. 57 SDAaTC
In the present case, equity dictates that BPI should not be allowed to claim from Sian on the
basis of the Indemnity Agreement. The facts unmistakably show that both BPI and Sian participated in the
deceptive scheme to allow Manuel to withdraw the funds. As succinctly admitted by Capistrano during her
testimony:
xxx xxx xxx
Q: I see, in other words, the same certificates of deposit earlier presented by Mrs.
Tarcila were recognized by the bank as having been lost and thereafter
transactions were made in favor of Mr. Manuel Fernandez, that was
what happened?
A: Yes Sir, because of the representation of Mr. Manuel Fernandez that he lost it.
Q: You accepted, the bank immediately accepted in face value that representation?
A: Yes Sir. 58
BPI knew very well the irregularity in Manuel's transaction for it had actual knowledge that
the certificates of deposit were in Tarcila's possession. Because of this knowledge, it entertained the
possibility of reprisal from the co-depositors. Thus, it took shrewdly calculated steps and required
Manuel and Sian to execute an Indemnity Agreement, hoping that this instrument would absolve it
from liability.
BPI and Sian are in pari delicto, thus, no affirmative relief should be given to one against
the other. BPI came to court with unclean hands; for which reason, it cannot obtain relief and thereby
gain from its indispensable participation in the irregular transaction. One who seeks equity and justice
must come to court with clean hands. 59
Award of exemplary damages proper
Exemplary or corrective damages are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated, or compensatory damages. 60 In quasi-
delicts, exemplary damages may be granted if the defendant acted with gross negligence. 61
In the present case, BPI's bias and bad faith unquestionably caused prejudice to Tarcila.
The law allows the grant of exemplary damages in cases such as this to serve as a warning to the
public and as a deterrent against the repetition of this kind of deleterious actions. 62 From this
perspective, we find that the CA did not err in affirming the RTC's award of P50,000.00 by way of
exemplary damages.
Attorney's fees in order
In view of the award of exemplary damages, we find that that the CA did not err in
confirming the RTC's award of attorney's fees, in accordance with Article 2208 (1) of the Civil
Code.We find the award of attorney's fees, equivalent to P500,000.00, to be just and reasonable
under the circumstances.
WHEREFORE, premises considered, the petition is hereby DENIED.
Costs against the petitioner.
SO ORDERED.
||| (Bank of the Philippine Islands v. Fernandez, G.R. No. 173134, [September 2, 2015], 768 PHIL 173-194)
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.
Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI)
No. D891,2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3 dated February 4,
1981, and a Detached Assignment4 dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally
filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the Central Bank of the
Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached
Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto
Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS:
THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the transferor
intended to complete the assignment through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably authorized the said issuer (Central
Bank) to transfer the said bond/certificates on the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and
in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred
and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . ., which
CBCI was among those previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the
Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial
No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE
HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it
issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable
the latter to have its title completed and registered in the books of the respondent. And by means of said
Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to
petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to transfer
the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments
(Annexes "B" and "D"), to the Securities Servicing Department of the respondent, and requested the latter to
effect the transfer of the CBCI on its books and to issue a new certificate in the name of petitioner as absolute
owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding
petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is
hereto attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's
request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by
the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly noted
hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate shall be
issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in
writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as required by the
above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer
of ownership over the CBCI and issuing a new certificate to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of
the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby
calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of
the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an
insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund
doctrine and to the prejudice of policyholders and to all who have present or future claim against policies
issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without any board
resolution, knowledge or consent of the board of directors of Filriters, and without any clearance or
authorization from the Insurance Commissioner, executed a detached assignment purportedly assigning
CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-
Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any
consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders and
all who have present or future claims against its policies, executed similar detached assignment forms
transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate
act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void from the
beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the
Insurance Code for its existence as an insurance company and the pursuit of its business operations. The
assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to make,
either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and
against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters
(and has in fact helped in placing Filriters under conservatorship), an inevitable result known to the officer who
executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer
but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the
absolute owner and that the value of the registered certificates shall be payable only to the registered owner; a
sufficient notice to plaintiff that the assignments do not give them the registered owner's right as absolute
owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered
certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular
transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance
Code and its assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance
or authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its
business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or substantially
all" of the assets of Filriters, which requires the affirmative action of the stockholders (Section 40, Corporation
[sic] Code.7
In its Decision dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of
8
CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor
of Traders Royal Bank null and void and of no force and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance
Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of
CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay
the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum
of P10,000 as attorney's fees; and
(d) to pay the costs. SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of Appeals 10
, but their appeals likewise
failed. The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of
assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters
Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still
registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a
repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument
on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a
deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No.
D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its
name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however,
refused to effect the transfer and registration in view of an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the
Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case of
interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and the
court adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable
judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all
parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent
that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without
consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any
"assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in
person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent,
having acquired the certificate through simulation. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the
latter. For lack of such authority, the assignment did not therefore bind Filriters and violated as the same time
Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer
(People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders
Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant. SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the
two corporations have identical corporate officers, thus demanding the application of the doctrine or piercing the
veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to petitioner
TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is no
merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for
lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the
meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this
Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered
owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a
permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is
properly understood as acknowledgment of an obligation to pay a fixed sum of money. It is usually used for the
purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered
owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is
inscribed thereon. It lacks the words of negotiability which should have served as an expression of consent that
the instrument may be transferred by negotiation.15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the petitioner's submission that the same is a
negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to
circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or
entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of
the parties is to control, if it can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet
as they have constituted the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the parties meant must be
determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI
from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to
entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it
acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer
was for "value received", there was really no consideration involved. What happened was Philfinance
merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank
Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", under which the note was issued. Published in the Official Gazette on
November 19, 1980, Section 3 thereof provides that any assignment of registered certificates shall not be
valid unless made . . . by the registered owner thereof in person or by his representative duly authorized in
writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for
the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated at the
same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of
the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and
Philfinance, though separate corporate entities on paper, have used their corporate fiction to defraud TRB into
purchasing the subject CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the
principle of piercing the veil of corporate entity were to be applied in this case, then TRB's payment to
Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the registered
owner of the CBCI as to bar the latter from claiming, as it has, that it never received any payment for that CBCI
sold and that said CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed
by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it were
to be consistent therewith, on the issued raised by TRB that there was a piercing a veil of corporate entity, the
Court of Appeals should have ruled that such veil of corporate entity was, in fact, pierced, and the payment by
TRB to Philfinance should be construed as payment to Filriters. 17
On its face the subject certificates states that it is registered in the name of Filriters. This should have put
the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or
its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of
the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such
registration no transfer thereof shall be valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and
similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered
as herein authorized, the person in whose name the same is registered as the absolute owner of this
Certificate, for the purpose of receiving payment hereof, or on account hereof, and for all other purpose
whether or not this Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.

We disagree with Petitioner.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner
was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, inquire as to the title Philfinance to dispose to the CBCI.
and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
person. 18
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides
that:
Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a
Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not be valid
seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that
unless made at the office where the same have been issued and registered or at the Securities Servicing
the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another,
Department, Central Bank of the Philippines, and by the registered owner thereof, in person or by his
disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing
representative, duly authorized in writing. For this purpose, the transferee may be designated as the
with the corporate entity which the law aims to protect by this doctrine.
representative of the registered owner.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one
requirements. An entity which deals with corporate agents within circumstances showing that the agents
shall be maintained as to the other, there is nothing else which could lead the court under circumstance to
are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as
disregard their corporate personalities.
everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith. 23
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical
personality separate from its stockholders and from other corporations may be disregarded, 19 in the absence of
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all
such grounds, the general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by
intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the
itself a ground to disregard the independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of
deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the
Internal Revenue, 20 the mere ownership by a single stockholder or by another corporation of all or nearly all of
necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale
the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate
from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration
corporate personalities.
for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject
certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can do
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the anything except what he can do lawfully.
subject certificate of indebtedness from Philfinance.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are
required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-
Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of
P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in early
1981 and this CBCI No. 891 was among the CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the
company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the
Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance Commission
requires this reserve to be invested preferably in government securities or government binds. This is how this
CBCI came to be purchased by the company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the
anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation,
not without the approval of its Board of Directors, and the maintenance of the required reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed
interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby
AFFIRMED. SO ORDERED.

G.R. No. 142381 October 15, 2003
PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners,
vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
This is a petition for review on certiorari 1 to annul the Decision2 dated 16 July 1999 of the Court of Appeals in
CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the motion for reconsideration.
The Court of Appeals affirmed with modification the Decision 3 dated 31 August 1992 rendered by Branch 113 of
the Regional Trial Court of Pasay City ("trial court"). The trial court’s Decision declared petitioner Alfredo Ching
("Ching") liable to respondent Traders Royal Bank ("TRB") for the payment of the credit accommodations
extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. ₱959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106; 4
2. ₱1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113; 5 and
3. ₱3,500,000 under the trust loan covered by a notarized Promissory Note. 6
Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer, Ching
signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL BANK, its
successors and assigns, the due and punctual payment by the following individuals and/or companies/firms,
hereinafter called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective
names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
PHIL. BLOOMING MILLS
TEN MILLION PESOS
CORP.
(₱ 10,000,000.00)
owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other credit obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor
of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness herein
secured at maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its successors and assigns,
the prompt payment, without demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other
credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all
expenses which may be incurred by the latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be
performed under any contracts, evidencing indebtedness/obligations and any supplements, amendments,
charges or modifications made thereto, including but not limited to, the due and punctual payment by the
said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand,
protest and notice of dishonor of any and all such instruments, loans, advances, credits, or other
indebtedness or obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon
the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may have against
the DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be and remain
bound upon this suretyship, irrespective of the existence, value or condition of any collateral, and
notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may
exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as attorney’s
fees a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and interest) then
unpaid, exclusive of all costs or expenses for collection allowed by law. 7 (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his capacity
as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust receipts, which
acknowledged receipt in trust for TRB of the merchandise subject of the letters of credit. Under the trust
receipts, PBM had the right to sell the merchandise for cash with the obligation to turn over the entire
proceeds of the sale to TRB as payment of PBM’s indebtedness. Letter of Credit No. 479 AD, covered by
Trust Receipt No. 106, has a face value of US$591,043, while Letter of Credit No. 563 AD, covered by Trust
Receipt No. 113, has a face value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of __ per
centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake and
agree to pay on demand on the said BANK, all sums and amounts of money which said BANK may call
upon them to pay arising out of, pertaining to, and/or in any manner connected with this receipt. In case it
is necessary to collect the draft covered by the Trust Receipt by or through an attorney-at-law, the
undersigned hereby further agree(s) to pay an additional of 10% of the total amount due on the draft as
attorney’s fees, exclusive of all costs, fees and other expenses of collection but shall in no case be less than
₱200.00"8 (Emphasis supplied)
On 27 April 1981, PBM obtained a ₱3,500,000 trust loan from TRB. Ching signed as co-maker in the
notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the TRADERS
ROYAL BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of
Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY (₱3,500,000.00), Philippine Currency, with the
interest rate of Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional amount
equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection charges in the form
of liquidated damages until fully paid, and the further sum of ten percent (10%) thereof in full, without any
deduction, as and for attorney’s fees whether actually incurred or not, exclusive of costs and other
judicial/extrajudicial expenses; moreover, I/We jointly and severally, further empower and authorize the
TRADERS ROYAL BANK at its option, and without notice to set off or to apply to the payment of this note any
and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of us, and to hold as
security therefor any real or personal property which may be in its possession or control by virtue of any other
contract.9 (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for ₱959,611.96, and of
Trust Receipt No. 113 (Letter of Credit No. 563 AD) for ₱1,191,137.13. PBM also defaulted on its ₱3,500,000
trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and Exchange
Commission ("SEC"), docketed as SEC Case No. 2250. 10 The petition sought to suspend payment of PBM’s
obligations and prayed that the SEC allow PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM was TRB. 11
On 9 July 1982, the SEC placed all of PBM’s assets, liabilities, and obligations under the rehabilitation
receivership of Kalaw, Escaler and Associates.12
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed with the trial
court a complaint for collection against PBM and Ching. TRB asked the trial court to order defendants to pay
solidarily the following amounts:
(1) ₱6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness arising from
the letters of credit issued to its various suppliers];
(2) ₱4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from the trust loan
of 27 April 1981 evidenced by a promissory note];
(3) ₱783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the money
market loan of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay ₱10,000,000.00 under the Deed of Suretyship in the event plaintiff can not
recover the full amount of PBM’s indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorney’s fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and expenses
for litigation.13
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC had already
placed PBM under receivership.14 The trial court thus dismissed the complaint against PBM. 15
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court
had no jurisdiction over the subject matter of the case. PBM and Ching invoked the assumption of
jurisdiction by the SEC over all of PBM’s assets and liabilities. 16
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his personal
capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension of payments is not binding
on TRB; and (3) Presidential Decree No. 1758 ("PD No. 1758"), 17 which Ching relied on to support his
assertion that all claims against PBM are suspended, does not apply to Ching as the decree regulates
corporate activities only.18
In its order dated 15 August 1983, 19 the trial court denied the motion to dismiss with respect to Ching and
affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB was holding Ching
liable under the Deed of Suretyship. As Ching’s obligation was solidary, the trial court ruled that TRB could
proceed against Ching as surety upon default of the principal debtor PBM. The trial court also held that PD
No. 1758 applied only to corporations, partnerships and associations and not to individuals.
Upon the trial court’s denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and
Prohibition20 before the Court of Appeals. The appellate court granted Ching’s petition and ordered the
dismissal of the case. The appellate court ruled that the SEC assumed jurisdiction over Ching and PBM to
the exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals’ Decision 21 before this Court. In Traders Royal Bank v. Court of
Appeals,22 this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case No. 2250.
Creditors may sue individual sureties of debtor corporations, like Ching, in a separate proceeding before
regular courts despite the pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-maker of
PBM. He claimed that the SEC had already issued a decision 23 approving a revised rehabilitation plan for
PBM’s creditors, and that PBM obtained the credit accommodations for corporate purposes that did not
redound to his personal benefit. He further claimed that even as a surety, he has the right to the defenses
personal to PBM. Thus, his liability as surety would attach only if, after the implementation of payments
scheduled under the rehabilitation plan, there would remain a balance of PBM’s debt to TRB. 24 Although
Ching admitted PBM’s availment of the credit accommodations, he did not show any proof of payment by
PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed
receiver.25 Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendant’s outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much? 26
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB, and Ms.
Carla Pecson, manager of the International Department of TRB, as witnesses. Both witnesses testified to
the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBM’s liabilities to TRB
up to ₱10,000,000;27
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for
US$591,043, and the actual availment by PBM of the full proceeds of the credit accommodation; 28
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for US$156,000, WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the
and the actual availment by PBM of the full proceeds of the credit accommodation; 29 and amount of ₱19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE
HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon from such
date until it is fully paid. To pay plaintiff 5% of the entire amount by way of attorney’s fees.
4. The existence of a trust loan of ₱3,500,000 evidenced by a notarized Promissory Note dated 27 April 1981
wherein Ching bound himself solidarily with PBM;30 and
SO ORDERED.37
5. Per TRB’s computation, Ching is liable for ₱19,333,558.16 as of 31 October 1991. 31
The Ruling of the Court of Appeals
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human Resources
Department of TRB, as witness. Ching sought to establish that TRB’s Board of Directors adopted a resolution On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of
fixing the PBM account at an amount lower than what TRB wanted to collect from Ching. The trial court allowed the obligation as provided in Article 1222 of the Civil Code, which reads:
Atty. Aranda to testify over TRB’s manifestation that the Answer failed to plead the subject matter of his
testimony. Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained the minutes
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are
of the special meeting of TRB’s Board of Directors held on 8 June 1990. 32 In the resolution, the Board of
derived from the nature of the obligation and of those which are personal to him, or pertain to his own
Directors advised TRB’s Management "not to release Alfredo Ching from his JSS liability to the bank." 33 The
share. With respect to those which personally belong to the others, he may avail himself thereof only as
resolution also stated the following:
regards that part of the debt for which the latter are responsible.

a) Accept the ₱1.373 million deposits remitted over a period of 17 years or until 2006 which shall be applied
directly to the account (as remitted per hereto attached schedule). The amount of ₱1.373 million shall be
considered as full payment of PBM’s account. (The receiver is amenable to this alternative)
The initial deposit/remittance which amounts to ₱150,000.00 shall be remitted upon approval of the above and
conforme to PISCOR and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every
June 30th of the year) until June 30, 2006.
Ching claimed that his liability should likewise be reduced since the equitable apportionment of PBM’s
remaining assets among its creditors under the rehabilitation proceedings would have the effect of reducing
PBM’s liability. He also claimed that the amount for which he was being held liable was excessive. He
contended that the outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was
only ₱5,650,749.09.38 Ching also contended that he was not liable for interest, as the loan documents did
not stipulate the interest rate, pursuant to Article 1956 of the Civil Code. 39 Finally, Ching asserted that the
Deed of Suretyship executed on 21 July 1977 could not guarantee obligations incurred after its execution. 40

Failure to pay one annual installment shall make the whole obligation due and demandable. TRB did not file its appellee’s brief. Thus, the Court of Appeals resolved to submit the case for decision. 41

b) Write-off immediately ₱4.278 million. The balance [of] ₱1.373 million to remain outstanding in the books of The Court of Appeals considered the following issues for its determination:
the Bank. Said balance will equal the deposits to be remitted to the Bank for a period of 17 years. 34
1. Whether the Answer of Ching amounted to an admission of liability.
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with or
implemented. Not only was there no initial deposit of ₱150,000 as required in the resolution, TRB also
2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation receivership,
disapproved the document prepared by the receiver, which would have released Ching from his suretyship. 35
and if in the affirmative, for how much.42

The Ruling of the Trial Court

The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:

The trial court found Ching liable to TRB for ₱19,333,558.16 under the Deed of Suretyship. The trial court
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts,
explained:
Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRB’s action rested. He
is, therefore, presumed to be liable unless he presents evidence showing payment, partially or in full, of
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine these obligations (Investment and Underwriting Corporation of the Philippines v. Comptronics Philippines,
Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to assume Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
PBM’s liability to the plaintiff in the event PBM defaulted in the payment of the said obligation in addition to
whatever penalties, expenses and bank charges that may occur by reason of default. Clear enough, under the
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the
Deed of Suretyship (Exh. J), defendant Ching bound himself jointly and severally with PBM in the payment of the
obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc.,
latter’s obligation to the plaintiff. The obligation being solidary, the plaintiff Bank can hold Ching liable upon
and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo
default of the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code already quoted
Ching, 177 SCRA 788 [1989]).
above.36

Even a[n] SEC injunctive order cannot suspend payment of the surety’s obligation since the rehabilitation
The dispositive portion of the trial court’s Decision reads:
receivers are limited to the existing assets of the corporation. 43
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount of
liability of defendant Alfredo Ching which is lowered from ₱19,333,558.16 to ₱15,773,708.78 with legal interest
of 12% per annum until it is fully paid. SO ORDERED.44
The Court of Appeals denied Ching’s Motion for Reconsideration for lack of merit. Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER ALFREDO CHING WAS
LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF
SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE PETITIONERS WERE LIABLE
FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED THEIR
FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO CHING LIABLE
FOR ₱15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT
UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH WAS APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED TO ₱1,373,415.00. 45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in
existence at the time of its execution. Specifically, Ching maintained that the Deed of Suretyship could not
answer for debts contracted by PBM in 1980 and 1981. Ching contended that no accessory contract of
suretyship could arise without an existing principal contract of loan. Ching likewise argued that TRB could no
longer claim on the trust receipts because TRB had already taken the properties subject of the trust receipts.
Ching likewise maintained that his obligation as surety could not exceed the ₱1,373,415 apportioned to PBM
under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought before the trial
court. Furthermore, TRB pointed out that Ching never presented PBM’s rehabilitation plan before the trial court.
TRB also stated that the Supreme Court ruling in Traders Royal Bank v. Court of Appeals46 constitutes res
judicata between the parties. Therefore, TRB could proceed against Ching separately from PBM to enforce in full
Ching’s liability as surety.47
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court’s denial of Ching’s motion to have the case dismissed against
him. The petition is a thinly veiled attempt to make this Court reconsider its decision in the prior case of Traders
Royal Bank v. Court of Appeals. 48 This Court has already resolved the issue of Ching’s separate liability as a
surety despite the rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as
rehabilitation receiver, to take custody and control of the assets and properties of PBM only, for the SEC
has jurisdiction over corporations only [and] not over private individuals, except stockholders in an intra-
corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No.
2250, Ching’s properties were not included in the rehabilitation receivership that the SEC constituted to
take custody of PBM’s assets. Therefore, the petitioner bank was not barred from filing a suit against
Ching, as a surety for PBM. An anomalous situation would arise if individual sureties for debtor corporations
may escape liability by simply co-filing with the corporation a petition for suspension of payments in the
SEC whose jurisdiction is limited only to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article
1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual stockholders
and members. Being an officer or stockholder of a corporation does not make one’s property the property
also of the corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching’s act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction
over his person or property, for jurisdiction does not depend on the consent or acts of the parties but upon
express provision of law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court
of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Ching’s liability as a surety of the credit
accommodations TRB extended to PBM. The decision amounts to res judicata 49 which bars Ching from
raising the same issue again. Hence, the only question that remains is the amount of Ching’s liability.
Nevertheless, we shall resolve the issues Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21
July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM
"may now be indebted or may hereafter become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code provides:
A guaranty may also be given as security for future debts, the amount of which is not yet known; there can
be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.
(Emphasis supplied)
Furthermore, this Court has ruled in Diño v. Court of Appeals50 that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not
be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time
or until revoked. It is prospective in its operation and is generally intended to provide security with respect
to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or contemplation of the
contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing
when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period; especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract states that the guaranty is to secure advances to be made "from
time to time," it will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any
debt," "any indebtedness," or "any sum," or the guaranty of "any transaction," or money to be furnished the
principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to
indicate a continuing guaranty.
Whether Ching’s liability is limited to the amount stated in PBM’s rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBM’s
rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself thereof only as regards that part of
the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Ching’s surety precisely to insure full recovery of the loan in case PBM
becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use PBM’s
failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full
PBM’s loan in case PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBM’s loan.
This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected. (Emphasis
supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that PBM’s
outstanding loans may be reduced to ₱1.373 million subject to certain conditions like the payment of ₱150,000
initial payment.51 The resolution also states that TRB should not release Ching’s solidary liability under his surety.
The resolution even directs TRB’s management to study Ching’s criminal liability under the trust documents. 52
Ching’s own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver
never paid the ₱150,000 initial payment to TRB. TRB also rejected the document that PBM’s receiver presented
which would have released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to
escape liability under his suretyship.
Ching’s attempts to have this Court review the factual issues of the case are improper. It is not a function of the
Supreme Court to assess and evaluate again the evidence, testimonial and evidentiary, adduced by the parties
particularly where the findings of both the trial court and the appellate court coincide on the matter. 53
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other than
his bare allegations, Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda,
TRB’s corporate secretary and First Vice President of its Human Resource Management Department,
testified that the conditions in the TRB board resolution presented by Ching were not met or implemented,
thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to condition
or step No. 1, which reads: "a) Accept the ₱1.373 million deposits remitted over a period of 17 years or
until 2006 which shall be applied directly to the account (as remitted per hereto attached schedule). The
amount of ₱1.373 million shall be considered as full payment of PBM’s account. (The receiver is amenable
to this alternative.) The initial deposit/remittance which amounts to ₱150,000.00 shall be remitted upon
approval of the above and conforme of PISCOR [xxx] and PBM. Subsequent deposits shall start on the 3rd
year and annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable. Now Mr.
Witness, would you be in a position to inform [the court] if these conditions listed in item (a) in Resolution
No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the amount
of ₱150,000.00 which have to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were met?
Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution which I read and quote: "Write
off immediately ₱4.278 million. The balance of ₱1.373 million to remain outstanding in the books of the
bank. Said balance will be remitted to the Bank for a period of 17 years." Mr. Witness, would you be in a
position to inform the court if the bank implemented that particular condition?
A In the implementation of this settlement the receiver prepared a document for approval and conformity
of the bank. The said document would in effect release the suretyship of Alfredo Ching and for that reason
the bank refused or denied fixing its conformity and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these conditionalities
[sic] was because the former defendant corporation requested that the suretyship of Alfredo Ching be
released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx the bank
would release the suretyship of Alfredo Ching, that is why the bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of said requirement or conformity did not seek to
implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that document because it was
the condition of the board that the suretyship should not be released but the document being presented to the
bank for signature and conformity in effect if signed would release the suretyship. So it would be a violation with
the approval of the board so the bank did not sign the conformity. 54
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when TRB,
together with other creditor banks, took hold of PBM’s inventories, including the goods covered by the trust
receipts. Ching asserts that this act of TRB released him from liability under the suretyship. Ching forgets that he
executed, on behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the right to
take possession of the goods at any time to protect TRB’s interests. TRB may exercise such right without
waiving its right to collect the full amount of the loan to PBM. The Undertakings also provide that any
suspension of payment or any assignment by PBM for the benefit of creditors renders the loan due and
demandable. Thus, the separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take possession of said merchandise with
the right to sell and dispose of the same under such terms and conditions it may deem best, or of the proceeds
of such of the same as may then have been sold, wherever the said merchandise or proceeds may then be
found and all the provisions of the Trust Receipt shall apply to and be deemed to include said above-mentioned
merchandise if the same shall have been made up or used in the manufacture of any other goods, or
merchandise, and the said BANK shall have the same rights and remedies against the said merchandise in its
manufactured state, or the product of said manufacture as it would have had in the event that such
merchandise had remained [in] its original state and irrespective of the fact that other and different
merchandise is used in completing such manufacture. In the event of any suspension, or failure or assignment
for the benefit of creditors on the part of the undersigned or of the non-fulfillment of any obligation, or of the
non-payment at maturity of any acceptance made under said credit, or any other credit issued by the said BANK
on account of the undersigned or of the non-payment of any indebtedness on the part of the undersigned to the
said BANK, all obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon without notice
mature and become due and payable and the BANK may avail of the remedies provided herein .55 (Emphasis
supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts Law, expressly allows TRB
to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. — The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount
owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with
any of the terms and conditions of the trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give
notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such
notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the
payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the
goods, documents or instruments; (c) to the satisfaction of the entrustee’s indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the entruster for any deficiency . Notice of sale shall be
deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid
ordinary mail to the entrustee’s last known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching remained
liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Ching’s credit obligations with TRB, Ching’s liability is
what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The trust receipts, as
well as the Letter of Undertaking dated 16 April 1980 56 executed by PBM, stipulate in writing the payment
of interest without specifying the rate. In such a case, the applicable interest rate shall be the legal rate,
which is now 12% per annum.57 This is in accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as
the "Usury Law," the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent (12%)
per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the ₱3,500,000 trust loan provides for 18% interest per
annum plus 2% penalty interest per annum in case of default. This stipulated interest should continue to
run until full payment of the ₱3,500,000 trust loan. In addition, the accrued interest on all the credit
accommodations should earn legal interest from the date of filing of the complaint pursuant to Article 2212
of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts as of the filing
of the complaint with the trial court on 13 May 1983 were ₱959,611.96 under Trust Receipt No. 106,
₱1,191,137.13 under Trust Receipt No. 113, and ₱3,500,000 for the trust loan. As extracted from TRB’s
Statement of Account as of 31 October 1991, 58 the accrued interest on the trust receipts and the trust loan
as of the filing of the complaint on 13 May 1983 were ₱311,387.51 59 under Trust Receipt No. 106,
₱338,739.8160 under Trust Receipt No. 113, and ₱1,287,616.44 61 under the trust loan. The penalty interest
on the trust loan amounted to ₱137,315.07. 62 Ching did not rebut this Statement of Account which TRB
presented during trial.
Thus, the following is the summary of Ching’s liability under the suretyship as of 13 May 1983, the date of
filing of TRB’s complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal ₱ 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal ₱ 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal ₱ 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07
WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner Alfredo
Ching shall pay respondent Traders Royal Bank the following (1) on the credit accommodations under the
trust receipts, the total principal amount of ₱2,150,749.09 with legal interest at 12% per annum from 14
May 1983 until full payment; (2) on the trust loan evidenced by the Promissory Note, the principal sum of
₱3,500,000 with 20% interest per annum from 14 May 1983 until full payment; (3) on the total accrued
interest as of 13 May 1983, ₱2,075,058.84 with 12% interest per annum from 14 May 1983 until full
payment. Petitioner Alfredo Ching shall also pay attorney’s fees to respondent Traders Royal Bank
equivalent to 5% of the total principal and interest. SO ORDERED.

G.R. No. 85161 September 9, 1991
COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 09504 "Enrique
Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation" affirming in toto the
decision of the Regional Trial Court, Cabanatuan City, Branch XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the counterclaim of the defendant
O. Ventanilla Enterprises Corporation, judgment is hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the defendant's re-
entry and repossession of the Avenue, Broadway and Capitol theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement, and confirming the
forfeiture of the plaintiffs remaining cash deposit of P290,000.00 in favor of the defendant thereunder, as of
February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in rentals,
unremitted amounts for amusement tax delinquency and accrued interest thereon, with further interest on said
amounts at the rate of 12% per annum (per lease agreement) from December 1, 1980 until the same is fully
paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the P10,000.00 portion
of the monthly lease rental which were not deducted from the cash deposit of the plaintiff from February to
November, 1980, after the forfeiture of the said cash deposit on February 11, 1980, with interest thereon at the
rate of 12% per annum on each of the said monthly amounts of P10,000.00 from the time the same became
due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00,
representing the P10,000.00 monthly increase in rentals which the defendant failed to realize from February to
November 1980 result from the injunction, with legal interest thereon from the finality of this decision until fully
paid;
6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of the above-
mentioned amounts of P289,534.78, P100,000.00 and P100,000.00, as and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as
lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which
they are situated in Cabanatuan City, including their air-conditioning systems, projectors and accessories needed
for showing the films or motion pictures. The term of the lease was for six (6) years commencing from June 13,
1977 and ending June 12,1983. After more than two (2) years of operation of the Avenue, Broadway and Capitol
Theaters, the lessor OVEC made demands for the repossession of the said leased properties in view of the Sy's
arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy had a
conference and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three (3)
theaters, the former was allowed to continue operating the leased premises upon his conformity to certain
conditions imposed by the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31,
1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued amusement tax liability
of the three (3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00
despite the fact that Sy had been deducting the amount of P4,000.00 from his monthly rental with the
obligation to remit the said deductions to the city government. Hence, letters of demand dated January 7,
1980 and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and amusement
tax delinquency. The latter demand was with warning that OVEC will re-enter and repossess the Avenue,
Broadway and Capital Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease
contract of June 11, 1977 and their supplemental letter-agreement of August 13, 1979. But
notwithstanding the said demands and warnings SY failed to pay the above-mentioned amounts in full
Consequently, OVEC padlocked the gates of the three theaters under lease and took possession thereof in
the morning of February 11, 1980 by posting its men around the premises of the Id movie houses and
preventing the lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages and
injunction late in the afternoon of the same day. And by virtue of a restraining order dated February 12,
1980 followed by an order directing the issuance of a writ of preliminary injunction issued in said case, Sy
regained possession and operation of the Avenue, Broadway and Capital theaters.
As first cause of action, Sy alleged that the amount of deposit — P600,000.00 as agreed upon, P300,000.00
of which was to be paid on June 13, 1977 and the balance on December 13, 1977 — was too big; and that
OVEC had assured him that said forfeiture will not come to pass. By way of second cause of action, Sy
sought to recover from OVEC the sums of P100,000.00 which Sy allegedly spent in making "major repairs"
on Broadway Theater and the application of which to Sy's due rentals; (2) P48,000.00 covering the cost of
electrical current allegedly used by OVEC in its alleged "illegal connection" to Capitol Theater and (3)
P31,000.00 also for the cost of electrical current allegedly used by OVEC for its alleged "illegal connection"
to Broadway Theater and for damages suffered by Sy as a result of such connection. Under the third cause
of action, it is alleged in the complaint that on February 11, 1980, OVEC had the three theaters padlocked
with the use of force, and that as a result, Sy suffered damages at the rate of P5,000.00 a day, in view of
his failure to go thru the contracts he had entered into with movie and booking companies for the showing
of movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining order/preliminary
injunction to enjoin OVEC and all persons employed by it from entering and taking possession of the three
theaters, conditioned upon Sy's filing of a P500,000.00 bond supplied by Country Bankers Insurance
Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's violation of
the terms of the subject lease agreement, OVEC became authorized to enter and possess the three
theaters in question and to terminate said agreement and the balance of the deposits given by Sy to OVEC
had thus become forfeited; that OVEC would be losing P50,000.00 for every month that the possession and
operation of said three theaters remain with Sy and that OVEC incurred P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement;
that the repossession of the leased premises by OVEC after the cancellation and termination of the lease
was in accordance with the stipulation of the parties in the said agreement and the law applicable thereto
and that the consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them
in the lease agreement. The trial court further concluded that Sy was not entitled to the writ of preliminary
injunction issued in his favor after the commencement of the action and that the injunction bond filed by
Sy is liable for whatever damages OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the possession and
enjoyment of the leased premises and also suffered damages as a result of the filing of the case by Sy and
his violation of the terms and conditions of the lease agreement. Hence, it held that OVEC is entitled to recover
the said damages in addition to the arrears in rentals and amusement tax delinquency of Sy and the accrued
interest thereon. From the evidence presented, it found that as of the end of November, 1980, when OVEC
finally regained the possession of the three (3) theaters under lease, Sy's unpaid rentals and amusement tax
liability amounted to P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every
month from February to November, 1980 or the total amount of P100,000.00 with interest on each amount of
P10,000.00 from the time the same became due. This P10,000.00 portion of the monthly lease rental was
supposed to come from the remaining cash deposit of Sy but with the consequent forfeiture of the remaining
cash deposit of P290,000.00, there was no more cash deposit from which said amount could be deducted.
Further, it adjudged Sy to pay attorney's fees equivalent to 10% of the amounts above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every month from
February to November, 1980. The amount represents the supposed increase in rental from P50,000.00 to
P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the three theaters involved for P60,000.00
a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC appealed insofar
as the decision failed to hold the injunction bond liable for an damages awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It held that the
provisions are fair and reasonable and therefore, should be respected and enforced as the law between the
parties. It held that the cancellation or termination of the agreement prior to its expiration period is justified as it
was brought about by Sy's own default in his compliance with the terms of the agreement and not "motivated
by fraud or greed." It also affirmed the award to OVEC of the amount of P100,000.00 chargeable against the
injunction bond posted by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in not
charging and holding the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO
under the bond referred only to damages which OVEC may suffer as a result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A. PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE BENEFITTED AT THE
EXPENSE OF THE PETITIONERS.
B. RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE ABUSE OF DISCRETION IN
NOT SETTING OFF THE P100,000.00 SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION AGAINST THE
P290,000.00 REMAINING CASH DEPOSIT OF PETITIONER ENRIQUE SY.
C. RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW AND GRAVE ABUSE OF
DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS COUNTER-CLAIM FOR FAILURE TO PAY THE
NECESSARY DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement would
unjustly enrich the respondent OVEC at the expense of Sy and CBISCO — contrary to law, morals, good
customs, public order or public policy. A provision which calls for the forfeiture of the remaining deposit still in
the possession of the lessor, without prejudice to any other obligation still owing, in the event of the termination
or cancellation of the agreement by reason of the lessee's violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into. A penal clause is an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special presentation (generally consisting in the payment of a sum of money) in case the obligation is
not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil Law,
Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of non-compliance. This is specifically
provided for in Article 1226, par. 1, New Civil Code. In such case, proof of actual damages suffered by the
creditor is not necessary in order that the penalty may be demanded (Article 1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and
the payment of interests in case of non-compliance with the principal obligation. They are first, when there
is a stipulation to the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and
third, when the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code). It is evident that in all said
cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee can recover from the
obligor not only the penalty but also the damages resulting from the non-fulfillment or defective
performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited,
without prejudice to any other obligation still owing by the lessee to the lessor, the penalty cannot
substitute for the P100,000.00 supposed damage resulting from the issuance of the injunction against the
P290,000.00 remaining cash deposit. This supposed damage suffered by OVEC was the alleged P10,000.00
a month increase in rental from P50,000.00 to P60,000,00), which OVEC failed to realize for ten months
from February to November, 1980 in the total sum of P100,000.00. This opportunity cost which was duly
proven before the trial court, was correctly made chargeable by the said court against the injunction bond
posted by CBISCO. The undertaking assumed by CBISCO under subject injunction refers to "all such
damages as such party may sustain by reason of the injunction if the Court should finally decide that the
Plaintiff was/were not entitled thereto." ( Rollo, p. 101) Thus, the respondent Court correctly sustained the
trial court in holding that the bond shall and may answer only for damages which OVEC may suffer as a
result of the injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency,
the amount of P100,000.00 (P10,000.00 portions of each monthly rental which were not deducted from
plaintiffs cash deposit from February to November, 1980 after the forfeiture of said cash deposit on
February 11, 1980) and attorney's fees which were all charged against Sy were correctly considered by the
respondent Court as damages which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law
and grave abuse of discretion in not dismissing private respondent's counterclaim for failure to pay the
necessary docket fee, which is an issue raised for the first time in this petition. Petitioners rely on the rule
in Manchester Development Corporation v. Court of Appeals , G.R. No. 75919, May 7, 1987, 149 SCRA 562
to the effect that all the proceedings held in connection with a case where the correct docket fees are not
paid should be peremptorily be considered null and void because, for all legal purposes, the trial court
never acquired jurisdiction over the case. It should be remembered however, that in Davao Light and
Power Co., Inc. v. Dinopol, G.R. 75195, August 19, 1988, 164 SCRA 748, this Court took note of the fact
that the assailed order of the trial court was issued prior to the resolution in the Manchester case and held
that its strict application to the case at bar would therefore be unduly harsh. Thus, We allowed the
amendment of the complaint by specifying the amount of damages within a non-extendible period of five
(5) days from notice and the re-assessment of the filing fees. Then, in Sun Insurance Office, Ltd. v.
Asuncion, G.R. 79937-38, February 3, 1989, 170 SCRA 274, We held that where the filing of the initiatory
pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within
a reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or
occurrence that is subject matter of the opposing party's claim; (b) they do not require for their
adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and (c) the court
has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379, March 31,
1989, 171 SCRA 605). Whether the respective claims asserted by the parties arise out of the same contract
or transaction within the limitation on counterclaims imposed by the statutes depends on a consideration of
all the facts brought forth by the parties and on a determination of whether there is some legal or equitable
relationship between the ground of recovery alleged in the counterclaim and the matters alleged as the
cause of action by the plaintiff (80 C.J.S. 48). As the counterclaims of OVEC arise from or are necessarily
connected with the facts alleged in the complaint for reformation of instrument of Sy, it is clear that said
counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby
DENIED and the decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the
respondent Court of Appeals are AFFIRMED. SO ORDERED.
G.R. No. 78315 January 2, 1989
COMMERCIAL CREDIT CORPORATION CAGAYAN DE ORO, petitioner,
vs.
THE COURT OF APPEALS and THE CAGAYAN DE ORO COLISEUM, INC., respondents.
In this petition for review of a decision of the Court of Appeals in CA G.R. SP No. 10888 1 the issue is whether or
not a compromise judgment which was found by the Court of Appeals to be lawful may be modified by the same
court.
Sometime in 1978 private respondent Cagayan De Oro Coliseum, Inc. executed a promissory note in the amount
of P329,852.54 in favor of petitioner Commercial Credit Corporation of Cagayan de Oro, payable in 36 monthly
installments. The note is secured by a real estate mortgage duly executed by private respondent in favor of
petitioner. As said respondent defaulted in the payment of the monthly installments due, petitioner proceeded
with the extrajudicial foreclosure of the real estate mortgage in September, 1979.
Five minority stockholders of private respondent then instituted Special Civil Action No. 68111 in the then Court
of First Instance (CFI) of Misamis Oriental questioning the power of the private respondent to execute the real
estate mortgage without the consent of its stockholders. In due course a compromise agreement was entered
into by the parties on the basis of which a compromise judgment was rendered by the trial court on March 11,
1980 which reads as follows:
JUDGMENT
The parties in the above-entitled case assisted by their respective counsel, submitted for the approval of the
Court the following Compromise Agreement, to wit:
COMES NOW, Parties, Petitioners and Respondents, represented by their respective counsels, unto this
Honorable Court, most respectfully submit for approval the following Compromise Agreement:
1. That, Petitioners herein hereby state that they ratified and approved the loan and real estate mortgage
entered into and assigned by the Cagayan de Oro Coliseum, Inc. to the Commercial Credit Corporation of
Cagayan de Oro and as such therefore, the issue raised by the herein petitioners in the above entitled case has
become moot and academic;
2. That, by virtue of the aforementioned, the Cagayan de Oro Coliseum, Inc. thru its Board of Directors and
represented by its President, Mr. Johnny Wilson, hereby admits its total outstanding obligation to herein
Respondent Commercial Credit Corporation of Cagayan de Oro in the amount of TWO HUNDRED FORTY NINE
THOUSAND TWO HUNDRED SIXTY THREE & 23/100 PESOS (P 249,263.23), as of February 15, 1980, including
therein the sum of P 10,000.00 representing attorney's fees for Respondent Commercial Credit Corporation of
Cagayan de Oro;
3. That the Cagayan de Oro Coliseum, Inc. has agreed to pay the above obligation plus interest on
diminishing balance computed yearly at sixteen (16) percent per annum, thus:
Total Account.................... P 249,263.23
Total Interest...................... P 76,138.60
Total Payable ...................... P 325,401.83
4. That, the Cagayan de Oro Coliseum, Inc. hereby agrees to pay the aforegoing obligation in paragraph
(3) hereof in equal monthly installments of P11,000.00, the first installment shall be payable in February,
1980 and every month thereafter until the whole account payable as aforementioned is fully paid;
5. That, failure on the part of Respondent Cagayan de Oro Coliseum, Inc. to pay any of the installments as
they shall become due, the whole amount then outstanding and unpaid shall immediately become due and
payable in its entirety and shall render the judgment herein to be immediately final, unappealable and
executory; and the overdue and unpaid installments shall earn a three (3%) per cent per month penalty
charge until fully paid, plus five percent (5%) of the outstanding balance as additional attorney's fee;
6. That, Respondent Commercial Credit Corporation of Cagayan de Oro hereby agrees to withdraw its
application with Respondent City Sheriff of Cagayan de Oro for the extrajudicial foreclosure of the real
estate mortgage subject of this complaint;
7. That, the Parties herein waive in favor of each other any and all forms of damage arising out of,
connected with and/or as a result of this action.
WHEREFORE, the Parties respectfully pray of this Honorable Court that judgment in accordance with the
Compromise Agreement be rendered. (Pages 25-27, Rollo)
However as private respondent failed to comply with the terms of the judgment for failure to pay several
installments in the amount of P70,152.65 which matured on July 13, 1982, petitioner filed an ex-
parte motion for the issuance of a writ of execution on March 4, 1983. The Court granted the said motion
in an order dated March 10, 1983. A notice of auction sale was issued on March 11, 1983. Private
respondent filed a motion for reconsideration of said order alleging that it had paid its obligation. The
execution of the writ was suspended pending consideration of said motion. An opposition thereto was filed
by petitioner to which a reply was filed by the private respondent and, in turn, the comment of the
petitioner was also submitted. On November 26, 1986, the trial court denied said motion for
reconsideration and, accordingly, a writ of execution was issued on December 4, 1986. The Deputy
Provincial Sheriff set the auction sale for January 23, 1987. However, said auction sale did not take place
as scheduled due to some internal problems in the office of sheriff.
Private respondent then filed a special civil action in the Court of Appeals to annul said compromise-
judgment, alleging that the trial court acted in serious violation of law and/or in grave abuse of discretion.
In due course, a decision was rendered by said appellate court on February 13, 1987, the dispositive part
of which reads as follows:
WHEREFORE, the present petition is DENIED due course and is hereby DISMISSED. Effective March 16,
1983, the overdue and unpaid installments shall earn one half per cent (1/2%) per month penalty charge
until fully paid, plus two per cent (2%) of the outstanding balance as additional attorney's fees. (Page 33,
Rollo)
A motion for reconsideration of the decision was filed by petitioner. On March 23, 1987 a resolution denying the
motion was issued by the respondent appellate court.
On the other hand, private respondent also filed a motion for reconsideration and comment on the petitioner's
motion for reconsideration. On May 19, 1987, respondent Court issued a resolution, the dispositive part of which
reads as follows:
Acting on the said first part of the petitioner's motion for reconsideration as well as the private respondent's
comment thereon, the aforestated grounds for said motion having been already taken up by this Court in
reaching the said February 13, 1987 decision, and finding no reason to disturb the same, the said motion as to
its said first part, is DENIED for lack of merit.
As to the said second part of petitioner's motion for reconsideration, for clarity, the dispositive portion of the
February 13, 1987 decision is re-worded to read as follows:
WHEREFORE, the present petition is GRANTED in the sense that effective March 16, 1983, the overdue and
unpaid installments shall earn one half per cent (1/2%) per month penalty charge until fully paid, plus two per
cent (2%) of the outstanding balance as additional attorney's fees.
And in view of such disposition.
1) THE JUDGMENT DATED MARCH 11, 1980 AND THE ORDER DATED NOVEMBER 26, 1986 OF RESPONDENT
DENT COURT ARE HEREBY DECLARED MODIFIED CONFORMABLY WITH THE FEBRUARY 13, 1987 DECISION OF
THIS COURT; and
2) THE WRIT OF EXECUTION ISSUED BY RESPONDENT DENT CLERK OF COURT, AND THE SHERIFF'S NOTICE
OF SALE, THE PUBLIC AUCTION SALE AND THE CERTIFICATE OF SALE ARE DECLARED NULL AND VOID IN SO
FAR AS THEY ARE NOT IN ACCORDANCE WITH AND IN EXCESS OF THE NOW MODIFIED JUDGMENT AND
MODIFIED ORDER OF THE RESPONDENT COURT DATED MARCH 11, 1980 AND NOVEMBER 26, 1986,
RESPECTIVELY
(Page 148, Rollo)
Hence, the herein petition for review on certiorari wherein petitioner alleges the following reasons as warranting
the grant of the petition:
a) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR IN EXCESS OF JURISDICTION WHEN IT MODIFIED THE TRIAL COURT'S COMPROMISE JUDGMENT AFTER
IT DENIED DUE COURSE AND DISMISSED THE PETITION FOR ANNULMENT OF RESPONDENT COLISEUM.
b) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR IN APPLYING ARTICLE
1229 OF THE CIVIL CODE IN THE CASE AT BAR.
c) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR WHEN IT MODIFIED
THE EFFECT'S OF THE 3% PENALTY INTEREST AND ATTORNEY'S FEES, AFTER IT UPHELD THE LEGALITY OF
THE COMPROMISE JUDGMENT OF THE TRIAL COURT." (Page 14, Rollo)
The petition is impressed with merit. It is axiomatic that a compromise judgment is final and immediately
executory. Once a judgment becomes final and executory, the prevailing party can have it executed as a matter
of right and the execution becomes a ministerial duty on the part of the court . 2
A judicial compromise has
the force and effect of res judicata. 3
Such a final and executory judgment cannot be modified or amended. If an amendment is to be made, it
may consist only of supplying an omission, striking out a superfluity or interpreting an ambiguous phrase
therein in relation to the body of the decision which gives it life . 4 A compromise judgment should not be
disturbed except for vices in consent or forgery. 5
In the present case, the compromise agreement was voluntarily entered into by the parties assisted by
their respective counsel and was duly approved by the trial court. Indeed, it was confirmed by the
respondent appellate court to be lawful. There was, therefore, no cogent basis for the respondent appellate
court to modify said compromise agreement by reducing the penalty and attorney's fees provided for
therein.
In spite of the protestation of private respondent that the penalty and interests provided in the compromise
agreement was violative of the Usury Law, the respondent appellate court, applying the provisions of
Central Bank Circular No. 721, found no violation thereof as in fact the imposition of the penalty is
sanctioned by Article 1226 of the Civil Code. The respondent court cited the De Venecia vs. Del
Rosario 6 where this Court held that in the absence of a stipulation to the contrary, recovery of both the
penalty and the interest until full payment of the debt is allowed under existing laws.
The modification of said compromise judgment by the respondent appellate court is predicated on the
provision of Article 1229 of the Civil Code which provides as follows:
ART. 1229. 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.
The foregoing provision of the law applies only to obligations or contract, subject of a litigation, the
condition being that the same has been partly or irregularly complied with by the debtor. The provision also
applies even if there has been no performance, as long as the penalty is iniquituous or unconscionable. It
cannot apply to a final and executory judgment.
When the parties entered into the said compromise agreement and submitted the same for the approval of
the trial court, its terms and conditions must be the primordial consideration why the parties voluntarily
entered into the same. The trial court approved it because it is lawful, and is not against public policy or
morals. Even the respondent Court of Appeals upheld the validity of the said compromise agreement.
Hence, the respondent court has no authority to reduce the penalty and attorney's fees therein stipulated
which is the law between the parties and is res judicata.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals dated February
13, 1987 and its resolutions dated March 23, 1987 and May 19, 1987 are hereby SET ASIDE and another
judgment is hereby rendered affirming in toto the compromise judgment of the trial court dated March 11,
1980, with costs against private respondent. This decision is immediately executory. SO ORDERED.

G.R. No. 225562
WILLIAM C. LOUH, JR. and IRENE L. LOUH,, Petitioners
vs
BANK OF THE PHILIPPINE ISLANDS, Respondent
Before the Court is the instant petition for review on certiorari1 filed by William C. Louh, Jr. (William) and Irene
L. Louh (Irene) (collectively, the Spouses Louh) to assail the Decision 2 and Resolution,3 dated August 11, 2015
and May 23, 2016, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 100754.
The herein respondent, Bank of the Philippine Islands (BPI), issued a credit card in William's name, with Irene as
the extension card holder. Pursuant to the terms and conditions of the cards' issuance, 3.5% finance charge and
6% late payment charge shall be imposed monthly upon unpaid credit availments. 4
The Spouses Louh made purchases from the use of the credit cards and paid regularly based on the amounts
indicated in the Statement of Accounts (SO As). However, they were remiss in their obligations starting October
14, 2009.5 As of August 15, 2010, their account was unsettled prompting BPI to send written demand letters
dated August 7, 2010, January 25, 2011 and May 19, 2011. By September 14, 2010, they owed BPI the total
amount of ₱533,836.27. Despite repeated verbal and written demands, the Spouses Louh failed to pay BPI. 6
On August 4, 2011, BPI filed before the Regional Trial Court (RTC) of Makati City a Complaint for Collection of a
7
Sum of Money.
On February 21, 2012, William filed before the RTC a Motion for Extension of Time to File an Answer or
Responsive Pleading.8 In its Order9 dated February 27, 2012, the RTC granted an extension of 15 days or up to
March 4, 2012, but the Spouses Louh still failed to comply within the prescribed period. 10 On June 11, 2012, BPI
filed a motion to declare the Spouses Louh in default. 11 Before the RTC can rule on BPI's motion, the Spouses
Louh filed an Answer12 on July 20, 2012 or more than three months after the prescribed period, which ended on
March 4, 2012. On July 24, 2012, the RTC issued an Order 13 declaring the Spouses Louh in default and setting
BPI's ex-parte presentation of evidence on August 7, 2012. The Branch Clerk of Court thereafter submitted a
Commissioner's Report14 dated September 7, 2012, and the RTC considered the case submitted for decision on
November 27, 2012.15
On November 29, 2012, the RTC rendered a Decision, 16 the fallo of which ordered the Spouses Louh to solidarily
pay BPI (1) P533,836.27 plus 12% finance and 12% late payment annual charges starting from August 7, 2010
until full payment, and (2) 25% of the amount due as attorney's fees, plus ₱l,000.00 per court hearing and
₱8,064.00 as filing or docket fees; and (3) costs of suit. 17
The RTC explained that BPI had adduced preponderant evidence proving that the Spouses Louh had in fact
availed of credit accommodations from the use of the cards. However, the RTC found the 3.5% finance and 6%
late payment monthly charges 18 imposed by BPI as iniquitous and unconscionable. Hence, both charges
were reduced to 1 % monthly. Anent the award of attorney's fees equivalent to 25% of the amount due,
the RTC found the same to be within the terms of the parties' agreement. 19
The Spouses Louh filed a Motion for Reconsideration, 20 which the RTC denied in the Order 21 issued on April
8, 2013. The appeal22 they filed was likewise denied by the CA in the herein assailed decision and
resolution.
In affirming in toto the RTC's judgment, the CA explained that the Spouses Louh were properly declared in
default for their failure to file an answer within the reglementary period. The Spouses Louh further filed no
motion to set aside the order of default. The CA also found that BPI had offered ample evidence, to wit: (1)
delivery receipts pertaining to the credit cards and the terms and conditions governing the use thereof
signed by the Spouses Louh; (2) computer-generated authentic copies of the SOAs; and (3) demand letters
sent by BPI, which the Spouses Louh received but ignored. As to the award of attorney's fees, the CA ruled
that the terms governing the use of the cards explicitly stated that should the account be referred to a
collection agency, then 25% of the amount due shall be charged as attorney's fees. 23 In the herein assailed
Resolution24 dated May 23, 2016, the CA denied the Spouses Louh's Motion for Reconsideration. 25
Issue: Aggrieved, the Spouses Louh are before the Court raising the sole issue of whether or not the CA
erred in sustaining BPI's complaint.26
The Spouses Louh pray for the dismissal of BPI's suit. They likewise seek a relaxation of procedural rules
claiming that their failure to file a timely Answer was due to William's medical condition, which required him
to undergo a heart by-pass surgery. 27 They further alleged that BPI failed to establish its case by
preponderance of evidence. Purportedly, BPI did not amply prove that the Spouses Louh had in fact
received and accepted the SO As, which were, however, unilaterally prepared by the bank. 28 They allege
the same circumstance as to the receipt of the demand letters. The computations likewise did not show the
specific amounts pertaining to the principal, interests and penalties. They point out that since their credit
limit was only ₱326,000.00, it is evident that the amount of ₱533,836.27 demanded by BPI included
unconscionable charges.29
BPI failed to file a comment to the instant petition within the prescribed period, which expired on
September 23, 2016.
Ruling of the Court: The Court affirms the herein assailed decision and resolution, but modifies the principal
amount and attorney's fees awarded by the RTC and the CA.
The Spouses Louh reiterate that the RTC wrongly declared them in default since by reason of William's
sickness, they were entitled to a relaxation of the rules. Moreover, BPI had failed to offer preponderant
evidence relative to the actual amount of the Spouses Louh's indebtedness.
The foregoing claims are untenable.
In Magsino v. De Ocampo,30 the Court instructs that:
Procedural rules are tools designed to facilitate the adjudication
of cases. Courts and litigants alike are thus enjoined to abide
strictly by the rules. And while the Court, in some instances,
allows a relaxation in the application of the rules, this, we
stress, was never intended to forge a bastion for erring litigants
to violate the rules with impunity. The liberality in the
interpretation and application of the rules applies only in proper
 cases and under justifiable causes and circumstances. While it is true
that litigation is not a game of technicalities, it is equally true that
every case must be prosecuted in accordance with the prescribed
procedure to insure an orderly and speedy administration of justice.
Like all rules, procedural rules should be followed except only when,
for the most persuasive of reasons, they may be relaxed to relieve a
litigant of an injustice not commensurate with the degree of his
thoughtlessness in not complying with the prescribed procedure.
The rules were instituted to be faithfully complied with, and allowing them to be ignored or
lightly dismissed to suit the convenience of a party like the petitioner was impermissible.
Such rules, often derided as merely technical, are to be relaxed only in the furtherance of
justice and to benefit the deserving. Their liberal construction in exceptional situations
should then rest on a showing of justifiable reasons and of at least a reasonable attempt
at compliance with them.xx x.31 (Citations omitted and emphasis and italics ours)
In the case at bar, the CA aptly pointed out that the Spouses Louh filed their Answer with the RTC only on July
20, 2012 or more than three months after the prescribed period, which expired on March 4, 2012. When they
were thereafter declared in default, they filed no motion to set aside the RTC's order, a remedy which is allowed
under Rule 9, Section 332 of the Rules of Civil Procedure. The Spouses Louh failed to show that they exerted due
diligence in timely pursuing their cause so as to entitle them to a liberal construction of the rules, which can only
be made in exceptional cases.
The Spouses Louh claim as well that BPI's evidence are insufficient to prove the amounts of the former's
obligation; hence, the complaint should be dismissed. The Court, in Macalinao v. BPl,33 emphatically ruled that:
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinao's failure to file an answer and concomitantly, to allow the latter to submit
additional evidence by dismissing or remanding the case for further reception of evidence.
Significantly, petitioner Macalinao herself admitted the existence of her obligation to
respondent BPI, albeit with reservation as to the principal amount. Thus, a dismissal of the
case would cause great injustice to respondent BPI. Similarly, a remand of the case for
further reception of evidence would unduly prolong the proceedings of the instant case
and render inutile the proceedings conducted before the lower courts. 34
BPI had offered as evidence the (1) testimony of Account Specialist Carlito M. Igos, who executed a Judicial
Affidavit in connection with the case, and (2) documentary exhibits, which included the (a) delivery receipts
pertaining to the credit cards and the terms and conditions governing the use thereof signed by the Spouses
Louh, (b) computer-generated authentic copies of the SOAs, 35 and (c) demand letters sent by BPI, which the
Spouses Louh received.36 The Clerk of Court subsequently prepared a Commissioner's Report, from which the
RTC based its judgment.
The Spouses Louh slept on their rights to refute BPI's evidence, including the receipt of the SO As and demand
letters. BPI cannot be made to pay for the Spouses Louh 's negligence, omission or belated actions.
Be that as it may, the Court finds excessive the principal amount and attorneys fees awarded by the RTC and
CA. A modification of the reckoning date relative to the computation of the charges is in order too.
In Macalinao,37 where BPI charged the credit cardholder of 3.25% interest and 6% penalty per month, 38 and
25% of the total amount due as attorney's fees, the Court unequivocally declared that:
[T]his is not the first time that this Court has considered the interest rate of 36% per annum as
excessive and unconscionable. We held in Chua vs. Timan:
The stipulated interest rates of 7% and 5% per month imposed
on respondents' loans must be equitably reduced to 1% per
month or 12% per annum. We need not unsettle· the principle
we had affirmed 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. While C.B.
Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both
secured and unsecured loans, regardless of maturity, nothing in
the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels
which would either enslave their borrowers or lead to a
hemorrhaging of their assets. x x x
Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand.
The same is true with respect to the penalty charge. x x x Pertinently, Article 1229 of the Civil
Code states:
Art. 1229. 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. x x xx
x x x [T]he stipulated penalty charge of 3% per month or 36% per annum, in
addition to regular interests, is indeed iniquitous and unconscionable. 39 (Citations and
emphasis in the original omitted, and emphasis ours)
Thus, in Macalinao, the Court reduced both the interest and penalty charges to 12% each, and the
attorney's fees to ₱l0,000.00. In MCMP Construction Corp. v. Monark Equipment Corp., 40 the creditor
cumulatively charged the debtor 60% annually as interest, penalty and collection fees, and 25% of the
total amount due as attorney's fees. The Court similarly found the rates as exorbitant and unconscionable;
hence, directed the reduction of the annual interest to 12%, penalty and collection charges to 6%, and
attorney's fees to 5%. The Court explained that attorney's fees are in the nature of liquidated damages,
which under Article 2227 of the New Civil Code, "shall be equitably reduced if they are iniquitos or
unconscionable."41 In the case at bench, BPI imposed a cumulative annual interest of 114%, plus 25% of
the amount due as attorney's fees. Inevitably, the RTC and the CA aptly reduced the charges imposed by
BPI upon the Spouses Louh. Note that incorporated in the amount of ₱533,836.27 demanded by BPI as the
Spouses Louh's obligation as of August 7, 2010 were the higher rates of finance and late payment charges,
which the comis a quo had properly directed to be reduced.
In the SOA42 dated October 14, 2009, the principal amount indicated was ₱l13,756.83. In accordance
with Macalinao, the finance and late payment charges to be imposed on the principal amount of
₱l13,756.83 are reduced to 12% each per annum, reckoned from October 14, 2009, the date when the
Spouses Louh became initially remiss in the payment of their obligation to BPI, until full payment. Anent
BPI's litigation expenses, the Court retains the RTC and CA' s disquisition awarding ₱5,064.00 as filing or
docket fees, and costs of suit. However, the Court reduces the attorney's fees to five percent (5%) of the total
amount due from the Spouses Louh pursuant to MCMP43 and Article 2227 of the New Civil Code.
WHEREFORE, the Decision and Resolution, dated August 11, 2015 and May 23, 2016, respectively, of the Court
of Appeals in CA-G.R. CV No. 100754, finding the Spouses William and Irene Louh liable to the Bank of the
Philippine Islands for the payment of their past credit availments, plus finance and late payment charges of 12%
each per annum, ₱5,064.00 as filing or docket fees, and costs of suit, are AFFIRMED. The principal amount due,
reckoning period of the computation of finance and late payment charges, and attorney's fees are,
however, MODIFIED as follows:
(1) the principal amount due is Pl 13,756.83 as indicated in the Statement of Account dated October 14, 2009;
(2) finance and late payment charges of twelve percent (12%) each per annum shall be computed from October
14, 2009 until full payment; and (3) five percent (5%) of the total amount due is to be paid as attorney's fees.
SO ORDERED.
[G.R. NO. 157480 : May 6, 2005]
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), Petitioners, v. PHILIPPINE
AMUSEMENT AND GAMING CORPORATION, Respondent.
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an agreement is
terminated, it is deemed valid at inception. Prior to termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual restitution of benefits received. The consequences of
termination may be anticipated and provided for by the contract. As long as the terms of the contract are not
contrary to law, morals, good customs, public order or public policy, they shall be respected by courts. The
judiciary is not authorized to make or modify contracts; neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002 Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003 Resolution3 denying petitioner's Motion
for Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case No. 93-68266,
the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering [Respondent] Philippine Amusement and
Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total amount of P687,289.50 as actual
damages representing the accrued rentals for the quarter September to November 1993 with interest and
penalty at the rate of two percent (2%) per month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorney's fees; (2) In Civil Case No. 93-68337, the
appealed decision is REVERSED and SET ASIDE and a new judgment is rendered ordering [Petitioner] Pryce
Properties Corporation to reimburse [Respondent] Philippine Amusement and Gaming Corporation the amount
of P687,289.50 representing the advanced rental deposits, which amount may be compensated by [Petitioner]
Pryce Properties Corporation with its award in Civil Case No. 93-68266 in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC for brevity) made
representations with the Philippine Amusement and Gaming Corporation (PAGCOR) on the possibility of setting
up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of negotiations followed. PAGCOR
representatives went to Cagayan de Oro City to determine the pulse of the people whether the presence of a
casino would be welcomed by the residents. Some local government officials showed keen interest in the
casino operation and expressed the view that possible problems were surmountable. Their negotiations
culminated with PPC's counter-letter proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of the Hotel
for a period of three (3) years starting December 1, 1992 and until November 30, 1995. On November 13,
1992, they executed an addendum to the contract x x x which included a lease of an additional 1000
square meters of the hotel grounds as living quarters and playground of the casino personnel. PAGCOR
advertised the start of their casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No. 2295 x x x
dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow the establishment
of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated October 19, 1992 (or a
month before the contract of lease was executed) was subsequently passed reiterating with vigor and
vehemence the policy of the City under Resolution No. 2295, series of 1990, banning casinos in Cagayan de
Oro City. On December 7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance
No. 3353 x x x prohibiting the issuance of business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion thereof for the operation of a
casino.
"In the afternoon of December 18, 1992 and just hours before the actual formal opening of casino
operations, a public rally in front of the hotel was staged by some local officials, residents and religious
leaders. Barricades were placed [which] prevented some casino personnel and hotel guests from entering
and exiting from the Hotel. PAGCOR was constrained to suspend casino operations because of the rally. An
agreement between PPC and PAGCOR, on one hand, and representatives of the rallyists, on the other,
eventually ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of Cagayan
de Oro City, prohibiting the operation of casinos and providing for penalty for violation thereof. On January
7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x against then public respondent
Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before the Court of Appeals, docketed as CA
G.R. SP No. 29851 praying inter alia, for the declaration of unconstitutionality of Ordinance No. 3353.
PAGCOR intervened in said petition and further assailed Ordinance No. 4475-93 as being violative of the
non-impairment of contracts and equal protection clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of which reads:
'
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and all other persons acting under their authority and
in their behalf are PERMANENTLY ENJOINED from enforcing those ordinances.
'SO ORDERED. '
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the Supreme
Court denied the petition and affirmed the decision of the Court of Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which, however, another
public rally was held. Casino operations continued for some time, but were later on indefinitely suspended
due to the incessant demonstrations. Per verbal advice x x x from the Office of the President of the
Philippines, PAGCOR decided to stop its casino operations in Cagayan de Oro City. PAGCOR stopped its
casino operations in the hotel prior to September, 1993. In two Statements of Account dated September 1,
1993 x x x, PPC apprised PAGCOR of its outstanding account for the quarter September 1 to November 30,
1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to the parties' earlier
conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x stating its Board of
Directors' decision to collect the full rentals in case of pre-termination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable to the
payment of the full rentals citing as reasons unforeseen legal and other circumstances which prevented it
from complying with its obligations. PAGCOR further stated that it had no other alternative but to pre-
terminate the lease agreement due to the relentless and vehement opposition to their casino operations. In a
letter dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total of P1,437,582.25 representing the
reimbursable rental deposits and expenses for the permanent improvement of the Hotel's parking lot. In a letter
dated November 5, 1993 x x x, PAGCOR formally demanded from PPC the payment of its claim for
reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of Manila docketed
as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for sum of money in the Regional
Trial Court of Manila docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract of lease due
to PAGCOR's continuing breach of the contract and further stated that it was exercising its rights under the
contract of lease pursuant to Article 20 (a) and (c) thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which the trial court
admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994, Civil Case No. 93-68377 was
ordered consolidated with Civil Case No. 93-68266. These cases were jointly tried by the court a quo. On August
17, 1995, the court a quo promulgated its decision. Both parties appealed."5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award actual and
moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the court's ruling that the
2 percent penalty was to be imposed from the date of the promulgation of the Decision, not from the date
stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latter's failure to rule that the Contract of Lease had
already been terminated as early as September 21, 1993, or at the latest, on October 14, 1993, when PPC
received PAGCOR's letter dated October 12, 1993. The gaming corporation added that the trial court erred in 1)
failing to consider that PPC was entitled to avail itself of the provisions of Article XX only when PPC was the
party terminating the Contract; 2) not finding that there were valid, justifiable and good reasons for terminating
the Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack of merit, and not
finding PPC liable for the reimbursement of PAGCOR'S cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCOR'S pretermination of the Contract of Lease was
unjustified. The appellate court explained that public demonstrations and rallies could not be considered as
fortuitous events that would exempt the gaming corporation from complying with the latter's contractual
obligations. Therefore, the Contract continued to be effective until PPC elected to terminate it on November 25,
1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the right to ask
for (1) rescission of the Contract and indemnification for damages; or (2) only indemnification plus the
continuation of the Contract. These two remedies were alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly exercised
the option to terminate the lease agreement. Previously, the Contract remained effective, and PPC could collect
the accrued rentals. However, from the time it terminated the Contract on November 25, 1993, PPC could no
longer demand payment of the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR had acted in
gross or evident bad faith in failing to pay the rentals from September to November 1993. Such failure was
shown especially by the fact that PPC still had in hand three (3) months advance rental deposits of PAGCOR.
The former could have simply applied this deposit to the unpaid rentals, as provided in the Contract. Neither did
PPC adequately show that its reputation had been besmirched or the hotel's goodwill eroded by the
establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had not
presented official receipts to prove the latter's alleged expenses. The appellate court, however, upheld the
trial court's award to PPC of P50,000 attorney's fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that Pryce was not
entitled to future rentals or lease payments for the unexpired period of the Contract of Lease between
Pryce and PAGCOR?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of PRYCE
to terminate the Contract for cause and to moreover collect rentals from PAGCOR corresponding to the
remaining term of the lease valid and binding?cralawlibrary
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract, PRYCE having
'rescinded' the Contract of Lease?cralawlibrary
"3. Do the case of Rios, et al. v. Jacinto Palma Enterprises, et al. and the other cases cited by PAGCOR
support its position that PRYCE was not entitled to future rentals?cralawlibrary
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?cralawlibrary
"5. Could we not have 'harmonized' Article 1659 of the Civil Code and Article 20 of the Contract of Lease?
cralawlibrary
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts, particularly in the
PRYCE-PAGCOR Contract of Lease?"7
The Court's Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different from the remedy of rescission prescribed under
Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that Article 1659 of
the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals, because it chose
to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith."8 In deference to the rights of
the parties, the law9 allows them to enter into stipulations, clauses, terms and conditions they may deem
convenient; that is, as long as these are not contrary to law, morals, good customs, public order or public
policy. Likewise, it is settled that if the terms of the contract clearly express the intention of the contracting
parties, the literal meaning of the stipulations would be controlling.10
In this case, Article XX of the parties' Contract of Lease provides in part as follows:
 "XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be deemed
essential conditions of this contract, and in the event of default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become bankrupt, or insolvent, or compounds with his creditors, the
LESSOR shall have the right to terminate and cancel this contract by giving them fifteen (15 days) prior notice
delivered at the leased premises or posted on the main door thereof. Upon such termination or cancellation, the
LESSOR may forthwith lock the premises and exclude the LESSEE therefrom, forcefully or otherwise, without
incurring any civil or criminal liability. During the fifteen (15) days notice, the LESSEE may prevent the
termination of lease by curing the events or causes of termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to the remaining term
of the lease as well as for any and all damages, actual or consequential resulting from such default and
termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to terminate and
cancel the Contract in the event of a default or breach by the lessee; and 2) to make PAGCOR fully liable for
rentals for the remaining term of the lease, despite the exercise of such right to terminate. Plainly, the parties
have voluntarily bound themselves to require strict compliance with the provisions of the Contract by stipulating
that a default or breach, among others, shall give the lessee the termination option, coupled with the lessor's
liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order or public
policy. Neither is there anything objectionable about the inclusion in the Contract of mandatory provisions
concerning the rights and obligations of the parties.11 Being the primary law between the parties, it governs the
adjudication of their rights and obligations. A court has no alternative but to enforce the contractual stipulations
in the manner they have been agreed upon and written.12 It is well to recall that courts, be they trial or
appellate, have no power to make or modify contracts.13 Neither can they save parties from disadvantageous
provisions.
Termination or Rescission?
Well-taken is petitioner's insistence that it had the right to ask for " termination plus the full payment of future
rentals" under the provisions of the Contract, rather than just rescission under Article 1659 of the Civil Code.
This Court is not unmindful of the fact that termination and rescission are terms that have been used loosely
and interchangeably in the past. But distinctions ought to be made, especially in this controversy, in which the
terms mean differently and lead to equally different consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general provision on rescission of
reciprocal obligations; 2) Article 1659,15 which authorizes rescission as an alternative remedy, insofar as the
rights and obligations of the lessor and the lessee in contracts of lease are concerned; and 3) Article
138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA, 17 Justice J. B. L. Reyes differentiated rescission
under Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not predicated on injury to economic interests of
the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the culpable breach of his obligations to the
defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound
to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: Non servanti fidem,
non est fides servanda. 'Hence, the reparation of damages for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic prejudice, the cause
of action is subordinated to the existence of that prejudice, because it is the raison d
etre as well as the measure of the right to rescind. x x x."18
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil Code,
and that the term became the basis for rescission under Article 1191 (and, conformably, also Article
1659).19
Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA20 held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus, the
remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos' aim was to cancel or terminate the contract
because they sought its partial enforcement in praying for rental arrearages. There is a distinction in law
between cancellation of a contract and its rescission. To rescind is to declare a contract void in its inception
and to put an end to it as though it never were. It is not merely to terminate it and release parties from
further obligations to each other but to abrogate it from the beginning and restore the parties to relative
positions which they would have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of its terms prior
to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract,
he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of
a contract need not undergo judicial intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the beginning,
and not merely its termination." Rescission may be effected by both parties by mutual agreement; or
unilaterally by one of them declaring a rescission of contract without the consent of the other, if a legally
sufficient ground exists or if a decree of rescission is applied for before the courts.22 On the other
hand, termination refers to an "end in time or existence; a close, cessation or conclusion." With respect to
a lease or contract, it means an ending, usually before the end of the anticipated term of such lease or
contract, that may be effected by mutual agreement or by one party exercising one of its remedies as a
consequence of the default of the other.23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to their
original situation prior to the inception of the contract.24 Applying this principle to this case, it means that
PPC would re-acquire possession of the leased premises, and PAGCOR would get back the rentals it paid
the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is the
contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with their
contractual obligations. Only after the contract has been cancelled will they be released from their
obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals from
September to November 1993 because, as previously stated, it actually demanded the enforcement of the
Lease Contract prior to termination. Any intent to rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such abrogation was not the rescission provided for under Article
1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy resorted to
by the lessors in that case was rescission, not termination. The rights and obligations of the parties in Rios were
governed by Article 1659 of the Civil Code; hence, the Court held that the damages to which the lessor was
entitled could not have extended to the lessee's liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of another's
property after the termination of a contract. We stress that by abrogating the Contract in the present case, PPC
released PAGCOR from the latter's future obligations, which included the payment of rentals. To grant that right
to the former is to unjustly enrich it at the latter's expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest from a
reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph (c) of the
Contract. A penal clause is "an accessory obligation which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting
in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled."26
Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation and to
provide, in effect, for what could be the liquidated damages resulting from a breach. 27 There is nothing immoral
or illegal in such indemnity/penalty clause, absent any showing that it was forced upon or fraudulently foisted on
the obligor.28
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the indemnity
for damages and the payment of interests in case of noncompliance; that is, if there is no stipulation to the
contrary,29 in which case proof of actual damages is not necessary for the penalty to be demanded.30 There
are exceptions to the aforementioned rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. Hence, the obligee can recover from the former not only the penalty, but also
other damages resulting from the nonfulfillment of the principal obligation.31
In the present case, the first exception applies because Article XX (c) provides that, aside from the payment of
the rentals corresponding to the remaining term of the lease, the lessee shall also be liable "for any and all
damages, actual or consequential, resulting from such default and termination of this contract." Having entered
into the Contract voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to its
obligations. It cannot evade further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.32 This power is
explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
"Art. 1229. 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."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the
courts. To be considered in fixing the amount of penalty are factors such as - - but not limited to - - the
type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and relationship of the parties; and the like.33
In this case, PAGCOR's breach was occasioned by events that, although not fortuitous in law, were in fact
real and pressing. From the CA's factual findings, which are not contested by either party, we find that
PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It did so
not only with the PPC, but also with local government officials, who assured it that the problems were
surmountable. Likewise, PAGCOR took pains to contest the ordinances34 before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the former to
cease operations prior to September 1993.
Also worth mentioning is the CA's finding that PAGCOR's casino operations had to be suspended for days
on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of the
Office of President, until the formal cessation of operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected revenues, not to
mention the fact that it had fully operated under the Contract only for a limited time.
While petitioner's right to a stipulated penalty is affirmed, we consider the claim for future rentals to the
tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for
respondent's breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay petitioner
the additional amount of P687,289.50 as penalty, which may be set off or applied against the former's
advanced rental deposits. Meanwhile, the CA's award to petitioner of actual damages representing the
accrued rentals for September to November 1993 - - with interest and penalty at the rate of two percent
(2%) per month, from the date of filing of the Complaint until the amount shall have been fully paid - - as
well as the P50,000 award for attorney's fees, is AFFIRMED. No costs. SO ORDERED.

G.R. No. 130759 June 20, 2003
ASIATRUST DEVELOPMENT BANK, Petitioner,
vs.
CONCEPTS TRADING CORPORATION, Respondent.
This is a petition for review on certiorari of the Decision1 of the Court of Appeals and its Resolution in CA-G.R.
CV No. 44211 affirming on appeal with modification the Decision 2 of the Regional Trial Court of Makati, Branch
68, in Civil Case No. 89-3789.
As culled from the records, the facts of the case are as follows:
In March 1996, respondent Concepts Trading Corporation obtained from petitioner Asiatrust Development
Corporation a credit accommodation in the amount of ₱2,000,000 covered by a loan agreement 3 and secured by
real and chattel mortgages.4 The amount was drawn from an Industrial Guarantee Loan Fund (IGLF) account
opened by the petitioner in favor of the respondent. On March 4, 1986, the respondent executed Promissory
Note (PN) No. 35745 in favor of the petitioner. Under the promissory note, the principal amount of ₱2,000,000
would be charged an interest of 23% per annum, inclusive of 1% service fee. Attached to and made part of the
promissory note was the schedule of amortization agreed upon by the parties. 6 As set forth in the schedule, the
payment of the loan was to be amortized quarterly over a period of ten years with a two-year grace period on
the principal payment. The first payment fell due on May 15, 1986 and the subsequent installments were to be
paid every three months thereafter.
In the event that the respondent defaulted in the payment of any installment or interest thereof, paragraph 4 of
the promissory note provided that:
... the entire amount outstanding under this Note shall immediately, without need for any notice, demand,
presentment, protest, or of any other act or deed, the right to all of which is hereby waived by the undersigned:
(i) become due, payable and defaulted; (ii) be subject to a penalty equivalent to thirty-six percent (36%) per
annum thereof; (iii) together with said penalty, commence to earn interest as [sic] the rate of twenty-three
percent (23%) per annum counted from the date of default until full payment thereof.
The respondent failed to pay the amortizations due on August 15 and November 15, 1987, prompting the
petitioner to enforce the aforementioned acceleration clause. On January 25, 1988, the petitioner sent a letter 7
to the respondent demanding payment of its outstanding loan obligation, amounting to ₱3,203,049 under PN
No. 3574 and PN No. 4132.8
In its Letter to the petitioner dated February 3, 1988, the respondent expressed its willingness to settle its
obligation and, due to its tight financial situation, negotiated for a modified payment scheme. 9 Thereafter,
on March 30, 1988, the parties entered into a Memorandum of Agreement (MOA), the pertinent provisions
of which read:
WHEREAS, CONCEPTS hereby acknowledges and affirms that it has applied and was granted by the Bank a
credit accommodation consisting of an Industrial Guarantee Loan Fund ("IGLF") Account in the amount of
P2.0 Million dated 4 March 1986 (hereinafter, the "LOAN OBLIGATION") which, to date, is already overdue
and demandable in its entirety including all interests, penalties, service and other miscellaneous charges.
1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN
OBLIGATION in the following manner, to wit:
a) On 5 May 1988, the amount of P159,259.14, to be covered by a post-dated check
for the same amount to be issued by CONCEPTS; and
b) On 5 June 1988 and every 5th of every succeeding month, P150,000.00 until the
LOAN OBLIGATION shall have been fully paid. CONCEPTS hereby undertakes to cover
the above-mentioned payments by post-dated checks, by first delivering to the BANK
five (5) checks covering the first five (5) month period, without prejudice to the
BANK’s right to demand the delivery of another set of five (5) checks covering the
subsequent five (5) month period, 15 days prior to the due date of the last check in
the BANK’s possession, and so on and so forth, until the LOAN OBLIGATION shall
have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as
above-indicated or upon updating of payments of the LOAN OBLIGATION, CONCEPTS
shall have the right to re-negotiate with the Bank the reinstatement of the original
terms of payment under Promissory Note No. 3574. …
3. The BANK and CONCEPTS hereby further agree that all other provisions and
stipulations in the existing Promissory Notes and other documents evidencing the
LOAN OBLIGATION shall remain in force and effect, except those which are
inconsistent with the above-mentioned Mode of Payment.
4. CONCEPTS hereby waives notice of dishonor and/or default of its LOAN
OBLIGATION: provided, however, that the BANK reserves the right to grant a grace
period of (15) days for settlement of the obligation; provided, further, that such grant
of a grace period shall not constitute waiver of any right of the BANK. It shall also be
understood that CONCEPTS’ default in this mode of payment shall likewise
automatically accelerate the entire LOAN OBLIGATION.
5. It shall likewise be understood that this mode of payment arises out of the BANK’s
liberality and is without prejudice and without waiver of the BANK’s accrued rights
under the existing chattel and real estate mortgages as well as the Continuing
Suretyship Agreement pertinent to the LOAN OBLIGATION, all of which mortgages
and Agreement are hereby expressly continued to be in force and effect. 10
In compliance with its undertaking under the MOA, the respondent delivered the first check dated May 5,
1988 in the amount of ₱159,259.14 and four other checks in the sum of ₱150,000 each or for the total
amount of ₱759,259.14. This was followed by another batch of five checks covering the months of October
1988 to February 1989, also in the amount of ₱150,000 each or for a total amount of ₱750,000.
On March 30, 1989, the petitioner wrote to the respondent requesting for the delivery of the "last checks to
completely rehabilitate" its account in accordance with the MOA. When the respondent failed to make the said
payments, the petitioner on April 25, 1989 sent a final demand on the respondent to pay its entire obligation
under the IGLF in the amount of ₱2,361,970.10 within five days from receipt thereof. 11
The respondent thereafter filed with the Regional Trial Court of Makati City, Branch 149, a petition for
declaratory relief. The respondent alleged that it is up to date in the payment of its loan obligation and,
according to its record, the remaining balance amounted to only ₱316,550.48. The respondent prayed for the
trial court to determine the rights and duties of the parties under the MOA to avoid the miscomputation of the
loan obligation and any breach thereof.
In its answer, the petitioner averred that as of February 15, 1988, the outstanding obligation of the respondent
amounted to ₱2,833,867.04. According to the petitioner, the monthly amortizations paid by the respondent
covered only the penalties accruing on the loan. Further, declaratory relief as a remedy sought by the
respondent was allegedly improper as it already committed a breach of its obligations. The respondent filed the
action a quo merely to defer or avoid payment of its legally contracted loan obligation with the petitioner. By
way of compulsory counterclaim, the petitioner prayed for damages and attorney’s fees.
The respondent then filed an amended complaint alleging that as of August 1989, it had already paid the
petitioner the total amount of ₱2,259,259 and that there was an overpayment of ₱100,000. The respondent
prayed that the petitioner be ordered to refund the amount overpaid, as well as to release the mortgages and to
pay damages and attorney’s fees.
After due trial, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered:
a) ordering the subject complaint DISMISSED for lack of merit:
b) ordering the plaintiff to pay to the defendant the amount of P395,210.30 to earn interest at 22% per annum
from the date of this decision;
c) declaring the Real Estate Mortgage and the Chattel Mortgage as valid and subsisting which may be foreclosed
by the defendant in case of non-payment of the aforestated obligation after demand;
d) ordering the plaintiff to pay to the defendant the amount of P10,000.00 as attorney’s fees and litigation
expenses. So ordered.12
On appeal by the petitioner, the Court of Appeals (CA) affirmed with modification the decision of the trial court.
The CA found that the respondent’s outstanding obligation to the petitioner amounted only to ₱309,298.58. The
CA likewise reduced the penalty accruing thereon from 36% to 3% per annum. The dispositive portion of the
assailed decision reads:
WHEREFORE, IN VIEW OF THE FOREGOING, the Decision of the lower court dated December 14, 1992 is
AFFIRMED with the modification that the outstanding balance of plaintiff-appellee as of September 5, 1989 is
₱309,298.58 subject to a penalty of 3% per annum, and together with said penalty, the whole amount is subject
to an interest of 23% per annum inclusive of service charges, until the entire amount has been fully paid. No
pronouncement as to costs. SO ORDERED.13
Aggrieved, the petitioner now comes to this Court alleging that:
A. THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN ACCORD WITH LAW
AND SUPREME COURT DECISIONS IN RULING THAT ASIATRUST WAIVED COLLECTION OF ACCRUED
PENALTIES AND CHARGES DUE FROM CONCEPTS UNDER PN 3574 BY EXECUTING THE MOA, BECAUSE THE
MOA DID NOT EXPRESSLY PROVIDE FOR SUCH WAIVER, AND STIPULATED THAT, UNLESS INCONSISTENT
WITH THE MOA MODE OF PAYMENT, "ALL OTHER EXISTING PROVISIONS AND STIPULATIONS IN THE
EXISTING PROMISSORY NOTES X X X SHALL REMAIN IN FORCE AND EFFECT."
B. THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN ACCORD WITH
§20 OF RULE 132 OF THE RULES OF COURT IN FINDING WITNESS REBECCA DE LA CRUZ’ UNREBUTTED
IDENTIFICATION OF ASIATRUST’S EXHIBIT "7" AS A STATEMENT OF ACCOUNT, AND HER UNREBUTTED
IDENTIFICATION OF THE SIGNATURE OF THE EXHIBIT, AS INSUFFICIENT AUTHENTICATION OF THAT
EXHIBIT, AND IN RELYING ON TESTIMONY READ FROM A LEDGER NEITHER IDENTIFIED NOR OFFERED
IN EVIDENCE.14
The petition is bereft of merit.
The petitioner maintains that the CA erred in holding that the petitioner waived collection of accrued
penalties and miscellaneous charges under PN 3574 by entering into the MOA. No such waiver was
expressed in the MOA and, in fact, paragraph 3 thereof expressly provides that "all other provisions and
stipulations in the existing promissory notes and other documents evidencing the LOAN OBLIGATION shall
remain in force and effect, except those which are inconsistent with the above-mentioned mode of
payment." Further, the petitioner’s consistent application of the payments respondent made to the
penalties, charges and interests is a plain manifestation of its contractual intent, and is properly cognizable
as evidence of that intent under Article 1371 of the Civil Code which provides:
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
The petitioner likewise avers that the CA erred in not according probative value to the statement of account
which the petitioner offered in evidence. The petitioner contends that, contrary to the holding of the CA,
the statement of account was properly identified by its witness, Rebecca de la Cruz.
The Court does not agree with the petitioner.
It is a time-honored rule of evidence that when the terms of an agreement are reduced to writing, it is
deemed to contain all the terms agreed upon and no evidence of such terms can be admitted other than
the contents of the agreement itself. 15 This rule allows exceptions, in that a party may present parole
evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his
pleadings:
a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
b) The failure of the written agreement to express the true intent and agreement of the parties thereto;
c) The validity of the written agreement; or
d) The existence of other terms agreed to by the parties or their successors-in-interest after the execution
of the written agreement.16
A careful perusal of the MOA reveals that it fixed the respondent’s loan obligation to the petitioner at
₱2,000,000 which was already due and demandable in its entirety, including "all interests, penalties, service
and other miscellaneous charges." Further, Paragraph 1 thereof set forth the manner by which the loan
obligation was to be paid, to wit:
1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in the following
manner, to wit:
a) On 5 May 1988, the amount of ₱159,259.14, to be covered by a post-dated check for the same amount
to be issued by CONCEPTS; and
b) On 5 June 1988 and every 5th of every succeeding month, ₱150,000.00 until the LOAN OBLIGATION shall
have been fully paid. CONCEPTS hereby undertakes to cover the above-mentioned payments by post-dated
checks, by first delivering to the BANK five (5) checks covering the first five (5) month period, without prejudice
to the BANK’s right to demand the delivery of another set of five (5) checks covering the subsequent five (5)
month period, 15 days prior to the due date of the last check in the BANK’s possession, and so on and so forth,
until the LOAN OBLIGATION shall have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as above-indicated or upon
updating of payments of the LOAN OBLIGATION, CONCEPTS shall have the right to re-negotiate with the Bank
the reinstatement of the original terms of payment under Promissory Note No. 3574. 17
However, the MOA failed to state the exact amounts of interests, service charges and penalties accruing on the
loan obligation. To determine the same, the CA relied on the testimony of the petitioner’s comptroller, Rebecca
de la Cruz, who testified thereon as follows:
Atty. Ortiz:
Q: Now, as of the date January 25, 1988 what was the total obligation of the plaintiff to the defendant?
COURT: (to the witness)
According to your ledger it could be any date closer to January 25, 1988?
WITNESS:
A: The date which is closer to January 25, 1988 is April 28, 1988. It says here if you still have a 2 MILLION
PESO principal balance. We have here an interest of ₱24,000.00 and still we have service charges.
COURT:
Service charges of how much?
WITNESS:
A: ₱123,000.00 and still we have unpaid penalties of ₱76,000.00, Your Honor.18
Accordingly, under the MOA, plaintiff-appellee continues to be liable for its obligation under the note, i.e.,
principal amount of ₱2 million plus interests and service fees, as if it was not yet in default. The first
installment under the MOA in the amount of ₱159,259.14 including several of the monthly installments of
₱150,000 were applicable to interest and service fees in arrears while the remaining monthly amortizations
covered the principal and interest falling due thereon.19
The petitioner nonetheless assails the above figures, insisting that the CA erred in holding that:
However, due to the bank’s liberality, it waived the demandability of the entire loan by entering into the
MOA, allowing plaintiff-appellee to continue paying its amortization, this time on a monthly basis. By such
waiver, plaintiff-appellee has effectively not been rendered in default thereby waiving likewise the penalty
imposable on the loan in event of default.20
The petitioner asserts that the respondent continued to be liable for penalty charges as provided under the
promissory note notwithstanding the execution of the MOA. This contention is untenable. Under the
schedule of amortization contained in the promissory note, the respondent obliged to pay the principal
obligation in quarterly amortizations over a period of ten years and that in case of default, the entire
amount shall be due and demandable in its entirety. On the other hand, under the MOA, a new mode of
payment was agreed upon, i.e., the payment by the respondent of the initial amount of ₱159,259.14 and
subsequent payments of ₱150,000 every month until full payment of the loan obligation. The MOA, in
effect, rendered the loan no longer due and demandable in its entirety at the time of its execution,
precisely because it allowed the respondent under the new schedule of payments to pay the same by
monthly installments. It bears stressing that the MOA provided that the mode of payment arose "out of the
BANK’s liberality." To allow the petitioner to collect penalty charges as if the respondent were in default,
notwithstanding the existence of a new payment schedule, would be inconsistent with the aforesaid
agreement.

Based on the foregoing, the CA correctly fixed the respondent’s outstanding balance to the petitioner as of the
execution of the MOA at ₱2,223,000 consisting of the principal obligation of ₱2,000,000, penalties of ₱76,000,
service charges of ₱123,000 and interests of ₱24,000:
After a thorough review of the MOA, We are convinced that plaintiff-appellee’s obligation consists of its original
₱2 million loan under PN No. 3574 including interests and service fees but excluding penalty and other
miscellaneous charges.
Thus, the MOA itself provides:
It must be stressed, however, that the foregoing should not be construed as to mean that the respondent
could no longer be held in default and that the petitioner completely waived collection of penalty charges in
case of default. Non-payment by the respondent of any of the monthly installments as provided under the
MOA would render it in default and the petitioner could collect the penalty charges therefor. As will be
shown later, the CA did in fact determine the exact time when the respondent defaulted on its obligation
under the MOA and accordingly reckoned therefrom the penalty charges due the petitioner.
The records show that the respondent, in accordance with the MOA, made the initial payment of
₱159,259.16 on May 5, 1988. Thereafter, the respondent made payments in the amount of ₱150,000 every
month up to September 1989. The CA then tabulated these payments 21 as follows:

"1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in the following
manner, to wit:" Principal Interest Service Charge Penalty Subtotal Payment Total
4/28/88 ₱2,000,000.00 ₱24,000.00 ₱123,000.00 ₱76,000.00 ₱2,063,740.86 ₱159,259.14 ₱2,063,740.86
(p. 2, MOA; Exhs. "B" and "10," pp. 5 and 45, Folder of Exhibits) 1. 2,063,740.90 37,835.25 1,719.78 2,103,295.90 150,000.00 1,953,295.90
2. 1,953,295.90 35,810.42 1,627.75 1,990,734.00 150,000.00 1,840,734.00
In the MOA’s first whereas clause, the term "loan obligation" was referred to as "the amount of ₱2 Million, which 3. 1,840,734.00 33,746.79 1,533.94 1,876,014.70 150,000.00 1,726,014.70
to date, is already overdue and demandable in its entirety including all interests, penalties, service and other 4. 1,726,014.70 31,643.60 1,438.34 1,759,096.60 150,000.00 1,609,096.60
miscellaneous charges." (p. 1, MOA; pp. 4 and 44, ibid.). The MOA, therefore, acknowledged that plaintiff-
5. 1,609,096.60 29,500.10 1,340.91 1,639,937.60 150,000.00 1,489,937.60
appellee, having failed to pay several amortizations under the PN, was liable for the entire amount of ₱2 million
plus interest in arrears, penalties and other charges in accordance with the acceleration clause of the PN. 6. 1,489,937.60 27,315.52 1,241.61 1,518,494.70 150,000.00 1,368,494.70
7. 1,368,494.70 25,089.07 1,140.41 1,394,724.10 150,000.00 1,244,724.10
However, due to the bank’s liberality, it waived the demandability of the entire loan by entering into the MOA, 8. 1,244,724.10 22,819.94 1,037.27 1,268,581.30 150,000.00 1,118,581.30
allowing plaintiff-appellee to continue paying its amortization, this time on a monthly basis. By such waiver, 9. 1,118,581.30 20,507.32 932.15 1,140,020.70 150,000.00 990,020.70
plaintiff-appellee has effectively not been rendered in default thereby waiving likewise the penalty imposable on
the loan in the event of default. 10. 990,020.70 18,150.38 825.02 1,008,996.00 150,000.00 858,996.00
 11. 858,996.00 15,748.28 715.83 875,460.11 150,000.00 725,460.11 WHEREFORE, the petition is hereby DENIED for lack of merit. The assailed Decision dated July 18, 1997
and Resolution dated September 12, 1997 of the Court of Appeals in CA-G.R. CV No. 44211 are AFFIRMED
12. 725,460.11 13,300.10 604.55 739,364.76 150,000.00 589,364.76
in toto. SO ORDERED.
13. 589,364.76 10,805.02 491.14 600,660.91 150,000.00 450,660.91
14. 450,660.91 8,262.12 375.55 459,298.58 150,000.00 309,298.58 G.R. No. 124853 February 24, 1998

As noted by the CA, after the last payment of ₱150,000 on September 1989, the respondent still owed the
petitioner the sum of ₱309,298.58. The respondent’s non-payment of the amortizations due after the said date
rendered the balance due and demandable in its entirety, in accordance with the acceleration clause under the
MOA. Further, since the respondent defaulted in its monthly payments after September 1989, it was only then
that it could be rightfully imposed the penalty charges in accordance with the promissory note. Thus, contrary to
the petitioner’s contention, the CA did not rule that the MOA operated as a waiver by the petitioner of its right to
collect penalty charges.

The petitioner faults the CA for reducing the penalty charges from 36% to 3% per annum on its finding that the
former rate was too excessive, considering that the petitioner had already charged an interest rate of 23% per
annum and that the principal obligation had been partly complied with.

This Court does not agree with the petitioner. Article 1229 of the Civil Code states:

Art. 1229. 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.

Indeed, this Court had equitably reduced the penalty in not a few cases.1âwphi1 In the recent case of Ligutan v.
Court of Appeals,22 the Court affirmed the reduction of the penalty charges by the CA upon its finding that the
debtors therein had partially complied with their obligation. In Rizal Commercial Banking Corp. v. Court of
Appeals,23 the Court 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. In Insular Bank of Asia and America v. Spouses
Salazar,24 the Court reduced the penalty charge on a loan of ₱42,050, considering that the debtor spouses paid a
total of ₱68,676.75 which the creditor bank applied to satisfy the penalty and interest charges.

Given the peculiar circumstances in this case, particularly that the principal obligation had been partially
complied with by the respondent, the Court sees no justifiable reason to modify the reduction by the CA of the
penalty charges made by the CA.

Anent the second issue, the petitioner insists that the CA should have relied on the petitioner’s statement of
account25 to determine the amount owed by the respondent. According to the said statement, the respondent
still owed the petitioner ₱5,665,906 as of June 29, 1990, since previous payments made were applied only to
the penalties and service charges. The Court does not agree. The MOA clearly provides that the loan obligation
of ₱2,000,000 shall be paid by the respondent by issuing the post-dated checks in the amount of ₱150,000
every month beginning June 5, 1998 until the same shall have been fully paid. Thus, the monthly payments
made by the respondent were for the satisfaction of the principal loan obligation, not merely as payments of the
penalties and service charges.

Further, as correctly pointed out by the CA, the petitioner’s statement of account could not be given any
probative value because it was belied for the most part by its key witness, comptroller Rebecca de la Cruz. Even
the trial court gave scant consideration to this statement of account, upon its finding that certain entries therein
were inconsistent with the terms of the promissory note. The Court thus finds no cogent reason to deviate from
the trial court’s and the CA’s assessment of the probative value of the same. After all, it is not this Court’s
function under Rule 45 of the Rules of Court, as amended, to review, examine, and evaluate or weigh the
probative value of the evidence presented.26

FRANCISCO L. JISON, petitioner,
vs.
COURT OF APPEALS and MONINA JISON, respondents.
This is a petition for review under Rule 45 of the Rules of Court of the 27 April 1995 decision of the Court of
Appeals (CA) in CA-G.R. CV No. 32860 1 which reversed the decision of Branch 24 of the Regional Trial Court
(RTC) of Iloilo City in Civil Case No. 16373. 2 The latter dismissed the complaint of private respondent Monina
Jison (hereafter MONINA) for recognition as an illegitimate child of petitioner Francisco Jison (hereafter
FRANCISCO).
In issue is whether or not public respondent Court of Appeals committed reversible error, which, in this instance,
necessitates an inquiry into the facts. While as a general rule, factual issues are not within the province of this
Court, nevertheless, in light of the conflicting findings of facts of the trial court and the Court of Appeals, this
case falls under an exception to this rule?3
In her complaint4 filed with the RTC on 13 March 1985, MONINA alleged that FRANCISCO had been married to a
certain Lilia Lopez Jison since 1940. At the end of 1945 or the start of 1946, however, FRANCISCO impregnated
Esperanza F. Amolar (who was then employed as the nanny of FRANCISCO's daughter, Lourdes). As a result,
MONINA was born on 6 August 1946, in Dingle, Iloilo, and since childhood, had enjoyed the continuous, implied
recognition as an illegitimate child of FRANCISCO by his acts and that of his family. MONINA further alleged that
FRANCISCO gave her support and spent for her education, such that she obtained a Master's degree, became a
certified public accountant (CPA) and eventually, a Central Bank examiner. In view of FRANCISCO's refusal to
expressly recognize her, MONINA prayed for a judicial declaration of her illegitimate status and that FRANCISCO
support and treat her as such.
In his answer,5 FRANCISCO alleged that he could not have had sexual relations with Esperanza Amolar during
the period specified in the complaint as she had ceased to be in his employ as early as 1944, and did not know
of her whereabouts since then; further, he never recognized MONINA, expressly or impliedly, as his illegitimate
child. As affirmative and special defenses, FRANCISCO contended that MONINA had no right or cause of action
against him and that her action was barred by estoppel, laches and/or prescription. He thus prayed for dismissal
of the complaint and an award of damages due to the malicious filing of the complaint.
After MONINA filed her reply,6 pre-trial was conducted where the parties stipulated on the following issues:
1. Did Francisco Jison have any sexual relation[s] with Esperanza Am[o]lar about the end of 1945 or the start of
1946?
2. Is Monina Jison the recognized illegitimate daughter of Francisco Jison by the latter's own acts and those of
his family?
3. Is Monina Jison barred from instituting or prosecuting the present action by estoppel, laches and/or
prescription?
4. Damages.7
At trial on the merits, MONINA presented a total of eleven (11) witnesses, namely: herself, Ruben Castellanes,
Sr., Adela Casabuena, Arsenio Duatin, Zafiro Ledesma, Danthea Lopez, Romeo Bilbao, Rudy Tiangson, Alfredo
Baylosis, Dominador Zavariz and Lope Amolar.
Ruben Castellanes, Sr., a 63-year old resident of Iloilo City, testified that he had worked for FRANCISCO for a
total of six (6) years at Nelly Garden, FRANCISCO's Iloilo residence. Towards the end of the Japanese
occupation, FRANCISCO's wife suffered a miscarriage or abortion, thereby depriving FRANCISCO of
consortium; thereafter, FRANCISCO's wife managed a nightclub on the ground floor of Nelly Garden which
operated daily from 6:00 p.m. till 3:00 a.m. of the following day, thereby allowing FRANCISCO free access
to MONINA's mother, Esperanza Amolar, who was nicknamed Pansay.
Adela Casabuena, a 61-year old farmer, testified that she served as the yaya ("nanny") of Lourdes from
July 1946 up to February 1947. Although Pansay had left Nelly Garden two (2) weeks before Adela started
working for the Jisons, Pansay returned sometime in September 1946, or about one month after she gave
birth to MONINA, to ask FRANCISCO for support. As a result, Pansay and Lilia Jison, FRANCISCO's wife,
quarreled in the living room, and in the course thereof, Pansay claimed that FRANCISCO was the father of
her baby. To which, Lilia replied: "I did not tell you to make that baby so it is your fault." During the
quarrel which lasted from 10:30 till 11:00 a.m., FRANCISCO was supposedly inside the house listening.
Arsenio Duatin, a 77-year old retired laborer, testified that from 1947 until 1977, he worked as
FRANCISCO's houseboy at the latter's house on 12th Street, Capitol Subdivision, Bacolod City. Arsenio met
MONINA in 1967, when Felipe Lagarto, the bookkeeper at Nelly Garden, informed Arsenio that MONINA,
FRANCISCO's daughter, would arrive at Bacolod City with a letter of introduction from Lagarto.
Initially, Arsenio identified seven (7) black-and-white photographs (Exhs. X-5 to X-11) of MONINA, 8 and as
he paid for the telephone bills, he likewise identified six (6) telephone cards (Exhs. G to L). Arsenio then
declared that when MONINA arrived in Bacolod City, she introduced herself to him as FRANCISCO's
daughter. She stayed at FRANCISCO's house, but when the latter and his wife would come over, Arsenio
would "conceal the presence of MONINA because Mrs. Jison did not like to see her face." Once, Arsenio hid
MONINA in the house of FRANCISCO's sister, Mrs. Luisa Jison Alano, in Silay City; another time, at the
residence of FRANCISCO's cousin, Mrs. Concha Lopez Cuaycong. Finally, Arsenio declared that the last time
he saw MONINA was when she left for Manila, after having finished her schooling at La Salle College in
Bacolod City.
On re-direct and upon questions by the court, Arsenio disclosed that it was FRANCISCO who instructed that
MONINA be hidden whenever FRANCISCO and his wife were around; that although FRANCISCO and
MONINA saw each other at the Bacolod house only once, they called each other "through long distance;"
and that MONINA addressed FRANCISCO as "Daddy" during their lone meeting at the Bacolod house and
were "affectionate" to each other. Arsenio likewise declared that MONINA stayed at FRANCISCO's Bacolod
house twice: first for a month, then for about a week the second time. On both occasions, however,
FRANCISCO and his wife were abroad. Finally, Arsenio recalled that FRANCISCO likewise bade Arsenio to
treat MONINA like his (FRANCISCO's) other daughters.
The testimony of Zafiro Ledesma, a 74-year old banker and former mayor of Iloilo City, initially touched on
how he and his wife were related to FRANCISCO, FRANCISCO's wife and MONINA. Zafiro first identified
Exhibit R, a diagram of the family trees of the Jison and Lopez families, which showed that former Vice-
President Fernando Lopez was the first cousin of FRANCISCO's wife, then told the court that the family of
Vice-President Lopez treated MONINA "very well because she is considered a relative . . . by reputation, by
actual perception." Zafiro likewise identified Exhibits X-13 to X-18, photographs taken at the 14 April 1985
birthday celebration of Mrs. Fernando Lopez, which showed MONINA with the former Vice-President and
other members of the Lopez family.
Zafiro further testified that while MONINA lived with Mrs. Cuaycong, the latter paid for some of MONINA's
school needs and even asked MONINA to work in a hospital owned by Mrs. Cuaycong; and that another
first cousin of FRANCISCO's wife, a certain Remedios Lopez Franco, likewise helped MONINA with her
studies and problems, and even attended MONINA's graduation in 1978 when she obtained a masteral
degree in Business Administration, as evidenced by another photograph (Exh. X-12). Moreover, upon
Remedios' recommendation, MONINA was employed as a secretary at Merchant Financing Company, which
was managed by a certain Danthea Lopez, the wife of another first cousin of FRANCISCO's wife, and
among whose directors were Zafiro himself, his wife and Danthea's husband. In closing, Zafiro identified
MONINA's Social Security Record (Exh. W), which was signed by Danthea as employer and where MONINA
designated Remedios as the beneficiary.
Danthea Lopez, a 58-year old housekeeper, declared that FRANCISCO was the first cousin of her husband,
Eusebio D. Lopez; and that she came to know MONINA in the latter part of 1965 when Remedios Franco
recommended MONINA for employment at Merchant Financing Co., which Danthea managed at that time.
Remedios introduced MONINA to Danthea "as being reputedly the daughter of Mr. Frank Jison;" and on several
occasions thereafter, Remedios made Danthea and the latter's husband understand that MONINA was
"reputedly the daughter of [FRANCISCO]" While MONINA worked at Merchant Financing, Danthea knew that
MONINA lived with Remedios; however, in the latter part of 1966, as Remedios left for Manila and MONINA was
still studying at San Agustin University, Danthea and her husband invited MONINA to live with them. During
MONINA's 6-month stay with them, she was not charged for board and lodging and was treated as a relative,
not a mere employee, all owing to what Remedios had said regarding MONINA's filiation. As Danthea
understood, MONINA resigned from Merchant Financing as she was called by Mrs. Cuaycong, a first cousin of
Danthea's husband who lived in Bacolod City.
Romeo Bilbao, a 43-year old seaman, testified that he had worked for FRANCISCO from 1969 up to 1980 at
Nelly Garden in various capacities: as a procurement officer, hacienda overseer and, later, as hacienda
administrator. Sometime in May, 1971, Romeo saw and heard MONINA ask "her Daddy" (meaning FRANCISCO)
for the money he promised to give her, but FRANCISCO answered that he did not have the money to give, then
told MONINA to go see Mr. Jose Cruz in Bacolod City. Then in the middle of September that year, FRANCISCO
told Romeo to pick up Mr. Cruz at the Iloilo pier and bring him to the office of Atty. Benjamin Tirol. At said
office, Atty. Tirol, Mr. Cruz and MONINA entered a room while Romeo waited outside. When they came out,
Atty. Tirol had papers for MONINA to sign, but she refused. Atty. Tirol said that a check would be released to
MONINA if she signed the papers, so MONINA acceded, although Atty. Tirol intended not to give MONINA a
copy of the document she signed. Thereafter, Mr. Cruz gave MONINA a check (Exh. Q), then MONINA grabbed a
copy of the document she signed and ran outside. Romeo then brought Mr. Cruz to Nelly Garden. As to his
motive for testifying, Romeo stated that he wanted to help MONINA be recognized as FRANCISCO'S daughter.
Rudy Tingson, a 45-year old antique dealer, testified that in 1963-1964, he was employed by FRANCISCO's wife
at the Baguio Military Institute in Baguio City; then in 1965, Rudy worked at FRANCISCO's office at Nelly Garden
recording hacienda expenses, typing vouchers and office papers, and, at times, acting as paymaster for the
haciendas. From the nature of his work, Rudy knew the persons receiving money from FRANCISCO's office, and
clearly remembered that in 1965, as part of his job, Rudy gave MONINA her allowance from FRANCISCO four
(4) times, upon instructions of a certain Mr. Lagarto to give MONINA P15.00 a month. Rudy likewise recalled
that he first met MONINA in 1965, and that she would go to Nelly Garden whenever FRANCISCO's wife was not
around. On some of these occasions, MONINA would speak with and address FRANCISCO as "Daddy," without
objection from FRANCISCO. In fact, in 1965, Rudy saw FRANCISCO give MONINA money thrice. Rudy further
declared that in April 1965, FRANCISCO's office paid P250.00 to Funeraria Bernal for the funeral expenses of
MONINA's mother. Finally, as to Rudy's motives for testifying, he told the court that he simply wanted to held
bring out the truth "and nothing but the truth," and that MONINA's filiation was common knowledge among the
people in the office at Nelly Garden.
On re-direct, Rudy declared that the moneys given by FRANCISCO's office to MONINA were not reflected in the
books of the office, but were kept in a separate book, as Mr. Lagarto explained that FRANCISCO's wife and
children "should not know [of] this." Rudy further revealed that as to the garden "meetings" between
FRANCISCO and MONINA, Rudy saw MONINA kiss FRANCISCO on the cheek both upon arriving and before
leaving, and FRANCISCO's reaction upon seeing her was to smile and say in the Visayan dialect: " Kamusta ka
iha?" ("How are you, daughter?"); and that MONINA was free to go inside the house as the household staff
knew of her filiation, and that, sometimes, MONINA would join them for lunch.
Alfredo Baylosis, a 62-year old retired accountant, testified that he worked for FRANCISCO at Central Santos-
Lopez in Iloilo from 1951 up to 1961, then at Nelly Garden from 1961 until 1972. Alfredo first served
FRANCISCO as a bookkeeper, then when Mr. Lagarto died in 1967 or 1969, Alfredo replaced Mr. Lagarto as
office manager.
Alfredo knew MONINA since 1961 as she used to go to Nelly Garden to claim her P15.00 monthly allowance
given upon FRANCISCO's standing order. Alfredo further declared that MONINA's filiation was pretty well-
known in the office, that he had seen MONINA and FRANCISCO go from the main building to the office,
with FRANCISCO's arm on MONINA's shoulder; and that the office paid for the burial expenses of Pansay,
but this was not recorded in the books in order to hide it from FRANCISCO's wife. Alfredo also disclosed
that the disbursements for MONINA's allowance started in 1961 and were recorded in a separate cash
book. In 1967, the allowances ceased when MONINA stopped schooling and was employed in Bacolod City
with Miller, Cruz & Co., which served as FRANCISCO's accountant-auditor. Once, when Alfredo went to the
offices of Miller, Cruz & Co. to see the manager, Mr. Atienza, and arrange for the preparation of
FRANCISCO's income tax return, Alfredo chanced upon MONINA. When Alfredo asked her how she came to
work there, she answered that "her Daddy," FRANCISCO, recommended her, a fact confirmed by Mr.
Atienza Alfredo then claimed that Mr. Jose Cruz, a partner at Miller, Cruz & Co., was the most trusted man
of FRANCISCO.
Dominador Savariz, a 55-year old caretaker, testified that he worked as FRANCISCO's houseboy at Nelly
Garden from November 1953 up to 1965. One morning in April 1954, MONINA and her mother Pansay
went to Nelly Garden and spoke with FRANCISCO for about an hour, during which time, Dominador was
vacuuming the carpet about six (6) to seven (7) meters away. Due to the noise of the vacuum cleaner,
FRANCISCO and MONINA spoke in loud voices, thus Dominador overheard their conversation. As
FRANCISCO asked Pansay why they came, Pansay answered that they came to ask for the "sustenance" of
his child MONINA. FRANCISCO then touched MONINA's head and asked: "How are you Hija?," to which
MONINA answered: "Good morning, Daddy." After FRANCISCO told Pansay and MONINA to wait, he pulled
something from his wallet and said to Pansay. "I am giving this for a child."
In May 1954, Dominador saw MONINA at Mr. Lagarto's office where Dominador was to get "the day's
expenses," while MONINA was claiming her allowance from Mr. Diasnes. The next month, Dominador saw
MONINA at Nelly Garden and heard in the office that MONINA was there to get her allowance "from her
Daddy." In December 1960, Dominador saw MONINA at Nelly Garden, in the room of Don Vicente (father
of FRANCISCO's wife), where she asked for a Christmas gift "and she was calling Don Vicente, Lolo
(grandfather)." At that time, FRANCISCO and his wife were not around. Then sometime in 1961, when
Dominador went to Mr. Legarto's office to get the marketing expenses, Dominador saw MONINA once more
claiming her allowance.
Dominador further testified that in February 1966, after he had stopped working for FRANCISCO,
Dominador was at Mrs. Franco's residence as she recommended him for employment with her sister, Mrs.
Concha Cuaycong. There, he saw MONINA, who was then about 15 years old, together with Mrs. Franco's
daughter and son. Mrs. Franco pointed at MONINA and asked Dominador if he knew who MONINA was.
Dominador answered that MONINA was FRANCISCO's daughter with Pansay, and then Mrs. Franco
remarked that MONINA was staying with her (Mrs. Franco) and that she was sending MONINA to school at
the University of San Agustin.
Lope Amolar, a 50-year old resident of Dingle, Iloilo, and the younger brother of Esperanza Amolar
(Pansay), testified that he worked for FRANCISCO as a houseboy from March to November 1945 at Nelly
Garden. Thereafter, FRANCISCO sent Lope to work at Elena Apartments in Manila. By November 1945,
Pansay was also working at Elena Apartments, where she revealed to Lope that FRANCISCO impregnated
her. Lope then confronted FRANCISCO, who told Lope "don't get hurt and don't cause any trouble, because
I am willing to support your Inday Pansay and my child." Three (3) days after this confrontation, Lope
asked for and received permission from FRANCISCO to resign because he (Lope) was hurt.
On 21 October 1986, MONINA herself took the witness stand. At that time, she was 40 years old and a
Central Bank Examiner. She affirmed that as evidenced by certifications from the Office of the Local Civil
Registrar (Exhs. E and F) and baptismal certificates (Exhs. C and D), she was born on 6 August 1946 in
Barangay Tabugon, Dingle, Iloilo, to Esperanza Amolar (who passed away on 20 April 1965) and
FRANCISCO.9 MONINA first studied at Sagrado where she stayed as a boarder. While at Sagrado from 1952
until 1955 (up to Grade 4), her father, FRANCISCO, paid for her tuition fees and other school expenses.
She either received the money from FRANCISCO or from Mr. Lagarto, or saw FRANCISCO give money to her
mother, or Mr. Lagarto would pay Sagrado directly. After Sagrado, MONINA studied in different schools, 10 but
FRANCISCO continuously answered for her schooling.
For her college education, MONINA enrolled at the University of Iloilo, but she later dropped due to an accident
which required a week's hospitalization. Although FRANCISCO paid for part of the hospitalization expenses, her
mother shouldered most of them. In 1963, she enrolled at the University of San Agustin, where she stayed with
Mrs. Franco who paid for MONINA's tuition fees. However, expenses for books, school supplies, uniforms and
the like were shouldered by FRANCISCO. At the start of each semester, MONINA would show FRANCISCO that
she was enrolled, then he would ask her to canvass prices, then give her the money she needed. After finishing
two (2) semesters at University of San Agustin, as evidenced by her transcript of records (Exh. Z showing the
FRANCISCO was listed as Parent/Guardian [Exh. Z-1], she transferred to "De Paul College," just in front of Mrs.
Franco's house, and studied there for a year. Thereafter, MONINA enrolled at Western Institute of Technology
(WIT), where she obtained a bachelor's degree in Commerce in April 1967. During her senior year, she stayed
with Eusebio and Danthea Lopez at Hotel Kahirup, owned by said couple. She passed the CPA board exams in
1974, and took up an M.B.A. at De La Salle University as evidenced by her transcript (Exh. AA), wherein
FRANCISCO was likewise listed as "Guardian" (Exhs. AA-1 and AA-2).
MONINA enumerated the different members of the household staff at Nelly Garden, to wit: Luz, the household
cook; the houseboys Silvestre and Doming; the housemaid Natang; the yaya of the adopted triplets, Deling; the
yaya of Lolo Vicente, Adelina; and others. MONINA likewise enumerated the members of the office staff (Messrs.
Baylosis, Lagarto, Tingson, Diasnes, Jalandoni, Supertisioso, Doroy, and other), and identified them from a
photograph marked as Exhibit X-2. She then corroborated the prior testimony regarding her employment at
Merchant Financing Co., and her having lived at Hotel Kahirup and at Mrs. Cuaycong's residence in Bacolod City,
while working at the hospital owned by Mrs. Cuaycong.
MONINA further testified that in March 1968, she went to Manila and met FRANCISCO at Elena Apartments at
the corner of Romero and Salas Streets, Ermita. She told FRANCISCO that she was going for a vacation in
Baguio City with Mrs. Franco's mother, with whom she stayed up to June 1968. Upon her return from Baguio
City, MONINA told FRANCISCO that she wanted to work, so the latter arranged for her employment at Miller &
Cruz in Bacolod City. MONINA went to Bacolod City, was interviewed by Mr. Jose Cruz, a partner at Miller &
Cruz, who told her she would start working first week of September, sans examination. She resigned from Miller
& Cruz in 1971 and lived with Mrs. Cuaycong at her Forbes Park residence in Makati. MONINA went to see
FRANCISCO, told him that she resigned and asked him for money to go to Spain, but FRANCISCO refused as she
could not speak Spanish and would not be able find a job. The two quarreled and FRANCISCO ordered a helper
to send MONINA out of the house. In the process, MONINA broke many glasses at the pantry and cut her hand,
after which, FRANCISCO hugged her, gave her medicine, calmed her down, asked her to return to Bacolod City
and promised that he would giver her the money.
MONINA returned to Bacolod City by plane, using a Filipinas Orient Airways plane ticket (Exh. M) which
FRANCISCO gave. She called Mr. Cruz, then Atty. Tirol, as instructed by Mr. Cruz. These calls were evidenced by
PLDT long distance toll card (Exhs. G to L), with annotations at the back reading; "charged and paid under the
name of Frank L. Jison" and were signed by Arsenio Duatin (Exhs. G-1 to L-1). PLDT issued a certification as to
the veracity of the contents of the toll cards (Exh. BB). Likewise introduced in evidence was a letter of
introduction prepared by Mr. Cruz addressed to Atty. Tirol, on MONINA's behalf (Exh. N).
MONINA also declared that Atty. Tirol then told her that she would have to go to Iloilo and sign a certain
affidavit, before Mr. Cruz would turn over the money promised by FRANCISCO. She went to Atty. Tirol's office in
Iloilo, but after going over the draft of the affidavit, refused to sign it as it stated that she was not FRANCISCO's
daughter. She explained that all she had agreed with FRANCISCO was that he would pay for her fare to go
abroad, and that since she was a little girl, she knew about her illegitimacy. She started crying, begged Atty.
Tirol to change the affidavit, to which Atty. Tirol responded that he was also a father and did not want this to
happen to his children as they could not be blamed for being brought into the world. She then wrote a letter
(Exh. O) to FRANCISCO and sent it to the latter's Forbes Park residence (Bauhinia Place) by JRS courier service
(Exhs. O-5 to O-7). MONINA subsequently met FRANCISCO in Bacolod City where they discussed the affidavit
which she refused to sign. FRANCISCO told her that the affidavit was for his wife, that in case she heard
about MONINA going abroad, the affidavit would "keep her peace."
MONINA then narrated that the first time she went to Atty. Tirol's office, she was accompanied by one Atty.
Fernando Divinagracia, who advised her that the affidavit (Exh. P) 11 would "boomerang" against
FRANCISCO "as it is contrary to law." MONINA returned to Bacolod City, then met with Atty. Tirol once
more to reiterate her plea, but Atty. Tirol did not relent. Thus, on the morning of 20 or 21 September 1971,
she signed the affidavit as she was jobless and needed the money to support herself and finish her studies.
In exchange for signing the document, MONINA received a Bank of Asia check for P15,000.00 (Exh. Q),
which was less than the P25,000.00 which FRANCISCO allegedly promised to give. As Atty. Tirol seemed
hesitant to give her a copy of the affidavit after notarizing it, MONINA merely grabbed a copy and
immediately left.
MONINA then prepared to travel abroad, for which purpose, she procured letters of introduction (Exhs. S
and T) from a cousin, Mike Alano (son of FRANCISCO's elder sister Luisa); and an uncle, Emilio Jison
(FRANCISCO's elder brother), addressed to another cousin, Beth Jison (Emilio's daughter), for Beth to
assist MONINA. Exhibit S contained a statement (Exh. S-1) expressly recognizing that MONINA was
FRANCISCO's daughter. Ultimately though, MONINA decided not to go abroad, opting instead to spend the
proceeds of the P15,000.00 check for her CPA review, board exam and graduate studies. After finishing her
graduate studies, she again planned to travel abroad, for which reason, she obtained a letter of
introduction from former Vice President Fernando Lopez addressed to then United States Consul Vernon
McAnnich (Exh. V).
As to other acts tending to show her filiation, MONINA related that on one occasion, as FRANCISCO's wife
was going to arrive at the latter's Bacolod City residence, FRANCISCO called Arsenio Duatin and instructed
Arsenio to hide MONINA. Thus, MONINA stayed with Mrs. Luisa Jison for the duration of the stay of
FRANCISCO's wife. MONINA also claimed that she knew Vice President Fernando Lopez and his wife,
Mariquit, even before starting to go to school. Thus, MONINA asked for a recommendation letter (Exh. U)
from Mrs. Mariquit Lopez for possible employment with Mrs. Rosario Lopez Cooper, another second cousin
of FRANCISCO. In Exhibit U, Mrs. Lopez expressly recognized MONINA as FRANCISCO's daughter. As
additional proof of her close relationship with the family of Vice President Lopez, MONINA identified
photographs taken at a birthday celebration on 14 April 1985.
MONINA finally claimed that she knew the three (3) children of FRANCISCO by wife, namely, Lourdes,
Francisco, Jr., (Junior) and Elena, but MONINA had met only Lourdes and Junior. MONINA's testimony dealt
lengthily on her dealings with Junior and the two (2) occasions when she met with Lourdes. The last time
MONINA saw FRANCISCO was in March 1979, when she sought his blessings to get married.
In his defense, FRANCISCO offered his deposition taken before then Judge Romeo Callejo of the Regional
Trial Court of Manila, Branch 48. As additional witnesses, FRANCISCO presented Nonito Jalandoni, Teodoro
Zulla, Iñigo Supertisioso, Lourdes Ledesma, Jose Cruz and Dolores Argenal.
FRANCISCO declared that Pansay's employment ceased as of October, 1 1944, and that while employed by
him, Pansay would sleep with the other female helpers on the first floor of his residence, while he, his wife
and daughter slept in a room on the second floor. At that time, his household staff was composed of three
(3) female workers and two (2) male workers. After Pansay left in October 1944, she never communicated
with him again, neither did he know of her whereabouts. FRANCISCO staunchly denied having had sexual
relations with Pansay and disavowed any knowledge about MONINA's birth. In the same vein, he denied
having paid for MONINA's tuition fees, in person or otherwise, and asserted that he never knew that Mr.
Lagarto paid for these fees. Moreover, FRANCISCO could not believe that Lagarto would pay for these fees
despite absence of instructions or approval from FRANCISCO. He likewise categorically denied that he told
anyone, be it Danthea Lopez, Zafiro Ledesma, Concha Cuaycong or Remedios Franco, that MONINA was his
daughter.
FRANCISCO also disclosed that upon his return from the United States in 1971, he fired Alfredo Baylosis upon
discovering that Alfredo had taken advantage of his position during the former's absence. FRANCISCO likewise
fired Rudy Tingson and Romeo Bilbao, but did not give the reasons therefor.
Finally, FRANCISCO denied knowledge of MONINA's long distance calls from his Bacolod residence; nevertheless,
when he subsequently discovered this, he fired certain people in his office for their failure to report this
anomaly. As regards the caretaker of his Bacolod residence, FRANCISCO explained that since MONINA lived at
Mrs. Cuaycong's residence, the caretaker thought that he could allow people who lived at the Cuaycong
residence to use the facilities at his (FRANCISCO's) house.
Nonito Jalandoni, bookkeeper and paymaster at Nelly's Garden from 1963 up to 1974, then from 1980 up to
1986, the assistant overseer of Hacienda Lopez, testified that he did not know MONINA; that he learned of her
only in June 1988, when he was informed by FRANCISCO that MONINA had sued him; and that he never saw
MONINA at Nelly's Garden, neither did he know of any instructions for anyone at Nelly's Garden to give money
to MONINA.
Teodoro Zulla, FRANCISCO's bookkeeper and paymaster from 1951 up to 1986, testified that FRANCISCO
dismissed Alfredo Baylosis due to certain unspecified discrepancies; and that he never saw MONINA receive
funds from either Mr. Lagarto or Mr. Baylosis. Upon questions from the trial court, however, Teodoro admitted
that he prepared vouchers for only one of FRANCISCO's haciendas, and not vouchers pertaining to the latter's
personal expenses.
Iñigo Supertisioso testified that he worked for FRANCISCO at Nelly's Garden from 1964 up to 1984 as a field
inspector, paymaster, cashier and, eventually, officer-in-charge (OIC). He confirmed Alfredo Baylosis' dismissal
due to these unspecified irregularities, then denied that FRANCISCO ever ordered that MONINA be given her
allowance. Likewise, Iñigo never heard FRANCISCO mention that MONINA was his (FRANCISCO's) daughter.
Lourdes Ledesma, FRANCISCO's daughter, testified that she saw (but did not know) MONINA at the Our Lady of
Mercy Hospital, on the occasion of the birth of Lourdes' first son, Mark. Over lunch one day, Lourdes' aunt
casually introduced Lourdes and MONINA to each other, but they were referred to only by their first names.
Then sometime in 1983 or 1984, MONINA allegedly went to Lourdes' house in Sta. Clara Subdivision requesting
for a letter of introduction or referral as MONINA was then job-hunting. However, Lourdes did not comply with
the request.
Jose Cruz, a partner at Miller, Cruz & Co., testified that MONINA worked at Miller & Cruz from 1968 up to 1971,
however, he did not personally interview her before she was accepted for employment. Moreover, MONINA
underwent the usual screening procedure before being hired. Jose recalled that one of the accountants, a
certain Mr. Atienza, reported that MONINA claimed to be FRANCISCO's daughter. Jose then told Mr. Atienza to
speak with MONINA and see if he (Mr. Atienza) could stop her from spreading this rumor. Mr. Atienza reported
that he spoke with MONINA, who told him that she planned to leave for the United States and needed
P20,000.00 for that purpose, and in exchange, she would sign a document disclaiming filiation with FRANCISCO.
Thus, Jose instructed Mr. Atienza to request that MONINA meet with Jose, and at that meeting, MONINA
confirmed Mr. Atienza's report. Jose then informed Atty. Tirol, FRANCISCO's personal lawyer, about the matter.
Atty. Tirol told Jose to send MONINA and her lawyer to his (Atty. Tirol's) office in Iloilo. Jose then wrote out a
letter of introduction for MONINA addressed to Atty. Tirol Jose relayed Atty. Tirol's message to MONINA through
Mr. Atienza, then later, Atty. Tirol told Jose to go to Iloilo with a clerk for P15,000.00 Jose complied, and at Atty.
Tirol's office, Jose saw MONINA, Atty. Tirol and his secretary reading some documents. MONINA then expressed
her willingness to sign the document, sans revisions. Jose alleged that he drew the P15,000.00 from his personal
funds, subject to reimbursement from and due to an understanding with FRANCISCO.
Dolores Argenal, a househelper at Nelly Garden from May 1944 up to May 1946, testified that she knew that
Pansay was Lourdes' nanny; that Lourdes slept in her parents' room; that she had not seen FRANCISCO give
special treatment to Pansay; that there was no "unusual relationship" between FRANCISCO and Pansay,
and if there was any, Dolores would have easily detected it since she slept in the same room as Pansay.
Dolores further declared that whenever FRANCISCO's wife was out of town, Pansay would bring Lourdes
downstairs at nighttime, and that Pansay would not sleep in the room where FRANCISCO slept. Finally,
Dolores declared that Pansay stopped working for FRANCISCO and his wife in October, 1944.
The reception of evidence having been concluded, the parties filed their respective memoranda.
It need be recalled that Judge Catalino Castañeda, Jr. presided over trial up to 21 October 1986, thereby
hearing only the testimonies of MONINA's witnesses and about half of MONINA's testimony on direct
examination. Judge Norberto E. Devera, Jr. heard the rest of MONINA's testimony and those of
FRANCISCO's witnesses.
In its decision of 12 November 1990 12 the trial court, through Judge Devera, dismissed the complaint with
costs against MONINA. In the opening paragraph thereof, it observed:
This is a complaint for recognition of an illegitimate child instituted by plaintiff Monina Jison against
defendant Francisco Jison. This complaint was filed on March 13, 1985 at the time when plaintiff, reckoned
from her death of birth, was already thirty-nine years old. Noteworthy also is the fact that it was instituted
twenty years after the death of plaintiff's mother, Esperanza Amolar. For the years between plaintiff's birth
and Esperanza's death, no action of any kind was instituted against defendant either by plaintiff, her
mother Esperanza or the latter's parents. Neither had plaintiff brought such an action against defendant
immediately upon her mother's death on April 20, 1965, considering that she was then already nineteen
years old or, within a reasonable time thereafter. Twenty years more had to supervene before this
complaint was eventually instituted.
The trial court then proceeded to discuss the four issues stipulated at pre-trial, without, however,
summarizing the testimonies of the witnesses nor referring to the testimonies of the witnesses other than
those mentioned in the discussion of the issues.
The trial court resolved the first issue in the negative, holding that it was improbable for witness Lope
Amolar to have noticed that Pansay was pregnant upon seeing her at the Elena Apartments in November
1945, since Pansay was then only in her first month of pregnancy; that there was no positive assertion that
"copulation did indeed take place between Francisco and Esperanza;" and that MONINA's attempt to show
opportunity on the part of FRANCISCO failed to consider "that there was also the opportunity for copulation
between Esperanza and one of the several domestic helpers admittedly also residing at Nelly's Garden at
that time." The RTC also ruled that the probative value of the birth and baptismal certificates of MONINA
paled in light of jurisprudence, especially when the misspellings therein were considered.
The trial court likewise resolved the second issue in the negative, finding that MONINA's evidence thereon
"may either be one of three categories, namely: hearsay evidence, incredulous evidence, or self-serving
evidence." To the first category belonged the testimonies of Adela Casabuena and Alfredo Baylosis, whose
knowledge of MONINA's filiation was based, as to the former, on "utterances of defendant's wife Lilia and
Esperanza allegedly during the heat of their quarrel," while as to the latter, Alfredo's conclusion was based
"from the rumors going [around] that plaintiff is defendant's daughter, front his personal observation of
plaintiff's facial appearance which he compared with that of defendant's and from the way the two (plaintiff
and defendant) acted and treated each other on one occasion that he had then opportunity to closely
observe them together." To the second category belonged that of Dominador Savariz, as:
At each precise time that Esperanza allegedly visited Nelly's Garden and allegedly on those occasions when
defendant's wife, Lilia was in Manila, this witness was there and allegedly heard pieces of conversation
between defendant and Esperanza related to the paternity of the latter's child. . .
The RTC then placed MONINA's testimony regarding the acts of recognition accorded her by FRANCISCO's
relatives under the third category, since the latter were never presented as witnesses, for which reason the trial
court excluded the letters from FRANCISCO's relatives (Exhs. S to V).
As to the third issue, the trial court held that MONINA was not barred by prescription for it was of "the
perception . . . that the benefits of Article 268 accorded to legitimate children may be availed of or extended to
illegitimate children in the same manner as the Family Code has so provided;" or by laches, "which is [a]
creation of equity applied only to bring equitable results, and . . . addressed to the sound discretion of the court
[and] the circumstances [here] would show that whether plaintiff filed this case immediately upon the death of
her mother Esperanza in 1965 or twenty years thereafter in 1985, . . . there seems to be no inequitable result to
defendant as related to the situation of plaintiff."
The RTC ruled, however, that MONINA was barred by estoppel by deed because of the affidavit (Exh. P/Exh. 2)
which she signed "when she was already twenty-five years, a professional and . . . under the able guidance of
counsel."
Finally, the RTC denied FRANCISCO's claim for damages, finding that MONINA did not file the complaint with
malice, she having been "propelled by an honest belief, founded on probable cause."
MONINA seasonably appealed to the Court of Appeals (CA-G.R. CV No. 32860) and sought reversal of the trial
court's decision on the grounds that:
I
THE TRIAL COURT WAS ERRONEOUSLY PREDISPOSED TO ADJUDGE THIS CASE AGAINST APPELLANT DUE TO
ITS MISPERCEPTION THAT APPELLANT'S DELAY IN FILING HER COMPLAINT WAS FATAL TO HER CASE.
II
THE TRIAL COURT ERRED IN ITS REJECTION OF THE TESTIMONIES OF APPELLANT'S WITNESSES AS TAILOR-
MADE, INADEQUATE AND INCREDIBLE.
III
THE TRIAL COURT ERRED IN ITS REJECTION OF THE ADMISSIBILITY OF THE CERTIFIED COPIES OF PUBLIC
DOCUMENTS PRESENTED BY APPELLANT AS PART OF HER EVIDENCE.
IV
THE TRIAL COURT ERRED IN ITS REQUIREMENT THAT A WITNESS TO THE ACTUAL ACT O COPULATION
BETWEEN THE APPELLEE AND APPELLANT'S MOTHER SHOULD HAVE POSITIVELY TESTIFIED TO SAID EFFECT.
V Arsenio Duatin, Rudy Tingson and Alfredo Baylosis. . . .
THE TRIAL COURT ERRED IN REJECTING THE ADMISSIBILITY OF THE DULY IDENTIFIED NOTES AND LETTER
OF THE RELATIVES OF THE APPELLEE AS HEARSAY.
VI
THE TRIAL COURT ERRED IN CONCLUDING THAT APPELLANT'S AFFIDAVIT (EXH. P) SERVED AS A BAR
AGAINST HER CLAIM FOR RECOGNITION INSTEAD OF REINFORCING SAID CLAIM.13
Expectedly, FRANCISCO refuted these alleged errors in his Appellee's Brief. 14
In its decision of 27 April 1995, 15 the Court of Appeals initially declared that as no vested or acquired rights were
affected, the instant case was governed by Article 175, in relation to Articles 172 and 173, of the Family
Code.16 While the Court of Appeals rejected the certifications issued by the Local Civil Registrar of Dingle, Iloilo
(Exhs. E and F) as FRANCISCO did not sign them, said court focused its discussion on the other means by which
illegitimate filiation could be proved, i.e., the open and continuous possession of the status of an illegitimate
child or, by any other means allowed by the Rules of Court and special laws, such as "the baptismal certificate of
the child, a judicial admission, a family bible wherein the name of the child is entered, common reputation
respecting pedigree, admission by silence, testimonies of witnesses . . ." 17 To the Court of Appeals, the "bottom
line issue" was whether or not MONINA established her filiation as FRANCISCO's illegitimate daughter by
preponderance of evidence, as to which issue said court found:
[N]ot just preponderant but overwhelming evidence on record to prove that [MONINA] is the illegitimate
daughter of [FRANCISCO] and that she had continuously enjoyed such status by direct acts of
[FRANCISCO] and/or his relatives.
In so ruling, the Court of Appeals observed that the testimonies of Lope Amolar, Adela Casabuena and
Dominador Savariz were already sufficient to establish MONINA's filiation:
As adverted to earlier, the trial court discredited Lope Amolar's testimony by saying that Lope could not
have detected Esperanza's pregnant state in November, 1945 since at that point in time [ sic] she was still
in the initial stage of pregnancy. Apparently, the trial court paid more emphasis on the date mentioned by
Lope Amolar than on the tenor and import his testimony. As . . . Lope . . . was asked about an incident that
transpired more than 41 years back, [u]nder the circumstances, it is unreasonable to expect that Lope
could still be dead right on the specific month in 1945 that [he] met and confronted his sister. At any rate,
what is important is not the month that they met but the essence of his testimony that his sister pointed to
their employer [FRANCISCO] as the one responsible for her pregnancy, and that upon being confronted,
[FRANCISCO] assured him of support for Esperanza and their child. It would appear then that in an
attempt to find fault with Lope's testimony, the trial court has fallen oblivious to the fact that even
[FRANCISCO], in his deposition, did not deny that he was confronted by Lope about what he had done to
Esperanza during which he unequivocally acknowledged paternity by assuring Lope of support for both
Esperanza and their child.
The Court of Appeals further noted that Casabuena and Savariz "testified on something that they personally
observed or witnessed," which matters FRANCISCO "did not deny or refute." Finally, said court aptly held:
Taking into account all the foregoing uncontroverted testimonies
. . . let alone such circumstantial evidence as [MONINA's] Birth Certificates . . . and Baptismal Certificates
which invariably bear the name of [FRANCISCO] as her father, We cannot go along with the trial court's
theory that [MONINA's] illegitimate filiation has not been satisfactorily established.
xxx xxx xxx
Significantly, [MONINA's] testimony finds ample corroboration from [FRANCISCO's] former employees,
xxx xxx xxx
Carefully evaluating appellant's evidence on her enjoyment of the status of an illegitimate daughter of
[FRANCISCO] vis-a-vis [FRANCISCO's] controversion thereof, We find more weight in the former. The
positive testimonies of [MONINA] and [her] witnesses . . . all bearing on [FRANCISCO's] acts and/or
conduct indubitably showing that he had continuously acknowledged [MONINA] as his illegitimate daughter
have not been succeessfully [ sic] refuted. In fact, [FRANCISCO] himself, in his deposition, only casually
dismissed [MONINA's] exhaustive and detailed testimony as untrue, and with respect to those given by
[MONINA's] witnesses, he merely explained that he had fired [them] from their employment. Needless to
state, [FRANCISCO's] vague denial is grossly inadequate to overcome the probative weight of [MONINA's]
testimonial evidence.
Even the affidavit (Exh 2) which [FRANCISCO] had foisted on the trial court . . . does not hold sway in the
face of [MONINA's] logical explanation that she at first did agree to sign the affidavit which contained
untruthful statements. In fact, she promptly complained to [FRANCISCO] who, however explained to her
that the affidavit was only for the consumption of his spouse . . . Further, the testimony of Jose Cruz
concerning the events that led to the execution of the affidavit . . . could not have been true, for as pointed
out by [MONINA] she signed the affidavit . . . almost five months after she had resigned from the Miller, Cruz & His motion for reconsideration having been denied by the Court of Appeals in its resolution of 29 March
Co. . . . 1996,18 FRANCISCO filed the instant petition. He urges us to reverse the judgment of the Court of Appeals,
alleging that said court committed errors of law:
At any rate, if [MONINA] were not his illegitimate daughter, it would have been uncalled for, if not absurd, for
[FRANCISCO] or his lawyer to have secured [MONINA's] sworn statement . . . On the contrary, in asking I.
[MONINA] to sign the said affidavit at the cost of P15,000. [FRANCISCO] clearly betrayed his intention to . . . IN REVERSING THE DECISION OF THE TRIAL COURT AND DECLARING PRIVATE RESPONDENT AS THE
conceal or suppress his paternity of [MONINA] . . . ILLEGITIMATE CHILD OF PETITIONER, CONSIDERING [THE] IMPOSSIBILITY OF SEXUAL CONTACT
BETWEEN THE PETITIONER AND THE PRIVATE RESPONDENTS MOTHER AT THE TIME CONCEPTION WAS
SUPPOSED TO HAVE OCCURRED.
In fine, We hold that [MONINA's] filiation as [FRANCISCO's] illegitimate daughter has been conclusively,
II.
established by the uncontroverted testimonies of Lope Amolar, Adela Casabuena and Dominador Savariz to the
. . . IN REVERSING THE TRIAL COURT'S FINDING CONSIDERING THAT PRIVATE RESPONDENTS
effect that appellee himself had admitted his paternity of the appellee, and also by the testimonies of appellant;
TESTIMONIAL EVIDENCE OF PATERNITY AND FILIATION IS NOT CLEAR AND CONVINCING.
Arsenio Duatin, Romeo Bilbao, Rudy Tingson and Alfredo Baylosis unerringly demonstrating that by his own
III.
conduct or overt acts like sending appellant to school, paying for her tuition fees, school uniforms, books, board
. . . IN GIVING CREDENCE TO DOCUMENTARY EVIDENCE PRESENTED BY THE PRIVATE RESPONDENT AS
and lodging at the Colegio del Sagrado Corazon de Jesus, defraying appellant's hospitalization expenses,
EVIDENCE OF FILIATION CONSIDERING THAT THE SAME ARE HEARSAY, SELF-SERVING AND CANNOT
providing her with [a] monthly allowance, paying for the funeral expenses of appellant's mother, acknowledging
BIND THE PETITIONER UNDER THE BASIC RULES OF EVIDENCE.
appellant's paternal greetings and calling appellant his "Hija" or child, instructing his office personnel to give
IV.
appellant's monthly allowance, recommending appellant for employment at the Miller, Cruz & Co., allowing
. . . IN INTERPRETING THE PRIVATE RESPONDENTS SWORN STATEMENT (EXH. "P" /EXH. "2") IN A
appellant to use his house in Bacolod and paying for her long distance telephone calls, having appellant spend
MANNER NOT IN CONSONANCE WITH THE RULINGS OF THE HONORABLE SUPREME COURT.
her vacation in his apartment in Manila and also at his Forbes residence, allowing appellant to use his surname
V.
in her scholastic and other records (Exhs. Z, AA, AA-1, to AA-5, W & W-5), appellee had continuously recognized
. . . IN NOT CONSIDERING THE LONG AND UNEXPLAINED DELAY IN THE FILING OF THE PRESENT
appellant as his illegitimate daughter. Added to these are the acts of [FRANCISCO's] relatives acknowledging or
PATERNITY SUIT AS EQUIVALENT TO LACHES.
treating [MONINA] as [FRANCISCO's] daughter (Exh. U) or as their relative (Exhs. T & V). On this point, witness
Zafiro Ledesma, former Mayor of Iloilo City, whose spouse belongs to the Lopez clan just like [FRANCISCO],
testified that [MONINA) has been considered by the Lopezes as a relative. He identified pictures of the appellee As regards the first error, FRANCISCO insists that taking into account the second paragraph of MONINA's
in the company of the Lopezes (Exhs X-16 & X-17). Another witness, Danthea H. Lopez, whose husband Eusebio complaint wherein she claimed that he and Pansay had sexual relations "by about the end of 1945 or the
Lopez is appellee's first cousin, testified that appellant was introduced to her by appellee's cousin, Remedios start of 1946," it was physically impossable for him and Pansay to have had sexual contact which resulted
Lopez Franco, as the daughter of appellee Francisco Jison, for which reason, she took her in as [a] secretary in in MONINA's birth, considering that:
the Merchant's Financing Corporation of which she was the manager, and further allowed her to stay with her
family free of board and lodging. Still on this aspect, Dominador Savariz declared that sometime in February,
The normal period of human pregnancy is nine (9) months. If as claimed by private respondent in her
1966 appellee's relative, Ms. Remedios Lopez Franco pointed to appellant as the daughter of appellee Francisco
complaint that her mother was impregnated by FRANCISCO "at the end of 1945 or the start of 1946", she
Jison.
would have been born sometime in late September or early October and not August 6, 1946 . . . The
instant case finds factual and legal parallels in Constantino vs. Mendez,19 thus: . . .
Finally, the Certifications of the Local Civil Registrar of Dingle (Exhs E and F) as well as [MONINA's] Baptismal
Certificates (Exhs C & D) which the trial court admitted in evidence as part of [MONINA's] testimony, may serve
FRANCISCO further claims that his testimony that Pansay was no longer employed by him at the time in
as circumstantial evidence to further reinforce [MONINA's] claim that she is [FRANCISCO's] illegitimate daughter
question was unrebutted, moreover, other men had access to Pansay during the time of or even after her
by Esperanza Amolar.
employment by him.

True it is that a trial judge's assessment of the credibility of witnesses is accorded great respect on appeal. But
As to the second error, FRANCISCO submits that MONINA's testimonial evidence is "shaky, contradictory
the rule admits of certain exceptions. One such exception is where the judge who rendered the judgment was
and unreliable," and proceeds to attack the credibility of her witnesses by claiming, in the main, that: (a)
not the one who heard the witnesses testify. [citations omitted] The other is where the trial court had
Lope Amolar could not have detected Pansay pregnancy in November 1945 when they met since she would
overlooked, misunderstood or misappreciated some facts or circumstances of weight and substance which, if
have been only one (1) month pregnant then; (b) Dominador Savariz did not in fact witness the meeting
properly considered, might affect the result of the case. [citations omitted] In the present case, both exceptions
between FRANCISCO, Pansay and MONINA; (c) Zafiro Ledesma had an ulterior motive in testifying for
obtain. All of [MONINA's] witnesses . . . whose testimonies were not given credence did not testify before the
MONINA as he owned a bank in Iloilo which was then under Central Bank supervision and MONINA was the
judge who rendered the disputed judgment . . .
Bank Examiner assigned to Iloilo; and (d) Danthea Lopez was not related to him by blood and whatever
favorable treatment MONINA received from Danthea was due to the former's employment at Merchants'
The Court of Appeals then decreed: Financing Company and additional services rendered at Kahirup Hotel; besides Danthea admitted that she
had no personal knowledge as to the issue of paternity and filiation of the contending parties, hence
Sections 39 and 4020 of Rule 130 of the Rules of Court did not come into play. FRANCISCO likewise re-
WHEREFORE, premises considered, the judgment of the trial court is SET ASIDE and another one is hereby
echoes the view of the trial court as regards the testimonies of Adela Casabuena and Alfredo Baylosis.
entered for appellant Monina Jison, declaring her as the illegitimate daughter of appellee Francisco Jison, and
entitled to all rights and privileges granted by law.
FRANCISCO further asserts that MONINA's testimony that he answered for her schooling was self-serving
and uncorroborated by any receipt or other documentary evidence; and assuming he did, such should be
Costs against appellee. SO ORDERED.
interpreted as a manifestation of kindness shown towards the family of a former household helper.
Anent the treatment given by his relatives to MONINA as his daughter, FRANCISCO points to the fact that
Pansay was the former laundrywoman of Mrs. Franco; MONINA resided with the families of Eusebio Lopez and
Concha Cuaycong because she was in their employ at Kahirup Hotel and Our Lady of Mercy Hospital,
respectively; MONINA failed to present Mrs. Franco, Eusebio Lopez and Mrs. Cuaycong; and MONINA's
employment at the accounting firm of Miller, Cruz & Co. was attributable to her educational attainment, there
being absolutely no evidence to prove that FRANCISCO ever facilitated her employment thereat. Hence, in light
of Baluyot v. Baluyot,21 the quantum of evidence to prove paternity by clear and convincing evidence, not merely
a preponderance thereof, was not met.
With respect to the third assigned error, FRANCISCO argues that the Court of Appeals' reliance on the
certifications of the Local Civil Registrar (Exhs. E and F) and Baptismal Certificates (Exhs. C and D) as
circumstantial evidence is misplaced. First, their genuineness could not be ascertained as the persons who
issued them did not testify. Second, in light of Reyes v. Court of Appeals,22 the contents of the baptismal
certificates were hearsay, as the data was based only on what was told to the priest who solemnized the
baptism, who likewise was not presented as a witness. Additionally, the name of the father appearing therein
was "Franque Jison," which was not FRANCISCO's name. Third, in both Exhibits E and F, the names of the
child's parents were listed as "Frank Heson" and "Esperanza Amador" (not Amolar). FRANCISCO further points
out that in Exhibit F, the status of the child is listen as "legitimate," while the father's occupation as "laborer."
Most importantly, there was no showing that FRANCISCO signed Exhibits E and F or that he was the one who
reported the child's birth to the Office of the Local Civil Registrar. As to MONINA's educational records,
FRANCISCO invokes Bañas v. Bañas23 which recognized that school records are prepared by school authorities,
not by putative parents, thus incompetent to prove paternity. And, as to the photographs presented by
MONINA, FRANCISCO cites Colorado v. Court of Appeals,24 and further asserts that MONINA did not present any
of the persons with whom she is seen in the pictures to testify thereon; besides these persons were, at best,
mere second cousins of FRANCISCO. He likewise assails the various notes and letters written by his relatives
(Exhs. S to V) as they were not identified by the authors. Finally, he stresses that MONINA did not testify as to
the telephone cards (Exhs. G to L) nor did these reveal the circumstances surrounding the calls she made from
his residence.
Anent the fourth assigned error, FRANCISCO contends that the Court of Appeals' interpretation of MONINA's
affidavit of 21 September 1971 ran counter to Dequito v. Llamas,25 and overlooked that at the time of execution,
MONINA was more than 25 years old and assisted by counsel.
As to the last assigned error, FRANCISCO bewails the Court of Appeals' failure to consider the long and
unexplained delay in the filing of the case.
In her comment, MONINA forcefully refuted FRANCISCO's arguments, leading FRANCISCO to file his reply
thereto.
On 20 November 1996, we gave due course to this petition and required the parties to submit their respective
memoranda, which they subsequently did.
A painstaking review of the evidence and arguments fails to support petitioner.
Before addressing the merits of the controversy, we first dispose of preliminary matters relating to the applicable
law and the guiding principles in paternity suits. As to the former, plainly, the Family Code of the Philippines
(Executive Order No. 209) governs the present controversy. As correctly cited by the Court of Appeals,
Uyguangco26 served as a judicial confirmation of Article 256 of the Family Code 27 regarding its retroactive effect
unless there be impairment of vested rights, which does not hold true here, it appearing that neither the
putative parent nor the child has passed away and the former having actually resisted the latter's claim below.
Under Article 175 of the Family Code, illegitimate filiation, such as MONINA's, may be established in the
same way and on the same evidence as that of legitimate children. Article 172 thereof provides the various
forms of evidence by which legitimate filiation is established, thus:
Art. 172. The filiation of legitimate children is established by any of the following:
(1) The record of birth appearing in the civil register or a final judgment; or
(2) An admission of legitimate filiation in a public document or a private handwritten instrument signed by
the parent concerned.
In the absence of the foregoing evidence, the legitimate filiation shall be proved by:
(1) The open and continuous possession of the status of a legitimate child; or
(2) Any other means allowed by the Rules of Court and special laws.
This Article reproduces, with amendments, Articles 265, 266 and 267 of the Civil Code.
For the success of an action to establish illegitimate filiation under the second paragraph. which MONINA
relies upon given that she has none of the evidence mentioned in the first paragraph, a "high standard of
proof"28 is required. Specifically, to prove open and continuous possession of the status of an illegitimate
child, there must be evidence of the manifestation of the permanent intention of the supposed father to
consider the child as his, by continuous and clear manifestations of parental affection and care, which
cannot be attributed to pure charity. Such acts must be of such a nature that they reveal not only the
conviction of paternity, but also the apparent desire to have and treat the child as such in all relations in
society and in life, not accidentally, but continuously. 29
By "continuous" is meant uninterrupted and consistent, but does not require any particular length of time. 30
The foregoing standard of proof required to establish one's filiation is founded on the principle that an
order for recognition and support may create an unwholesome atmosphere or may be an irritant in the
family or lives of the parties, so that it must be issued only if paternity or filiation is established by clear
and convincing evidence.31
The foregoing discussion, however, must be situated within the general rules on evidence, in light of the
burden of proof in civil cases, i.e., preponderance of evidence, and the shifting of the burden of evidence in
such cases. Simply put, he who alleges the affirmative of the issue has the burden of proof, and upon the
plaintiff in a civil case, the burden of proof never parts. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to
controvert plaintiff's prima facie case, otherwise, a verdict must be returned in favor of plaintiff. Moreover,
in civil cases, the party having the burden of proof must produce a preponderance of evidence thereon,
with plaintiff having to rely on the strength of his own evidence and not upon the weakness of the
defendant's. The concept of "preponderance of evidence" refers to evidence which is of greater weight, or
more convincing, that which is offered in opposition to it; at bottom, it means probability of truth. 32
With these in mind, we now proceed to resolve the merits of the instant controversy.
FRANCISCO's arguments in support of his first assigned error deserve scant consideration. While it has
been observed that unlawful intercourse will not be presumed merely from proof of an opportunity for such
indulgence,33 this does not favor FRANCISCO. Akin to the crime of rape where, in most instances, the only
witnesses to the felony are the participants in the sexual act themselves, in deciding paternity suits, the issue of
whether sexual intercourse actually occurred inevitably redounds to the victim's or mother's word, as against the
accused's or putative father's protestations. In the instant case, MONINA's mother could no longer testify as to
the fact of intercourse, as she had, unfortunately, passed away long before the institution of the complaint for
recognition. But this did not mean that MONINA could no longer prove her filiation. The fact of her birth and her
parentage may be established by evidence other than the testimony of her mother. The paramount question
then is whether MONINA's evidence is coherent, logical and natural. 34
The complaint stated that FRANCISCO had carnal knowledge of Pansay "by about the end of 1945." We agree
with MONINA that this was broad enough to cover the fourth quarter of said year, hence her birth on 6 August
1946 could still be attributed to sexual relations between FRANCISCO and MONINA's mother. In any event, since
it was established that her mother was still in the employ of FRANCISCO at the time MONINA was conceived as
determined by the date of her birth, sexual contact between FRANCISCO and MONINA's mother was not at all
impossible, especially in light of the overwhelming evidence, as hereafter shown, that FRANCISCO fathered
MONINA, has recognized her as his daughter and that MONINA has been enjoying the open and continuous
possession of the status as FRANCISCO's illegitimate daughter.
We readily conclude that the testimonial evidence offered by MONINA, woven by her narration of circumstances
and events that occurred through the years, concerning her relationship with FRANCISCO, coupled with the
testimonies of her witnesses, overwhelmingly established the following facts:
1) FRANCISCO is MONINA's father and she was conceived at the time when her mother was in the employ of
the former;
2) FRANCISCO recognized MONINA as his child through his overt acts and conduct which the Court of Appeals
took pains to enumerate, thus:
[L]ike sending appellant to school, paying for her tuition fees, school uniforms, books, board and lodging at the
Colegio del Sagrado de Jesus, defraying appellant's hospitalization expenses, providing her with [a] monthly
allowance, paying for the funeral expenses of appellant's mother, acknowledging appellant's paternal greetings
and calling appellant his "Hija" or child, instructing his office personnel to give appellant's monthly allowance,
recommending appellant to use his house in Bacolod and paying for her long distance telephone calls, having
appellant spend her long distance telephone calls, having appellant spend her vacation in his apartment in
Manila and also at his Forbes residence, allowing appellant to use his surname in her scholastic and other
records (Exhs Z, AA, AA-1 to AA-5, W & W-5) . . .
3) Such recognition has been consistently shown and manifested throughout the years
publicly, 35 spontaneously, continuously and in an uninterrupted manner. 36
Accordingly, in light of the totality of the evidence on record, the second assigned error must fail.
There is some merit, however, in the third assigned error against the probative value of some of MONINA's
documentary evidence.
MONINA's reliance on the certification issued by the Local Civil Registrar concerning her birth (Exhs. E and F) is
clearly misplaced. It is settled that a certificate of live birth purportedly identifying the putative father is not
competent evidence as to the issue of paternity, when there is no showing that the putative father had a hand
in the preparation of said certificates, and the Local Civil Registrar is devoid of authority to record the paternity
of an illegitimate child upon the information of a third person. 37 Simply put, if the alleged father did not
intervene in the birth certificate, e.g., supplying the information himself, the inscription of his name by the
mother or doctor or registrar is null and void; the mere certificate by the registrar without the signature of the
father is not proof of voluntary acknowledgment on the latter's part. 38 In like manner, FRANCISCO's lack of
participation in the preparation of the baptismal certificates (Exhs. C and D) and school records (Exhs. Z
and AA) renders these documents incompetent to prove paternity, the former being competent merely to
prove the administration of the sacrament of baptism on the date so specified. 39 However, despite the
inadmissibility of the school records per se to prove the paternity, they may be admitted as part of
MONINA's testimony to corroborate her claim that FRANCISCO spent for her education.
We likewise disagree with the ruling of the Court of Appeals that the certificates issued by the Local Civil
Registrar and the baptismal certificates may be taken as circumstantial evidence to prove MONINA's
filiation. Since they are per se inadmissible in evidence as proof of such filiation, they cannot be admitted
indirectly as circumstantial evidence to prove the same.
As to Exhibits "S," "T," "U" and "V," the various notes and letters written by FRANCISCO's relatives, namely
Mike Alano, Emilio Jison, Mariquit Lopez and Fernando Lopez, respectively, allegedly attesting to MONINA's
filiation, while their due execution and authenticity are not in issue, 40 as MONINA witnessed the authors
signing the documents, nevertheless, under Rule 130, Section 39, the contents of these documents may
not be admitted, there being no showing that the declarants-authors were dead or unable to testify,
neither was the relationship between the declarants and MONINA shown by evidence other than the
documents in question.41 As to the admissibility of these documents under Rule 130, Section 40, however,
this requires further elaboration.
Rule 130, Section 40, provides:
Sec. 40. Family reputation or tradition regarding pedigree. — The reputation or tradition existing in a family
previous to the controversy, in respect to the pedigree of any one of its members, may be received in
evidence if the witness testifying thereon be also a member of the family, either by consanguinity or
affinity. Entries in family bibles or other family books or charts, engravings on rings, family portraits and
the like may be received as evidence of pedigree. (emphasis supplied)
It is evident that this provision may be divided into two (2) parts: the portion containing the first
underscored clause which pertains to testimonial evidence, under which the documents in question may
not be admitted as the authors thereof did not take the witness stand; and the section containing the
second underscored phrase. What must then be ascertained is whether Exhibits S to V, as private
documents, fall within the scope of the clause "and the like" as qualified by the preceding phrase "[e]ntries
in family bibles or other family books or charts, engravings on rights [and] family portraits,"
We hold that the scope of the enumeration contained in the second portion of this provision, in light of the
rule of ejusdem generis, is limited to objects which are commonly known as "family possessions," or those
articles which represent, in effect, a family's joint statement of its belief as to the pedigree of a
person.42 These have been described as objects "openly exhibited and well known to the family," 43 or those
"which, if preserved in a family, may be regarded as giving a family tradition." 44 Other examples of these
objects which are regarded as reflective of a family's reputation or tradition regarding pedigree are
inscriptions on tombstones,45 monuments or coffin plates.46
Plainly then, Exhibits S to V, as private documents not constituting "family possessions" as discussed
above, may not be admitted on the basis of Rule 130, Section 40. Neither may these exhibits be admitted
on the basis of Rule 130, Section 41 regarding common reputation, 47 it having been observed that:
[T]he weight of authority appears to be in favor of the theory that it is the general repute, the common
reputation in the family, and not the common reputation in community, that is a material element of
evidence going to establish pedigree. . . . [Thus] matters of pedigree may be proved by reputation in the
family, and not by reputation in the neighborhood or vicinity, except where the pedigree in question is
marriage which may be proved by common reputation in the community. 48
Their inadmissibility notwithstanding, Exhibits "S" to "V," inclusive, may, in like manner as MONINA's school
records, properly be admitted as part of her testimony to strengthen her claim that, indeed, relatives of
FRANCISCO recognized her as his daughter.
We now direct our attention to MONINA's 21 September 1971 affidavit (Exh. P/Exh. 2), subject of the fourth
assigned error, where she attests that FRANCISCO is not her father. MONINA contends that she signed it under
duress, i.e., she was jobless, had no savings and needed the money to support herself and finish her studies.
Moreover, she signed Exhibit P upon the advice of Atty. Divinagracia that filiation could not be waived and that
FRANCISCO's ploy would "boomerang" upon him. On the other hand, FRANCISCO asserts that full credence
should be afforded Exhibit P as MONINA was already 25 years old at the time of its execution and was advised
by counsel; further, being a notarized document, its genuineness and due execution could not be questioned.
He relies on the testimony of Jose Cruz, a partner at the accounting firm of Miller & Cruz, who declared that he
intervened in the matter as MONINA was spreading rumors about her filiation within the firm, which might have
had deleterious effects upon the relationship between the firm and FRANCISCO.
On this issue, we find for MONINA and agree with the following observations of the Court of Appeals:
Even the affidavit (Exh 2) which [FRANCISCO] had foisted on the trial court . . . does not hold sway in the face
of [MONINA's] logical explanation that she at first did agree to sign the affidavit which contained untruthful
statements. In fact, she promptly complained to [FRANCISCO] who, however explained to her that the affidavit
was only for the consumption of his spouse . . .
At any rate, if [MONINA] were not his illegitimate daughter, it would have been uncalled for, if not absurd, for
[FRANCISCO] of his lawyer to have secured [MONINA's] sworn statement . . . On the contrary, in asking
[MONINA] to sign the said affidavit at the cost of P15,000. [FRANCISCO] clearly betrayed his intention to
conceal or suppress his paternity of [MONINA] . . .
Indeed, if MONINA were truly not FRANCISCO's illegitimate daughter, it would have been unnecessary for him to
have gone to such great lengths in order that MONINA denounce her filiation. For as clearly established before
the trial court and properly appreciated by the Court of Appeals, MONINA had resigned from Miller & Cruz five
(5) months prior to the execution of the sworn statement in question, hence negating FRANCISCO's theory of
the need to quash rumors circulating within Miller & Cruz regarding the identity of MONINA's father. Hence,
coupled with the assessment of the credibility of the testimonial evidence of the parties discussed above, it is
evident that the standard to contradict a notarial document, i.e. clear and convincing evidence and more than
merely preponderant, 49 has been met by MONINA
Plainly then, the burden of evidence fully shifted to FRANCISCO.
Two (2) glaring points in FRANCISCO's defense beg to be addressed: First, that his testimony was comprised of
mere denials, rife with bare, unsubstantiated responses such as "That is not true," "I do not believe that," or
"None that I know." In declining then to lend credence to FRANCISCO's testimony, we resort to a guiding
principle in adjudging the credibility of a witness and the truthfulness of his statements, laid down as early as
1921:
The experience of courts and the general observation of humanity teach us that the natural limitations of our
inventive faculties are such that if a witness undertakes to fabricate and deliver in court a false narrative
containing numerous details, he is almost certain to fall into fatal inconsistencies, to make statements which can
be readily refuted, or to expose in his demeanor the falsity of his message.
For this reason it will be found that perjurers usually confine themselves to the incidents immediately related to
the principal fact about which they testify, and when asked about collateral facts by which their truthfulness
could be tested, their answers not infrequently take the stereotyped form of such expressions as "I don't
know" or "I don't remember." . . .50
Second, the reasons for the dismissals of Tingson, Baylosis and Savariz were unspecified or likewise
unsubstantiated, hence FRANCISCO's attempt to prove ill-motive on their part to falsely testify in MONINA's
favor may not succeed. As may be gleaned, the only detail which FRANCISCO could furnish as to the
circumstances surrounding the dismissals of his former employees was that Baylosis allegedly "took
advantage of his position" while FRANCISCO was in the United States. But aside from this bare claim,
FRANCISCO's account is barren, hence unable to provide the basis for a finding of bias against FRANCISCO
on the part of his former employees.
As to FRANCISCO's other witnesses, nothing substantial could be obtained either. Nonito Jalandoni avowed
that he only came to know of MONINA in June 1988; 51 that during his employment at Nelly Garden from
1963 up to 1974, he did not recall ever having seen MONINA there, neither did he know of any instructions
from FRANCISCO nor Mr. Lagarto (FRANCISCO's office manager before passing away) regarding the
disbursement of MONINA's allowance. 52 Teodoro Zulla corroborated Jalandoni's testimony regarding not
having seen MONINA at Nelly Garden and MONINA's allowance; declared that Alfredo Baylosis was
dismissed due to discrepancies discovered after an audit, without any further elaboration, however; but
admitted that he never prepared the vouchers pertaining to FRANCISCO's personal expenses, merely those
intended for one of FRANCISCO's haciendas. 53 Then, Iñigo Superticioso confirmed that according to the
report of a certain Mr. Atienza, Baylosis "was dismissed by Mr. Jison for irregularities," while Superticioso
was informed by FRANCISCO that Tingson was dismissed for loss of confidence. Superticioso likewise
denied that MONINA received money from FRANCISCO's office, neither was there a standing order from
FRANCISCO to release funds to her.54
It is at once obvious that the testimonies of these witnesses for FRANCISCO are likewise insufficient to
overcome MONINA's evidence. The former merely consist of denials as regards the latter's having gone to
Nelly Garden or having received her allowance from FRANCISCO's office, which, being in the form of
negative testimony, necessarily stand infirm as against positive testimony; 55 bare assertions as regards the
dismissal of Baylosis; ignorance of FRANCISCO's personal expenses incapable of evincing that FRANCISCO
did not provide MONINA with an allowance; or hearsay evidence as regards the cause for the dismissals of
Baylosis and Tingson. But what then serves as the coup de grace is that despite Superticioso's claim that
he did not know MONINA,56 when confronted with Exhibit H, a telephone toll ticket indicating that on 18
May 1971, MONINA called a certain "Eñing" at FRANCISCO's office, Superticioso admitted that his nickname
was "Iñing" and that there was no other person named "Iñing" in FRANCISCO's office. 57
All told, MONINA's evidence hurdled "the high standard of proof" required for the success of an action to
establish one's illegitimate filiation when relying upon the provisions regarding "open and continuous
possession'' or "any other means allowed by the Rules of Court and special laws;" moreover, MONINA
proved her filiation by more than mere preponderance of evidence.
The last assigned error concerning laches likewise fails to convince. The essential elements of laches are:
(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of
which the complaint seeks a remedy; (2) delay in asserting the complainant's rights, the complainant
having had knowledge or notice of the defendant's conduct as having been afforded an opportunity to
institute a suit; (3) lack of knowledge or notice on the part of the defendant that the complaint would
assert the right in which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is
accorded to the complaint, or the suit is not held barred. 58 The last element is the origin of the doctrine
that sale demands apply only where by reason of the lapse of time it would be inequitable to allow a party
to enforce his legal rights.59
As FRANCISCO set up, laches as an affirmative defense, it was incumbent upon him to prove the existence
of its elements. However, he only succeeded in showing MONINA's delay in asserting her claim, but
miserably failed to prove the last element. In any event, it must be stressed that laches is based upon
grounds of public policy which requires, for the peace of society, the discouragement of state claims, and is
principally a question of the inequity or unfairness of permitting a right or claim to be enforced or asserted.
There is no absolute rule as to what constitutes laches; each case is to be determined according to its particular
circumstances. The question of laches is addressed to the sound discretion of the court, and since it is an
equitable doctrine, its application is controlled by equitable considerations. It cannot be worked to defeat justice
or to perpetuate fraud and injustice.60 Since the instant case involves paternity and filiation, even if illegitimate,
MONINA filed her action well within the period granted her by a positive provision of law. A denial then of her
action on ground of laches would clearly be inequitable and unjust.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DENIED and the challenged decision of the
Court of Appeals of 27 April 1995 in CA-G.R. CV No. 32860 is AFFIRMED. Costs against petitioner. SO ORDERED.
 [G.R. No. 149420. October 8, 2003.]
SONNY LO, Petitioner, v. KJS ECO-FORMWORK SYSTEM PHIL., INC., Respondent.
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel scaffoldings,
while petitioner Sonny L. Lo, doing business under the name and style San’s Enterprises, is a building contractor.
On February 22, 1990, petitioner ordered scaffolding equipments from respondent worth P540,425.80. 1 He paid
a downpayment in the amount of P150,000.00. The balance was made payable in ten monthly
installments.chanrob1es virtua1 1aw 1ibrary
Respondent delivered the scaffoldings to petitioner. 2 Petitioner was able to pay the first two monthly
installments. His business, however, encountered financial difficulties and he was unable to settle his obligation
to respondent despite oral and written demands made against him. 3
On October 11, 1990, petitioner and respondent executed a Deed of Assignment, 4 whereby petitioner assigned
to respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions
of the Deed provide:chanrob1es virtual 1aw library
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at Greenmeadow
Avenue, Quezon City owned by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on account
scaffolding equipments from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four Hundred
Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the ASSIGNOR’s
collectible from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE
all collectibles amounting to the said amount of P335,462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and authority to
demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in
the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns that
said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said ASSIGNOR has
not done and will not cause anything to be done to diminish or discharge said debt, or delay or to prevent the
ASSIGNEE, its successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents. . . . 5 (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter refused to
honor the Deed of Assignment because it claimed that petitioner was also indebted to it. 6 On November 26,
1990, respondent sent a letter 7 to petitioner demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the
petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074. 8
During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Bañaga,
who testified that Jomero Realty refused to honor the assignment of credit because it claimed that
petitioner had an outstanding indebtedness to it.chanrob1es virtua1 1aw 1ibrary
On August 25, 1994, the trial court rendered a decision 9 dismissing the complaint on the ground that the
assignment of credit extinguished the obligation. The decretal portion thereof provides:chanrob1es virtual
1aw library
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and
against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorney’s fees
in the amount of P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered
a decision, 10 the dispositive portion of which reads:chanrob1es virtual 1aw library
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters judgment
ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint) until
fully paid and attorney’s fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED. 11
In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the respondent,
the Court of Appeals held that (1) petitioner failed to comply with his warranty under the Deed; (2) the
object of the Deed did not exist at the time of the transaction, rendering it void pursuant to Article 1409 of
the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when he failed to execute
and do all acts and deeds as shall be necessary to effectually enable the respondent to recover the
collectibles. 12
Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of Appeals.
In this petition for review, petitioner assigns the following errors:chanrob1es virtual 1aw library
I. THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF
ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY
CLAIM.
II. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH.
"4") DID NOT EXTINGUISH PETITIONER’S OBLIGATION ON THE WRONG NOTION THAT PETITIONER
FAILED TO COMPLY WITH HIS WARRANTY THEREUNDER.
III. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT
AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEY’S FEES. 14
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against the debtor. 15chanrob1es
virtua1 1aw 1ibrary
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. 16 In order that there be a valid
dation in payment, the following are the requisites: (1) There must be the performance of the prestation in
lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (2) There must be some difference between the prestation due and that which is
given in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the performance of a prestation different from that due. 17
The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing
or property of the debtor, payment for which is to be charged against the debtor’s debt. As such, the vendor in
good faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for the
solvency of the debtor, in specified circumstances. 18

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, 19
produced the effects of a dation in payment which may extinguish the obligation. 20 However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first paragraph of
Article 1628 of the Civil Code provides:chanrob1es virtual 1aw library

The vendor in good faith shall be responsible for the existence: and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.

From the above provision, Petitioner, as vendor or assignor, is bound to warrant the existence and legality of the
credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner
since the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner has been
extinguished by compensation. 21 In other words, respondent alleged the non-existence of the credit and
asserted its claim to petitioner’s warranty under the assignment. Therefore, it behooved on petitioner to make
good its warranty and paid the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:chanrob1es
virtual 1aw library

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents. 22 (Emphasis ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the
performance thereof in case the same is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we find that the award by the Court of Appeals of attorney’s
fees is without factual basis. No evidence or testimony was presented to substantiate this claim. Attorney’s fees,
being in the nature of actual damages, must be duly substantiated by competent proof.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-G.R. CV
No. 47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of 6% per annum
from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate
of legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit. 23 The award of attorney’s fees is DELETE for lack of evidentiary basis. SO ORDERED.
 To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's
Office to proceed with the sale of the subject real properties to satisfy not only the amount of P499,060.25
owed by the spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of
G.R. No. L-46658 May 13, 1991
interest, commission charges and other expenses owed by said spouses as sureties of TCC. 7 Said petition
was opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of
finding that the questions raised by the parties required the reception and evaluation of evidence, hence,
Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
proper for adjudication by the courts of law. Since said questions were prejudicial to the holding of the
foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders unless and until there be a court ruling on the aforementioned issues." 8
dated March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 1 of the Court of First Instance of Rizal,
Branch XXI, respectively granting private respondent Tayabas Cement Company, Inc.'s application for a writ of
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition
preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon City and Negros Occidental
for mandamus9 against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel her to
and denying petitioner's motion for reconsideration thereof.
proceed with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 in order to satisfy
both the personal obligation of the spouses Arroyo as well as their liabilities as sureties of TCC. 10
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of
P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock, and thereby acquire the
On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure
controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). 2 As security for said loan, the
sale of the mortgaged properties covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the
spouses Arroyo executed a real estate mortgage over a parcel of land covered by Transfer Certificate of Title No.
corresponding Sheriff's Certificate of Sale.11
55323 of the Register of Deeds of Quezon City known as the La Vista property.

Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance
Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8)
of Rizal, Pasig, Branch XXI a complaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros
year deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to
Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary
cover the importation of a cement plant machinery and equipment.
injunction to restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as
well as a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the of the imported machinery and equipment.13
account of TCC, the Arroyo spouses executed the following documents to secure this loan accommodation:
Surety Agreement dated August 5, 19643 and Covenant dated August 6, 1964.4
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order 14 and on
March 4, 1977, granted a writ of preliminary injunction. 15 PNB's motion for reconsideration was denied,
The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a hence this petition.
trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the
L/C as scheduled. TCC, however, failed to remit and/or pay the corresponding amount covered by the drawings.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a)
Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its intention to repossess,
that it contravenes P.D. No. 385 which prohibits the issuance of a restraining order against a government
as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C. 5
financial institution in any action taken by such institution in compliance with the mandatory foreclosure
provided in Section 1 thereof; b) that the writ countermands a final decision of a co-equal and coordinate
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 court; c) that the writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction;
secured by a real estate mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, and, d) private respondent TCC has not shown any clear legal right or necessity to the relief of preliminary
Negros Occidental, had likewise become due. The spouses Arroyo having failed to satisfy their obligations with injunction.
PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its favor.
Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar,
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under Act firstly because no foreclosure proceedings have been instituted against it by PNB and secondly, because its
3138, as amended by Act 4118 and under Presidential Decree No. 385 of the real estate mortgage over the account under the L/C has been fully satisfied with the repossession of the imported machinery and
properties known as the La Vista property covered by TCT No. 55323. 6 PNB likewise filed a similar petition with equipment by PNB.
the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties located at Isabela,
Negros Occidental and covered by OCT No. RT 1615.
The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has
been extinguished by the repossession of PNB of the imported cement plant machinery and equipment.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB was
the highest bidder with a bid price of P1,000,001.00. However, when said property was about to be awarded to
We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement
PNB, the representative of the mortgagor-spouses objected and demanded from the PNB the difference between
plant machinery and equipment pursuant to the trust receipt agreement executed by and between PNB and
the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal
TCC giving the former the unqualified right to the possession and disposal of all property shipped under the
account. It was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred
Letter of Credit until such time as all the liabilities and obligations under said letter had been
only to the personal account of the mortgagor spouses without reference to the account of TCC.
discharged.16 In the case of Vintola vs. Insular Bank of Asia and America 17 wherein the same argument was
advanced by the Vintolas as entrustees of imported seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as,
through no fault of their own, they were unable to dispose of the seashells, and that they have relinquished
possession thereof to the IBAA, as owner of the goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of
credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-
up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In
other words, the transaction involves a loan feature represented by the letter of credit, and a security feature
which is in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the
goods.1âwphi1 It secures an indebtedness and there can be no such thing as security interest that secures no
obligation. As defined in our laws:
(h) "Security interest" means a property interest in goods, documents or instruments to secure performance of
some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or retained for security only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely
the holder of a security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor.
xxx xxx xxx
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they
have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are
absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact
that they were unable to sell the seashells in question does not affect IBAA's right to recover the advances it
had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances
given to TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan
secured thereby. Payment would legally result only after PNB had foreclosed on said securities, sold the same
and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the
property and includes the sale itself.18
Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is
alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. 19 Dation in
payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. 20 As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo
as sureties of TCC. A surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.21 As sureties, the Arroyo spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding.22
Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions
like herein petitioner PNB are required to foreclose on the collaterals and/or securities for any loan, credit
or accommodation whenever the arrearages on such account amount to at least twenty percent (20%) of
the total outstanding obligations, including interests and charges, as appearing in the books of account of
the financial institution concerned.23 It is further provided therein that "no restraining order, temporary or
permanent injunction shall be issued by the court against any government financial institution in any action
taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any
third party or parties . . ."24
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in
compliance with the mandate of P.D. 385. This being the case, the respondent judge acted in excess of his
jurisdiction in issuing the injunction specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction complained of is that it interfered with
the order of a co-equal and coordinate court. Since Branch V of the CFI of Rizal had already acquired
jurisdiction over the question of foreclosure of mortgage over the La Vista property and rendered judgment
in relation thereto, then it retained jurisdiction to the exclusion of all other coordinate courts over its
judgment, including all incidents relative to the control and conduct of its ministerial officers, namely the
sheriff thereof.25 The foreclosure sale having been ordered by Branch V of the CFI of Rizal, TCC should not
have filed injunction proceedings with Branch XXI of the same CFI, but instead should have first sought
relief by proper motion and application from the former court which had exclusive jurisdiction over the
foreclosure proceeding.26
This doctrine of non-interference is premised on the principle that a judgment of a court of competent
jurisdiction may not be opened, modified or vacated by any court of concurrent jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of
Negros Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First
Instance, now Regional Trial Courts, can only enforce their writs of injunction within their respective
designated territories.28
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against
private respondent
 G.R. No. 125862 April 15, 2004 SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region10
FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and style "Culaba
Store", petitioners,
vs. The Trial Court’s Ruling
COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.
After trial on the merits, the trial court rendered judgment in favor of SMC, and held the Culaba spouses
This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of the Decision 1 of the Court of liable on the balance of its obligation, thus:
Appeals in CA-G.R. CV No. 19836 affirming in toto the Decision 2 of the Regional Trial Court of Makati, Branch
138, in Civil Case No. 1033 for collection of sum of money, and the Resolution 3 denying the motion for
Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:
reconsideration of the said decision.

1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per annum from April
The Undisputed Facts
12, 1983 until the whole amount is fully paid;

The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba Store and were
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for attorney’s fees plus costs.
engaged in the sale and distribution of San Miguel Corporation’s (SMC) beer products. SMC sold beer products
on credit to the Culaba spouses in the amount of P28,650.00, as evidenced by Temporary Credit Invoice No.
42943.4 Thereafter, the Culaba spouses made a partial payment of P3,740.00, leaving an unpaid balance of SO ORDERED.11
P24,910.00. As they failed to pay despite repeated demands, SMC filed an action for collection of a sum of
money against them before the RTC of Makati, Branch 138.
According to the trial court, it was unusual that defendant Francisco Culaba forgot the name of the
collector to whom he made the payments and that he did not require the said collector to print his name on
The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on four the receipts. The court also noted that although they were part of a single booklet, the TCS Liquidation
separate occasions. To substantiate this claim, the defendants presented four (4) Temporary Charge Sales (TCS) Receipts submitted by the defendants did not appear to have been issued in their natural sequence.
Liquidation Receipts, as follows: Furthermore, they were part of the lost booklet receipts, which the public was duly warned of through the
Notice of Loss the plaintiff caused to be published in a daily newspaper. This confirmed the plaintiff’s claim
that the receipts presented by the defendants were spurious ones.
April 19, 1983 Receipt No. 27331 for P8,0005
The Case on Appeal
April 22, 1983 Receipt No. 27318 for P9,0006

April 27, 1983 Receipt No. 27339 for P4,5007 On appeal, the appellants interposed the following assignment of errors:

April 30, 1983 Receipt No. 27346 for P3,4108 I

THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY DEFENDANTS EVIDENCING
Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor who came in
HIS PAYMENTS TO PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
an SMC van. He was then showed a list of customers’ accountabilities which included his account. The
defendant, in good faith, then paid to the said supervisor, and he was, in turn, issued genuine SMC liquidation
receipts. II

For its part, SMC submitted a publisher’s affidavit 9 to prove that the entire booklet of TCSL Receipts bearing Nos.
27301-27350 were reported lost by it, and that it caused the publication of the notice of loss in the July 9, 1983
issue of the Daily Express, as follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES LIQUIDATION RECEIPTS WITH
SERIAL NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE RECEIPTS WILL NOT BE
HONORED.
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS SUFFICIENTLY PROVED ITS
CAUSE OF ACTION AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT DUE TO PLAINTIFF
AS ATTORNEY’S FEES.12
The appellants asserted that while the trial court’s observations were true, it was the usual business
practice in previous transactions between them and SMC. The SMC previously honored receipts not bearing
the salesman’s name. According to appellant Francisco Culaba, he even lost some of the receipts, but did
not encounter any problems.
According to appellant Francisco, he could not be faulted for paying the SMC collector who came in a van and
was in uniform, and that any regular customer would, without any apprehension, transact with such an SMC
employee. Furthermore, the respective receipts issued to him at the time he paid on the four occasions
mentioned had not yet then been declared lost. Thus, the subsequent publication in a daily newspaper declaring
the booklets lost did not affect the validity and legality of the payments made. Accordingly, by its actuations, the
SMC was estopped from questioning the legality of the payments and had no cause of action against the
appellants.
Anent the issue of attorney’s fees, the order of the trial court for payment thereof is without basis. According to
the appellant, the provision for attorney’s fees is a contingent fee, already provided for in the SMC’s contract
with the law firm. To further order them to pay 20% of the amount due as attorney’s fees is double payment,
tantamount to undue enrichment and therefore improper. 13
The appellee, for its part, contended that the primary issue in the case at bar revolved around the basic and
fundamental principles of agency.14 It was incumbent upon the defendants-appellants to exercise ordinary
prudence and reasonable diligence to verify and identify the extent of the alleged agent’s authority. It was their
burden to establish the true identity of the assumed agent, and this could not be established by mere
representation, rumor or general reputation. As they utterly failed in this regard, the appellants must suffer the
consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants, we cannot fault the lower court for
giving more weight to appellee’s testimonial and documentary evidence, all of which establish with some degree
of preponderance the existence of the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual findings of the lower court to which we
must accord respect, for which reason, the judgment appealed from is hereby AFFIRMED in all respects.
SO ORDERED.15
Hence, the instant petition.
The petitioners pose the following issues for the Court’s resolution:
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT IT HAD PROPERLY
AND TIMELY NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT PETITIONER WAS
REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16
According to the petitioners, receiving receipts from the private respondent’s agents instead of its salesmen was
a usual occurrence, as they had been operating the store since 1979. Thus, on four occasions in April 1983,
when an agent of the respondent came to the store wearing an SMC uniform and driving an SMC van, petitioner
Francisco Culaba, without question, paid his accounts. He received the receipts without fear, as they were
similar to what he used to receive before. Furthermore, the petitioners assert that, common experience will
attest that unless the attention of the customers is called for, they would not take note of the serial number of
the receipts.
The petitioners contend that the private respondent advertised its warning to the public only after the
damage was done, or on July 9, 1993. Its belated notice showed its glaring lack of interest or concern for
its customers’ welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts were paid
had all the physical and material attributes or indications of a representative of the private respondent,
leaving no doubt that he was duly authorized by the latter. Petitioner Francisco Culaba’s testimony that "he
does not necessarily check the contents of the receipts issued to him except for the amount indicated if
[the] same accurately reflects his actual payment" is a common attitude of customers. He could, thus, not
be faulted for paying the private respondent’s agent on four occasions. Petitioner Francisco Culaba asserts
that he made the payment in good faith, to an agent who issued SMC receipts which appeared to be
genuine. Thus, according to the petitioners, they had duly paid their obligation in accordance with Articles
1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with the debtor, in
consonance with the express provision of Article 1233 of the New Civil Code. The petitioners miserably
failed to prove the self-serving allegation that they already paid their liability to the private respondent.
Furthermore, under normal circumstances, an obligor would not just pay a substantial amount to someone
whom he saw for the first time, without even asking for the latter’s name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the payment of the petitioners’
obligation to the private respondent was properly made, thus, extinguishing the same. This is clearly a
factual issue, and beyond the purview of the Court to delve into. This is in consonance with the well-settled
rule that findings of fact of the trial court, especially when affirmed by the Court of Appeals, are accorded
the highest degree of respect, and generally will not be disturbed on appeal. Such findings are binding and
conclusive on the Court.17 Furthermore, it is not the Court’s function under Rule 45 of the Rules of Court, as
amended, to review, examine and evaluate or weigh the probative value of the evidence presented. 18
To reiterate, the issue being raised by the petitioners does not involve a question of law, but a question of
fact, not cognizable by this Court in a petition for review under Rule 45. The jurisdiction of the Court in
such a case is limited to reviewing only errors of law, unless the factual findings being assailed are not
supported by evidence on record or the impugned judgment is based on a misapprehension of facts. 19
A careful study of the records of the case reveal that the appellate court affirmed the trial court’s factual
findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondent’s lost booklet,
which loss was duly advertised in a newspaper of general circulation; thus, the private respondent could
not have officially issued them to the petitioners to cover the alleged payments on the dates appearing
thereon.
Second. There was something amiss in the way the receipts were issued to the petitioners, as one receipt
bearing a higher serial number was issued ahead of another receipt bearing a lower serial number,
supposedly covering a later payment. The petitioners failed to explain the apparent mix-up in these
receipts, and no attempt was made in this regard.
Third. The fact that the salesman’s name was invariably left blank in the four receipts and that the petitioners
could not even remember the name of the supposed impostor who received the said payments strongly argue
against the veracity of the petitioners’ claim.

We find no cogent reason to reverse the said findings.

The dismissal of the petition is inevitable even upon close perusal of the merits of the case.

Payment is a mode of extinguishing an obligation. 20 Article 1240 of the Civil Code provides that payment shall be
made to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any
person authorized to receive it.21 In this case, the payments were purportedly made to a "supervisor" of the
private respondent, who was clad in an SMC uniform and drove an SMC van. He appeared to be authorized to
accept payments as he showed a list of customers’ accountabilities and even issued SMC liquidation receipts
which looked genuine. Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and
authority of the said supervisor, nor did he ask to be shown any identification to prove that the latter was,
indeed, an SMC supervisor. The petitioners relied solely on the man’s representation that he was collecting
payments for SMC. Thus, the payments the petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.

The basis of agency is representation. 22 A person dealing with an agent is put upon inquiry and must discover
upon his peril the authority of the agent. 23 In the instant case, the petitioners’ loss could have been avoided if
they had simply exercised due diligence in ascertaining the identity of the person to whom they allegedly made
the payments. The fact that they were parting with valuable consideration should have made them more
circumspect in handling their business transactions. Persons dealing with an assumed agent are bound at their
peril to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it. 24 The petitioners in this case failed to discharge
this burden, considering that the private respondent vehemently denied that the payments were accepted by it
and were made to its authorized representative.

Negligence is the omission to do something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of something, which a prudent and
reasonable man would not do. 25 In the case at bar, the most prudent thing the petitioners should have done was
to ascertain the identity and authority of the person who collected their payments. Failing this, the petitioners
cannot claim that they acted in good faith when they made such payments. Their claim therefor is negated by
their negligence, and they are bound by its consequences. Being negligent in this regard, the petitioners cannot
seek relief on the basis of a supposed agency.26

WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April 16, 1996, and the
Resolution dated July 19, 1996 of the Court of Appeals are AFFIRMED. Costs against the petitioners.

SO ORDERED.
G.R. No. 175863 February 18, 2015 With an agreement basically out of reach, Mangondato filed a complaint for reconveyance against
petitioner before the Regional Trial Court (RTC) of Marawi City in July 1992. In his complaint, Mangondato
asked for, among others, the recovery of the subject land and the payment by petitioner of a monthly
NATIONAL POWER CORPORATION, Petitioner,
rental from 1978 until the return of such land. Mangondato’s complaint was docketed as Civil Case No. 605-
vs.
92.
LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD G.
MARUHOM, FAROUK G. MARUHOM, HIDJARA G. MARUHOM, ROCANIA G. MARUHOM, POTRISAM G. MARUHOM,
LUMBA G. MAR UH OM, SIN AB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G. MARUHOM, MOHAMAD M. For its part, petitioner filed an expropriation complaint 9 before the RTC on 27 July 1992. Petitioner’s
IBRAHIM, CAIRONESA M. IBRAHIM and MACAPANTON K. MANGONDATO Respondents. complaint was docketed as Civil Case No. 610-92.

At bench is a petition for review on certiorari 1 assailing the Decision2 dated 24 June 2005 and Resolution 3 dated Later, Civil Case No. 605-92 and Civil Case No. 610-92 were consolidated before Branch 8 of the Marawi
5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061. The facts: City RTC.

The Subject Land On 21 August 1992, Branch 8 of the Marawi City RTC rendered a Decision 10 in Civil Case No. 605-92 and
Civil Case No. 610-92. The decision upheld petitioner’s right to expropriate the subject land: it denied
Mangondato’s claim for reconveyance and decreed the subject land condemned in favor of the petitioner,
In 1978, petitioner took possession of a 21,995 square meter parcel of land in Marawi City (subject land) for the
effective July of 1992, subject to payment by the latter of just compensation in the amount of
purpose of building thereon a hydroelectric power plant pursuant to its Agus 1 project. The subject land, while in
₱21,995,000.00. Anent petitioner’s occupation of the subject land from 1978to July of 1992, on the other
truth a portion of a private estate registered under Transfer Certificate of Title (TCT) No. 378-A 4 in the name of
hand, the decision required the former to pay rentals therefor at the rate of ₱15,000.00 per month
herein respondent Macapanton K. Mangondato (Mangondato), 5 was occupied by petitioner under the mistaken
with12% interest per annum. The decision’s fallo reads:
belief that such land is part of the vast tract of public land reserved for its use by the government under
Proclamation No. 1354, s. 1974.6
WHEREFORE, the prayer in the recovery case for [petitioner’s] surrender of the property is denied
but[petitioner] is ordered to pay monthly rentals in the amount of ₱15,000.00 from 1978 up to July 1992
Mangondato first discovered petitioner’s occupation of the subject land in 1979—the year that petitioner started
with 12% interest per annum xxx and the property is condemned in favor of [petitioner] effective July 1992
its construction of the Agus 1plant. Shortly after such discovery, Mangondato began demanding compensation
upon payment of the fair market value of the property at One Thousand (₱1,000.00) Pesos per square
for the subject land from petitioner.
meter or a total of Twenty-One Million Nine Hundred Ninety-Five Thousand (₱21,995,000.00) [P]esos. 11

In support of his demand for compensation, Mangondato sent to petitioner a letter 7 dated 28 September 1981
Disagreeing with the amount of just compensation that it was adjudged to pay under the said decision,
wherein the former detailed the origins of his ownership over the lands covered by TCT No. 378-A, including the
petitioner filed an appeal with the Court of Appeals. This appeal was docketed in the Court of Appeals as
subject land. The relevant portions of the letter read:
CA-G.R. CV No. 39353.

Now let me trace the basis of the title to the land adverted to for particularity. The land titled in my name was
Respondents Ibrahims and Maruhoms and Civil Case No. 967-93
originally consisting of seven (7) hectares. This piece of land was particularly set aside by the Patriarch
Maruhom, a fact recognized by all royal datus of Guimba, to belong to his eldest son, Datu Magayo-ong
Maruhom. This is the very foundation of the right and ownership over the land in question which was titled in During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993, herein respondents the Ibrahims and
my name because as the son-in-law of Hadji Ali Maruhom the eldest son of, and only lawyer among the Maruhoms12 filed before the RTC of Marawi City a complaint 13 against Mangondato and petitioner. This
descendants of Datu Magayo-ong Maruhom, the authority and right to apply for the title to the land was given complaint was docketed as Civil Case No. 967-93and was raffled to Branch 10of the Marawi City RTC.
to me by said heirs after mutual agreement among themselves besides the fact that I have already bought a
substantial portion of the original seven (7) hectares.
In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s ownership of the lands covered by
TCT No. 378-A, including the subject land. The Ibrahims and Maruhoms asseverate that they are the real
The original title of this seven (7) hectares has been subdivided into several TCTs for the other children of Datu owners of the lands covered by TCT No. 378-A; they being the lawful heirs of the late Datu Magayo-ong
Magayo-ong Maruhom with whom I have executed a quit claim. Presently, only three (3) hectares is left to me Maruhom, who was the original proprietor of the said lands. 14 They also claimed that Mangondato actually
out of the original seven (7) hectares representing those portion [sic] belonging to my wife and those I have holds no claim or right over the lands covered by TCT No. 378-A except that of a trustee who merely holds
bought previously from other heirs. This is now the subject of this case. 8 the said lands in trust for them.15 The Ibrahims and Maruhoms submit that since they are the real owners
of the lands covered by TCT No. 378-A, they should be the ones entitled to any rental fees or expropriation
indemnity that may be found due for the subject land.
Petitioner, at first, rejected Mangondato’s claim of ownership over the subject land; the former then adamant in
its belief that the said land is public land covered by Proclamation No. 1354, s. 1974. But, after more than a
decade, petitioner finally acquiesced to the fact that the subject land is private land covered by TCT No. 378-A Hence, the Ibrahims and Maruhoms prayed for the following reliefs in their complaint: 16
and consequently acknowledged Mangondato’s right, as registered owner, to receive compensation therefor.
1. That Mangondato be ordered to execute a Deed of Conveyance transferring to them the ownership of
Thus, during the early 1990s, petitioner and Mangondato partook in a series of communications aimed at the lands covered by TCT No. 378-A;
settling the amount of compensation that the former ought to pay the latter in exchange for the subject land.
Ultimately, however, the communications failed to yield a genuine consensus between petitioner and
Mangondato as to the fair market value of the subject land. Civil Case No. 605-92 and Civil Case No. 610-92
2. That petitioner be ordered to pay to them whatever indemnity for the subject land it is later on adjudged to
pay in Civil Case No. 605-92 and Civil Case No. 610-92;
3. That Mangondato be ordered to pay to them any amount that the former may have received from the
petitioner by way of indemnity for the subject land;
4. That petitioner and Mangondatobe ordered jointly and severally liable to pay attorney’s fees in the sum of
₱200,000.00.
In the same complaint, the Ibrahims and Maruhoms also prayed for the issuance of a temporary restraining
order (TRO) and a writ of preliminary injunction to enjoin petitioner, during the pendency of the suit, from
making any payments to Mangondato concerning expropriation indemnity for the subject land. 17
On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer of the Ibrahims and Maruhoms for the
issuance of a TRO.18 On 29 May 1993, after conducting an appropriate hearing for the purpose, the same court
likewise granted the prayer for the issuance of a writ of preliminary injunction. 19
In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in CA-G.R. CV No. 39353 and the Decision of this Court in G.R. No. 113194
On 21 December 1993, the Court of Appeals rendered a Decision in CA-G.R. CV No. 39353 denying the appeal of
petitioner and affirming in toto the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case No. 610-92.
Undeterred, petitioner next filed a petition for review on certiorari with this Court that was docketed herein as
G.R. No. 113194.20
On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein we upheld the Court of Appeals’
denial of petitioner’s appeal.21 In the same decision, we likewise sustained the appellate court’s affirmance of the
decision in Civil Case No. 605-92 and Civil Case No. 610-92 subject only to a reduction of the rate of interest on
the monthly rental fees from 12% to 6% per annum.22
Our decision in G.R. No. 113194 eventually became final and executory on 13 May 1996. 23
Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case No. 610-92, as Modified
In view of the finality of this Court’s decision in G.R. No. 113194, Mangondato filed a motion for execution of the
decision in Civil Case No. 605-92 and Civil Case No. 610-92. 24 Against this motion, however, petitioner filed an
opposition.25
In its opposition, petitioner adverted to the existence of the writ of preliminary injunction earlier issued in Civil
Case No. 967-93 that enjoins it from making any payment of expropriation indemnity over the subject land in
favor of Mangondato.26 Petitioner, in sum, posits that such writ of preliminary injunction constitutes a legal
impediment that effectively bars any meaningful execution of the decision in Civil Case No. 605-92 and Civil
Case No. 610-92.
Finding no merit in petitioner’s opposition, however, Branch 8 of the Marawi City RTC rendered a
Resolution27 dated 4 June 1996 ordering the issuance of a writ of execution in favor of Mangondato in Civil Case
No. 605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the trial court ordered the issuance of a
notice of garnishment against several of petitioner’s bank accounts 28 for the amount of ₱21,801,951.00—the
figure representing the total amount of judgment debt due from petitioner in Civil Case No. 605-92 and Civil
Case No. 610-92 less the amount then already settled by the latter. The dispositive portion of the resolution
reads:
WHEREFORE, let a Writ of Execution and the corresponding order or notice of garnishment be immediately
issued against [petitioner] and in favor of [Mangondato] for the amount of Twenty One Million Eight
Hundred One Thousand and Nine Hundred Fifty One (₱21,801,951.00) Pesos.
x x x.29
Pursuant to the above resolution, a notice of garnishment 30 dated 5 June 1996 for the amount of
₱21,801,951.00 was promptly served upon the Philippine National Bank (PNB)—the authorized depositary
of petitioner. Consequently, the amount thereby garnished was paid to Mangondato in full satisfaction of
petitioner’s judgment debt in Civil Case No. 605-92 and Civil Case No. 610-92.
Decision in Civil Case No. 967-93
Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City RTC decided Civil Case No. 967-
93.31 In its decision, Branch 10 of the Marawi City RTC made the following relevant findings: 32
1. The Ibrahims and Maruhoms—not Mangondato—are the true owners of the lands covered by TCT No.
378-A, which includes the subject land.
2. The subject land, however, could no longer be reconveyed to the Ibrahims and Maruhoms since the
same was already expropriated and paid for by the petitioner under Civil Case No. 605-92 and Civil Case
No. 610-92.
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the subject land, are the rightful
recipients of whatever rental fees and indemnity that may be due for the subject land as a result of its
expropriation.
Consistent with the foregoing findings, Branch 10 of the Marawi City RTC thus required payment of all the
rental fees and expropriation indemnity due for the subject land, as previously adjudged in Civil Case No.
605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms.
Notable in the trial court’s decision, however, was that it held both Mangondato and the petitioner solidarily
liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity adjudged in Civil Case
No. 605-92 and Civil Case No. 610-92.33
In addition, Mangondato and petitioner were also decreed solidarily liable to the Ibrahims and Maruhoms
for attorney’s fees in the amount of ₱200,000.00. 34
The pertinent dispositions in the decision read:
WHEREFORE, premises considered, judgment is hereby rendered in favor of [the Ibrahims and Maruhoms]
and against [Mangondato and petitioner] as follows:
1. x x x
2. Ordering [Mangondato and petitioner] to pay jointly and severally [the Ibrahims and Maruhoms] all forms of
expropriation indemnity as adjudged for [the subject land] consisting of 21,995 square meters in the amount of
₱21,801,051.00 plus other forms of indemnity such as rentals and interests;
3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and Maruhoms] jointly and severally the sum of
₱200,000.00 as attorney’s fees; SO ORDERED.35
Petitioner’s Appeal to the Court of Appeals and the Execution
Pending Appeal of the Decision in Civil Case No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93 with the Court of Appeals: contesting mainly the
holding in the said decision that it ought to be solidarily liable with Mangondato to pay to the Ibrahims and
Maruhoms the rental fees and expropriation indemnity adjudged due for the subject land. This appeal was
docketed as CA-G.R. CV No. 68061.
While the foregoing appeal was still pending decision by the Court of Appeals, however, the Ibrahims and
Maruhoms were able to secure with the court a quo a writ of execution pending appeal 36 of the decision in Civil
Case No. 967-93. The enforcement of such writ led to the garnishment of Mangondato’s moneys in the
possession of the Social Security System (SSS) in the amount of ₱2,700,000.00 on 18 September
1998.37 Eventually, the amount thereby garnished was paid to the Ibrahims and Mangondato in partial
satisfaction of the decision in Civil Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its Decision 38 in CA-G.R. CV No. 68061 denying petitioner’s
appeal. The appellate court denied petitioner’s appeal and affirmed the decision in Civil Case No. 967-93, subject
to the right of petitioner to deduct the amount of ₱2,700,000.00 from its liability as a consequence of the partial
execution of the decision in Civil Case No. 967-93. 39
Hence, the present appeal by petitioner.
The Present Appeal
The present appeal poses the question of whether it is correct, in view of the facts and circumstances in this
case, to hold petitioner liable in favor of the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity adjudged due for the subject land.
In their respective decisions, both Branch 10 of the Marawi City RTC and the Court of Appeals had answered the
foregoing question in the affirmative. The two tribunals postulated that, notwithstanding petitioner’s previous
payment to Mangondato of the rental fees and expropriation indemnity as a consequence of the execution of the
decision in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to the Ibrahims and Maruhoms
for such fees and indemnity because its previous payment to Mangondato was tainted with "bad faith." 40 As
proof of such bad faith, both courts cite the following considerations: 41
1. Petitioner "allowed" payment to Mangondato despite its prior knowledge, which dates back as early as 28
September 1981, by virtue of Mangondato’s letter of even date, that the subject land was owned by a certain
Datu Magayo-ong Maruhom and not by Mangondato; and
2. Petitioner "allowed" such payment despite the issuance of a TRO and a writ of preliminary injunction in Civil
Case No. 967-93 that precisely enjoins it from doing so.
For the two tribunals, the bad faith on the part of petitioner rendered its previous payment to Mangondato
invalid insofar as the Ibrahims and Maruhoms are concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity
previously paid to Mangondato.42
Petitioner, however, argues otherwise. It submits that a finding of bad faith against it would have no basis
in fact and law, given that it merely complied with the final and executory decision in Civil Case No. 605-92
and Civil Case No. 610-92 when it paid the rental fees and expropriation indemnity due the subject to
Mangondato.43 Petitioner thus insists that it should be absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms and prays for the dismissal of Civil Case No. 967-93
against it.
We grant the appeal.
No Bad Faith On The Part of Petitioner
Petitioner is correct. No "bad faith" may be taken against it in paying Mangondato the rental fees and
expropriation indemnity due the subject land.
Our case law is not new to the concept of bad faith. Decisions of this Court, both old and new, had been
teeming with various pronouncements that illuminate the concept amidst differing legal contexts. In any
attempt to understand the basics of bad faith, it is mandatory to take a look at some of these
pronouncements:
In Lopez, et al. v. Pan American World Airways, 44 a 1966 landmark tort case, we defined the concept of bad
faith as:
"…a breach of a known duty through some motive of interest or ill will." 45
Just months after the promulgation of Lopez, however, came the case of Air France v. Carrascoso, et
al.,46 In Air France, we expounded on Lopez’s definition by describing bad faith as:
"xxx a state of mind affirmatively operating with furtive design or with some motive of self-interest or will
or for ulterior purpose."47
Air France’s articulation of the meaning of bad faith was, in turn, echoed in a number subsequent
cases,48 one of which, is the 2009 case of Balbuena, et al. v. Sabay, et al. 49
In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw, 50 on the other hand, we enunciated one of
the more oft-repeated formulations of bad faith in our case law:
"xxx 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 means breach of a known duty thru some motive or
interest of ill will; it partakes of the nature of fraud." 51
As a testament to its enduring quality, the foregoing pronouncement in Board of Liquidators had been
reiterated in a slew of later cases,52 more recently, in the 2009 case of Nazareno, et al. v. City of
Dumaguete53 and the 2012 case of Aliling v. Feliciano.54
Still, in 1995, the case of Far East Bank and Trust Company v. Court of Appeals 55 contributed the following
description of bad faith in our jurisprudence:
"Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity;xxx."56
The description of bad faith in Far East Bank and Trust Companythen went on to be repeated in subsequent
cases such as 1995’s Ortega v. Court of Appeals, 57 1997’s Laureano Investment and Development Corporation v.
Court of Appeals,58 2010’s Lambert Pawnbrokers v. Binamira59 and 2013’s California Clothing, Inc., v.
Quiñones,60 to name a few.
Verily, the clear denominator in all of the foregoing judicial pronouncements is that the essence of bad faith
consists in the deliberate commission of a wrong. Indeed, the concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere unintentional wrongs resulting from mere simple negligence
or oversight.61
A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is wrong or illegal, and second, that despite such actual or
imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds with such course
of action. Only with the concurrence of these two elements can we begin to consider that the wrong committed
had been done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City RTC and the Court of Appeals held that petitioner was in bad
faith when it paid to Mangondato the rental fees and expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it "allowed" such payment to take place despite the latter’s alleged
knowledge of the existing claim of the Ibrahims and Maruhoms upon the subject land and the issuance ofa TRO
in Civil Case No. 967-93. Hence, the two tribunals claim that petitioner’s payment to Mangondato is ineffective
as to the Ibrahims and Maruhoms, whom they found to be the real owners of the subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court of Appeals erred in their finding of bad faith because they have
overlooked the utter significance of one important fact: that petitioner’s payment to Mangondato of the rental
fees and expropriation indemnity adjudged due for the subject land in Civil Case No. 605-92 and Civil Case No.
610-92, was required by the final and executory decision in the said two cases and was compelled thru a writ of
garnishment issued by the court that rendered such decision. In other words, the payment to Mangondato was
not a product of a deliberate choice on the part of the petitioner but was made only in compliance to the lawful
orders of a court with jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City RTC and of the Court of Appeals, it was not the
petitioner that "allowed" the payment of the rental fees and expropriation indemnity to Mangondato. Indeed,
given the circumstances, the more accurate rumination would be that it was the trial court in Civil Case No. 605-
92 and Civil Case No. 610-92 that ordered or allowed the payment to Mangondato and that petitioner merely
complied with the order or allowance by the trial court. Since petitioner was only acting under the lawful orders
of a court in paying Mangondato, we find that no bad faith can be taken against it, even assuming that
petitioner may have had prior knowledge about the claims of the Ibrahims and Maruhoms upon the subject land
and the TRO issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner
Cannot Be Held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of the RTC and of the Court of Appeals apropos petitioner’s
remaining liability to the Ibrahims and Maruhoms becomes devoid of legal basis. In fact, petitioner’s
previous payment to Mangondato of the rental fees and expropriation indemnity due the subject land
pursuant to the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92 may be considered to
have extinguished the former’s obligation regardless of who between Mangondato, on one hand, and the
Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject land. 62 Either way,
petitioner cannot be made liable to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land, then the obligation by petitioner to pay for the
rental fees and expropriation indemnity due the subject land is already deemed extinguished by the latter’s
previous payment under the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92. This would
be a simple case of an obligation being extinguished through payment by the debtor to its creditor. 63 Under
this scenario, the Ibrahims and Maruhoms would not even be entitled to receive anything from anyone for
the subject land. Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms.
Second. We, however, can reach the same conclusion even if the Ibrahims and Maruhoms turn out to be
the real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be the real owners of the subject land, petitioner’s previous
payment to Mangondato pursuant to Civil Case No. 605-92 and Civil Case No. 610-92—given the absence
of bad faith on petitioner’s part as previously discussed—may nonetheless be considered as akin to a
payment made in "good faith "to a person in "possession of credit" per Article 1242 of the Civil Code that,
just the same, extinguishes its obligation to pay for the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
"Payment made in good faith to any person in possession of the credit shall release the debtor." Article
1242 of the Civil Code is an exception to the rule that a valid payment of an obligation can only be made to
the person to whom such obligation is rightfully owed.64 It contemplates a situation where a debtor pays a
"possessor of credit" i.e., someone who is not the real creditor but appears, under the circumstances, to be
the real creditor.65 In such scenario, the law considers the payment to the "possessor of credit" as valid
even as against the real creditor taking into account the good faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil Code, we find that Mangondato—being the
judgment creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as well as the registered owner of the
subject land at the time 66 —may be considered as a "possessor of credit" with respect to the rental fees
and expropriation indemnity adjudged due for the subject land in the two cases, if the Ibrahims and
Maruhoms turn out to be the real owners of the subject land. Hence, petitioner’s payment to Mangondato
of the fees and indemnity due for the subject land as a consequence of the execution of Civil Case No. 605-
92 and Civil Case No. 610-92 could still validly extinguish its obligation to pay for the same even as against
the Ibrahims and Maruhoms.
Effect of Extinguishment of
Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for the rental fees and expropriation indemnity due the
subject land carries with it certain legal effects:
First. If Mangondato turns out to be the real owner of the subject land, the Ibrahims and Maruhoms would
not be entitled to recover anything from anyone for the subject land.1âwphi1 Consequently, the partial
execution of the decision in Civil Case No. 967-93 that had led to the garnishment of Mangondato’s moneys
in the possession of the Social Security System (SSS) in the amount of ₱2,700,000.00 in favor of the
Ibrahims and Maruhoms, becomes improper and unjustified. In this event, therefore, the Ibrahims and
Maruhoms may be ordered to return the amount so garnished to Mangondato.
Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of the subject land, they may only
recover the rental fees and expropriation indemnity due the subject land against Mangondato but only up to
whatever payments the latter had previously received from petitioner pursuant to Civil Case No. 605-92 and Civil
Case No. 610-92.

Second. At any rate, the extinguishment of petitioner’s obligation to pay for the rental fees and expropriation
indemnity due the subject land negates whatever cause of action the Ibrahims and Maruhoms might have had
against the former in Civil Case No. 967-93. Hence, regardless of who between Mangondato, on one hand, and
the Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject land, the dismissal of
Civil Case No. 967-93 insofar as petitioner isconcerned is called for.

Re: Attorney’s Fees

The dismissal of Civil Case No. 967-93 as against petitioner necessarily absolves the latter from paying
attorney’s fees to the Ibrahims and Maruhoms arising from that case.

WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 24 June2005 and
Resolution dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE. The
Decision dated 16 April 1998 of the Regional Trial Court in Civil Case No. 967-93 is MODIFIED in that petitioner
is absolved from any liability in that case in favor of the respondents Lucman M. Ibrahim, Atty. Omar G.
Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G.
Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G. Maruhom, Acmad G.
Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93 is
DISMISSED as against petitioner.

No costs.

SO ORDERED.
G.R. No. 135043 July 14, 2004
TOWNE & CITY DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and GUILLERMO R. VOLUNTAD (substituted by TOMAS VOLUNTAD and FLORDELIZA
ESTEBAN Vda. De VOLUNTAD) respondents.
Before us is a Petition for Review on Certiorari under Rule 45 assailing the August 12, 1998 Decision1 of the
Court of Appeals, Tenth Division, in CA-G.R. CV No. 50919.
Respondent Guillermo Voluntad (Guillermo) and petitioner Towne & City Development Corporation were both
engaged in the construction business. From 1984 to 1985, Guillermo and petitioner entered into a contract for
the (a) construction of several housing units belonging to or reserved for different individuals; (b) repair of
several existing housing units belonging to different individuals; and (c) repair of facilities, all located at the
Virginia Valley Subdivision, owned and developed by the petitioner. The total contract cost amounted to One
Million Forty One Thousand Three Hundred Fifty Nine (P1,041,359.00) Pesos.
The parties agreed that Guillermo should be paid in full by petitioner the agreed contract cost upon completion
of the project. In 1985, pending completion of the project, Guillermo was allowed by petitioner to occupy, free
of charge, one of its houses at the Virginia Valley Subdivision.
After completing the construction and repair works subject of the contract, Guillermo demanded payment for his
services.
When petitioner failed to satisfy his claim in full, Guillermo filed on April 30, 1990 a Complaint for collection
against petitioner before the Regional Trial Court of Manila (RTC). The case was docketed as Civil Case No. 90-
52880 and raffled to Branch 25 of the RTC. Guillermo alleged that petitioner paid him only the amount
of P69,400.00, leaving a balance of P971,959.00 under the terms of their contract.2
In its Answer with Counter-claims (sic), petitioner averred that it had already paid Guillermo the amount
of P1,022,793.46 for his services and that there was even an overpayment of P58,189.46. Petitioner further
claimed that Guillermo is liable for unpaid rentals amounting to P66,000.00 as of June 1990 for his occupancy of
one of the houses in Virginia Valley Subdivision since 1985. 3
During the pre-trial of the case, the parties agreed to limit the issues to: (1) whether petitioner had paid
Guillermo in full in accordance with their contract; (2) if payment in full had been made by petitioner, whether
there was an overpayment on its part; and (3) whether either or both parties are entitled to attorney's fees. 4
While the case was pending before the trial court, Guillermo passed away. Upon motion of respondents Tomas
Voluntad and Flordeliza Vda. de Voluntad, the trial court issued an Order substituting them as plaintiffs in place
of the deceased Guillermo.5
Guillermo did not adduce evidence, whether testimonial or documentary, as evidence-in-chief in view of the
admissions made by petitioner in its Answer with Counter-claims6 that indeed it entered into a contract with him
and that it was obliged to pay him for his services. Petitioner, for its part, presented as its sole witness Ms.
Rhodora Aguila (Ms. Aguila), its Corporate Secretary, to prove that it paid Guillermo for his services under the
contract. She testified that she personally handed or delivered the cash or check payments to Guillermo, adding
that Guillermo acknowledged payments with his signatures on the vouchers. 7 In rebuttal, Guillermo testified
along with two employees of the Special Security System.
On December 29, 1994, the trial court rendered its Decision, the dispositive portion of which states:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
1. Ordering defendant to pay plaintiff the total sum of P715,228.50 representing defendant's unpaid
balance owing in favor of plaintiff, with 3% interest from the time of filing of the complaint until the full
amount is satisfied;
2. Ordering plaintiff to vacate the house occupied by him belonging to defendant;
3. No pronouncement as to cost and attorney's fees.
SO ORDERED."8
Petitioner filed a Motion for Reconsideration on March 2, 1995, stressing that the lower court erred that it
had not paid Guillermo's claim in full. 9 The trial court denied the motion for lack of merit in its Order dated
April 24, 1995.10
Consequently, on May 3, 1995 petitioner filed its Notice of Partial Appeal to the Court of Appeals insofar as
the Decision ordered it to pay Guillermo the total sum of P715,228.50, which according to the lower court
represented its unpaid balance, with interest thereon.11
On August 12, 1998, the appellate court rendered a Decision affirming the judgment of the lower court.
The dispositive portion reads:
"ACCORDINGLY, finding no reversible error in the decision appealed from dated December 29, 1994, the
same is hereby AFFIRMED in all respects. Costs against defendant-appellant.
SO ORDERED."12
Hence, this Petition.
Petitioner submits that the "Court a quo committed reversible errors of law and/or acted with grave abuse
of discretion" in not considering as proofs of payment the vouchers and other documentary exhibits, and in
ignoring the ruling in Philippine National Bank vs. Court of Appeals,13 although it was cited in the assailed
decisions.14
The alleged errors, however, refer to the appreciation of evidence which the appellate and trial courts
made. As such, they involve questions of fact of which the Court cannot take cognizance of In the case
of Naguiat v. Court of Appeals ,15 the Court said that there is a question of fact when a doubt or difference
arises as to the truth or the falsehood of alleged facts, while there is a question of law when such doubt or
difference refers to what the law is on a certain state of facts.
It must be emphasized that this Court is not a trier of facts, and under Rule 45 of the 1997 Rules of Civil
Procedure, a petition for review to be given due course should raise only questions of law. 16 This rule finds
even greater application when the findings of fact of the trial court were affirmed by the Court of Appeals,
as in this case.17
Neither does the present case fall under any of the recognized exceptions 18 to warrant a review of the
assailed factual findings. Truth to tell, the findings of the Court of Appeals are amply supported by the
evidence on record.
To skirt the procedural obstacle, petitioner insists that the issue of whether a voucher suffices as evidence of
payment is a question of law. Significantly, petitioner claims that the appellate court's failure to consider the
vouchers as proof of payment runs counter to our ruling in Philippine National Bank (PNB) v. Court of Appeals 19
that "the best evidence for proving payment is by evidence of receipts showing the same."
Fundamentally, however, petitioner's point raises a question of fact which is definitely out of place in a petition
for review under Rule 45. The question of whether petitioner's vouchers bearing Guillermo's signature constitute
adequate proof of payment of Guillermo's claim requires an examination of the vouchers and an inquiry into the
circumstances surrounding petitioner's issuance thereof. Such are functions reserved for the trial courts and the
Court of Appeals when reviewing findings of fact by the trial court. They are not functions of this Court.
The ruling in PNB v. Court of Appeals 20 is that while a receipt of payment is the best evidence of the fact of
payment, it is, however, not conclusive but merely presumptive; 21 neither it is exclusive evidence as the fact of
payment may be established also by parole evidence. 22 Contrary to petitioner's stance, the appellate court did
not disregard but instead took into account the ruling in the cited case. This may easily be confirmed by
reviewing the factual predicates on which the ruling was handed down.
A receipt is a written and signed acknowledgment that money has been or goods have been delivered, 26
while a voucher is documentary record of a business transaction. 27
The references to alleged check payments in the vouchers presented by the petitioner do not vest them
with the character of receipts. Under Article 1249 of the Civil Code, 28 payment of debts in money has to be
made in legal tender and the delivery of mercantile documents, including checks, "shall produce the effect
of payment only when they have been cashed, or when through the fault of the creditor they have been
impaired."
From the text of the Civil Code provision, it is clear that there are two exceptions to the rule that payment
by check does not extinguish the obligation. Neither exception is present in this case. Concerning the first,
petitioner failed to produce the originals of the checks after their supposed encashment and even the bank
statements although the supposed payments by check were effected only about 5 years before the filing of
the collection suit. Anent the second exception, the doctrine is that it does not apply to instruments
executed by the debtor himself and delivered to the creditor. 29 Indubitably, that is not the situation in this
case.

In the cited case, private respondent Flores purchased from petitioner PNB and its Manila Pavilion Unit, two (2) Petitioner also relied upon the testimony of its Corporate Secretary, Rhodora Aguila. Again, the issue about
manager's check worth P500,000.00 each, paying a total of P1,000,040.00, the extra P40.00 representing the the credibility of said witness involves a question of fact which is a definite incongruity in petitions for
service charge. PNB issued a receipt for the amount. On the following day, Flores presented the checks at PNB review, as in the case before us. In any event, the Court of Appeals convincingly debunked the testimony. 30
Baguio Hyatt Casino unit, but PNB initially refused to encash the checks. Eventually, it agreed to encash one of
the checks. However, it deferred payment of the other check until after Flores agreed that it be broken down to
All told, the Court finds no reason to disturb the findings of the Court of Appeals which affirmed in toto the
five (5) checks of P100,000.00 each. Moreover, PNB refused to encash one of the five (5) checks until after it
trial court's Decision.
shall have been cleared by its Manila Pavilion Hotel Unit. The PNB Malate Branch, to which Flores made
representations upon his return to Manila, refused to encash the last check. So, Flores filed a case for collection,
plus damages. WHEREFORE, the Petition is DENIED. The assailed Decision of the Court of Appeals is AFFIRMED. Costs
against the petitioner.
PNB admitted that it issued a receipt for P1,000,040.00 but at same time countered that the receipt is not the
best evidence to prove how much Flores actually paid for the purchase of its manager's checks. So, according to SO ORDERED.
PNB, the issue was not what appears on the receipt but how much money Flores paid to PNB which, also
according to PNB, allows the presentation of evidence aliunde.

This Court held:

Although a receipt is not conclusive evidence, in the case at bench, an exhaustive review of the records fails to
disclose any other evidence sufficient and strong enough to overturn the acknowledgment embodied in
petitioner's receipt(as to the amount of money it actually received.) 23

....

Having failed to adduce sufficient rebuttal evidence, petitioner is bound by the contents of the receipt it issued
to Flores. The subject receipt remains to be the primary or best evidence or "that which affords the greatest
certainty of the fact in question."24

In the case at bar, petitioner has relied on vouchers to prove its defense of payment. However, as correctly
pointed out by the trial court which the appellate court upheld, vouchers are not receipts.

It should be noted that a voucher is not necessarily an evidence of payment. It is merely a way or method of
recording or keeping track of payments made. A procedure adopted by companies for the orderly and proper
accounting of funds disbursed. Unless it is supported by an actual payment like the issuance of a check which is
subsequently encashed or negotiated, or an actual payment of cash duly receipted for as is customary among
businessmen, a voucher remains a piece of paper having no evidentiary weight. 25 (Emphasis supplied).
 G.R. No. 211564
BENJAMIN EVANGELISTA, Petitioner
vs.
SCREENEX,1 INC., represented by ALEXANDER G, YU, Respondent
This is a Petition2 for Review on Certiorari seeking to set aside the Decision3 and Resolution4 rendered by the
Court of Appeals (CA) Manila, Fifth Division, in CA-G.R. SP No. 110680.
ANTECEDENT FACTS
The facts as summarized by the CA are as follows:
Sometime in 1991, [Evangelista] obtained a loan from respondent Screenex, Inc. which
issued two (2) checks to [Evangelista]. The first check was UCPB Check No. 275345 for
₱l,000,000 and the other one is China Banking Corporation Check No. BDO 8159110 for
₱500,000. There were also vouchers of Screenex that were signed by the accused
evidencing that he received the 2 checks in acceptance of the loan granted to him.
As security for the payment of the loan, [Evangelista] gave two (2) open-dated checks:
UCPB Check Nos. 616656 and 616657, both pay to the order of Screenex, Inc. From the
time the checks were issued by [Evangelista], they were held in safe keeping together with
the other documents and papers of the company by Philip Gotuaco, Sr., father-in-law of
respondent Alexander Yu, until the former's death on 19 November 2004.
Before the checks were deposited, there was a personal demand from the family for
[Evangelista] to settle the loan and likewise a demand letter sent by the family lawyer. 5
On 25 August 2005, petitioner was charged with violation of Batas Pambansa (BP) Blg. 22 in Criminal Case Nos.
343615-16 filed with the Metropolitan Trial Court (MeTC) of Makati City, Branch 61. 6 The Information reads:
That sometime in 1991, in the City of Makati, Metro Manila, Philippines, a place within the
jurisdiction of this Honorable Court, the above-named accused, did then and there,
willfully, unlawfully and feloniously make out, draw, and issue to SCREENEX INC., herein
represented by ALEXANDER G. YU, to apply on account or for value the checks described
below:
Check No. Date Amount
United Coconut AGR 616656 12-22-04 ₱l ,000,000.00
Planters Bank AGR 616657 12-22-04 500,000.00
said accused well knowing that at the time of issue thereof, said accused did not have
sufficient funds in or credit with the drawee bank for the payment in full of the face
amount of such check upon its presentment which check when presented for payment
within ninety (90) days from the date thereof, was subsequently dishonored by the drawee
bank for the reason "ACCOUNT CLOSED" and despite receipt of notice of such dishonor,
the said accused failed to pay said payee the face amount of said checks or to make
arrangement for full payment thereof within five (5) banking days after receiving notice.
CONTRARY TO LAW.7
Petitioner pleaded not guilty when arraigned, and trial proceeded. 8
THE RULING OF THE METC
The MeTC found that the prosecution had indeed proved the first two elements of cases involving violation
of BP 22: i.e. the accused makes, draws or issues any check to apply to account or for value, and the check
is subsequently dishonored by the drawee bank for insufficiency of funds or credit; or the check would
have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank
to stop payment. The trial court pointed out, though, that the prosecution failed to prove the third element;
i.e. at the time of the issuance of the check to the payee, the latter did not have sufficient funds in, or
credit with, the drawee bank for payment of the check in full upon its presentment. 9 In the instant case,
the court held that while prosecution witness Alexander G. Yu declared that the lawyer had sent a demand
letter to Evangelista, Yu failed to prove that the letter had actually been received by addressee. Because
there was no way to determine when the five-day period should start to toll, there was a failure to
establish prima facie evidence of knowledge of the insufficiency of funds on the part of
Evangelista.10 Hence, the court acquitted him of the criminal charges.
Ruling on the civil aspect of the cases, the court held that while Evangelista admitted to having issued and
delivered the checks to Gotuaco and to having fully paid the amounts indicated therein, no evidence of
payment was presented.11 It further held that the creditor's possession of the instrument of credit was
sufficient evidence that the debt claimed had not yet been paid. 12 In the end, Evangelista was declared
liable for the corresponding civil obligation.13
The dispositive portion of the Decision14 reads:
WHEREFORE, judgment is rendered acquitting the accused BENJAMIN EVANGELISTA
for failure of the prosecution to establish all the elements constituting the offense of
Violation of B.P. 22 for two (2) counts. However, accused is hereby ordered to pay his
civil obligation to the private complainant in the total amount of ONE MILLION FIVE
HUNDRED THOUSAND PESOS (₱l,500,000) plus twelve (12%) percent interest per
annum from the date of the filing of the two sets of Information until fully paid and to
pay the costs of suit.
SO ORDERED.15
THE RULING OF THE RTC
Evangelista filed a timely Notice of Appeal 16 and raised two errors of the MeTC before the Regional Trial
Court (RTC) of Makati City, Branch 147. Docketed therein as Criminal Case Nos. 08-1723 and 08-1724, the
appeal posed the following issues: (1) the lower court erred in not appreciating the fact that the
prosecution failed to prove the civil liability of Evangelista to private complainant; and (2) any civil liability
attributable to Evangelista had been extinguished and/or was barred by prescription. 17
After the parties submitted their respective Memoranda, 18 the R TC ruled that the checks should be taken
as evidence of Evangelista's indebtedness to Gotuaco, such that even if the criminal aspect of the charge
had not been established, the obligation subsisted. 19 Also, the alleged payment by Evangelista was an
affirmative defense that he had the burden of proving, but that he failed to discharge. 20 With respect to the
defense of prescription, the RTC ruled in this wise:
 As to the defense of prescription, the same cannot be successfully invoked in this appeal.
The 10-year prescriptive period of the action under Art. 1144 of the New Civil Code is
computed from the time the right of action accrues. The terms and conditions of the loan
obligation have not been shown, as only the checks evidence the same. It has not been
shown when the loan obligation was to mature such that there is no basis to show or from
which to infer, when the cause of action (non-payment of the loan) which would give the
obligee the right to seek redress for the non-payment of the obligation, accrued. In other
words, the reckoning point of prescription has not been established.
Prosecution witness Alexander G. Yu was not competent to state that the loan was
contracted in 1991 as in fact, Yu admitted that it was a few months before his father-in-
law (Philip Gotuaco) died when the latter told him about accused's failure to pay his
obligation. That was a few months before November 19, 2004, date of death of his father-
in-law.
At any rate, the right of action in this case is not upon a written contract, for which
reason, Art. 1144, New Civil Code, on prescription does not apply. 21
In a Decision22 dated 18 December 2008, the R TC dismissed the appeal and affirmed the MeTC decision in
toto.23 The Motion for Reconsideration24 was likewise denied in an Order25 dated 19 August 2009.
THE RULING OF THE CA
Evangelista filed a petition for review before the CA insisting that the lower court erred in finding him liable to
26
pay the sum with interest at 12% per annum from the date of filing until full payment. He further alleged that
witness Yu was not competent to testify on the loan transaction; that the insertion of the date on the checks
without the knowledge of the accused was an alteration that avoided the checks; and that the obligation had
been extinguished by prescription.27
Screenex, Inc., represented by Yu, filed its Comment. 28 Yu claimed that he had testified on the basis of his
personal dealings with his father-in-law, whom Evangelista dealt with in obtaining the loan. He further claimed
that during the trial, petitioner never raised the competence of the witness as an issue. 29 Moreover, Yu argued
that prescription set in from the accrual of the obligation; hence, while the loan was transacted in 1991, the
demand was made in February 2005, which was within the 10-year prescriptive period. 30 Yu also argued that
while Evangelista claimed under oath that the loan had been paid in 1992, he was not able to present any proof
of payment.31 Meanwhile, Yu insisted that the material alteration invoked by Evangelista was unavailing, since
the checks were undated; hence, nothing had been altered. 32 Finally, Yu argued that Evangelista should not be
allowed to invoke prescription, which he was raising for the first time on appeal, and for which no evidence was
adduced in the court of origin.33
The CA denied the petition.34 It held that (1) the reckoning time for the prescriptive period began when the
instrument was issued and the corresponding check returned by the bank to its depositor; 35 (2) the issue of
prescription was raised for the first time on appeal with the RTC; 36 (3) the writing of the date on the check
cannot be considered as an alteration, as the checks were undated, so there was nothing to change to begin
with;37 (4) the loan obligation was never denied by petitioner, who claimed that it was settled in 1992, but failed
to show any proof of payment.38 Quoting the MeTC Decision, the CA declared:
[t]he mere possession of a document evidencing an obligation by the person in whose
favor it was executed, merely raises a presumption of nonpayment which may be
overcome by proof of payment, or by satisfactory explanation of the fact that the
instrument is found in the hands of the original creditor not inconsistent with the fact of
payment.39
The dispositive portion reads:
WHEREFORE, premises considered, the petition is DENIED. The assailed August 19,
2009 Order of the Regional Trial Court, Branch 147, Makati City, denying petitioner's
Motion for Reconsideration of the Court's December 18, 2008 Decision in Crim. Case
Nos. 08-1723 and 08- 1724 are AFFIRMED.
SO ORDERED.40
Petitioner filed a Motion for Reconsideration, 41 which was similarly denied in a Resolution 42 dated 27
February 2014.
Hence, this Petition,43 in which petitioner contends that the lower court erred in ordering the accused to
pay his alleged civil obligation to private complainant. In particular, he argues that the court did not
consider the prosecution's failure to prove his civil liability to respondent, and that any civil liability there
might have been was already extinguished and/or barred by prescription. 44
Meanwhile, respondent filed its Comment, 45 arguing that the date of prescription was reckoned from the
date of the check, 22 December 2004. So when the complaint was filed on 25 August 2005, it was
supposedly well within the prescriptive period of ten (10) years under Article 1144 of the New Civil Code. 46
OUR RULING
With petitioner's acquittal of the criminal charges for violation of BP 22, the only issue to be resolved in this
petition is whether the CA committed a reversible error in holding that petitioner is still liable for the total
amount of ₱l.5 million indicated in the two checks.
We rule in favor of petitioner.
A check is discharged by any other
act which will discharge a simple
contract for the payment of money.
In BP 22 cases, the action for the corresponding civil obligation is deemed instituted with the criminal
action.47 The criminal action for violation of BP 22 necessarily includes the corresponding civil action, and
no reservation to file such civil action separately shall be allowed or recognized. 48
The rationale for this rule has been elucidated in this wise: Generally, no filing fees
are required for criminal cases, but because of the inclusion of the civil action in
complaints for violation of B.P. 22, the Rules require the payment of docket fees upon
the filing of the complaint. This rule was enacted to help declog court dockets which
are filled with B.P. 22 cases as creditors actually use the courts as collectors. Because
ordinarily no filing fee is charged in criminal cases for actual damages, the payee uses
the intimidating effect of a criminal charge to collect his credit gratis and sometimes.
upon being paid, the trial court is not even informed thereof. The inclusion of the civil
action in the criminal case is expected to significantly lower the number of cases filed
before the courts for collection based on dishonored checks. It is also expected to
expedite the disposition of these cases. Instead of instituting two separate cases, one
for criminal and another for civil, only a single suit shall be filed and tried. It should
be stressed that the policy laid down by the Rules is to discourage the separate filing
of the civil action. The Rules even prohibit the reservation of a separate civil action,
 which means that one can no longer file a separate civil case after the criminal complaint
is filed in court. The only instance when separate proceedings are allowed is when the civil
action is filed ahead of the criminal case. Even then, the Rules encourage the consolidation
of the civil and criminal cases. We have previously observed that a separate civil action for
the purpose of recovering the amount of the dishonored checks would only prove to be
costly, burdensome and time-consuming for both parties and would further delay the final
disposition of the case. This multiplicity of suits must be avoided. 49 (Citations omitted)
This notwithstanding, the civil action deemed instituted with the criminal action is treated as an "independent
civil liability based on contract."50
By definition, a check is a bill of exchange drawn on a bank 'payable on demand. 51 It is a negotiable instrument -
written and signed by a drawer containing an unconditional order to pay on demand a sum certain in money. 52 It
is an undertaking that the drawer will pay the amount indicated thereon. Section 119 of the NIL, however,
states that a negotiable instrument like a check may be discharged by any other act which will discharge a
simple contract for the payment of money, to wit:
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made
or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in
his own right. (Emphasis supplied)
A check therefore is subject to prescription of actions upon a written contract. Article 1144 of the Civil Code
provides:
Article 1144. The following actions must be brought within ten years from the time the
right of action accrues:
1) Upon a written contract;
2) Upon an obligation created by law;
3) Upon a judgment. (Emphasis supplied)
Barring any extrajudicial or judicial demand that may toll the 10-year prescription period and any evidence which
may indicate any other time when the obligation to pay is due, the cause of action based on a check is reckoned
from the date indicated on the check.
If the check is undated, however, as in the present petition, the cause of action is reckoned from the date of the
issuance of the check. This is so because regardless of the omission of the date indicated on the check, Section
1753 of the Negotiable Instruments Law instructs that an undated check is presumed dated as of the time
of its issuance.
While the space for the date on a check may also be filled, it must, however, be filled up strictly in
accordance with the authority given and within a reasonable time. 54 Assuming that Yu had authority to
insert the dates in the checks, the fact that he did so after a lapse of more than 10 years from their
issuance certainly cannot qualify as changes made within a reasonable time.
Given the foregoing, the cause of action on the checks has become stale, hence, time-barred. No written
extrajudicial or judicial demand was shown to have been made within 10 years which could have tolled the
period. Prescription has indeed set in.
Prescription allows the court to
dismiss the case motu proprio.
We therefore have no other recourse but to grant the instant petition on the ground of prescription. Even if
that defense was belatedly raised before the RTC for the first time on appeal from the ruling of the Me TC,
we nonetheless dismiss the complaint, seeking to enforce the civil liability of Evangelista based on the
undated checks, by applying Section 1 of Rule 9 of the Rules of Court, to wit:
Section 1. Defenses and objections not pleaded. - Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived. However,
when it appears from the pleadings or the evidence on record that the court has no
jurisdiction over the subject matter, that there is another action pending between the
same parties for the same cause, or that the action is barred by a prior judgment or
by statute of limitations, the court shall dismiss the claim.
While it was on appeal before the RTC that petitioner invoked the defense of prescription, we find that the
pleadings and the evidence on record indubitably establish that the action to hold petitioner liable for the
two checks has already prescribed.
The delivery of the check produces
the effect of payment when through
the fault of the creditor they have
been impaired
It is a settled rule that the creditor's possession of the evidence of debt is proof that the debt has not been
discharged by payment.55 It is likewise an established tenet that a negotiable instrument is only a substitute
for money and not money, and the delivery of such an instrument does not, by itself, operate as
payment.56 Thus, in BPI v. Spouses Royeca,57 we ruled that despite the lapse of three years from the time
the checks were issued, the obligation still subsisted and was merely suspended until the payment by
commercial document could actually be realized.58
However, payment is deemed effected and the obligation for which the check was given as conditional
payment is treated discharged, if a period of 10 years or more has elapsed from the date indicated on the
check until the date of encashment or presentment for payment. The failure to encash the checks within a
reasonable time after issue, or more than 10 years in this instance, not only results in the checks becoming
stale but also in the obligation to pay being deemed fulfilled by operation of law.
Art. 1249 of the Civil Code specifically provides that checks should be presented for payment within a
reasonable period after their issuance, to wit:
 Art. 1249. 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 the
abeyance. (Emphasis supplied)

This rule is similarly stated in the Negotiable Instruments Law as follows:

Sec. 186. Within what time a check must be presented. - A check must be presented for
p:iyment within a reasonable time after its issue or the drawer will be discharged from
liability thereon to the extent of the loss caused by the delay. (Emphasis supplied)

These provisions were the very same ones we cited when we discharged a check by reason of the creditor's
unreasonable or unexplained delay in encashing it. In Papa v. Valencia,59 the respondents supposedly paid the
petitioner the purchase price of the lots in cash and in check. The latter disputed this claim and argued that he
had never encashed the checks, and that he could no longer recall the transaction that happened 10 years
earlier. This Court ruled:

Granting that petitioner had never encashed the check, his failure to do so for more than
ten (10) years undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom
it is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. It has, likewise, been held that if
no presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the
Civil Code under which payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this provision and
if its no-payment is caused by his negligence, payment will be deemed effected and the
obligation for which the check was given as conditional payment will be
discharged.60 (Citations omitted and emphasis supplied)

Similarly in this case, we find that the delivery of the checks, despite the subsequent failure to encash them
within a period of 10 years or more, had the effect of payment. Petitioner is considered discharged from his
obligation to pay and can no longer be pronounced civilly liable for the amounts indicated thereon.

WHEREFORE, the instant Petition is GRANTED. The Decision dated 1 October 2013 and Resolution dated 27
February 2014 in CA-G.R. SP No. 110680 are SET ASIDE. The Complaint against petitioner is hereby
DISMISSED.

SO ORDERED.
NOEMI M. CORONEL, petitioner, 3. To pay the costs of the suit. SO ORDERED.
vs.
ENCARNACION C. CAPATI, respondent.
On appeal to the Court of Appeals, petitioner was unsuccessful as the appellate court affirmed the ruling of
the trial court.
On appeal is the Court of Appeals’ May 31, 2001 Decision 1 in CA-G.R. CV No. 58060 and April 8, 2003
Resolution,2 affirming the April 30, 1997 Decision 3 of the Regional Trial Court of Guagua, Pampanga in Civil Case
Petitioner’s Motion for Reconsideration8 was denied.
No. G-2549 which found petitioner liable to pay respondent its loan obligation, plus attorney's fees and costs of
suit.
Hence, this appeal.9
The facts are as follows:
Petitioner denied contracting the two loans in the amounts of P121,000.00 and P363,000.00 from
respondent. She alleged that the Metrobank checks representing the foregoing amounts were two of
Petitioner contracted two loans from respondent on September 4, 1992 and October 25, 1992. The first
several checks she issued in favor of respondent for a loan amounting to P1.101 million which she has fully
amounted to P121,000.00 payable on or before February 4, 1993 and the second amounted to P363,000.00
paid. She claimed that despite full payment, respondent still deposited the two checks because of a dispute
payable on or before March 25, 1993. In return, petitioner issued respondent two checks: Metrobank Check No.
between them arising from respondent’s demand for exorbitant and additional interest on the P1.101
1146784 dated September 4, 1992 for the first loan and Metrobank Check No. 114679 5 dated October 25, 1992
million loan.
for the second loan. The two loans are embodied in two handwritten instruments. The first one reads:

Petitioner alleged further that there were instances when respondent asked her to affix her signature on
P121,000. 00/xx
blank sheets of paper¸ thereby implying that the contents of Exhibits "A-1" and "B-1," containing the loan
agreements were written by respondent on sheets of paper signed in advance by petitioner.
Received the amount of one hundred twenty one thousand pesos only P121,000. 00/xx from Mrs. Encarnacion C.
Capati & payable in 5 months from Sept. 4, 1992 & said loan is secured by Metrobank (Guagua Branch) and with
In detail, petitioner contended that on May 20, 1992, respondent informed her that her loan obligation
check # 114678.
added to P980,000.00 plus interest of P121,000.00, totaling P1,101,000.00, to which computation
petitioner agreed. At the same time, respondent also asked her to sign a document entitled " Pacto de
(signed) Retro Sale"10 with the assurance that it will serve only as "security." On June 18, 1992, petitioner paid
Noemi M. Coronel6 respondent P66,000.00 in cash.11 Before the end of the redemption period under the pacto de retro sale
which was on August 20, 1992, petitioner, expecting that she will be unable to pay the full amount on due
date, issued respondent two checks: Metrobank check no. 114668 12 in the amount of P980,000.00 dated
The second instrument, in like tenor, reads as follows: August 20, 1992 and Metrobank check no. 114669 13 in the amount of P121,000.00 dated September 4,
1992. Later, respondent returned these two Metrobank checks numbered 114668 and 114669 to petitioner.
Petitioner replaced these checks with Metrobank check no. 114675 14 in the same amount of P980,000.00
Received the amount of three hundred sixty three thousand pesos only P363,000. 00/xx from Mrs. Encarnacion C. and likewise dated August 20, 1992, and Metrobank check no. 114678, 15 again in the same amount
Capati & payable from Oct. 25, 1992 (5 months) & said loan is secured with Metrobank check # 114679 of P121,000.00 and likewise dated September 4, 1992.
(Guagua Branch).

On September 7, 1992, petitioner paid respondent another P40,000.00 in the form of Metrobank check no.
(signed) 114700.16 And on November 13, 1992, petitioner paid respondent P1M, evidenced by a handwritten
Noemi M. Coronel7 receipt17 signed by respondent. The receipt reads as follows:

Petitioner failed to pay her loans upon maturity despite repeated demands from respondent. The two checks she Received from Miss Noemi M. Coronel the Bank of Philippine Island Cashier’s Check No. 019877 dated Nov.
issued were dishonored when presented for payment on February 16, 1993 and April 7, 1993. Hence, on 13, 1992 for ONE MILLION (P1,000,000.00) pesos as partial payment of the loan from Mrs. Encarnacion C.
September 14, 1993, respondent filed a complaint for sum of money and damages with attachment against Capati, & the balance will be paid on or before Dec. 15, 1992.
petitioner before the Regional Trial Court of Guagua, Pampanga.

(signed)
On April 30, 1997, the trial court ruled in favor of respondent, ordering petitioner to pay, as follows:

ENCARNACION CAPATI
WHEREFORE, premises considered, judgment is rendered ordering defendant: LENDER-MORTGAGEE

1. To pay plaintiff the amount of P484,000.00 as principal obligation plus 12% interest per annum computed November 13, 1992
from the time of the filing of this case up to the time it is fully paid;

Respondent returned to petitioner check no. 114675 18 in the amount of P980,000.00 dated August 20,
2. To pay plaintiff 10% of the principal obligation of P484,000.00 as attorney’s fees; 1992, upon payment of petitioner to respondent of the cashier’s check worth P1M. Petitioner also issued
another postdated check – Metrobank Check No. 114679 19 in the amount of P363,000.00 dated October 25, fact, petitioner’s total loan obligation to respondent has reached over millions of pesos. Petitioner has
1992 allegedly for interest of her obligation.20 transacted business with respondent several times. Among others, they include transactions involving
a pacto de retro sale which is the subject of another pending case between the parties and loans
amounting to P2M and P1M, secured by deeds of real estate mortgage and chattel mortgage, respectively.
Based on petitioner’s own computation, her remaining balance amounted to only P50,000.00. Thus, on
As the lower court correctly pointed out, petitioner apparently knows how to take care of her business
December 1, 1992, petitioner issued respondent a Metrobank Check No. 147653 in the amount
dealings. Thus, on October 21, 1992 and February 22, 1993, she caused the execution of two documents
of P50,000.00.21 On January 4, 1993, she allegedly ordered Metrobank Guagua, through a letter, 22 to stop
entitled "Discharge of Real Estate Mortgage"27 and "Discharge of Chattel Mortgage,"28 respectively, when
payment of the checks she issued respondent for P121,000.00 and P363,000.00. According to petitioner, these
she paid respondent the full consideration of the promissory notes of P2M and P1M, wherein the mortgages
two checks were not returned by respondent because the latter claimed that she has not completed the
served as security for the payment of said notes. 29 Similarly, petitioner, upon payment of P1M to
payment of interest yet.
respondent on November 13, 1992, retrieved the Metrobank Check No. 114675 30 dated August 20, 1992
which she issued as security to respondent. Interestingly, in the case of the two checks subject matter of
In sum, petitioner alleged that her total obligation is computed, as follows: this litigation, petitioner did not even demand their return from respondent, notwithstanding her claim that
she has paid in full her loan obligation. All she presented was a letter 31 ordering Metrobank Guagua to stop
payment of the checks without proof that it has been received by, nor actually sent to Metrobank Guagua.
P 980,000.00 ……………… principal obligation
176,000.00 ……………… 3% monthly interest from Again, we reiterate the rule that when the existence of a debt is fully established by the evidence contained
P1,156,000.00 May to Nov 1992 in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor
who offers such defense to the claim of the creditor. 32 Even where respondent-creditor who was plaintiff in
the lower court, alleges non-payment, the general rule is that the onus rests on the petitioner-debtor who
which she claimed to have paid, as follows: was defendant in the lower court, to prove payment, rather than on the plaintiff-creditor to prove non-
payment.33 The debtor has the burden of showing with legal certainty that the obligation has been
discharged by payment.34 This, petitioner failed to do.
P 66,000.00 ……………… June 18, 1992
40,000.00 ……………… September 7, 1992 IN VIEW THEREOF, petitioner’s appeal is DENIED. The Court of Appeals’ May 31, 2001 Decision in CA-G.R.
1,000,000.00 ……………… November 13, 1992 CV No. 58060 and April 8, 2003 Resolution, affirming the April 30, 1997 Decision of the Regional Trial Court
of Guagua, Pampanga in Civil Case No. G-2549, are AFFIRMED.
50,000.00 ……………… December 1, 1992
P1,156,000.00 SO ORDERED.

We find petitioner’s contentions unmeritorious.

The existence of petitioner’s obligation is supported by documentary evidence. Exhibits "A-1" and "B-1" are
written instruments containing the loan agreements. The signature of petitioner as debtor appears in both
instruments. Petitioner does not deny she owns these signatures. These exhibits are the best evidence of the
subject obligation. Petitioner’s contrary evidence has no leg to stand on. At first, she claims that her total loan
obligation amounted to P1.101 million, the amount of consideration stated in the document entitled " Pacto de
Retro Sale." At the end, however, she came up with a different computation of her obligation as totaling P1.156
million, without any document to support her allegation. The discrepancy between the two computations is not
explained. The age old rule of evidence is that oral testimony as to a certain fact, depending as it does on
human memory that is most often than not, momentary and fleeting, is not as reliable as written or
documentary evidence.23 We are, thus, more convinced that Exhibits "A-1" and "B-1" express the true
agreement of the parties, contrary to the oral testimony of petitioner that those amounts are part of a loan
amounting to P1.101 million which she has fully paid. The latter appears to be another loan, distinct from the
one involved in the case at bar. 24 Incidentally, the pacto de retro sale referred to by petitioner, is the subject
matter of another litigation between the same parties pending with the same court. 25

Petitioner tries to escape responsibility by testifying that it has been respondent’s practice to ask her to sign
blank sheets of paper. She wants the court to believe that she did not know of the contents of Exhibits "A-1"
and "B-1," and that these documentary evidence could have been one of those blank sheets of paper that
respondent has asked her to sign. We find this tale unacceptable, absent any form of duress or intimidation
from respondent, which petitioner does not even allege. Time and again, we have held that one who is of age
and a businesswise is presumed to have acted with due care and to have signed the documents in question with
full knowledge of its contents and consequences. 26 Petitioner is not one ignorant, illiterate person who could be
easily duped into signing blank sheets of papers. She has borrowed large sums of money from respondent. In
G.R. No. 124554 December 9, 1997 Sometime thereafter, the trial court rendered decisions in Civil Case Nos. 9556 (interpleader) and C-11836
(quieting of title). These decisions were appealed to the Court of Appeals, and the appeals were
consolidated.
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.
COURT OF APPEALS and NORTH PHILIPPINE UNION MISSION OF THE SEVENTH DAY ADVENTIST, respondents. The appellate court rendered judgment in the consolidated case on December 17, 1991 as follows: (a) the
trial court's decision in Civil Case No. 9556 was affirmed insofar as it dismissed the claims of the
intervenors, including the Maysilo Estate, and the titles of NPUM to the subject parcel of land were declared
This case if the derivative of G.R. No. 73794, which was decided by the Second Division of this Court on
valid; and (b) the trial court's decision in Civil Case No. C-11836 in favor of the Singson heirs was reversed
September 19, 1988.1
and set aside.7

The antecedents are as follows:2

Petitioner EGMPC and private respondent NPUM entered into a Land Development Agreement dated October 6,
1976. Under the agreement, EGMPC was to develop a parcel of land owned by NPUM into a memorial park
subdivided into lots. The parties further agreed —
(d) THAT the FIRST PARTY shall receive forty (40%) percent of the gross collection less Perpetual Care Fees
(which in no case shall exceed 10% of the price per lot unless otherwise agreed upon by both parties in writing)
or Net Gross Collection (NGC) from this project. This shall be remitted monthly by the SECOND PARTY in the
following manner: (i) Forty (40%) percent of the NGC, plus (ii) if it becomes necessary for the FIRST PARTY to
vacate the property earlier than two years from the date of this agreement, at the option of the FIRST PARTY,
an additional amount equivalent to twenty (20%) percent of the NGC as cash advance for the first four (4) years
with interest at twelve (12%) percent per annum which cash advance shall be deductible out of the proceeds
from the FIRST PARTY's 40% from the 5th year onward. The SECOND PARTY further agrees that if the FIRST
PARTY shall desire to have its projected receivables collected at the 5th year, the SECOND PARTY shall assist in
having the same discounted in advance.
The P1.5 million initial payment mentioned in the Deed of Absolute Sale, covering the first phase of the project,
shall be deducted out of the proceeds from the FIRST PARTY's 40% at the end of the 5th year. Subsequent
payments made by the SECOND PARTY on account of the stated purchase price in said Deed of Absolute Sale
shall be charged against what is due to the FIRST PARTY under this LAND DEVELOPMENT AGREEMENT. 3
From the consolidated decision, the Singson heirs, Maysilo Estate and EGMPC each filed with this Court
their petitions for review on certiorari. The petition filed by the Singson heirs docketed as G.R. No. 103247-
48 was denied for failure to comply with Circular No. 28-91, 8 and entry of judgment made on July 27, 1992
G.R. No. 105159 filed by the Maysilo Estate was denied for failure of petitioner to raise substantial legal
issues,9 and entry of judgment made on August 19, 1992. G.R. Nos. 103230-31 filed by EGMPC was denied
for failure to comply with Circular No. 19-91, 10 and entry of judgment made on July 20, 1993. EGMPC's
other petition, this time under Rule 65, docketed as G.R. Nos. 107646-47 was dismissed for having been
filed out of time and for lack of merit.
Following these, the Court, through the Third Division, issued a Resolution dated December 1, 1993 in G.R.
No. 73794, thus:
WHEREFORE, considering that the ownership of the property in dispute has now been settled with finality,
the Court sees no further legal obstacle in carrying out the respective covenants of the parties to the Land
Development Agreement. . . In respect to the mutual accounting required to determine the remaining
accrued rights and liabilities of said parties, the case is hereby remanded to the Court of Appeals for proper
determination and disposition.
All other incidental motions involving G.R. No. 73794, still pending with this Court, are hereby, declared
MOOT and are NOTED WITHOUT ACTION.11

In compliance with the Supreme Court resolution, the Court of Appeals proceeded with the disposition of
Later, two claimants of the parcel of land surfaced — Maysilo Estate and the heirs of a certain Vicente Singson
the case, docketed therein as CA G.R. SP No. 04869, and required the parties to appear at a scheduled
Encarnacion. EGMPC thus filed an action for interpleader against Maysilo Estate and NPUM, docketed as Civil
hearing on June 16, 1994, "with counsel and accountants, as well as books of accounts and related
Case No. 9556 before the Regional Trial Court of Kalookan City, Branch 120. The Singson heirs in turn filed an
records,' to determine the remaining accrued rights and liabilities of said
action for quieting of title against EGMPC and NPUM, docketed as Civil Case No. C-11836 before Branch 122 of
parties."12
the same court.

Citing the following provision of the land development agreement:

From these two cases, several proceedings ensued. One such case, from the interpleader action, culminated in
the filing and subsequent resolution of G.R. No. 73794. In G.R. No 73794, EGMPC assailed the appellate court's
resolution requiring "petitioner Eternal Gardens [to] deposit whatever amounts are due from it under the Land (e) THAT the SECOND PARTY shall keep proper books and accounting records of all transactions affecting
Development Agreement with a reputable bank to be designated by the respondent court." 4 the sale of said memorial lots, which records shall be open for inspection by the FIRST PARTY at any time
during usual office hours. The SECOND PARTY shall also render to the FIRST PARTY a monthly accounting
report of all sales and cash collections effected the preceding month. It is also understood that all financial
In the Decision of September 19, 1988, the court ruled thus:
statements shall be subject to annual audit by a reputable external accounting firm which should be
acceptable to the FIRST PARTY.13
PREMISES CONSIDERED, (a) the petition is DISMISSED for lack of merit: (b) this case (together with all the
claims of the intervenors on the merits) is REMANDED to the lower court for further proceedings; and (c) the
the appellate court required EGMPC to produce at the scheduled hearings the following documents:
Resolution of the Third Division of this Court of July 8, 1987 requiring the deposit by the petitioner (see footnote
6)5 of the amounts contested in a depository bank STANDS (the Motion for Reconsideration thereof being
hereby DENIED for reasons already discussed) until after the decision on the merits shall have become final and (a) statements of monthly gross income from the year 1981, supported by copies of the
executory. Entry of judgment was made on April 24, 1989.6 contracts/agreements of the sale of lots to buyers/customers; and
(b) summary statements, by month, of the forty per cent (40%) share in the "net gross" income under the land A-6 Machine copy of Assumptions to Projected Cash Flow and Income Statements prepared by EGMPC with
development agreement between the parties.14 assumptions that the 52,000 memorial lots would be sold and that 15% of total sales per year are cash
sales and 85% are on installment and that installment sales are payable over a period of 60 moths at 12%
interest per annum.
The accounting of the parties' respective obligations was referred to the Court's Accountant, Mrs. Carmencita
Angelo, with the concurrence of the parties, to whom the documents were to be submitted. 15
A-7 Formula for Computation of Interest Income for Lots Sold on Installment.
A-8 Sales Price Analysis based on Lawn Class Memorial Lots for the period 1978 to 1988, inclusive.
NPUM prepared and submitted a Summary of Sales and Total Amounts Due based on the following documents it
A-8a Price list issued by EGMPC effective December 1, 1977.
likewise submitted to the court.16
A-9 Computation of interest due for the use of NPUM share.
A-9a Letter dated April 11, 1983 of Alfonso P. Roda, President of PUC of NPUM showing summary of gross
A-1 Land Development Agreement executed between NPUM and EGMPC on October 6, 1976. collections from memorial lots sales starting January 1978 up to June 1982, inclusive, per computation
given to PUC by EGMPC.
A-9b Are validating documents consisting of accounting ledgers
A-2 Submittal of requirements filed by EGMPC to the Securities and Exchange Commission dated July 26, 1976 A-9c in support of the computations given by EGMPC to PUC
re: its application to develop, sell and maintain a first class private cemetery part situated in Baesa, Kalookan A-9d as mentioned in Dr. Roda's Letter dated April 11, 1983.
City on the 23 has. property of PUC of NPUM. EGMPC's application calls for the development of 31,326 lawn type A-10 Promissory Note of EGMPC dated April 6, 1976 issued to NPUM for a loan of P720,000 for which
memorial lots for underground and above ground interment, and 20,808 garden and family/estates memorial EGMPC agreed to pay 12% interest per annum.
lots for above ground interment, or a total of 52,134 memorial lots. B Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
B-1 effective February 3, 1981.
A-3 EGMPC Daily Sales Report which shows that from 1978, 1979, 1980 and 1981 EGMPC has sold 19,237 C Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
memorial lots with gross sales amounting to P52,421,879.70. C-1 effective March 15, 1982.
C-2
D- Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3a Machine copy of EGMPC Daily Sales Report dated December 29, 1979 showing that in 1978 it sold 2,805 D-1 effective February 18, 1983.
memorial lots valued at P5591,716.40 and in 1979 it sold 5,503 memorial lots valued at P11,943,631.00. D-2
E Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3a-1 Weekly Sales Report of EGMPC corresponding to the period December 26 to 31, 1979, showing E-1 effective January 23, 1984.
cumulatively as of said date it has sold a total of 5,503 memorial lots from January 1 to December 29, 1979. E-2
F Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
F-1 effective July 9, 1984.
A-3a-2 Sales Report of EGMPC for the period February 12 to 18, 1980. F-2
G Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3a-4 Letter of Gabriel O. Vida, Executive Vice President and General Manager of EGMPC, dated April 9, 1980, G-1 effective March 1, 1985.
to Pastor Bienvenido Capuli stating among others that for the year 1978, EGMPC has sold 2,805 memorial lots G-2
and in the first quarter of 1980 from January 1 to April 2, it has sold 2,418 memorial lots, for a total gross sales H Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective July 1, 1987.
of 10,730 memorial lots. I Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective January 4, 1989.
J Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective August 2, 1989.
K Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3b EGMPC Daily Sales Report which show that from 1978 up to December 9, 1980 it has sold a total of 15,253 K-1 effective February 4, 1990.
memorial lots with sales value of P38,085,299.40. L Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective February 2, 1991.
A-3b-1 Are supporting sales records and/or weekly sales report of EGMPC M Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3b-2 in relation to Exhibit "A-3b." M-1 effective October 2, 1991.
A-3b-3 N Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
A-3b-4 N-1 effective February 5, 1992.
A-3b-5 O Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective October 9, 1992.
A-3b-6 P Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective January 15, 1993.
A-3b-7 Q Price List of Memorial Lots of HIMLAYANG PILIPINO, INC. effective February 16, 1993.
R Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
R-1 effective March 16, 1993.
A-4 Audited Financial Statement of EGMPC for 1985 which it filed with the Securities and Exchange Commission
S Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
on April 16, 1986 pursuant to the reportorial requirements of the SEC, with accompanying balance sheet and
S-1 effective September 15, 1993.
statement of income and expenses, consisting of five (5) pages.
T Price List of Memorial Lots of MANILA MEMORIAL PARK
T-1 effective January 1, 1985.
A-5 Actual Gross Profit Rate of EGMPC for the year 1985 which shows that it sold 3,623 memorial lots valued at T-2
P25,299,601.20. T-3
T-4
U Price List of Memorial Lots of MANILA MEMORIAL PARK
U-1 effective June 1, 1991.
U-2
U-3
U-4
V Price List of Memorial Lots of MANILA MEMORIAL PARK
V-1 effective November 2, 1991.
V-2
V-3
V-4
W Price List of Memorial Lots of HOLY CROSS MEMORIAL
W-1 PARK effective December 1, 1987.
W-2
W-3
It appears that EGMPC did not submit any document whatsoever to aid the appellate court in its mandated task.
Thus, in a Resolution dated January 19, 1995, the appellate court declared.
. . . (1) that Eternal Gardens Memorial Park Corporation has waived its right to present the records and
documents necessarily for accounting, which records they were specifically required to preserve under the
parties' Land Development Agreement, and (2) that it will now proceed "to the mutual accounting required to
determine the remaining accrued rights and liabilities of the said parties . . ." ordered by the Supreme Court in
its Resolution of December 1, 1993 (p. 7, rec.), and that the Court will proceed to do what it is required to do on
the basis of the documents submitted by the North Philippine Union Mission of the Seventh Day Adventists
only.17
Ms. Angelo submitted her Report dated January 31, 1995, to which the appellate court required the parties to
comment on.18
EGMPC took exception to the appellate court's having considered it to have waived its right to present
documents.19 Considering EGMPC's arguments, the court set a hearing date where NPUM would present its
documents "according to the Rules [of Court], and giving the private respondent [EGMPC] the opportunity to
object thereto."20
Subsequently, NPUM asked for and the appellate court issued a subpoena duces tecum and subpoena ad
testificandum to EGMPC's President, Mr. Gabriel O. Vida requiring him to produce the following documents.
1. Copies of Deeds of Sale corresponding to each memorial lot sold subject of the Land Development Agreement
between the parties;
2. Lists of all memorial lots sold under or affecting the said Land Development Agreement with an indication of
the types/kinds of memorial lots and the corresponding prices at which each was sold and the dates when each
lot was sold;
3. Lists of all the owners of the memorial lots affected by the Land Development Agreement;
4. Copies of all the annual audits made by the external accounting firm pursuant to provision (a) of the Land
Development Agreement.
5. Copies of all audited financial statements of ETERNAL from 1978 to the present;
6. Copies of all monthly accounting reports of all sales and cash collections regarding all the memorial lots
sold under the Land Development Agreement pursuant to provision (e) of the said Land Development
Agreement;
7. The name/s of the Depository/Trustee Bank/s which acted as the depository/trustee of funds collected
by ETERNAL pursuant to provision (f) of the subject Land Development Agreement.
8. All other accounting books and records on all transactions affecting all the memorial lots covered under
the Land Development Agreement.
9. List of all the corporate officers and employees of ETERNAL from 1975 up to the present whose duties
and responsibilities involved the recording of all sales and other transactions and the safekeeping of such
records relating to the sale of the memorial lots subject of the Land Development Agreement. 21
NPUM also filed a Request for Admission of the documents it had earlier submitted to the Court annexed to
the Summary of Sales and Total Amounts Due, addressed to Mr. Vida. 22 EGMPC, however, filed a Denial to
the Request for Admission, alleging that it was without knowledge or information of the documents, except
for the Land Development Agreement of October 6, 1976.23
NPUM then reiterated its request for and was granted by the appellate court, a subpoena duces tecum and
subpoena ad testificandum, this time addressed to the Chief of the Records Division of EGMPC. 24 NPUM
further filed a Motion for Production, Inspection and Photocopying of Documents and Books of Accounts of
EGMPC, in particular:
1. Master Development and/or Operational Plan of Eternal Gardens for Memorial Park at Baesa, Metro
Manila subject of the Land Development Agreement.
2. Inventory of memorial lots developed and sold by Eternal under the Land Development Agreement and
the type of memorial lots developed and sold, i.e., whether lawn type, family estate type, garden estate
type and the number of each type developed and sold.
3. List of buyers and owners of memorial lots sold under the Land Development Agreement and the
corresponding sales contracts.
4. Records of number of memorial lots sold on installment terms, and those sold on cash basis.
5. Sales and marketing records as to the number of memorial lots effected by the Land Development
Agreement sold in each of the following years: 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986,
1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995.
6. Monthly accounting records of collections from sales of memorial lots under the Land Development
Agreement from 1978 to 1995, inclusive.
7. Year-end audited financial statements of Eternal Gardens Memorial Park Corporation from 1977 to 1995,
inclusive.
8. Price list of Eternal's memorial plot lots affected by the Land Development Agreement covering the
period 1977 to 1995.
9. List of accredited and/or authorized agents, brokers, salesmen, and sales counselors of Eternal from 1977 to
1995 and their addresses.
10. Records of collections representing 10% of the gross collections on each memorial lot sold under the Land
Development Agreement, for perpetual care fees and constituting a trust fund to secure perpetual care of the
memorial park affected by the Land Development Agreement.25
Later, NPUM filed a second Request for Admissions addressed to Mr. Vida. He was asked to make the following
admissions:
1. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position,
and which prepared Eternal's audited financial statements, for the years 1982, 1983 and 1984 was the auditing
and accounting firms of Josue, Arceo & Co., CPAs, with office at the 2nd Floor, Roman R. Santos Building, Plaza
Goeti, Manila.
2. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position,
and which prepared Eternal's audited financial statement for the Fiscal years 1985 and 1986 was Roseller A.
Ditangco, CPA, with offices at No. 6, Plata Street, Tugatog, Malabon, Metro Manila.
3. That the auditor retained by Eternal Gardens Memorial Park Corp. to audit and examine its financial position,
and which prepared Eternal's audited financial statements for the Fiscal years 1987, 1988, 1989, 1990, 1991,
1992 and 1993, was Bernardino T. Dela Cruz, CPA with offices at No. 9, Interior II, K-8th Street, Kamuning,
Quezon City.
4. That true and faithful copies of the audited financial statements of Eternal Gardens Memorial Park Corp. for
the Fiscal years 1981 to 1993, inclusive, specifically those referred to in paragraphs 1, 2 and 3 of this Request,
were submitted to and filed with the Bureau of Internal Revenue as an integral part of Eternal's Income Tax
Returns, as well as with the Securities and Exchange Commission in compliance with the reportorial
requirements of the said Securities and Exchange Commission.
5. That each of the following documents, exhibited with and attached to this request, are true and faithful
copies of the original and genuine documents, thus:
a. Annex "A" (inclusive of sub-markings from Annexes "A-1" to "A-9") is the audit report prepared by the
accounting firm of Josue, Arceo & Co., (CPAs), of the financial position of Eternal Gardens Memorial Park Corp.
at 31 December 1982;
b. Annex "B" (inclusive of sub-markings from Annexes "B-1" to "B-3") is the audit report prepared by the
accounting firm of Josue, Arceo & Co., (CPAs) of the financial position of Eternal Gardens Memorial Park Corp. at
31 December 1983;
c. Annex "C" (inclusive of sub-markings from Annexes "C-1" to "C-6") is the audit report prepared by the
accounting firm of Josue, Arceo & Co. (CPAs) of the financial position of Eternal Gardens Memorial Park Corp. at
31 December 1984;
d. Annex "D" (inclusive of sub-markings from Annexes "D-1" to "D-3") is the audit report prepared by Roseller A
Ditangco, CPA of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1985;
e. Annex "E" (inclusive of sub-markings from Annexes "E-1" to "E-8") is the audit report prepared by Bernardino
T. Dela Cruz, CPA; of the financial position of Eternal Gardens Memorial Park Corp. at 31 December 1987;
f. Annex "F" (inclusive of sub-markings from Annexes "F-1" to "F-7") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31
December 1989;
g. Annex "G" (inclusive of sub-markings from Annexes "G-1" to "G-9") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp., at 31
December 1990;
h. Annex "H" (inclusive of sub-markings from Annexes "H-1" to "H-13") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31
December 1991;
i. Annex "I" (inclusive of sub-markings from Annexes "I-1'' to "I-8") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31
December 1992.
j. Annex "J" (inclusive of sub-markings from Annexes "J-1" to "J-7") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial position of Eternal Gardens Memorial Park Corp. at 31
December 1993.26
Meanwhile, EGMPC failed to present the documents required by the subpoena. It further filed a Denial
and/or Objection to the Requests for Admission on the ground that it could not make comparison of the
documents with the originals thereof.27
On November 10, 1995, Ms. Angelo submitted her Report.28
In a Resolution dated January 15, 1996, the Court of Appeals approved the report of Ms. Angelo, finding
this "to be a just and fair account of what Eternal Gardens and Memorial Park owes to the petitioner North
Philippine Union Mission of the Seventh-Day Adventists, and accordingly orders the former to pay and turn
over to the latter the amounts of P167,065,195.00 as principal and P167,235,451.00 in interest . . ." 29
EGMPC filed a Motion for Reconsideration, which was denied for lack of merit by the appellate court in a
Resolution dated April 12, 1996.30
On April 29, 1996, EGMPC filed a Motion for Extension of Time to File Petition for Certiorari and Prohibition
with this Court, docketed as G.R. No. 124554, seeking the review of the appellate court's Resolutions dated
January 15, 1996 and April 12, 1996.31 The Court granted this motion for extension, 32 and on May 27, 1996,
EGMPC filed the instant petition.33
It appears, however, that in a Report dated May 31, 1996 in CA-G.R. SP No. 04869, the Court of Appeals
informed the parties that its January 15, 1996 Resolution had attained finality considering the following:
The respondent Eternal Gardens Memorial Park received copy of the [January 15, 1996] resolution on
January 22, 1996 and, after twelve (12) days from its receipt or on February 2, 1996, filed a motion for
reconsideration thereof. This Court denied Eternal Garden's motion for reconsideration in a resolution
promulgated April 12, 1996, a copy of which it received on April 18, 1996. After eleven (11) days from
receipt of the resolution denying its motion for reconsideration, or on April 12, 1996 ( sic), it filed a motion
for extension to file a petition for review with the Supreme Court.
It is quite clear that after the denial of its motion for reconsideration, Eternal Gardens had only three (3)
days left of the reglementary period to file a petition for review, or only up to April 12, 1996, but Eternal
Gardens allowed that period to lapse, and then filed its motion to extend to file its petition on April 29, 1996 —
which is eight (8) days beyond the period of finality of the resolution sought to be reviewed by the Supreme
Court. Consequently, the resolution of January 15, 1996 had attained finality before Eternal Gardens filed its
motion to extend before this Honorable Court.34
Entry of judgment was made on June 6, 1996.35
Following the above incidents, on June 20, 1996, EGMPC filed in G.R. No. 73794 an "Opposition and/or
Comment to the Report of the Court of Appeals dated 31 May 1996" with the prayer:
. . . to disregard and nullify the Report of the Court of Appeals dated May 31, 1996 and at the same time allow
or tolerate the First Division of the Honorable Supreme Court to resolved ( sic) the petitioner Eternal Gardens
Petition for Certiorari against the Court of Appeals and NPUM with G.R. No. 124554. 36
In retort to EGMPC's opposition, also in G.R. No. 73794, NPUM filed on June 11, 1996 an Omnibus Motion (a) to
dismiss the petition in G.R. No. 124554, or (b) to consolidate the two petitions, and (c) for the issuance of a writ
of execution. NPUM contended that as a consequence of the appellate court's resolutions in CA G.R. SP No.
04869 having attained finality, a writ of execution may be issued under G.R. No. 73794, and EGMPC could no
longer file a separate petition such as that docketed as G.R. No. 124554. 37
In its Comment filed on July 17, 1996, in G.R. No. 124554, NPUM prayed for the denial of the petition for "being
frivolous and dilatory", citing EGMPC's violation of Circular No. 04-94 on forum shopping, in reference to its
(EGMPC's) pleadings filed in G.R. No. 73794. NPUM pointed out that the reliefs sought by EGMPC in G.R. No.
124554 were "identical" to those in its Opposition And/Or Comment to the Report of the Court of Appeals dated
31 May 1996 filed in G.R. No. 73794.38
On December 26, 1996, the Regional Trial Court of Kalookan City, Branch 120, issued an Order in the case of
origin, Civil Case No. 9556, granting NPUM's motion for execution of judgment. 39 A writ of execution was
subsequently issued by that trial court on January 7, 1997.40
Because of the trial court's issuance of the writ of execution, on January 10, 1997, EGMPC filed in G.R. No.
124554 an Urgent Motion for Restraining Order And/Or Injunction and Motion for Contempt of Court. EGMPC
prayed that "pending resolution of the petition to promptly issue a restraining order and/or injunction against
Judge Jaime Discaya of the RTC Br. 120 of Kalookan City in Civil Case No. 9556 . . ." 41
EGMPC also filed in G.R. No. 73794 on January 17, 1997 an Urgent Motion for Restraining Order And/Or
Injunctive Relief with the same prayer as in its Urgent Motion filed in G.R. No. 124554. 42
In G.R. No. 124554, the Court granted EGMPC's motion and issued a temporary restraining order against the
trial court's order dated December 16, 1996 and writ of execution dated January 7, 1997. 43
In a Resolution dated January 27, 1997 issued in G.R. No. 73794, the Court denied for lack of merit EGMPC's
Urgent Motion.44
The threshold question here is whether Eternal Gardens timely filed its petition for review from the Court of
Appeals' January 15, 1996 and April 12, 1996 Resolutions.
We restate the material dates thus:
EGMPC received a copy of the January 15, 1996 Resolution on January 22, 1996. Twelve days from such
receipt, or on February 2, 1996, EGMPC filed its Motion for Reconsideration. On April 18, 1996, EGMPC
received the appellate court's Resolution of April 12, 1996 denying its Motion for Reconsideration. On April
29, 1996, or eleven days from its receipt of the denial of its motion for reconsideration, EGMPC filed a
motion for extension of time to file its "Petition for Certiorari and Prohibition" and concurrently paid the
legal fees.
We find that EGMPC's Motion for Extension of Time to File a Petition for Review was timely filed on April
29, 1996, such motion having been filed eleven days from receipt of the appellate court's denial of its
motion for reconsideration Supreme Court Circular No. 10 dated August 28, 1986 on modes and periods of
appeal provides thus.
(5) APPEALS BY CERTIORARI TO THE SUPREME COURT
In an appeal by certiorari to this Court under Rule 45 of the Rules of Court, Section 25 of the Interim Rules
and Section 7 of PD 1606, a party may file a petition for review on certiorari of the judgment of a regional
trial court, the Court of Appeals or the Sandiganbayan within fifteen days from notice of judgment or of the
denial of his motion for reconsideration filed in due time, and paying at the same time the corresponding
docket fee (Section 1 of Rule 45). In other words, in the event a motion for reconsideration is filed and
denied, the period of fifteen days begins to run again from notice of denial (See Codilla vs. Estenzo, 97
SCRA 351; Turingan vs. Cacdad, 122 SCRA 634).
A motion for extension of time to file a petition for review on certiorari may be filed with the Supreme
Court within the reglementary period, paying at the same time the corresponding docket fee. 45
While the petition filed by EGMPC purports to be one of certiorari under Rule 65 of the Revised Rules of
Court, we shall treat it as having been filed under Rule 45, considering that it was filed within the 15-day
reglementary period for the filing of a petition for review on certiorari. As the Court stated in Delsan
Transport Lines, Inc. vs. Court of Appeals, where the Court was liberal in its application of the Rules of
Court in the interest of justice: "It cannot . . . be claimed that this petition is being used as a substitute for
appeal after that remedy has been lost through the fault of petitioner. Moreover, stripped of allegations of
'grave abuse of discretion,' the petition actually avers errors of judgment rather than of jurisdiction, which
are the subject of a petition for review."46
The May 31, 1996 Report of the Court of Appeals informed the parties that the January 15, 1996
Resolution had attained finality, erroneously applying the rule applicable to petitions for review filed with
the Court of Appeals from a final judgment or order of the regional trial court. 47
We cannot and do not in the instant case vacate and set aside the May 31, 1996 Report. The report is not
before this Court on review. We must however, within the milieu of this case, regard the report impertinent
by the fact of EGMPC having timely filed its motion for extension of time to file its petition on April 29,
1996.
We also consider that the consequences of the issuance of the report, that is, the entry of judgment in the
appellate court and the writ of execution issued by the trial court in the case of origin, inextricably affect
the resolution of the instant case. Hence, the rationale for our restraining order of January 15, 1997.
We next consider whether, as asserted by NPUM, EGMPC's petition must be summarily dismissed on the
ground of forum shopping. NPUM points to EGMPC's Opposition and/or Comment to the Report of the
Court of Appeals dated May 31, 1996 filed in G.R. No. 73794 vis-a-vis its Petition for Review in the instant
case, and the two Urgent Motions for the Issuance of a Temporary Restraining Order filed in G.R. No.
73794 and in the instant case.
NPUM asserts that the reliefs sought by EGMPC in its opposition and in its petition are "identical" We disagree.
The petition here seeks the setting aside of the Court of Appeals' January 1, 1996 and April 12, 1996
Resolutions.
The Opposition in G.R. No. 73794, on the other hand, sought the nullification of the May 31, 1996 Report and as
a corollary, for the instant case to be "allowed or tolerated".
The opposition and the petition do not seek to provoke from this Court the resolution of a same issue, the evil
which Revised Circular No. 28-91 and its companion Administrative Circular No. 04-94 address. We read the
opposition in G.R. No. 73794 as a complement to the petition here, to which it makes categorical and express
reference.48 We consider it as merely a matter of discourse and emphasis that Eternal Gardens reiterated its
case in the later pleading.
Regarding the motions for the issuance of a temporary restraining order filed by EGMPC on January 10, 1997 in
the instant case and on January 17, 1997 in G.R. No. 73794, we consider the exigency which may have
prompted EGMPC to file the motions in both cases. The trial court in the case of origin, acted favorably on
NPUM's motion for the issuance of a writ of execution, the basis of which is the alleged finality of the appellate
court's January 15, 1996 Resolution. The trial court ruled that the instant case denominated as an original action
for certiorari "does not interrupt the course of the principal action [G.R No. 73794] nor the running of the period
in the proceeding."49 To not stay the execution considering the trial court's ratiocination would render moot
EGMPC's remedy in the instant case.
NPUM also contends that EGMPC has committed perjury, pointing to the certification under oath filed by EGMPC,
through its President Gabriel O. Vida, where he states "that there is no other case pending in any court or
tribunal in the Philippines, with the same issues in this case . . ." 50
Again, we disagree. It does not appear that EGMPC was to pursue the two cases concurrently. EGMPC filed this
new petition, and did not assail the appellate court's resolution under G.R. No. 73794, as in fact the Court has
informed the parties that no further pleadings were to be entertained in G.R. No. 73794 after remand to the
Court of Appeals.51
EGMPC next asserts that the Resolution of the Third Division dated December 1, 1993 ordering the remand to
the Court of Appeals of the case for accounting "changed, modified and reversed" the September 19, 1988
Decision of the Second Division which ordered the remand of the case to the trial court. EGMPC contends that
the Third Division "is in violation of the constitution which provides that no doctrine or principle of law laid down
in a decision en banc or in division may be changed modified or revised by the Court except when sitting en
banc."52
EGMPC had raised the very same issue in its Motion for Reconsideration 53 of the December 1, 1993 Resolution.
The Court, in its Resolution dated February 14, 1994 had denied the motion with finality for lack of merit.
Needless to say, the argument raised by EGMPC is utterly without consequence. At the time the September 19,
1988 Decision was rendered, the two civil cases — interpleader and quieting of title — were still pending. What
was brought before the appellate courts and subject of G.R. No. 73794 were mere incidents, and not the
judgment of the trial court; thus, the remand to the trial court for further proceedings on the merits of the case.
The December 1, 1993 Resolution was issued after the issue of ownership of the subject parcel of land was
already resolved with finality. What was left for the courts to do was to have an accounting done of the rights
and liabilities of EGMPC and NPUM, thus, the remand to the Court of Appeals.
We now consider the merits of the case.
The gist of EGMPCs' contention is that it owes the amount of only P35,000,000.00 less advances and not
P167,065,195.00 as principal and P167,235,451.00 in interest as computed by Court Accountant
Carmencita C. Angelo.54
EGMPC first contends that the appellate court, in appointing an accountant to make the computations,
delegated judicial function, such as to determine the admissibility of evidence. 55
Under the Revised Internal Rules of the Court of Appeals, that court has the —
d. Authority to receive evidence and perform any and all acts necessary for the resolution of factual issues
raised in cases falling within its original jurisdiction.
For the proper disposition of the case, the appellate court, under the above-quoted authority, designated
an accountant "to receive, collate and analyze the documents to be filed by the parties." 56
No judicial function was exercised by Ms. Angelo. She was not asked to rule on the admissibility of the
evidence. The documents were duly marked during the hearing of July 19, 1995, for the consideration of
the appellate court, which alone had the power to decide. Ms. Angelo's role in the proceedings was to
prepare a report, which she did, culling from the documents submitted to her. While it may be true that the
report, when adopted by the appellant court, became part of its decision, judicial power lies, not with the
official who prepared the report, but with the court itself which wields the power of approval or rejection.
Under American jurisprudence, the rule is thus —
It would seem on principle that a commissioner, master or referee appointed by a court to aid it in the
adjudication of a particular case is not a court when performing the functions assigned to him, although the
court may adopt his conclusions in its decision . . . It has, for instance, been held that a statute giving the
supreme court of a state the power to appoint commissioners thereof whose duty shall be, under such
rules and regulations as the court may adopt, to assist it in the performance of its functions, and in
disposing of undetermined cases before it, is not unconstitutional or open to the objection that the
commissioners are vested with judicial power, since the commissioners merely report facts found and
conclusions reached, and the court retains the power to decide which is the only judicial power. It has also
been pointed out that a chancellor does not, by referring a matter to a commissioner, delegate his judicial
function to him. The commissioner is appointed for the purpose of assisting the chancellor, not to supplant
or replace him, and the findings of a commissioner are merely advisory and not binding on the court. 57
EGMPC also contends that it was deprived of due process because it "was not given reasonable opportunity
to know and meet the claim of [NPUM] as its counsel was not able to cross-examine the American
Accountant of [NPUM].58
The contention is without merit.
Contrary to EGMPC's claim, it was given every opportunity to present its case. At the outset, the parties
were asked by the appellate court to submit documents for accounting. NPUM made full utilization of the
modes of discovery, asking the appellate court to subpoena documents and testimonies, and requesting
admissions from EGMPC regarding documents it (EGMPC) had in its possession, documents which
emanated from the corporation itself, and either sent to NPUM as communiques, such as the Letter of Mr.
Vida dated April 4, 1980 to Pastor Bienvenido Capule of NPUM stating inter alia that for 1978, EGMPC sold
2,805 memorial lots and that during the first quarter of 1980 the corporation sold 2,418 lots, totalling
10,730,59 or documents available to the general public, as in the Price Lists, or filed with government
offices, specifically the Securities and Exchange Commission and the Bureau of Internal Revenue.
EGMPC cannot claim that it was denied the forum to confer with NPUM and NPUM's accountant. The appellate
court had arranged conferences for the parties and their accountants to allow them to discuss with each other
and with Ms. Angelo. Even Ms. Angelo, in her Letter dated November 10, 1995 covering her second and final
report spoke of such a conference, to wit:
In compliance with your instructions in the last conference-meeting with the party-litigants in Case CA-G.R. No.
SP No. 04869 held last August 30, 1995, the undersigned together with the representatives of the North
Philippine Union Mission (NPUM) and the Eternal Gardens Memorial, Inc. had a discussion on the computations
made by each of the party of the amount due to the North Philippine Union Mission which were submitted to the
Court.60
It was not even imperative that EGMPC cross-examine the accountant who prepared EGMPC's computation, and
there was no denial of due process without such cross-examination. This computation was merely to aid Ms.
Angelo, who was to make her own independent computation from the documents submitted to her.
EGMPC also asserts that "substantially if not all records, documents and papers submitted by the private
respondent NPUM to the Court's Accountant which eventually became the basis of the report and Resolution of
January 15, 1996 of the public respondent Court, were not genuine and not properly identified by the persons
who were supposed to have executed the same including the alleged financial statement of Eternal Gardens
allegedly issued by the Securities and Exchange Commission (SEC)." 61
From the transcript of stenographic notes of the proceedings in the appellate court, we find that EGMPC
acquiesced to the use of the documents submitted by NPUM, including the financial statements, even actively
participating in the discussion of the contents of such documents. EGMPC's main objection was only on how the
entries in these documents were to be interpreted, for example, on how payments towards the perpetual care
fund would be credited. 62 EGMPC did not object even when counsel for NPUM read into the records the contents
of the documents.63
It even appears that after Ms. Angelo came up with her first report, EGMPC's counsel expressed that it was
"amenable to that computation."64 In that report, Ms. Angelo had stressed that "[s]ince the Eternal Gardens
Memorial Park, Inc. did not submit to the Court any documents pertaining to the computations of the 40% share
of the North Philippine Union Mission of the Seventh Day Adventists, then we have no other recourse but to
base the computation on the available figures and on the other documents as presented by the petitioner
[NPUM]."65
EGMPC lastly contends that it is not liable for interest. It claims that it was justified in withholding payment as
there was still the unresolved issue of ownership over the property subject of the Land Development Agreement
of October 6, 1976.66
The argument is without merit EGMPC under the agreement had the obligation to remit monthly to NPUM forty
percent (40%) of its net gross collection from the development of a memorial park on property owned by NPUM.
The same agreement provided for the designation of a depository/trustee bank to act as the depository/trustee
for all funds collected by EGMPC. 67 There was no obstacle, legal or otherwise, to the compliance by EGMPC of
this provision in the contract, even on the affectation that it did not know to whom payment was to be made.
Even disregarding the agreement, EGMPC cannot "suspend" payment on the pretext that it did not know who
among the subject property's claimants was the rightful owner. It had a remedy under the New Civil Code of the
Philippines — to give in consignation the amounts due, as these fell due. 68 Consignation produces the effect of
payment.69
The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the
debtor by reason of causes not imputable to
him.70 For its failure to consign the amounts due, Eternal Gardens' obligation to NPUM necessarily became
more onerous as it became liable for interest on the amounts it failed to remit.
Notably, EGMPC filed an interpleader action, "the essence of which, aside from the disavowal of interest in
the property in litigation on the part of the petitioner, is the deposit of the property or funds in controversy
with the court." Yet from the outset, EGMPC had assailed any court ruling ordering the deposit with a
reputable bank of the amounts due from it under the Land Development Agreement. In G.R. No.
73794,71 the Court made the following discourse on the disavowal of EGMPC of its obligations, thus:
In the case at bar, a careful analysis of the records will show that petitioner admitted among others in its
complaint in Interpleader that it is still obligated to pay certain amount to private respondent; that it claims
no interest in such amounts due and is willing to pay whoever is declared entitled to said amounts. Such
admissions in the complaint were reaffirmed in open court before the Court of Appeals as stated in the
latter court's resolution dated September 5, 1985 in C.A. G.R. No. 04869 which states:
The private respondent (MEMORIAL) then reaffirms before the Court its original position that it is a
disinterested party with respect to the property now the subject of the interpleader case.
In the light of the willingness, expressly made before the court, affirming the complaint filed below, that
the private respondent (MEMORIAL) will pay whatever is due on the Land Development Agreement to the
rightful owner/owners, there is no reason why the amount due on subject agreement has not been placed
in the custody of the Court.
Under the circumstances, there appears to be no plausible reason for petitioner's objections to the deposit
of the amounts in litigation after having asked for the assistance of the lower court by filing a complaint for
interpleader where the deposit of aforesaid amounts is not only required by the nature of the action but is
a contractual obligation of the petitioner under the Land Development Program.
As correctly observed by the Court of Appeals, the essence of an interpleader, aside from the disavowal of
interest in the property in litigation on the part of the petitioner, is the deposit of the property or funds in
controversy with the court, it is a rule founded on justice and equity: "that the plaintiff may not continue to
benefit from the property or funds in litigation during pendency of the suit at the expense of whoever will
ultimately be decided as entitled thereto."
The case at bar was elevated to the Court of Appeals on certiorari with prohibitory and mandatory
injunction. Said appellate court found that more than twenty million pesos are involved; so that on interest
alone for savings or time deposit would be considerable, now accruing in favor of the Eternal Gardens.
Finding that such is violative of the very essence of the complaint for interpleader as it clearly runs against
the interest of justice in this case, the Court of Appeals cannot be faulted for finding that the lower court
committed a grave abuse of discretion which requires correction by the requirement that a deposit of said
amounts should be made to a bank approved by the Court.
Petitioner would now compound the issue by its obvious turnabout, presently claiming in its memorandum
that there is a novation of contract so that the amounts due under the Land Development Agreement were
allegedly extinguished, and the requirement to make a deposit of said amounts in a depository bank should
be held in abeyance until after the conflicting claims of ownership now on trial before Branch CXXII RTC-
Caloocan City, has finally been resolved.
All these notwithstanding, the need for the deposit in question has been established, not only in the lower
courts and in the Court of Appeals but also in the Supreme Court where such deposit was required in the
resolution of July 8, 1987 to avoid wastage of funds.
Even during the pendency of G.R. No. 73794, EGMPC was required to deposit the accruing interests with a
reputable commercial bank "to avoid possible wastage of funds" when the case was given due course. 72 Yet,
EGMPC hedged in depositing the amounts due and made obvious attempts to stay payment by filing sundry
motions and pleadings. We thus find that the Court of Appeals correctly held Eternal Gardens liable for interest
at the rate of twelve percent (12%). The withholding of the amounts due under the agreement was tantamount
to a forbearance of money.73
CONSIDERING THE FOREGOING, the Court Resolved to DENY the petition. The Resolutions dated January 15,
1996 and April 12, 1996 are AFFIRMED. The temporary restraining order issued by this Court on January 15,
1997 is LIFTED. SO ORDERED.
G.R. No. 206037
PHILIPPINE NATIONAL BANK, Petitioner
vs
LILIBETH S. CHAN, Respondent
We resolve the Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the May 28, 2012
Decision1 and the February 21, 2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 98112.
The Antecedent Facts
Respondent Lilibeth S. Chan owns a three-story commercial building located along A. Linao Street, Paco, Manila
covered by Transfer Certificate of Title (TCT) No. 208782. 3 On May 10, 2000, she leased said commercial
building to petitioner Philippine National Bank (PNB) for a period of five years from December 15, 1999 to
December 14, 2004, with a monthly rental of ₱76,160.00. 4 When the lease expired, PNB continued to occupy the
property on a month-to-month basis with a monthly rental of ₱116,788.44. PNB vacated the premises on March
23, 2006.5
Meanwhile, on January 22, 2002, respondent obtained a ₱l,500,000.00 loan from PNB which was secured by a
Real Estate Mortgage constituted over the leased property. 6 In addition, respondent executed a Deed of
Assignment7 over the rental payments in favor of PNB.
The amount of the respondent's loan was subsequently increased to ₱7,500,000.00. Consequently, PNB and the
respondent executed an "Amendment to the Real Estate Mortgage by Substitution of Collateral" on March 31,
2004, where the mortgage over the leased property was released and substituted by a mortgage over a parcel
of land located in Paco, Manila, covered by TCT No. 209631.8
On August 26, 2005, respondent filed a Complaint for Unlawful Detainer before the Metropolitan Trial Court
(MeTC), Branch 7, Manila against PNB, alleging that the latter failed to pay its monthly rentals from October
2004 until August 2005:9
In its defense, PNB claimed that it applied the rental proceeds from October 2004 to January 15, 2005 as
payment for respondent's outstanding loan which became due and demandable in October 2004. 10 As for the
monthly rentals from January 16, 2005 to February 2006, PNB explained that it received a demand letter 11 from
a certain Lamberto Chua (Chua) who claimed to be the new owner of the leased property and requested that
the rentals be paid directly to him, reckoned from January 15, 2005 until PNB decides to vacate the premises or
a new lease contract with Chua is executed. PNB thus deposited the rentals in a separate non-drawing savings
account for the benefit of the rightful party.12
The MeTC held a hearing on April 25, 2006 where the parties agreed to apply the rental proceeds from
October 2004 to January 15, 2005 to the respondent's outstanding loan.13 PNB, too, consigned the amount
of ₱l,348,643.92, representing ti1ie rentals due from January 16, 2005 to February 2006, with the court on
May 31, 2006.14
Ruling of the Metropolitan Trial Court
In its August 9, 2006 Decision,15 the MeTC ordered PNB to pay respondent accrued rentals in the amount of
₱l,348,643.92,16 with interest at 6% per annum from January 16, 2005 up to March 23, 2006, when PNB
finally vacated the leased propeity. 17 The MeTC likewise directed PNB to pay attorney's fees in the amount
of ₱20,000.00 and the cost of suit.
PNB appealed the August 9, 2006 MeTC Decision to the Regional Trial Court (RTC), Branch 14, Manila,
insisting that respondent is not entitled to the disputed rental proceeds amounting to ₱l,348,643.92.
According to PNB, the money should be applied to offset respondent's outstanding loan pursuant to the
Deed of Assignment the latter executed in its favor. PNB also argued that it is not liable to pay any interest
on the lease rentals since it did not incur any delay in the payment of rent. 18
While the appeal was pending before the RTC, PNB initiated foreclosure proceedings on the mortgaged
property covered by TCT No. 209631. 19 The property was sold on October 31, 2006 for ₱l5,311,000.00 to
PNB as the highest bidder. Notably, the Certificate of Sale provides that respondent's indebtedness
amounted to ₱ll,211,283.53 as of May 15, 2005, "exclusive of penalties, expenses, charges and the ten
(10) percent attorney's fees, plus sheriff fees and other lawful expenses of foreclosure and sale." 20
In light of this development, respondent filed a Memorandum 21 before the RTC, claiming that PNB had no
right to retain foe ₱l,348,643.92 consigned with the court. She insisted that her loan was fully paid when
PNB bought the mortgaged property at ₱15,3ll,000.00.22
PNB filed a Rejoinder23 and argued that respondent's outstanding obligation as of October 31, 2006 was
₱18,016,300.71 while the bid price was only ₱l5,31l,000.00. Thus, PNB claimed that it is entitled to a
deficiency claim amounting to ₱2,705,300.71 to which the rental proceeds of ₱l,348,643.92 can be
applied.24
Ruling of the Regional Trial Court
The RTC affirmed the MeTC ruling in its December 7, 2006 Decision. 25 It found that respondent's obligation
to PNB "has already been paid, notwithstanding the belated claim of [the latter] that there remains a
deficiency."26 The RTC noted that the ₱11,211,283.53 amount of indebtedness stated in the Notice of
Extra-Judicial Sale27 dated August 9, 2006 as of May 15, 2006 plus penalties, expenses, charges, attorney's
fees and expenses could have been easily covered by the ₱l5,31l,000.00 bid price. 28
In addition, the RTC held that PNB incurred delay "when despite demand, it refused to pay and vacate the
premises.29 " As such, the RTC ruled that the respondent is entitled to legal interest at 6% per annum and
attorney's fees for having been compelled to litigate to protect her interests. 30
The respondent then moved for the issuance of a Writ of Execution which was granted by the HTC in its
December 18, 2006 Order.31 According to the Sheriff's Report of Execution 32 dated January 2, 2007, the
amount of ₱l,348,643.92, representing the monthly rentals from January 16, 2005 up to March 23, 2006,
was turned over to the respondent on December 20, 2006.33
PNB filed a motion for reconsideration of the December 7, 2006 Decision and for the quashal of the Writ of
Execution, but the RTC denied the motion in its Order dated February 6, 2007. 34 Following the denial, PNB filed
a Petition for Review under Rule 42 of the Rules of Court before the CA, challenging the RTC's December 7,
2006 Decision and February 6, 2007 Order.
Ruling of the Court of Appeals
The CA pointed out that PNB' s entitlement to the rental proceeds in the amount of ₱1,348,643.92 is dependent
on whether there is a deficiency in payment after the foreclosure sale. 35 It, however, found no sufficient
evidence on record that the amount of respondent's liability as of October 31, 2006 is indeed ₱18,016,300.71, as
PNB claims.36 Consequently, the CA remanded the case the MeTC for the proper reception of evidence and
determination, if any, of the deficiency on the foreclosure sale with the following guidelines: 37
"Consignation is the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment. [ I]t generally requires a prior tender of payment."44
Under Article 1256 of the Civil Code, consignation alone is sufficient even without a prior tender of payment
a) when the creditor is absent or unknown or does not appear at the place of payment; b) when he is
incapacitated to receive the payment at the time it is due; c) when, without just cause, he refuses to give a
receipt; d) when two or more persons claim the same right to collect; and e) when the title of the
obligation has been lost.
For consignation to be valid, the debtor must comply with the following requirements under the law:
1) there was a debt due;

(1) From October 2004 to January 15, 2005: Principal+ Interest+ Penalties - Monthly
2) valid prior tender of payment, unless the consignation was made because of some
Rentals (from October 2004 to January 15, 2005 by virtue of the Deed of Assignment)
legal cause provided in Article 1256;
=New Principal

3) previous notice of the consignation has been given to the persons interested in the
(2) From January 16, 2005 to October 31, 2006: New Principal + Interest + Penalties -
performance of the obligation;
Interest Earned by PN'B from the Savings Account = Outstanding Obligation as of October
31, 2006
4) the amount or thing due was placed at the disposal of the court; and,
(3) Outstanding Obligation as of October 31, 2006 – ₱15,311,000.00 = Deficiency 38
5) after the consignation had been made, the persons interested were notified
thereof:45
As regards the payment of legal interest, the CA noted that PNB merely opened a non-drawing savings account
wherein it deposited the monthly rentals from January 16, 2005 to February 2006. Such deposit of the rentals in
a savings account, however, is not the consignation contemplated by law. Thus, the CA found PNB liable to pay "Failure in any of the requirements is enough ground to render a consignation ineffective." 46
the 6% legal interest rate prescribed under Article 2209 of the Civil Code for having defaulted in the payment of
its monthly rentals to the respondent.39
In the present case, the records show that: first, PNB had the obligation to pay respondent a monthly
rental of ₱l16,788.44, amounting to ₱l,348,643.92, from January 16, 2005 to March 23,
Finally, the CA deleted the award of atton1ey's fees, pursuant to the general rule that attorney's fees cannot be 2006;47 second, PNB had the option to pay the monthly rentals to respondent or to apply the same as
recovered as part of damages because of the public policy that no premium should be placed on the right to payment for respondent's loan with the bank, but PNB did neither; 48 third, PNB instead opened a non-
litigate.40 drawing savings account at its Paco Branch under Account No. 202- 565327-3, where it deposited the
subject monthly rentals, due to the claim of Chua of the same right to collect the rent; 49 and fourth, PNB
consigned the amount of Pl,348,643.92 with the Office of the Clerk of Court of the MeTC of Manila on
PNB filed a partial Motion for Reconsideration, but the CA denied the motion in its Resolution dated February 21,
2013. As a consequence, PNB filed the present Petition for Review on Certiorari before the Court, assailing the
CA's May 28, 2012 Decision and February 21, 2013 Resolution. May 31, 2006.50

Issues
In the present Petition, PNB raises the following issues for the Court's resolution: first, whether PNB properly
consigned the disputed rental payments in the amount of ₱l,348,643.92 with the Office of the Clerk of Court of
the MeTC of Manila;41 second, whether PNB incurred delay in the payment of rentals to the respondent, making
it liable to pay legal interest to the latter; 42 and third, whether PNB is entitled to the disputed rental proceeds in
order to cover the alleged deficiency in payment of the respondent's liability after the foreclosure proceedings. 43
The Court's Ruling
We DENY the Petition for Review on Certiorari as we find no reversible error committed by the CA in issuing its
assailed Decision and Resolution.
Note that PNB's deposit of the subject monthly rentals in a non-drawing savings account is not the
consignation contemplated by law, precisely because it does not place the same at the disposal of the
court.51 Consignation is necessarily judicial; it is not allowed in venues other than the
courts.52 Consequently, PNB's obligation to pay rent for the period of January 16, 2005 up to March 23,
2006 remained subsisting, as the deposit of the rentals cannot be considered to have the effect of
payment.
It is important to point out that PNB's obligation to pay the subject monthly rentals had already fallen due
and demandable before PNB consigned the rental proceeds with the MeTC on May 31, 2006. Although it is
true that consignment has a retroactive effect, such payment is deemed to have been made only at the
time of the deposit of the thing in court or when it was placed at the disposal of the judicial
authority.53 Based on these premises, PNB's payment of the monthly rentals can only be considered to have
been made not earlier than May 31, 2006.
Given its belated consignment of the rental proceeds in court, PNB clearly defaulted in the payment of monthly
rentals to the respondent for the period January 16, 2005 up to March 23, 2006, when it finally vacated the
leased property, As such, it is liable to pay interest in accordance with Article 2209 of the Civil Code.1âwphi1

Article 2209 provides that if the debtor incurs delay in the performance of an obligation consisting of the
payment of a sum of money, he shall be liable to pay the interest agreed upon, and in the absence of
stipulation, the legal interest at 6% per annum. There being no stipulated interest in this case, PNB is liable to
pay legal interest at 6% per annum, from January 16, 2005 up to May 30, 2006

As for the issue on PNB' s entitlement to the subject rental proceeds to cover the deficiency in payment after the
foreclosure sale of the mortgaged property, we agree with the CA's finding that there is no sufficient evidence
on record to show that such a deficiency exists. 54 Unfortunately, the Statement of Account 55 submitted by PNB is
not enough to prove this claim, considering that it is unsupported by any corroborating evidence. Besides, the
copy of the document in our records, both in the CA rollo and the Supreme Court rollo,56 consists of illegible
pages.

We likewise agree with the CA's conclusion that the RTC seriously erred when it categorically stated that the
loan was folly paid by virtue of the foreclosure sale without determining the extent of the respondent's liability
as of October 1, 2006, the date of the foreclosure sale.57 Specifically, the RTC held that:

x x x In this regard, the amount of the indebtedness was clearly stated in the Notice of
Extra-Judicial Sale dated August 9, 2006 as ₱l1,211,283.53, as of May 15, [2006],
exclusive of penalties, expenses, charges, attorney's fees and expenses. And since the
property was sold to the bank as the winning bidder at ₱15,311,000,00, obviously, the
difference could have easily covered the said penalties, etc." 58

This is clearly an error. It is settled that a mortgagee has the light to recover the deficiency resulting from the
difference between the amount obtained in the sale at public auction and the outstanding obligation of the
mortgagor at the time of the foreclosure proceedings. 59 The RTC failed to consider that the amount of
indebtedness indicated in the Notice of Extra-Judicial Sale 60 dated August 9, 2006 was computed by PNB as of
May 15, 2006. Surely, the respondent's liability would have significantly increased by the time the foreclosure
sale was held on October 31, 2006.

It also appears that the RTC merely assumed that the bid price would cover the deficiency in payment, without
actually making a determination of whether such a deficiency exists and how much it really is.

In these lights, we uphold the CA's ruling remanding the case to the MeTC for the proper reception of evidence
and computation of respondent's total indebtedness as of October 31, 2006, in order to determine whether
there exists a deficiency in payment as PNB insists.

WHEREFORE, we DENY the Petition for Review on Certiorari and AFFIRM the Decision dated May 28, 2012 and
the Resolution dated February 21, 2013 of the Court of Appeals in CA-G.R. SP No. 98112.

SO ORDERED.
G.R. No. 176697 September 10, 2014 On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was dishonored by
the Bank for the reason "Deposit Under Hold." According topetitioners, the Bank unilaterally and unlawfully
put their account with the Bank on hold. On 22 March 2001, petitioners’ counsel sent a demand letter
CESAR V. AREZA and LOLITA B. AREZA, Petitioners,
asking the Bank to honor their check. The Bank refused to heed their request and instead, closed the
vs.
Special Savings Account of the petitioners with a balance of ₱1,179,659.69 and transferred said amount to
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO, Respondnets.
their savings account. The Bank then withdrew the amount of ₱1,800,000.00representing the returned
checks from petitioners’ savings account.
Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of Court, which seeks to
reverse the Decision1 and Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of Appeals in
Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and unilateral
CAG.R. CV No. 83192. The Court of Appeals affirmed with modification the 22 April 2004 Resolution 3 of the
withdrawal from their savings account, petitioners filed a Complaint for Sum of Money with Damages
Regional Trial Court (RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.
against the Bank and Potenciano with the RTC of Calamba.

The factual antecedents follow.

On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. The dispositive
portion of the Decision reads:
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent Express Savings
Bank’s Biñan branch: 1) Savings Account No. 004-01-000185-5 and 2) Special Savings Account No. 004-02-
WHEREFORE, the foregoing considered, the Court orders that judgment be rendered in favor of plaintiffs
000092-3.
and against the defendants jointly and severally to pay plaintiffs as follows, to wit:

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles. On 2 May
1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants from the account of
2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
plaintiffs;
Mitsubishi Pajero and a brand-new Honda CRV.

2. ₱500,000.00 as moral damages; and

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to
different payees and drawn against the Philippine Veterans Bank (drawee), each valued at Two Hundred
Thousand Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand Pesos (₱1,800,000.00). 3. ₱300,000.00 as attorney’s fees.8

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch manager of
respondent Express Savings Bank (the Bank) was present during the transaction and immediately offered the
services of the Bank for the processing and eventual crediting of the said checks to petitioners’ account. 4 On the
other hand,Potenciano countered that he was prevailed upon to accept the checks by way of accommodation of
petitioners who were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said checks in their savings account with the Bank. The Bank, inturn,
deposited the checks with its depositary bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI Bank
presented the checks to the drawee, the Philippine Veterans Bank, which honored the checks.
On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank werehonored. He
allegedly warned petitioners that the clearing of the checks pertained only to the availability of funds and did not
mean that the checks were not infirmed. 6 Thus, the entire amount of ₱1,800,000.00 was credited to petitioners’
savings account. Based on this information, petitioners released the two cars to the buyer.
Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that the amount
on the face of the checks was altered from the original amount of ₱4,000.00 to ₱200,000.00. The drawee
returned the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was
informed by Equitable-PCI Bank that the drawee dishonored the checks onthe ground of material alterations.
Equitable-PCI Bank initially filed a protest with the Philippine Clearing House. In February 2001, the latter ruled
in favor of the drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the
Bank in the amount of ₱1,800,000.00.
The Bank insisted that they informed petitioners of said development in August 2000 by furnishing them copies
of the documents given by its depositary bank. 7 On the other hand, petitioners maintained that the Bank never
informed them of these developments.
The trial court reduced the issue to whether or not the rights of petitioners were violated by respondents
when the deposits of the former were debited by respondents without any court order and without their
knowledge and consent. According to the trial court, it is the depositary bank which should safeguard the
right ofthe depositors over their money. Invoking Article 1977 of the Civil Code, the trial court stated that
the depositary cannot make use of the thing deposited without the express permission of the depositor.
The trial court also held that respondents should have observed the 24-hour clearing house rule that
checks should be returned within 24-hours after discovery of the forgery but in no event beyond the period
fixed by law for filing a legal action. In this case, petitioners deposited the checks in May 2000, and
respondents notified them of the problems on the check three months later or in August 2000. In sum, the
trial court characterized said acts of respondents as attended with bad faith when they debited the amount
of ₱1,800,000.00 from the account of petitioners.
Respondents filed a motion for reconsideration while petitioners filed a motion for execution from the
Decision of the RTC on the ground that respondents’ motion for reconsideration did not conform with
Section 5, Rule 16 of the Rules of Court; hence, it was a mere scrap of paper that did not toll the running
of the period to appeal.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the motion for
reconsideration, set aside the Pozas Decision, and dismissed the complaint. The trial court awarded
respondents their counterclaim of moral and exemplary damages of ₱100,000.00 each. The trial court first
applied the principle of liberality when it disregarded the alleged absence of a notice of hearing in
respondents’ motion for reconsideration. On the merits, the trial court considered the relationship of the
Bank and petitioners with respect to their savings account deposits as a contract of loan with the bank as
the debtor and petitioners as creditors. As such, Article 1977 of the Civil Code prohibiting the depository
from making use of the thing deposited without the express permission of the depositor is not applicable.
Instead, the trial court applied Article 1980 which provides that fixed, savings and current deposits
ofmoney in banks and similar institutions shall be governed by the provisions governing simple loan. The
trial court then opined thatthe Bank had all the right to set-off against petitioners’ savings deposits the value of Section 5. Notice of hearing. – The notice of hearing shall be addressed to all parties concerned, and shall
their nine checks that were returned. specify the time and date of the hearing which must not be later than ten (10) days after the filing of the
motion.
On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the award of damages. The
appellate court made the following ratiocination: Petitioners claim that the notice of hearing was addressed to the Clerk of Court and not to the adverse
party as the rules require. Petitioners add that the hearing on the motion for reconsideration was scheduled
beyond 10 days from the date of filing.
Any argument as to the notice of hearing has been resolved when the pairing judge issued the order on
February 24, 2004 setting the hearing on March 26, 2004. A perusal of the notice of hearing shows that request
was addressed to the Clerk of Court and plaintiffs’ counsel for hearing to be set on March 26, 2004. As held in Maturan v. Araula, 11 the rule requiring that the notice be addressed to the adverse party has
beensubstantially complied with when a copy of the motion for reconsideration was furnished to the
counsel of the adverse party, coupled with the fact that the trial court acted on said notice of hearing and,
The core issues in this case revolve on whether the appellee bank had the right to debit the amount of
as prayed for, issued an order12 setting the hearing of the motion on 26 March 2004.
₱1,800,000.00 from the appellants’ accounts and whether the bank’s act of debiting was done "without the
plaintiffs’ knowledge."
We would reiterate later that there is substantial compliance with the foregoing Rule if a copy of the said
motion for reconsideration was furnished to the counsel of the adverse party. 13
We find that the elements of legal compensation are all present in the case at bar. Hence, applying the case of
the Bank of the Philippine Islands v. Court of Appeals, the obligors bound principally are at the same time
creditors of each other. Appellee bank stands as a debtor of appellant, a depositor. At the same time, said bank Now to the substantive issues to which procedural imperfection must, in this case, give way.
is the creditor of the appellant with respect to the dishonored treasury warrant checks which amount were
already credited to the account of appellants. When the appellants had withdrawn the amount of the checks
The central issue is whether the Bank had the right to debit ₱1,800,000.00 from petitioners’ accounts.
they deposited and later on said checks were returned, they became indebted to the appellee bank for the
corresponding amount.
On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the
amountof ₱1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to release the
It should be noted that [G]erry Mambuay was the appellants’ walkin buyer. As sellers, appellants oughtto have
purchased cars to the buyer.
exercised due diligence in assessing his credit or personal background. The 24-hour clearing house rule is not
the one that governs in this case since the nine checks were discovered by the drawee bank to contain material
alterations. Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-PCI Bank. Three
months had passed when the Bank was informed by its depositary bank that the drawee had dishonored
the checks on the ground of material alterations.
Appellants merely allege that they were not informed of any development on the checks returned. However, this
Court believes that the bank and appellants had opportunities to communicate about the checks considering that
several transactions occurred from the time of alleged return of the checks to the date of the debit. The return of the checks created a chain of debiting of accounts, the last loss eventually falling upon the
savings account of petitioners with respondent bank. The trial court inits reconsidered decision and the
appellate court were one in declaring that petitioners should bear the loss.
However, this Court agrees withappellants that they should not pay moral and exemplary damages to each of
the appellees for lack of basis. The appellants were not shown to have acted in bad faith. 9
We reverse.
Petitioners filed the present petition for review on certiorariraising both procedural and substantive issues, to
wit: The fact that material alteration caused the eventual dishonor of the checks issued by PVAO is undisputed.
In this case, before the alteration was discovered, the checks were already cleared by the drawee bank,
the Philippine Veterans Bank. Three months had lapsed before the drawee dishonored the checks and
1. Whether or not the Honorable Court of Appeals committed a reversible error of law and grave abuse of
returned them to Equitable-PCI Bank, the respondents’ depositary bank. And itwas not until 10 months
discretion in upholding the legality and/or propriety of the Motion for Reconsideration filed in violation of Section
later when petitioners’ accounts were debited. A question thus arises: What are the liabilities of the
5, Rule 15 ofthe Rules on Civil Procedure;
drawee, the intermediary banks, and the petitioners for the altered checks?

2. Whether or not the Honorable Court of Appeals committed a grave abuse of discretion in declaring that the
LIABILITY OF THE DRAWEE
private respondents "had the right to debit the amount of ₱1,800,000.00 from the appellants’ accounts" and the
bank’s act of debiting was done with the plaintiff’s knowledge. 10
Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee
Before proceeding to the substantive issue, we first resolve the procedural issue raised by petitioners.
who accepts the bill. In Philippine National Bank v. Court of Appeals, 14 the payment of the amount of a
check implies not only acceptance but also compliance with the drawee’s obligation.
Sections 5, Rule 15 of the Rules of Court states:
In case the negotiable instrument isaltered before acceptance, is the drawee liable for the original or the
altered tenor of acceptance? There are two divergent intepretations proffered by legal analysts. 15 The first
view is supported by the leading case of National City Bank ofChicago v. Bank of the Republic. 16 In said case, a
certain Andrew Manning stole a draft and substituted his name for that of the original payee. He offered it as
payment to a jeweler in exchange for certain jewelry. The jeweler deposited the draft to the defendant bank
which collectedthe equivalent amount from the drawee. Upon learning of the alteration, the drawee sought to
recover from the defendant bank the amount of the draft, as money paid by mistake. The court denied recovery
on the ground that the drawee by accepting admitted the existence of the payee and his capacity to
endorse.17 Still, in Wells Fargo Bank & Union Trust Co. v. Bank of Italy, 18 the court echoed the court’s
interpretation in National City Bank of Chicago, in this wise:
We think the construction placed upon the section by the Illinois court is correct and that it was not the
legislative intent that the obligation of the acceptor should be limited to the tenorof the instrument as drawn by
the maker, as was the rule at common law,but that it should be enforceable in favor of a holder in due course
against the acceptor according to its tenor at the time of its acceptance or certification.
The foregoing opinion and the Illinois decision which it follows give effect to the literal words of the Negotiable
Instruments Law. As stated in the Illinois case: "The court must take the act as it is written and should give to
the words their natural and common meaning . . . ifthe language of the act conflicts with statutes or decisions in
force before its enactment the courts should not give the act a strained construction in order to make it
harmonize with earlier statutes or decisions." The wording of the act suggests that a change in the common law
was intended. A careful reading thereof, independent of any common-law influence, requires that the words
"according to the tenor of his acceptance" be construed as referring to the instrument as it was at the time it
came into the hands of the acceptor for acceptance, for he accepts no other instrument than the one presented
to him — the altered form — and it alone he engages to pay. This conclusion is in harmony with the law of
England and the continental countries. It makes for the usefulness and currency of negotiable paper without
seriously endangering accepted banking practices, for banking institutions can readily protect themselves against
liability on altered instruments either by qualifying their acceptance or certification or by relying on forgery
insurance and specialpaper which will make alterations obvious. All of the arguments advanced against the
conclusion herein announced seem highly technical in the face of the practical facts that the drawee bank has
authenticated an instrument in a certain form, and that commercial policy favors the protection of anyone who,
in due course, changes his position on the faith of that authentication. 19
The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the extent of
the bill prior to alteration.20 This view appears to be in consonance with Section 124 of the Negotiable
Instruments Law which statesthat a material alteration avoids an instrument except as against an assenting
party and subsequent indorsers, but a holder in due course may enforce payment according to its original tenor.
Thus, when the drawee bank pays a materially altered check, it violates the terms of the check, as well as its
duty tocharge its client’s account only for bona fide disbursements he had made. If the drawee did not pay
according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with utmost fidelity. 21 The drawee, however, still has recourse
to recover its loss. It may pass the liability back to the collecting bank which is what the drawee bank exactly did
in this case. It debited the account of Equitable-PCI Bank for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK
A depositary bank is the first bank to take an item even though it is also the payor bank, unless the item is
presented for immediate payment over the counter. 22 It is also the bank to which a check is transferred for
deposit in an account at such bank, evenif the check is physically received and indorsed first by another
bank.23 A collecting bank is defined as any bank handling an item for collection except the bank on which the
check is drawn.24
When petitioners deposited the check with the Bank, they were designating the latter as the collecting bank.
This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, the Bank shall credit
the amount in petitioners’ account or infuse value thereon only after the drawee bank shall have paid the
amount of the check or the check has been cleared for deposit. 25
The Bank and Equitable-PCI Bank are both depositary and collecting banks.
A depositary/collecting bank where a check is deposited, and which endorses the check upon presentment
with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has good title to
it; that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement
valid and subsisting." It has been repeatedly held that in check transactions, the depositary/collecting bank
or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the genuineness of the
endorsements.26 If any of the warranties made by the depositary/collecting bank turns out to be false, then
the drawee bank may recover from it up to the amount of the check. 27
The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high standard of conduct. 28
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially
altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account with
EquitablePCI Bank to be debited, it has the option toseek recourse against the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not following the 24-hour clearing period because it was only in
August 2000 that the drawee bank notified Equitable-PCI that there were material alterations in the checks.
We do not subscribe to the position taken by petitioners that the drawee bank was at fault because it did
not follow the 24-hour clearing period which provides that when a drawee bank fails to return a forged or
altered check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from
liability.
Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21. Special Return Items
Beyond The Reglementary Clearing Period.- Items which have been the subject of material alteration or
items bearing forged endorsement when such endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting Bank and not through the regular clearing house
facilities within the period prescribed by law for the filing of a legal action by the returning bank/branch,
institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
It is clear that the so-called "24-hour" rule has been modified. In the case of Hongkong & Shanghai vs.
People’s Bank reiterated in Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced
the 24-hour rule under which the drawee bank forever loses the right to claim against presenting/collecting
bank if the check is not returned at the next clearing day orwithin 24 hours. Apparently, the commercial
banks felt strict enforcement of the 24-hour rule is too harsh and therefore made representations and
obtained modification of the rule, which modification is now incorporated in the Manual of Regulations.
Since the same commercial banks controlled the Philippine Clearing House Corporation, incorporating the
amended rule in the PCHC Rules naturally followed.
As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the
drawee bank in accordance with long standing and accepted banking practices shall be returned through the
PCHC/local clearing office, as the case may be, not later than the next regular clearing (24-hour). The
modification, however, is that items which have been the subject of material alteration or bearing forged
endorsement may be returned even beyond 24 hours so long that the same is returned within the prescriptive
period fixed by law. The consensus among lawyers is that the prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written contract. Moreover, the item need not be returned through the
clearing house but by direct presentation to the presenting bank. 29
In short, the 24-hour clearing ruledoes not apply to altered checks.
LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co. is in point. A foreigner
30
purchased several pieces of jewelry from Gold Palace Jewellery using a United Overseas Bank (Malaysia) issued
draft addressed to the Land Bank of the Philippines (LBP). Gold Palace Jewellery deposited the draft in the
company’s account with Far East Bank. Far East Bank presented the draft for clearing to LBP. The latter cleared
the same and Gold Palace Jewellery’s account was credited with the amount stated in the draft. Consequently,
Gold Palace Jewellery released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East
Bank that the amount in the foreign draft had been materially altered from ₱300,000.00 to ₱380,000.00. LBP
returnedthe check to Far East Bank. Far East Bank refunded LBP the ₱380,000.00 paid by LBP. Far East Bank
initially debited ₱168,053.36 from Gold Palace Jewellery’s account and demanded the payment of the difference
between the amount in the altered draft and the amount debited from Gold Palace Jewellery.
However, for the reasons already discussed above, our pronouncement in the Far East Bank and Trust
Companycase that "the drawee is liable on its payment of the check according to the tenor of the check at the
time of payment, which was the raised amount"31 is inapplicable to the factual milieu obtaining herein.
We only adopt said decision in so far as it adjudged liability on the part of the collecting bank, thus:
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far
East, should not have debited the money paid by the drawee bank from respondent company's account. When
Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of
the NIL, became an agent of the former for the collection of the amount in the draft. The subsequent payment
by the drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the
drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher, and,
as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction
is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a
bank at some future time will call on the payee for the return of the money paid to him on the check.
As the transaction in this case had been closed and the principalagent relationship between the payee and the
collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on
its own and should now be responsible for its own actions. x x x Likewise, Far East cannot invoke the warranty
of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This
is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is
a restrictive indorsement. It did not in any way transfer the title of the instrument to the collecting bank. Far
East did not own the draft, it merely presented it for payment. Considering that the warranties of a general
indorser as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders
in due course, these warranties did not attach to the indorsement for deposit and collection made by Gold
Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not debit respondent's
account for the amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not
debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. 32
Applying the foregoing ratiocination, the Bank cannot debit the savings account of petitioners. A
depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer, the
payee, or either the drawee bank or depositary bank was negligent and such negligence substantially
contributed tothe loss from alteration. In the instant case, no negligence can be attributed to petitioners.
We lend credence to their claim that at the time of the sales transaction, the Bank’s branch manager was
present and even offered the Bank’s services for the processing and eventual crediting of the checks. True
to the branch manager’s words, the checks were cleared three days later when deposited by petitioners
and the entire amount ofthe checks was credited to their savings account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should have
made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the
collecting bank in this case and not from them.
The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’ savings account. Under
Art. 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. And the requisites for legal compensation are:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or similar institution is that of creditor-
debtor. Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loans. The bank is the
debtorand the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay
the depositor on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties. 33
But as previously discussed, petitioners are not liable for the deposit of the altered checks. The Bank, asthe
depositary and collecting bank ultimately bears the loss. Thus, there being no indebtedness to the Bank on
the part of petitioners, legal compensation cannot take place. DAMAGES
The Bank incurred a delay in informing petitioners of the checks’ dishonor. The Bank was informed of the
dishonor by Equitable-PCI Bank as early as August 2000 but it was only on 7 March 2001 when the Bank
informed petitioners that it will debit from their account the altered amount. This delay is tantamount to
negligence on the part of the collecting bank which would entitle petitioners to an award for damages under
Article 1170 of the New Civil Code which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.

The damages in the form of actual or compensatory damages represent the amount debited by the Bank from
petitioners’ account.

We delete the award of moral damages. Contrary to the lower court’s finding, there was no showing that the
Bank acted fraudulently or in bad faith. It may have been remiss in its duty to diligently protect the account of
its depositors but its honest but mistaken belief that petitioners’ account should be debited is not tantamount to
bad faith. We also delete the award of attorney’s fees for it is not a sound public policy to place a premium on
the right to litigate. No damages can becharged to those who exercise such precious right in good faith, even if
done erroneously.34

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior
to alteration.1âwphi1 Since Philippine Veterans Bank paid the altered amount of the check, it may pass the
liability back as it did, to Equitable-PCI Bank,the collecting bank. The collecting banks, Equitable-PCI Bank and
the Bank, are ultimately liable for the amount of the materially altered check. It cannot further pass the liability
back to the petitioners absent any showing in the negligence on the part of the petitioners which substantially
contributed to the loss from alteration.

Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered respondents to jointly and
severally pay petitioners ₱1,800,000.00, representing the amount withdrawn from the latter’s account. We do
not conform with said ruling regarding the finding of bad faith on the part of respondents, as well as its failure
toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12 February 2007
respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and SET ASIDE. The 15 January
2004 Decision of the Regional Trial Court of Calamba City, Branch 92 in Civil Case No. B-5886 rendered by Judge
Antonio S. Pozas is REINSTATEDonly insofar as it ordered respondents to jointly and severally pay petitioners
₱1,800,000.00 representing the amount withdrawn from the latter’s account. The award of moral damages and
attorney’s fees are DELETED.

SO ORDERED.

G.R. No. 107112 February 24, 1994
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents.
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract
charges himself with an obligation possible to be performed, he must perform it, unless its performance is
rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party
desires to be excused from performance in the event of contingencies arising thereto, it is his duty to provide
the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which
provides:
When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was explained, thus:
The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the
service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears
that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing
violence to that intention to hold their contemplation, it would be doing violence to that intention to hold the
obligor still responsible.2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in
favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists
that the complaint should have been dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance
telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO
II) is a private corporation established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation
of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor,
petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent in
the following places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;
(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &
(f) 2 Units — To be determined by the General Manager. 3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has need for the
electric light posts of the party of the second part it being understood that this contract shall terminate
when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes necessary to remove the electric lightpost; (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member
of the Board of Directors of private respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989
with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of
the contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in
conformity with the guidelines of the National Electrification Administration (NEA) which direct that the
reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11)
years of petitioners' use of the posts, the telephone cables strung by them thereon have become much
heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen bore
holes through the posts at which points those posts were broken during typhoons; that a post now costs as
much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish the
inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners have
used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City,
without any contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent
for the use thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that
petitioners had refused to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners of the
ten (10) telephone units which had caused it great inconvenience and damages to the tune of not less than
P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it
does not sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the
same having been filed more than ten (10) years after the execution of the contract; and (3) it is barred by
estoppel, since private respondent seeks to enforce the contract in the same action. Petitioners further
alleged that their utilization of private respondent's posts could not have caused their deterioration because
they have already been in use for eleven (11) years; and that the value of their expenses for the ten (10)
telephone lines long enjoyed by private respondent free of charge are far in excess of the amounts claimed
by the latter for the use of the posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines
in areas outside Naga City for which its posts were used by them; and that if petitioners had refused to comply
with private respondent's demands for payment for the use of the posts outside Naga City, it was probably
because what is due to them from private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had
been categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was
petitioner Maggay who prepared the contract; that the understanding between private respondent and
petitioners was that the latter would only use the posts in Naga City because at that time, petitioners' capability
was very limited and they had no expectation of expansion because of legal squabbles within the company; that
private respondent agreed to allow petitioners to use its posts in Naga City because there were many
subscribers therein who could not be served by them because of lack of facilities; and that while the telephone
lines strung to the posts were very light in 1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared
that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of
Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the
posts in 1989 are much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed by
typhoon Sisang: around 20 posts were located between Naga City and the town of Pili while the posts in
barangay Concepcion, Naga City were broken at the middle which had been bored by petitioner's linemen to
enable them to string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines
that were strung to the posts did not follow the minimum vertical clearance required by the National Building
Code, so that there were cases in 1988 where, because of the low clearance of the cables, passing trucks would
accidentally touch said cables causing the posts to fall and resulting in brown-outs until the electric lines were
repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of
Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone
systems of electric cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and
considering the escalation of prices since 1985, electric cooperatives have been charging from P10.00 to P15.00
per post, which is what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on
the poor service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which
was usually out of order such that they could not respond to the calls of their customers. In case of disruption of
their telephone lines, it would take two to three hours for petitioners to reactivate them notwithstanding their
calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him
to study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very
disadvantageous to private respondent. Notwithstanding his recommendation for the filing of a court action to
reform the contract, the former general managers of private respondent wanted to adopt a soft approach with
petitioners about the matter until the term of General Manager Henry Pascual who, after failing to settle the
matter amicably with petitioners, finally agreed for him to file the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private respondent and at the same time
the lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member
of the Board of Directors of private respondent, was the one who saw to it that the contract was fair to
both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as
long as it wishes without paying anything therefor except for long distance calls through PLDT out of which
the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts
have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only
small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according
to standard and comparable to those of PLDT. The accidents mentioned by private respondent involved
trucks that were either overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract
was that the coverage thereof would include the whole area serviced by petitioners because at that time,
they already had subscribers outside Naga City. Private respondent, in fact, had asked for telephone
connections outside Naga City for its officers and employees residing there in addition to the ten (10)
telephone units mentioned in the contract. Petitioners have not been charging private respondent for the
installation, transfers and re-connections of said telephones so that naturally, they use the posts for those
telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in
accordance with engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards
private respondent's first cause of action, that while the contract appeared to be fair to both parties when it
was entered into by them during the first year of private respondent's operation and when its Board of
Directors did not yet have any experience in that business, it had become disadvantageous and unfair to
private respondent because of subsequent events and conditions, particularly the increase in the volume of
the subscribers of petitioners for more than ten (10) years without the corresponding increase in the
number of telephone connections to private respondent free of charge. The trial court concluded that while
in an action for reformation of contract, it cannot make another contract for the parties, it can, however,
for reasons of justice and equity, order that the contract be reformed to abolish the inequities therein.
Thus, said court ruled that the contract should be reformed by ordering petitioners to pay private
respondent compensation for the use of their posts in Naga City, while private respondent should also be
ordered to pay the monthly bills for the use of the telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the rental of posts by telephone companies and the increase in
the costs of such posts, the trial court opined that a monthly rental of P10.00 for each post of private
respondent used by petitioners is reasonable, which rental it should pay from the filing of the complaint in
this case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same
date its monthly bills for the use and transfers of its telephones in Naga City at the same rate that the
public are paying.
On private respondent's second cause of action, the trial court found that the contract does not mention
anything about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court
held that for reason of equity, the contract should be reformed by including therein the provision that for the
use of private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post,
the payment to start on the date this case was filed, or on January 2, 1989, and private respondent should also
pay petitioners the monthly dues on its telephone connections located outside Naga City beginning January,
1989.
And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently
proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the
agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns of
Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where defendant NATELCO uses
plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole, per month beginning January, 1989
and ordering also the plaintiff to pay defendant NATELCO the monthly dues of all its telephones including those
installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio
Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's claim for attorney's
fees and expenses of litigation and defendants' counterclaim are both hereby ordered dismissed. Without
pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision
dated May 28, 1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds to
wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a
potestative condition which rendered said condition void. The motion for reconsideration was denied in the
resolution dated September 10, 1992.6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time
it became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the
contract does not involve the rendition of service or a personal prestation and it is not for future service with
future unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson, etc., et al. ,7 which interpreted
the article, should be followed in resolving this case. Besides, said article was never raised by the parties in their
pleadings and was never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie and may prosper,
there must be sufficient allegations as well as proof that the contract in question failed to express the true
intention of the parties due to error or mistake, accident, or fraud. Indeed, in embodying the equitable remedy
of reformation of instruments in the New Civil Code, the Code Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may
be expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to make
the instrument express their real agreement. The rationale of the doctrine is that it would be unjust and
inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real
meeting of the minds of the parties. The rigor of the legalistic rule that a written instrument should be the
final and inflexible criterion and measure of the rights and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56, Report of
Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where
through mistake or accident on the part of either or both of the parties or mistake or fraud on the part of
the clerk or typist who prepared the instrument, the true intention of the parties is not expressed therein,
then the instrument may be reformed at the instance of either party if there was mutual mistake on their
part, or by the injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake
on its part or mutual mistake on the part of both parties when they entered into the agreement Exh. "A",
and that because of this mistake, said agreement failed to express their true intention. Rather, plaintiff's
evidence shows that said agreement was prepared by Atty. Luciano Maggay, then a member of plaintiff's
Board of Directors and its legal counsel at that time, who was also the legal counsel for defendant-
appellant, so that as legal counsel for both companies and presumably with the interests of both companies
in mind when he prepared the aforesaid agreement, Atty. Maggay must have considered the same fair and
equitable to both sides, and this was affirmed by the lower court when it found said contract to have been
fair to both parties at the time of its execution. In fact, there were no complaints on the part of both sides
at the time of and after the execution of said contract, and according to 73-year old Justino de Jesus, Vice
President and General manager of appellant at the time who signed the agreement Exh. "A" in its behalf
and who was one of the witnesses for the plaintiff (sic), both parties complied with said contract "from the
very beginning" (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff with
the expansion of the business of appellant and the increase in the volume of its subscribers in Naga City
and environs through the years, necessitating the stringing of more and bigger telephone cable wires by
appellant to plaintiff's electric posts without a corresponding increase in the ten (10) telephone connections
given by appellant to plaintiff free of charge in the agreement Exh. "A" as consideration for its use of the
latter's electric posts in Naga City, appear, however, undisputed from the totality of the evidence on record
and the lower court so found. And it was for this reason that in the later (sic) part of 1982 or 1983 (or five
or six years after the subject agreement was entered into by the parties), plaintiff's Board of Directors
already asked Atty. Luis General who had become their legal counsel in 1982, to study said agreement
which they believed had become disadvantageous to their company and to make the proper
recommendation, which study Atty. General did, and thereafter, he already recommended to the Board the
filing of a court action to reform said contract, but no action was taken on Atty. General's recommendation
because the former general managers of plaintiff wanted to adopt a soft approach in discussing the matter
with appellant, until, during the term of General Manager Henry Pascual, the latter, after failing to settle
the problem with Atty. Luciano Maggay who had become the president and general manager of appellant,
already agreed for Atty. General's filing of the present action. The fact that said contract has become
inequitous or disadvantageous to plaintiff as the years went by did not, however, give plaintiff a cause of
action for reformation of said contract, for the reasons already pointed out earlier. But this does not mean
that plaintiff is completely without a remedy, for we believe that the allegations of its complaint herein and
the evidence it has presented sufficiently make out a cause of action under Art. 1267 of the New Civil Code
for its release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977
and the prevailing circumstances and conditions at the time, were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its two officials who signed said agreement in its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the
City of Naga because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic] not
expect to be able to expand because of the legal squabbles going on in the NATELCO. So, even at that time
there were so many subscribers in Naga City that cannot be served by the NATELCO, so as a mater of public
service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light and
that very few telephone lines were attached to the posts of CASURECO II in 1977, said posts have become
"heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's subscribers
and the corresponding increase in the telephone cables and wires strung by it to plaintiff's electric posts in Naga
City for the more 10 years that the agreement Exh. "A" of the parties has been in effect, there has been no
corresponding increase in the ten (10) telephone units connected by appellant free of charge to plaintiff's offices
and other places chosen by plaintiff's general manager which was the only consideration provided for in said
agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even started using plaintiff's
electric posts outside Naga City although this was not provided for in the agreement Exh. "A" as it extended and
expanded its telephone services to towns outside said city. Hence, while very few of plaintiff's electric posts
were being used by appellant in 1977 and they were all in the City of Naga, the number of plaintiff's electric
posts that appellant was using in 1989 had jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add
to this the destruction of some of plaintiff's poles during typhoons like the strong typhoon Sisang in 1987
because of the heavy telephone cables attached thereto, and the escalation of the costs of electric poles from
1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh. "A" has already become too
one-sided in favor of appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be
released therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at its
(plaintiff's) expense. As stated by Tolentino in his commentaries on the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain economic equilibrium between the prestation and the counter-prestation,
and does not permit the unlimited impoverishment of one party for the benefit of the other by the excessive
rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong
premise (i.e., reformation of contract), that from the date of the filing of this case, appellant must pay for the
use of plaintiff's electric posts in Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff
should pay appellant for the telephones in the same City that it was formerly using free of charge under the
terms of the agreement Exh. "A" at the same rate being paid by the general public. In affirming said ruling, we
are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt
the basic and essential services being rendered by both parties herein to the public and to avoid unjust
enrichment by appellant at the expense of plaintiff, said arrangement to continue only until such time as said
parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the
parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be substituted
and superseded by their new agreement. . . ..8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind
this provision,9 the term "service" should be understood as referring to the "performance" of the obligation. In
the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga
City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is
not a requirement thereunder that the contract be for future service with future unusual change. According to
Senator Arturo M. Tolentino,10 Article 1267 states in our law the doctrine of unforseen events. This is said to be
based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also
ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the trial
court praying for modification of the terms and conditions of the contract that they entered into by fixing
the proper shares that should pertain to them out of the gross proceeds from the sales of subdivided lots.
We ordered the dismissal of the complaint therein for failure to state a sufficient cause of action. We
rationalized that the Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court "render
judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision". The cited article (Article 1267) does not grant the courts (the) authority to remake, modify or
revise the contract or to fix the division of shares between the parties as contractually stipulated with the
force of law between the parties, so as to substitute its own terms for those covenanted by the parties
themselves. Respondent's complaint for modification of contract manifestly has no basis in law and
therefore states no cause of action. Under the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity grant the relief sought. 11
The ruling in the Occeña case is not applicable because we agree with respondent court that the
allegations in private respondent's complaint and the evidence it has presented sufficiently made out a
cause of action under Article 1267. We, therefore, release the parties from their correlative obligations
under the contract. However, our disposition of the present controversy does not end here. We have to
take into account the possible consequences of merely releasing the parties therefrom: petitioners will
remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their
service to the public; while private respondent, in consonance with the contract 12 will return all the
telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality.
Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its
posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other
places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per
month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its
telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances
of the present case, as distinguished further from the Occeña case, necessitates exercise of our equity
jurisdiction.13 By way of emphasis, we reiterate the rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential services being rendered by both parties
herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . . 14
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the
subject of trial and evidence has been passed upon by respondent court in its well reasoned resolution,
which we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this
case, we have changed its theory and decided the same on an issue not invoked by plaintiff in the lower
court. For basically, the main and pivotal issue in this case is whether the continued enforcement of the
contract Exh. "A" between the parties has, through the years (since 1977), become too inequitous or
disadvantageous to the plaintiff and too one-sided in favor of defendant-appellant, so that a solution must
be found to relieve plaintiff from the continued operation of said agreement and to prevent defendant-
appellant from further unjustly enriching itself at plaintiff's expense. It is indeed unfortunate that defendant
had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go to court. But
although plaintiff cannot, as we have held, correctly invoke reformation of contract as a proper remedy
(there having been no showing of a mistake or error in said contract on the part of any of the parties so as
to result in its failure to express their true intent), this does not mean that plaintiff is absolutely without a
remedy in order to relieve itself from a contract that has gone far beyond its contemplation and has
become so highly inequitous and disadvantageous to it through the years because of the expansion of
defendant-appellant's business and the increase in the volume of its subscribers. And as it is the duty of the
Court to administer justice, it must do so in this case in the best way and manner it can in the light of the
proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant court
may uphold the decision below upon some other point which was ignored or erroneously decided by the trial
court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA
467). Furthermore, the appellate court has the discretion to consider an unassigned error that is closely related
to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also
been held that the Supreme Court (and this Court as well) has the authority to review matters, even if they are
not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving at a just
decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143).
For it is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer,
that determines the relief to which the plaintiff is entitled, and the plaintiff is entitled to as much relief as the
facts warrant although that relief is not specifically prayed for in the complaint (Rosales v. Reyes and Ordoveza,
25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very
illuminating decision of our Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to be
entitled by the allegations in their pleadings and the facts proven at the trial, and the mere fact that they
themselves misconstrue the legal effect of the facts thus alleged and proven will not prevent the court from
placing the just construction thereon and adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also held:
We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues,
although not raised before the trial court. The presence of strong consideration of substantial justice has led this
Court to relax the well-entrenched rule that, except questions on jurisdiction, no question will be entertained on
appeal unless it has been raised in the court below and it is within the issues made by the parties in their
pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New
Civil Code to this case. Defendant-appellant stresses that the applicability of said provision is a question of fact,
and that it should have been given the opportunity to present evidence on said question. But defendant-
appellant cannot honestly and truthfully claim that it (did) not (have) the opportunity to present evidence on the
issue of whether the continued operation of the contract Exh. "A" has now become too one-sided in its favor
and too inequitous, unfair, and disadvantageous to plaintiff. As held in our decision, the abundant and copious
evidence presented by both parties in this case and summarized in said decision established the following
essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that
respondent court's ruling that the right of action "arose only after said contract had already become
disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime during the
latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is not the
contract itself, but the instrument embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the determination of
the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought
within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be
reckoned from the time the right of action accrues which is not necessarily the date of execution of the contract.
As correctly ruled by respondent court, private respondent's right of action arose "sometime during the latter
part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said contract as it already appeared disadvantageous to (private
respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said
contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, ten (10) years had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of
either party because petitioner's permission for free use of telephones is not made to depend purely on
their will, neither is private respondent's permission for free use of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to private
respondent under the allegations of its complaint and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement —
(a) That the term or period of this contract shall be as long as the party of the first part [herein appellant]
has need for the electric light posts of the party of the second part [herein plaintiff] it being understood
that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to
stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric
light post [sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the
aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A similar
provision in a contract of lease wherein the parties agreed that the lessee could stay on the leased
premises "for as long as the defendant needed the premises and can meet and pay said increases" was
recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of
Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition because it leaves
the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee." Further held
the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively
upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not,
completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of
lease of no equality exists between the lessor and the lessee since the life of the contract is dictated solely
by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There is no
mutuality and equality between them under the afore-quoted provision thereof since the life and continuity
of said agreement is made to depend as long as appellant needs plaintiff's electric posts. And this is
precisely why, since 1977 when said agreement was executed and up to 1989 when this case was finally
filed by plaintiff, it could do nothing to be released from or terminate said agreement notwithstanding that
its continued effectivity has become very disadvantageous and inequitous to it due to the expansion and
increase of appellant's telephone services within Naga City and even outside the same, without a
corresponding increase in the ten (10) telephone units being used by plaintiff free of charge, as well as the
bad and inefficient service of said telephones to the prejudice and inconvenience of plaintiff and its
customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment
of which depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based
on this definition, respondent court's finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for
the electric light posts of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions in the same
provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the
second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it
becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on
chance, hazard or the will of a third person, which do not invalidate the aforementioned
provision. 21 Nevertheless, in view of our discussions under the first and second issues raised by petitioners,
there is no reason to set aside the questioned decision and resolution of respondent court. WHEREFORE, the
petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its resolution dated
September 10, 1992 are AFFIRMED. SO ORDERED.
TAGAYTAY REALTY CO., INC., Petitioner, v. ARTURO G. GACUTAN, Respondent.
The Court reiterates the right of the installment buyer of a subdivision lot to withhold payment of his
amortizations for the duration that the subdivision developer has not complied with its contractual undertaking
to build the promised amenities in the subdivision.
The Case
On appeal by the subdivision developer is the decision promulgated on May 29, 2003, 1 whereby the Court of
Appeals (CA) upheld the ruling in favor of the installment buyer issued on December 6, 2001 by the Office of the
President (OP).2 By such ruling, the OP affirmed the July 14, 1997 decision 3 rendered by the Housing and Land
Use Regulatory Board (HLURB) Board of Commissioners adopting the HLURB Arbiter's decision dated March 22,
1995.4cralawrednad
Antecedents
On September 6, 1976, the respondent entered into a contract to sell with the petitioner for the purchase on
installment of a residential lot with an area of 308 square meters situated in the Foggy Heights Subdivision then
being developed by the petitioner.5 Earlier, on June 30, 1976, the petitioner executed an express undertaking in
favor of the respondent, as follows:6
We hereby undertake to complete the development of the roads, curbs, gutters, drainage
system, water and electrical systems, as well as all the amenities to be introduced in
FOGGY HEIGHTS SUBDIVISION, such as, swimming pool, pelota court, tennis and/or
basketball court, bath house, children's playground and a clubhouse within a period of two
years from 15 July 1976, on the understanding that failure on their part to complete such
development within the stipulated period shall give the VENDEE the option to suspend
payment of the monthly amortization on the lot/s he/she purchased until completion of
such development without incurring penalty interest.
It is clearly understood, however, that the period or periods during which we cannot
pursue said development by reason of any act of God, any act or event constituting force
majeure or fortuitous event, or any restriction, regulation, or prohibition by the
government or any of its branches or instrumentalities, shall suspend the running of said
2-year period and the running thereof shall resume upon the cessation of the cause
of the stoppage or suspension of said development.
In his letter dated November 12, 1979,7 the respondent notified the petitioner that he was suspending his
amortizations because the amenities had not been constructed in accordance with the undertaking. Despite
receipt of the respondent's other communications requesting updates on the progress of the construction
of the amenities so that he could resume his amortization, 8 the petitioner did not reply. Instead, on June
10, 1985, the petitioner sent to him a statement of account demanding the balance of the price, plus
interest and penalty.9 He refused to pay the interest and penalty.
On October 4, 1990, the respondent sued the petitioner for specific performance in the HLURB, praying
that the petitioner be ordered to accept his payment of the balance of the contract without interest and
penalty, and to deliver to him the title of the property.10cralawrednad
In its answer,11 the petitioner sought to be excused from performing its obligations under the contract,
invoking Article 1267 of the Civil Code as its basis. It contended that the depreciation of the Philippine Peso
since the time of the execution of the contract, the increase in the cost of labor and construction materials,
and the increase in the value of the lot in question were valid justifications for its release from the
obligation to construct the amenities.
In its positiOn paper,12 the petitiOner stated that it had purposely suspended the construction of the
amenities which would have deteriorated at any rate because its lot buyers had not constructed their
houses in the subdivision.
On March 22, 1995, the HLURB Arbiter ruled m favor of the respondent, 13 to wit:cralawlawlibrary
WHEREFORE, premises considered, respondents are hereby ordered to accept the
payment of the balance of the contract price in the amount of Eight Thousand Five
Hundred Eighty Seven and 80/100 Pesos (P8,587.80) without regular and penalty
interest and, thereafter, to execute and deliver to complainant the absolute deed of
sale covering the sale of property subj,ct of this complaint, together with the valid
title over the said lot.14
The petitioner appealed, but the HLURB Board of Commissioners affirmed the ruling of the HLURB Arbiter
on July 14, 1997.15 Upon the denial of its motion for reconsideration, the petitioner appealed to the
OP.16cralawrednad
On December 6, 2001, the OP upheld the decision of the HLURB Board of Commissioners. 17 The OP later
denied the petitioner's motion for reconsideration. 18cralawrednad
On appeal, the CA affirmed the OP through the assailed decision promulgated on May 29,
2003,19 disposing:cralawlawlibrary
WHEREFORE, premises considered and finding no reversible error in the challenged
Decision and Order dated December 6, 2001, and July 1, 2002, respectively, of the
Office of the President in OP Case No. 98-C-8261 said Decision and Order
are AFFIRMED and UPHELD, and the petition is DISMISSED for lack of merit.
SO ORDERED.20
The CA denied the petitioner's motion for reconsideration. 21cralawrednad
Issues
In this appeal by petition for review on certiorari, the petitioner contends that the CA erred in affirming the
incorrect findings of the OP in a way probably not in accord with law; and in declaring that the respondent
was not guilty of laches.
The petitioner submits that the CA, by observing that the petitioner did not fulfill its obligation to finish the
subdivision project and that it had itself admitted not having finished the project, did not consider that it
must be discharged because extraordinary and unforeseeable circumstances had rendered its duty to
perform its obligation so onerous that to insist on the performance would have resulted in its economic
ruin; that the Court should consider the practical circumstances surrounding the construction of the luxurious
amenities of the project; that the luxurious amenities of the project would only be exposed to the elements,
resulting in wastage and loss of resources, because none of the lot buyers had constructed any house in the
subdivision; that delaying the construction for that reason was reasonable on its part considering that no one
would have benefited from the amenities anyway, and was also a sound business practice because the
construction would be at great cost to it as the developer; that another justification for the non-construction was
its having suffered extreme economic hardships during the political and economic turmoil of the 1980s that the
parties did not foresee at the time they entered into their contract; that under Article 1267 of the Civil Code,
equity demanded a certain economic equilibrium between the prestation and the counter-prestation, and did not
permit the unlimited impoverishment of one party for the benefit of the other by the excessive rigidity of the
principle of the obligatory force of contracts; that as the debtor, it should be partially excused or altogether
released from its obligations due to the extraordinary obstacles to the prestation, which could be overcome only
by a sacrifice that would be absolutely disproportionate, or with very grave risks, or by violating some important
duties; and that the CA thereby erred in closing its eyes to the realities, and in opting not to apply the principles
of equity in favor of applying the terms of the agreement even if doing so would cause the economic ruin of one
of the parties.
The petitioner further submits that the CA erred in declaring that it was apparent that there was no
"unreasonable failure" on the part of the respondent because he had made timely written demands on
November 12, 1979, February 11, 1983, March 20, 1984, June 24, 1985 and November 16, 1988. It urges that
the CA's error consisted in its confusing laches as the failure to assert a right, notwithstanding that jurisprudence
has considered laches to be the unreasonable failure to assert a claim that, by exercising due diligence, could or
should be done earlier; that laches was not, in legal significance, mere delay, but a delay that worked a
disadvantage to another; that the letters of the respondent could hardly be construed as motivated by prudence
and good faith; that the economy had worsened between 1979 and 1988, and such worsening became a factor
that raised the cost of real estate development by leaps and bounds; and that the respondent, whose actuations
smacked of bad faith and opportunism at its expense, had then appeared out of nowhere to seize the
opportunity presented by the real estate boom of the early 1990s, despite having been silent and having failed
to act for a long time, evincing his belief of not having any right at all.
In his comment, the respondent asserts that the submissions of the petitioner did not warrant the non-
construction of the amemt1es; that Article 1159 of the Civil Code provides that obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith; that neither
party could unilaterally and upon his own exclusive volition escape his obligations under the contract unless for
causes sufficient in law and pronounced adequate by a competent tribunal; that correlative to Article 1159 is
Article 1308 of the Civil Code which holds that the validity or compliance of a contract cannot be left to the will
of one party; that a party could not revoke or renounce a contract without the consent of the other, nor could a
party have a contract set aside on the ground that he had made a bad bargain; that he was not liable for the
interest because it was not expressly stipulated in the contract pursuant to Article 1956 of the Civil Code; that no
penalty should be imposed on him by virtue of the undertaking clearly stating that the two-year period for the
completion of the amenities would be suspended only if the development could not be pursued "by reason of
any act God, any act or event constituting force majeure or fortuitous event; or any restriction, regulation, or
prohibition by the government or any of its branches or instrumentalities;" that the reason given by the
petitioner that "the contemplated amenities could not be constructed as they would have only been left exposed
to the elements and would have come to naught on account of the fact that there are no persons residing
thereat" did not justify or excuse the non� construction of the amenities; that the petitioner could not seek
refuge in Article 1267 of the Civil Code by merely alleging inflation without laying down the legal and factual
basis to justify the release from its obligation; that his written extrajudicial demands negated the defense of
laches; that he did not fail to assert his right, or abandon it; and that his written extrajudicial demands wiped
out the period that had already lapsed and started the prescriptive period anew.
In short, was the petitioner released from its obligation to construct the amenities in the Foggy Heights
Subdivision?
Ruling of the Court
The appeal is partly meritorious.
1.
Petitioner was not relieved from its statutory and contractual obligations to complete the amenities
The arguments of the petitioner to be released from its obligation to construct the amenities lack
persuasion.
To start with, the law is not on the side of the petitioner.
Under Section 20 of Presidential Decree No. 957, all developers, including the petitioner, are mandated to
complete their subdivision projects, including the amenities, within one year from the issuance of their
licenses. The provision reads:cralawlawlibrary
Section 20. Time of Completion. - Every owner or developer shall construct and
provide the facilities, improvements, infrastructures and other forms of development,
including water supply and lighting facilities, which are offered and indicated in the
approved subdivision or condominium plans, brochures, prospectus, printed matters,
letters or in any form of advertisement, within one year from the date of the issuance
of the license for the subdivision or condominium project or such other period of time
as maybe fixed by the Authority.
Pursuant to Section 30 of Presidential Decree No. 957,22 the amenities, once constructed, are to be
maintained by the developer like the petitioner until a homeowners' association has been organized to
manage the amenities.
There is no question that the petitioner did not comply with its legal obligation to complete the construction
of the subdivision project, including the amenities, within one year from the issuance of the license.
Instead, it unilaterally opted to suspend the construction of the amenities to avoid incurring maintenance
expenses. In so opting, it was not driven by any extremely difficult situation that would place it at any
disadvantage, but by its desire to benefit from cost savings. Such cost-saving strategy dissuaded the lot
buyers from constructing their houses in the subdivision, and from residing therein.
Considering that the petitioner's unilateral suspension of the construction of the amenities was intended to
save itself from costs, its plea for relief from its contractual obligations was properly rejected because it
would thereby gain a position of advantage at the expense of the lot owners like the respondent. Its
invocation of Article 1267 of the Civil Code, which provides that "(w)hen the service has become so difficult
as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom in
whole or in part," was factually unfounded. For Article 1267 to apply, the following conditions should
concur, namely: (a) the event or change in circumstances could not have been foreseen at the time of the
execution of the contract; (b) it makes the performance of the contract extremely difficult but not
impossible; (c) it must not be due to the act of any of the parties; and (d) the contract is for a future
prestation.23 The requisites did not concur herein because the difficulty of performance under Article 1267
of the Civil Code should be such that one party would be placed at a disadvantage by the unforeseen
event.24 Mere inconvenience, or unexepected impediments, or increased expenses did not suffice to relieve
the debtor from a bad bargain.25cralawredcralawrednad
And, secondly, the unilateral suspension of the construction had preceded the worsening of economic
conditions in 1983; hence, the latter could not reasonably justify the petitioner's plea for release from its
statutory and contractual obligations to its lot buyers, particularly the respondent. Besides, the petitioner
had the legal obligation to complete the amenities within one year from the issuance of the license (under
Section 20 of Presidential Decree No. 957), or within two years from July 15, 1976 (under the express
undertaking of the petitioner). Hence, it should have complied with its obligation by July 15, 1978 at the
latest, long before the worsening of the economy in 1983.
2.
Respondent as instalment buyer should pay the annual interest but not the penalty
The respondent insists that his unpaid obligation was only the balance of the contract price amounting to
P8,587.80.26 He declines to pay the interest and the penalty on the ground that the petitioner had not
constructed the amenities as promised under the undertaking.
The Court holds that the respondent was liable for the stipulated annual interest of 12% but not the penalty.
Paragraph 2.b, first sentence, of the contract to sell stipulated the 12% annual interest, as
follows:cralawlawlibrary
xxxx
2.) The VENDEE/S hereby agree/s to pay the purchase price of TWENTY SEVEN
THOUSAND SEVEN HUNDRED TWENTY ONLY PESOS (P27,720.00), Philippine Currency, at
the office of the VENDOR at Makati, Rizal, without necessity of demand or the services of a
collector in the following manner:ChanRoblesvirtualLawlibrary
a.) As downpayment, the amount of FOUR THOUSAND ONE HUNDRED FIFTY EIGHT ONLY
PESOS (P4,158.00) upon the execution of the contract.
b.) The balance of TWENTY THREE THOUSAND FIVE HUNDRED SIXTY TWO ONLY PESOS
(P23,562.00) in eighty four (84) consecutive monthly installments of FOUR HUNDRED
FIFTEEN & 95/100 PESOS (P415.95) each installment, including interest at the rate of
twelve (12%) percent per annum on all outstanding balances, the first of such monthly
installment to be paid on or before the 6 th day of each month, beginning October, 1976. It
is understood that unpaid installments or installments in arrears shall earn a penalty
interest of one (1%) percent per month until fully paid. 27 (Bold underscoring supplied for
emphasis of the relevant portion)
xxxx
Accordingly, the parties agreed to an 84-month or seven-year term of installment on the net contract price of
P23,562.00 at the monthly rate of P415.95, the monthly rate being inclusive of the 12% interest per annum.
Such monthly installment of P415.95 included the principal and the annual interest, the latter being legally
termed the amortization interest. The annual interest was designed to compensate the petitioner for waiting
seven years before receiving the total principal amount. As such, the total cost of the lot purchased by the
respondent for the seven-year term would be P39,097.80, which amount would be inclusive of the contract price
of the lot and the amortization interest.28cralawrednad
The imposition of the annual or amortization interest on the price for the purchase of a lot on installment was
valid and enforceable. As the Court has explained in Relucio v. Brillante-Garfin:29
x x x The contract price of P10,800.00 may thus be seen to be the cash price of the
subdivision lots, that is, the amount payable if the price of the lots were to be paid
in cash and in full at the execution of the contract; it is not the amount that the vendor will
have received in the aggregate after fifteen (15) years if the vendee shall have religiously
paid the monthly installments. The installment price, upon the other hand, of the
subdivision lots-the sum total of the monthly installments (i.e., P16,101.00) typically, as in
the instant case, has an interest component which compensates the vendor for waiting
fifteen (15) years before receiving the total principal amount of P10,600.00. Economically
or financially, P10,600.00 delivered in full today is simply worth much more than a long
series of small payments totalling, after fifteen (15) years, P10,600.00. For the vendor,
upon receiving the full cash price, could have deposited that amount in a bank, for
instance, and earned interest income which at six percent (6%) per year and for fifteen
(15) years, would precisely total P5,501.00 (the difference between the installment price of
P16,101.00 and the cash price of P10,600.00) To suppose, as private respondent argues,
that mere prompt payment of the monthly installments as they fell due would obviate
application of the interest charge of six percent (6%) per annum, is to ignore that simple
economic fact. That economic fact is, of course, recognized by law, which authorizes the
payment of interest when contractually stipulated for by the parties or when implied in
recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment of either the
cash price of a subdivision lot or its installment price. Should the vendee opt to
purchase a subdivision lot via the installment payment system, he is in effect paying
interest on the cash price, whether the fact and rate of such interest payment is
disclosed in the contract or not. The contract for the purchase and sale of a piece of
land on the installment payment system in the case at bar is not only quite lawful; it
also reflects a very wide spread usage or custom in our present day commercial life. 30
In view of the foregoing, the respondent's insistence on condoning his liability for the contractually-
stipulated 12% annual amortization interest is unwarranted. The condonation will impose a harsh burden
upon the petitioner, even as it will result in the unjust enrichment of the respondent. We cannot ignore that
the former has waited for a very long period of time before it would be able to use the proceeds of the lot
sold to the respondent.
The 1% monthly penalty sought to be charged on the arrears for failure to pay the amortizations on time
until the arrears would be fully paid was also stipulated in paragraph 2.b, second sentence, of the contract
to sell, supra. But such stipulation could not be enforced against the respondent because the petitioner
waived the penalty should the subdivision development not be completed by July 15, 1978. The waiver
should stand considering that the suspension of the amortization payment in 1979 was excusable on
account of the failure to construct the amenities by July 15, 1978, and considering further that the
petitioner did not contest the suspension of payment of the monthly amortization. 31cralawrednad
Under Tamayo v. Huang,32 the buyer has the option to demand the reimbursement of the total amounts
paid, or to await the further development of the subdivision; when the buyer opts for the latter alternative,
he may suspend the payment of his installments until the time when the developer has fulfilled its
obligation to him; should the developer persist in refusing to complete the facilities, the National Housing
Authority may take over or cause the development and completion of the subdivision at the expense of the
developer.33cralawrednad
In this case, the respondent initially opted to suspend the payment of his amortizations, but then offered to
complete the payment upon realizing that the petitioner did not anymore intend to build the amenities. His
payments from October 6, 1976 to October 6, 1979 corresponded to 36 monthly amortizations totaling
P14,974.20, leaving 48 installments unpaid totaling P19,965.60. 34cralawrednad
3.
Claim of respondent was not barred by laches
Laches is the failure of or neglect for an unreasonable and unexplained length of time to do that which by
exercising due diligence could or should have been done earlier, or to assert a right within a reasonable
time. It warrants a presumption that the party entitled thereto has either abandoned it or declined to assert
it.35cralawrednad
The CA correctly declared that laches did not set in to bar the claim of the respondent because he had
made periodic written demands upon the petitioner that indicated that he had not abandoned or declined
to assert the claim. In 1979, he manifested the intention to avail himself of his right to suspend the
payment of his amortizations pursuant to the undertaking. Since then until 1984, he had continuously
requested the petitioner for updates on the progress of the construction of the amenities so that he could
resume his amortizations. The petitioner did not respond to his requests. His efforts to have the petitioner
construct the amenities so that he would already pay for the lot demonstrated his prudence and alacrity in
insisting on his rights, negating any hint of bad faith or of lack of diligence on his part.
WHEREFORE, the Court AFFIRMS the judgment promulgated on May 29, 2003 subject to
the MODIFICATIONS, as follows: (1) the respondent shall pay to the petitioner the amount of P19,965.60;
(2) the petitioner shall execute the deed of absolute sale covering the property, and shall deliver the
property to the respondent together with the pertinent certificate of title in accordance with the terms of
their contract; and (3) the petitioner shall pay the costs of suit.

SO ORDERED.chan
G.R. No. 109172 August 19, 1994
TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,
vs.
The COURT OF APPEALS and ASSOCIATED BANK, respondents.
In this petition for review on certiorari, petitioner Trans-Pacific Industrial Supplies, Inc. seeks the reversal of the
decision of respondent court, the decretal portion of which reads:
WHEREFORE, the decision of June 11, 1991 is SET ASIDE and NULLIFIED; the complaint is dismissed, and on
the counterclaim, Transpacific is ordered to pay Associated attorney's fees of P15,000.00.
Costs against Transpacific. SO ORDERED. (Rollo, p. 47)
Sometime in 1979, petitioner applied for and was granted several financial accommodations amounting to
P1,300,000.00 by respondent Associated Bank. The loans were evidenced and secured by four (4) promissory
notes, a real estate mortgage covering three parcels of land and a chattel mortgage over petitioner's stock and
inventories.
Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a
restructuring of the remaining indebtedness which then amounted to P1,057,500.00, as all the previous
payments made were applied to penalties and interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes were executed by Trans-Pacific
as follows: (1) Promissory Note No. TL-9077-82 for the amount of P1,050,000.00 denominated as working
capital; (2) Promissory Note No. TL-9078-82 for the amount of P121,166.00 denominated as restructured
interest; (3) Promissory Note No. TL-9079-82 for the amount of P42,234.00 denominated similarly as
restructured interest (Rollo. pp. 113-115).
The mortgaged parcels of land were substituted by another mortgage covering two other parcels of land and a
chattel mortgage on petitioner's stock inventory. The released parcels of land were then sold and the proceeds
amounting to P1,386,614.20, according to petitioner, were turned over to the bank and applied to Trans-Pacific's
restructured loan. Subsequently, respondent bank returned the duplicate original copies of the three promissory
notes to Trans-Pacific with the word "PAID" stamped thereon.
Despite the return of the notes, or on December 12, 1985, Associated Bank demanded from Trans-Pacific
payment of the amount of P492,100.00 representing accrued interest on PN No. TL-9077-82. According to the
bank, the promissory notes were erroneously released.
Initially, Trans-Pacific expressed its willingness to pay the amount demanded by respondent bank. Later, it
had a change of heart and instead initiated an action before the Regional Trial Court of Makati, Br. 146, for
specific performance and damages. There it prayed that the mortgage over the two parcels of land be
released and its stock inventory be lifted and that its obligation to the bank be declared as having been
fully paid.
After trial, the court a quo rendered judgment in favor of Trans-Pacific, to wit:
WHEREFORE, premises considered and upon a clear preponderance of evidence in support of the stated
causes of action, the Court finds for the plaintiffs and against defendant, and
(a) declares plaintiff's obligations to defendant to have been already fully paid;
(b) orders defendant to execute and deliver to plaintiffs a release on the i September 11, 1981 mortgage
over TCT (50858)
S-10086 and TCT (50859) S-109087, and ii December 20, 1983 chattel mortgage, within fifteen (15) days
from the finality hereof;
(c) orders defendant to pay plaintiffs Romeo Javier and Romana Bataclan-Javier the sum of P50,000.00 as
and for moral damages; and
(d) orders defendant to pay plaintiffs the sum of P30,000.00 as attorney's fees, plus expenses of the suit.
Defendant's counterclaims are dismissed for lack of merit.
With costs against defendant.
SO ORDERED. (Rollo, p. 101)
Respondent bank elevated the case to the appellate court which, as aforesaid, reversed the decision of the
trial court. In this appeal, petitioner raises four errors allegedly committed by the respondent court,
namely:
I
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE ACCRUED INTEREST IN THE AMOUNT
OF 492,100.00 HAS NOT BEEN PAID WHEN ARTICLE 1176 OF THE CIVIL CODE PROVIDES THAT SUCH
CLAIM FOR INTEREST UPON RECEIPT OF PAYMENT OF THE PRINCIPAL MUST BE RESERVED OTHERWISE
IT IS DEEMED PAID.
II
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH THE DELIVERY OF THE DOCUMENTS
EVIDENCING THE PRINCIPAL OBLIGATION, THE ANCILLARY OBLIGATION OF PAYING INTEREST WAS
NOT RENOUNCED CONTRARY TO THE PROVISIONS OF ART. 1273 OF THE CIVIL CODE AND THE
UNDISPUTED EVIDENCE ON RECORD.
III
RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT PETITIONER HAS FULLY PAID ITS
OBLIGATION CONFORMABLY WITH ARTICLE 1234 OF THE CIVIL CODE.
IV
RESPONDENT APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES IN FAVOR OF ASSOCIATED BANK
(Rollo, p. 15).
The first three assigned errors will be treated jointly since their resolution border on the common issue, i.e.,
whether or not petitioner has indeed paid in full its obligation to respondent bank.
Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court ruled that petitioner has
fully discharged its obligation by virtue of its possession of the documents (stamped "PAID") evidencing its
indebtedness. Respondent court disagreed and held, among others, that the documents found in possession of
Trans-Pacific are mere duplicates and cannot be the basis of petitioner's claim that its obligation has been fully
paid. Accordingly, since the promissory notes submitted by petitioner were duplicates and not the originals, the
delivery thereof by respondent bank to the petitioner does not merit the application of Article 1271 (1st par.) of
the Civil Code which reads:
Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had against the latter.
Respondent court is of the view that the above provision must be construed to mean the original copy of the
document evidencing the credit and not its duplicate, thus:
. . . [W]hen the law speaks of the delivery of the private document evidencing a credit, it must be construed as
referring to the original. In this case, appellees (Trans-Pacific) presented, not the originals but the duplicates of
the three promissory notes." (Rollo, p. 42)
The above pronouncement of respondent court is manifestly groundless. It is undisputed that the documents
presented were duplicate originals and are therefore admissible as evidence. Further, it must be noted that
respondent bank itself did not bother to challenge the authenticity of the duplicate copies submitted by
petitioner. In People vs. Tan, (105 Phil. 1242 [1959]), we said:
When carbon sheets are inserted between two or more sheets of writing paper so that the writing of a contract
upon the outside sheet, including the signature of the party to be charged thereby, produces a facsimile upon
the sheets beneath, such signature being thus reproduced by the same stroke of pen which made the surface or
exposed impression, all of the sheets so written on are regarded as duplicate originals and either of them may
be introduced in evidence as such without accounting for the nonproduction of the others.
A duplicate copy of the original may be admitted in evidence when the original is in the possession of the party
against whom the evidence is offered, and the latter fails to produce it after reasonable notice (Sec. 2[b], Rule
130), as in the case of respondent bank.
This notwithstanding, we find no reversible error committed by the respondent court in disposing of the
appealed decision. As gleaned from the decision of the court a quo, judgment was rendered in favor of
petitioner on the basis of presumptions, to wit:
The surrender and return to plaintiffs of the promissory notes evidencing the consolidated obligation as
restructured, produces a legal presumption that Associated had thereby renounced its actionable claim against
plaintiffs (Art. 1271, NCC). The presumption is fortified by a showing that said promissory notes all bear the
stamp "PAID", and has not been otherwise overcome. Upon a clear perception that Associated's record
keeping has been less than exemplary . . ., a proffer of bank copies of the promissory notes without the
"PAID" stamps thereon does not impress the Court as sufficient to overcome presumed remission of the
obligation vis-a-vis the return of said promissory notes. Indeed, applicable law is supportive of a finding
that in interest bearing obligations-as is the case here, payment of principal (sic) shall not be deemed to
have been made until the interests have been covered (Art. 1253, NCC). Conversely, competent showing
that the principal has been paid, militates against postured entitlement to unpaid interests.
In fine. the Court is satisfied that plaintiffs must be found to have settled their obligations in full.
As corollary, a finding is accordingly compelled that plaintiffs (sic) accessory obligations under the real
estate mortgage over two (2) substituted lots as well as the chattel mortgage, have been extinguished by
the renunciation of the principal debt (Art. 1273, NCC), following the time-honored axiom that the
accessory follows the principal. There is, therefore, compelling warrant (sic) to find in favor of plaintiffs
insofar as specific performance for the release of the mortgages on the substituted lots and chattel is
concerned. (Rollo, p. 100)
premised by:
Records show that Associated's Salvador M. Mesina is on record as having testified that all three (3)
December 8, 1990 promissory notes for the consolidated principal obligation, interest and penalties had
been fully paid (TSN, July 18, 1990, p. 18). It is, moreover, admitted that said promissory notes were
accordingly returned to Romeo Javier. (Ibid.)
The above disquisition finds no factual support, however, per review of the records. The presumption
created by the Art. 1271 of the Civil Code is not conclusive but merely prima facie. If there be no evidence
to the contrary, the presumption stands. Conversely, the presumption loses its legal efficacy in the face of
proof or evidence to the contrary. In the case before us, we find sufficient justification to overthrow the
presumption of payment generated by the delivery of the documents evidencing petitioners indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of payment, but of
the renunciation of the credit where more convincing evidence would be required than what normally
would be called for to prove payment. The rationale for allowing the presumption of renunciation in the
delivery of a private instrument is that, unlike that of a public instrument, there could be just one copy of
the evidence of credit. Where several originals are made out of a private document, the intendment of the
law would thus be to refer to the delivery only of the original original rather than to the original duplicate of
which the debtor would normally retain a copy. It would thus be absurd if Article 1271 were to be applied
differently.
While it has been consistently held that findings of facts are not reviewable by this Court, this rule does not
find application where both the trial and the appellate courts differ thereon (Asia Brewery, Inc. v. CA, 224
SCRA 437 [1993]).
Petitioner maintains that the findings of the trial court should be sustained because of its advantage in
observing the demeanor of the witnesses while testifying (citing Crisostomo v. Court of Appeals, 197 SCRA
833) more so where it is supported by the records (Roman Catholic Bishop of Malolos v. Court of Appeals,
192 SCRA 169).
This case, however, does not concern itself with the demeanor of witnesses. As for the records, there is
actually none submitted by petitioner to prove that the contested amount, i.e., the interest, has been paid
in full. In civil cases, the party that alleges a fact has the burden of proving it (Imperial Victory Shipping
Agency v. NLRC 200 SCRA 178 [1991]). Petitioner could have easily adduced the receipts corresponding to the
amounts paid inclusive of the interest to prove that it has fully discharged its obligation but it did not.
There is likewise nothing on the records relied upon by the trial court to support its claim, by empirical evidence,
that the amount corresponding to the interest has indeed been paid. The trial court totally relied on a disputable
presumption that the obligation of petitioner as regards interest has been fully liquidated by the respondent's act
of delivering the instrument evidencing the principal obligation. Rebuttable as they are, the court a quo chose to
ignore an earlier testimony of Mr. Mesina anent the outstanding balance pertaining to interest, as follows:
Court:
Q Notwithstanding, let us go now specifically to promissory note No. 9077-82 in the amount of consolidated
principal of P1,050,000.00. Does the Court get it correctly that this consolidated balance has been fully paid?
A Yes, the principal, yes, sir.
Q Fully settled?
A Fully settled, but the interest of that promissory note has not been paid, Your Honor.
Q In other words, you are saying, fully settled but not truly fully settled?
A The interest was not paid.
Q Not fully settled?
A The interest was not paid, but the principal obligation was removed from our books, Your Honor.
Q And you returned the promissory note?
A We returned the promissory note. (TSN, July 18, 1990, p. 22)
That petitioner has not fully liquidated its financial obligation to the Associated Bank finds more than ample
confirmation and self-defeating posture in its letter dated December 16, 1985, addressed to respondent
bank, viz.:
. . . that because of the prevailing unhealthy economic conditions, the business is unable to generate sufficient
resources for debt servicing.
Fundamentally on account of this, we propose that you permit us to fully liquidate the remaining obligations to
you of P492,100 through a payment in kind (dacion en pago) arrangement by way of the equipments (sic) and
spare parts under chattel mortgage to you to the extent of their latest appraised values." (Rollo, pp. 153-154;
Emphasis supplied)
Followed by its August 20, 1986 letter which reads:
We have had a series of communications with your bank regarding our proposal for the eventual settlement of
our remaining obligations . . .
As you may be able to glean from these letters and from your credit files, we have always been conscious
of our obligation to you which had not been faithfully serviced on account of unfortunate business reverses.
Notwithstanding these however, total payments thus far remitted to you already exceede (sic) the original
principal amount of our obligation. But because of interest and other charges, we find ourselves still
obligated to you by P492,100.00. . . .
. . . We continue to find ourselves in a very fluid (sic) situation in as much as the overall outlook of the
industry has not substantially improved. Principally for this reason, we had proposed to settle our remaining
obligations to you by way of dacion en pago of the equipments (sic) and spare parts mortgaged to you to
(the) extent of their applicable loan values. (Rollo, p. 155; Emphasis supplied)
Petitioner claims that the above offer of settlement or compromise is not an admission that anything is due
and is inadmissible against the party making the offer (Sec. 24, Rule 130, Rules of Court). Unfortunately,
this is not an iron-clad rule.
To determine the admissibility or non-admissibility of an offer to compromise, the circumstances of the
case and the intent of the party making the offer should be considered. Thus, if a party denies the
existence of a debt but offers to pay the same for the purpose of buying peace and avoiding litigation, the
offer of settlement is inadmissible. If in the course thereof, the party making the offer admits the existence
of an indebtedness combined with a proposal to settle the claim amicably, then, the admission is admissible
to prove such indebtedness (Moran, Comments on the Rules of Court, Vol. 5, p. 233 [1980 ed.); Francisco,
Rules of Court, Vol. VII, p. 325 [1973 ed.] citing McNiel v. Holbrook, 12 Pac. (US) 84, 9 L.ed. 1009).
Indeed, an offer of settlement is an effective admission of a borrower's loan balance (L.M. Handicraft
Manufacturing Corp. v. Court of Appeals, 186 SCRA 640 [1990]). Exactly, this is what petitioner did in the
case before us for review.
Finally, respondent court is faulted in awarding attorney's fees in favor of Associated Bank. True, attorney's
fees may be awarded in a case of clearly unfounded civil action (Art. 2208 [4], CC). However, petitioner
claims that it was compelled to file the suit for damages in the honest belief that it has fully discharged its
obligations in favor of respondent bank and therefore not unfounded.
We believe otherwise. As petitioner would rather vehemently deny, undisputed is the fact of its admission
regarding the unpaid balance of P492,100.00 representing interests. It cannot also be denied that
petitioner opted to sue for specific performance and damages after consultation with a lawyer (Rollo, p. 99)
who advised that not even the claim for interests could be recovered; hence, petitioner's attempt to seek
refuge under Art. 1271 (CC). As previously discussed, the presumption generated by Art. 1271 is not
conclusive and was successfully rebutted by private respondent. Under the circumstances, i.e., outright and
honest letters of admission vis-a-vis counsel-induced recalcitrance, there could hardly be honest belief. In
this regard, we quote with approval respondent court's observation:
The countervailing evidence against the claim of full payment emanated from Transpacific itself. It cannot
profess ignorance of the existence of the two letters, Exhs. 3 & 4, or of the import of what they contain.
Notwithstanding the letters, Transpacific opted to file suit and insist(ed) that its liabilities had already been
paid. There was thus an
ill-advised attempt on the part of Transpacific to capitalize on the delivery of the duplicates of the
promissory notes, in complete disregard of what its own records show. In the circumstances, Art. 2208 (4)
and (11) justify the award of attorney's fees. The sum of P15,000.00 is fair and equitable. (Rollo, pp. 46-
47)
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner. SO ORDERED.

G. R. No. L-74027 December 7, 1989
SILAHIS MARKETING CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the name and style of
"MARK INDUSTRIAL SALES", respondents.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the decision of
the then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc. v. Silahis Marketing
Corporation", disallowing petitioner's counterclaim for commission to partially offset the claim against it of
private respondent Gregorio de Leon for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November and December, 1975, Gregorio de
Leon (De Leon for short) doing business under the name and style of Mark Industrial Sales sold and delivered to
Silahis Marketing Corporation (Silahis for short) various items of merchandise covered by several invoices in the
aggregate amount of P 22,213.75 payable within thirty (30) days from date of the covering invoices. Allegedly
due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed before the then
Court of First Instance of Manila a complaint for the collection of the said accounts including accrued interest
thereon in the amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as
affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a supposed commission that
Silahis should have received from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly
to Dole Philippines, Incorporated by the latter sometime in August 1975 without coursing the same through the
former allegedly in violation of the usual practice concerning sale of merchandise to Dole Philippines, Inc.; and
[b] Silahis' claim that it is entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B' which
was found defective by its client, Borden International, Davao City, and to have the corresponding amount
cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the claim of de Leon
but at the same time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo
for unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:
There is no question that the defendant received from the plaintiff the items contained in Exhs. 'A' to 'F'.
The only question is whether or not the defendant is entitled to set off against the claim of the plaintiff the
amount contained in the debit memo of the defendant, Exh. '1', and whether or not the defendant is
entitled to return the steel wire mesh which was returned to them by Borden Philippines, as shown by
Exhs. '6-A' and '6-B'. The Court believes that the defendant is properly chargeable for the amounts of the
unpaid invoices set forth in the complaint. However, the Court also believes that the plaintiff is also
properly chargeable for the debit memo of P 22,200.00, Exh. '1'. This is because it was proven by the
defendant from the testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the agreement
between plaintiff and defendant that the latter was to serve the account of Dole Philippines in Davao, the
plaintiff made a direct sale of sprockets for P 111,000.00 which therreby deprives the defendant of its
corresponding commission for P 22,200.00 which the defendant would have otherwise made if the plaintiff
had followed its previous arrangement with the defendant. However, as to the counterclaim of the
defendant for a cancellation of the amount of P 6,000.00 for defective stainless screen wire purchased and
intended for Borden International, Davao City, the Court believes that it is much too late now to present
said claim because the purchase was made and delivered as early as December 22,1975 and the proposed
return to the defendant by Borden was made on April 1, 1976 only. The Court is not ready to award
damages to any of the parties. After deducting the amount of P 22,200.00, which is the unpaid commission
of the defendant from the principal total amount of the unpaid invoices of the plaintiff of P 22,213.75, the
unpaid balance in favor of the plaintiff is P 13.75. The claim for interest and attorney's fees of the plaintiff
may be offset against the interest and attorney's fees of the defendant.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the
defendant to pay to the plaintiff the amount of P 13.75, with interest at 12% per annum from the date of
the filing of the action on July 1, 1976 until fully paid, without pronouncement as to costs.
SO ORDERED.2
De Leon appealed from the said decision insofar as it directed partial compensation and its failure to award
interest on his principal claim as well as attomey's fees in his favor. In a decision dated March 1 7,
1986, 3 respondent Intermediate Appellate Court 4 set aside the decision of the lower court and dismissed
herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal basis. The
appellate court found that there was no agreement, verbal or otherwise, nor was there any contractual
obligation between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc. by de Leon; nor
was there anything in the debit memo obligating de Leon to pay a commission to Silahis for the sale of P
111,000.00 worth of sprockets to Dole Philippines although in the past, the former did supply certain items
to the latter for delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is
liable to the petitioner for the commission or margin for the direct sale which the former concluded and
consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which petitioner's
counterclaim rests and found nothing contained therein to show that private respondent obligated himself
to set-off or compensate petitioner's outstanding accounts with the alleged unrealized commission from the
assailed sale of sprockets in the amount of P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are creditors
and debtors to each other. Article 1279 of the Civil Code provides that: "In order that compensation may
be proper, it is necessary: [1] that each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other; [2] that both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
[3] that the two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them
there be any retention or controversy, commenced by third persons and communicated in due time to the
debtor.
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by
operation of law, even without the consent or knowledge of the creditors and debtors. 5 Article 1279 requires,
among others, that in order that legal compensation shall take place, "the two debts be due" and "they be
liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off
against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim
existing from breach of contract.6

Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of
P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20%
margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance
prevents legal compensation from taking place.

The Court agrees with respondent appellate court that there is no evidence on record from which it can be
inferred that there was any agreement between the petitioner and private respondent prohibiting the latter from
selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a
contract binding between the parties considering that the same, as correctly found by the appellate court, was
not signed by private respondent nor was there any mention therein of any commitment by the latter to pay any
commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00.
Indeed, such document can be taken as self-serving with no probative value absent a showing or at the very
least an inference, that the party sought to be bound assented to its contents or showed conformity thereto.

In fact the letter written by private respondent's lawyer dated March 5,1975 7 in reply to petitioner's letter dated
February 19, 1976 transmitting its Debit Memo No. 1695 8 further strengthens private respondent's stand that it
never agreed to give petitioner any commission on the direct sale to Dole Philippines, Inc. by its company
because said letter denied any utilization of petitioners personnel and facilities at its Davao Branch in the
transaction with Dole Philippines, Inc. which would otherwise lend a basis for petitioner's monetary claim.

WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is hereby
AFFIRMED.

SO ORDERED.

G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to
allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered
titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio
San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square
meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of
Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in
his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of
Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale
and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on
January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint
and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant
Ho Fernandez over the parcel of land including the improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739
(37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on
Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto. Hence, this petition for
review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT
HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-
OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT
HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF
P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO
FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND
A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his
property was sold at public auction without notice to him and that the price paid for the property was
shockingly inadequate, amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition
upon himself. While we commiserate with him at the loss of his property, the law and the facts militate
against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the
other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-
setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes
can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes
of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are
they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80
C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible
against demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty
to, and are the positive acts of the government to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city government
while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by
the national government for the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28,
1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he
knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at
public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that
he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the mandatory
provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure
outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the
affirmative of this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and
properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden
of proof to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and the general
rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity
of all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a taxpayer
of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19
Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be
regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale.
The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the
auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated
November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that
he was not present on December 5, 1977 the date of the auction sale because he went to Iligan City. As
long as there was substantial compliance with the requirements of the notice, the validity of the auction
sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in
question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of
PD 464. Will you tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did
not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such Mr. Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by
notice. By his very own admission that he received the notice, his now coming to court assailing the validity of belatedly asking for the annulment of the sale.
the auction sale loses its force.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is respondent court is affirmed.
not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA
289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA
SO ORDERED.
388) we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to
redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for
the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable
considering the wide divergence between their assessed values and the amounts for which they had been
actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the
ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to
interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at
public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption.
And so it was aptly said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the
loss he claims to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188
Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this
manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.)
238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a
valid objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the
sale, it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by
purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32
Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which we would be glad to
relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of
taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.
.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value.
Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of
adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a
203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to
the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is
still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the
Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to
another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his
tax delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by