G.R. No.

L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant. D. T. Reyes, Liaison and Associates for petitioner-appellant. Office of the Solicitor General for plaintiff-appellee. PADILLA, J.: The Court of Appeals certified this case to this Court because only questions of law are raised. On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818). On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint. After hearing, on 30 July 1956 the trial court render judgment . . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs. On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion. It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract 1 ofcommodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum . . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . . (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. . . . and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . . The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule. As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs. Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur. Barrera, J., concurs in the result.

[G.R. No. 114398. October 24, 1997]

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, represented by the Solicitor General, respondents. DECISION ROMERO, J.: Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon City, in an information which reads as follows: That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place aforementioned, said accused received in trust from the offended party cash money amounting to P536,650.00, Philippine Currency, with the express obligation involving the duty to act as complainants agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several stores, to give her commission corresponding to 40% of the profits; and to return the aforesaid amount of offended party, but said accused, far from complying her aforesaid obligation, and once in possession thereof, misapplied, misappropriated and converted the same to her personal use and benefit, despite repeated demands made upon her, accused failed and refused and still fails and refuses to deliver and/or return the same to the damage and prejudice of the said ISIDORA ROSALES, in the aforementioned amount and in such other amount as may be awarded under the provision of the Civil Code. CONTRARY TO LAW. The antecedent facts are as follows: Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to P633,650.00. During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain information regarding their business proved futile. Alarmed by this development and believing that the amounts she advanced were being misappropriated, Rosales filed a case of estafa against Liwanag. After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty as charged. The dispositive portion of the decision reads thus: WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS. The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00, without subsidiary imprisonment, in case of insolvency. SO ORDERED. Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29, 1993, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is AFFIRMED. SO ORDERED. Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the instant petition, submitting the following assignment of errors: 1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL. 2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE. Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership, wherein Rosales [1] would contribute the funds while she would buy and sell the cigarettes, and later divide the profits between them. She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending to her the amount stated on an installment [2] basis. The Court of Appeals correctly rejected these pretenses. While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court, and [3] carry more weight when these affirm the factual findings of the trial court, we deem it more expedient to resolve the instant petition on its merits. Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means of unfaithfulness or [4] abuse of confidence, or of false pretenses of fraudulent acts. From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third [5] party, and it is essential that there be a fiduciary relation between them either in the form of a trust, commission or [6] administration. The receipt signed by Liwanag states thus: May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988. (SGD & Thumbedmarked) (sic) CARMEN LIWANAG 26 H. Kaliraya St. Quezon City Signed in the presence of: (Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner for a specific purpose (such as that obtaining in the instant case) and he [7] later misappropriated it, such partner is guilty of estafa. Neither can the transaction be considered a loan, since in a contract of loan once the money is received by the debtor, [8] ownership over the same is transferred. Being the owner, the borrower can dispose of it for whatever purpose he may deem proper. In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case there was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. 1(b) of the Revised Penal Code. WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner. SO ORDERED. Melo, Francisco, and Panganiban, JJ., concur. Narvasa, C.J., (Chairman), on leave.

G.R. Nos. L-43697 and L-442200

March 31, 1938

In re Liquidation of the Mercantile Bank of China, GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants, vs. PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees. A.M. Zarate for appellants Gopoco Grocery et al. Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion. Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al. Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al. Marcelo Nubla for appellees Ang Cheng Lian et al. DIAZ, J.: On petition of the Bank Commissioner who alleged to have found, after an investigation, that the Mercantile Bank of China could not continue operating as such without running the risk of suffering losses and prejudice its depositors and customers; and that with the requisite approval of the corresponding authorities, he had taken charge of all the assets thereof; the Court of First Instance of Manila declared the said bank in liquidation; approved all the acts theretofore executed by the commissioner; prohibited the officers and agents of the bank from interfering with said commissioner in the possession of the assets thereof, its documents, deed, vouchers, books of account, papers, memorandum, notes, bond, bonds and accounts, obligations or securities and its real and personal properties; required its creditors and all those who had any claim against it, to present the same in writing before the commissioner within ninety days; and ordered the publication, as was in fact done, of the order containing all these provisions, for the two consecutive weeks in two news-papers of general circulation in the City of Manila, at the expenses of the aforesaid bank. After these publications, and within the period of ninety days, the following creditors, among others, presented their presented their claims: Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea. I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said sum in the bank under liquidation on current account. II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its claim as follows: Balance due on open account subject to check Interest on c/a P4,927.95 4,53 4,932.48 Surety deposit 460.00

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows: Balance due on open account subject to check L759 Savings account No. 156 (foreign) with Mercantile Bank of China L-1611 Amoy $15,000,00 Interest on said Savings Account No. 156 Interest on checking a/c P7,610.44

8.22 10.54 7,624.20

IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim appearing in the record on appeal as follows:

Balance due on open subject to check L-845 Interest on checking a/c

P6,961.01 11.37 6,972.83

V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows: Balance due on open account subject to check L718 Interest on checking a/c P6,224.34 8.54 6,232.88 VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows: Balance due on open account subject to check Interest on account P1910.59 2.20 1,912.79 To better resolve not only these claims but also the many others which were presented against the bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and referee to receive the evidence which the interested parties may desire to present; and the commissioner and referee thus named, after qualifying for the office and receiving the evidence presented to him, resolved the aforesaid six claims by recommending that the same be considered as an ordinary credit only, and not as a preferred credit as the interested parties wanted, because they were at the same time debtors of the bank. The evidence adduced and the very admissions of the said interested parties in fact show that (a) the claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of China in the sum of P10,285.27 which he deposited on current account, was also a debtor not only in the sum of P633.76 but also in the sum of P664.77, the amount of a draft which he accepted, plus interest thereon and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a current account in the bank in the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of $2,334.80, the amount of certain drafts which it had accepted; (c) the claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d) the claimant Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and Sy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted by them and already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of P1,912.79, but it was, in turn, indebted in the sum of $565.40 including interest and other expenses, the amount of two drafts drawn upon and accepted by it. The lower court approved all the recommendations of The commissioner and referee as to claims of the six appellants as follows; (1) To approve the claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit, minus the amount of the draft for P664.77; (2) to approve the claim of Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee), minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit only (P7,610.44 according to the referee), deducting therefrom his obligation amounting to $1,378.90 or P2,757.80; to approve the claim of Woo & Lo & Co. but only as an ordinary credit (P6,961.01 according to the referee). after deducting its obligation to the bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an ordinary credit (P6,224.34 according to the referee), after deducting his obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la Bella Tondea but also as an ordinary credit only (1,917.50 according to the referee), after deducting it obligation amounting to $565.40 or P1,130.80; but he expressly refused to authorize the payment of the interest by reason of impossibility upon the ground set out in the decision. Not agreeable to the decision of the lower court, each of the interested parties appealed therefrom and thereafter filed their respective briefs. Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred: 1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes an ordinary credit only and not a preferred credit.

2. In holding as preferred credits the drafts and checks issued by the bank under liquidation in payment of the drafts remitted to it for collection from merchants residing in the country, by foreign entities or banks; and in not holding that the deposits on current account in said bank should enjoy preference over said drafts and checks; and 3. In holding that the amount of P633.76 (which should be understood as P664.77), which the claimant owes to the bank under liquidation, be deducted from his current account deposit therein, amounting to P10,285.27, upon the distribution of the assets of the bank among its various creditors, instead of holding that, after deducting the aforesaid sum of P633.76 (should be P664.77) from his aforesaid deposit, there be turned over to him the balance together with the dividends or shares then corresponding to him, on the basis of said amount. The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No. 43697, that the lower court erred: 1. In not first deducting from their respective deposits in the bank under liquidation, whose payment they claim, their respective obligation thereto. 2. In not holding that their claims constitute a preferred credit. 3. In holding that the drafts and checks issued by the bank under liquidation in payment of the drafts remitted to it by foreign entitles and banks for collection from the certain merchant residing in the country, are preferred credits; and in not holding that the deposits made by each of them enjoy preference over said drafts and checks, and 4. In denying their motion for a new trial base on the proposition that the appealed decision is not in accordance with law and is contrary to the evidence adduced at the trial. The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R. 43697 being identical in nature, we believe it practical and proper to resolve said questions jointly in one decision. Before proceeding, however, it is convenient to note that the commissioner and referee, classifying the various claims presented against the bank, placed under one group those partaking of the same nature, the classification having resulted in six groups. In the first group he included all the claims for current account, savings and fixed deposits. In the second group he included the claims for checks or drafts sold by the bank under liquidation and not paid by the agents or banks in whose favor they had been issued. In the third group he included the claims checks or drafts issued by the bank under liquidation in payment or reimbursement of the drafts or goods remitted to it for collection, from resident merchants and entitles, by foreign banks and entities. In the fourth group he included the claims for drafts or securities to be collected from resident merchants and entities to be collected from resident merchants and entities which were pending collection on the date payments were suspended. In the fifth group he included the claims of certain depositors or creditors of the bank who were at the same time debtors thereof; and he considered of this class the claims of the appellants in these two cases, and In the sixth group he included the other claims different in nature from the of the aforesaid five claims. I. Now, then, should the appellants' deposits on current account in the bank now under liquidation be considered preferred credits, and not otherwise, or should they be considered ordinary credits only? The appellants contend that they are preferred credits only? The appellants contend that they are preferred credits because they are deposits in contemplation of law, and as such should be returned with the corresponding interest thereon. In support thereof they cite Manresa (11 Manresa, Civil Code, page 663), and what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator who maintains that, notwithstanding the provisions of articles 1767 and 1768 and others of the aforesaid Code, from which it is inferred that the socalled irregular deposits no longer exist, the fact is that said deposits still exist. And they contend and argue that what they had in the bank should be considered as of this character. But it happens that they themselves admit that the bank owes them interest which should have been paid to them before it was declared in a state of liquidation. This fact undoubtedly destroys the character which they nullifies their contention that the same be considered as irregular deposits, because the payment of interest only takes

place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of Commerce, and not those of the Civil Code, are applicable to cases of the nature of those at bar, which have to do with parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We there said, and it is not amiss to repeat now, that the so-called current account and savings deposits have lost their character of deposits, properly so-called and are convertible into simple commercial loans because, in cases of such deposits, the bank has made use thereof in the ordinary course of its transactions as an institution engaged in the banking business, not because it so wishes, but precisely because of the authority deemed to have been granted to it by the appellants to enable them to collect the interest which they had been and they are now collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without considering of course the provisions of article 1768 of the Civil Code. Wherefore, it is held that the deposits on current account of the appellants in the bank under liquidation, with the right on their right on their part to collect interest, have not created and could not create a juridical relation between them except that of creditors and debtor, they being the creditors and the bank the debtor. What has so far been said resolves adversely the contention of the appellants, the question raised in the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and the appellants' second and third assigned errors in case G. R. No. 43697. II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by the other appellants in theirs, respectively, it should be stated that the question of set-off raised by them cannot be resolved a like question in the said case, G. R. No. 43682, entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be made, inasmuch as the appellants and the bank being reciprocally debtors and creditors, the same is only just and according to law (art. 1195, Civil Code), particularly as none of the appellants falls within the exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956), reading: SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off on counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing of the petition by or against the insolvent. It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1, pages 776 and 784) that: The rules of law as to the right of set-off between the bank and its depositors are not different from those applicable to other parties. (Page 776.) Where the bank itself stops payment and becomes insolvent, the customer may avail himself in set-off against his indebtedness to the bank of any indebtedness of the bank to himself, as, for example, the balance due him on his deposit account. (Page 784.) But if set-offs are proper in these cases, when and how should they be made, considering that the appellants ask for the payment of interest? Are they by any chance entitled to interest? If they are, when and until what time should they be paid the same? The question of whether they are entitled to interest should be resolved in the same way that we resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682. The circumstances in these two cases are certainly the same as those in the said case with reference to the said question. The Mercantile Bank of China owes to each of the appellants the interest claimed by them, corresponding to the year ending December 4, 1931, the date it was declared in a state of liquidation, but not which the appellants claim should be earned by their deposits after said date and until the full amounts thereof are paid to them. And with respect to the question of set-off, this should be deemed made, of course, as of the date when the Mercantile Bank of China was declared in a state of liquidation, that is, on December 4, 1931, for then there was already a reciprocal concurrence of debts, with respect to said bank and the appellants. (Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.) III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold, in view of the considerations set out in resolving the other assignments of errors, that the lower court properly denied the motion for new trial of said appellants. In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed by the appellants, and declared by the lower court to be ordinary credits are for the following amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La Bella Tondea, plus their corresponding interest up to December 4, 1931; that their obligations to the bank under liquidation which should be set off against said deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery

(Gopoco); P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we order that the set-offs in question be made in the manner stated in this decision, that is, as of the date already indicated, December 4, 1931. In all other respects, we affirm the aforesaid judgments, without special pronouncement as to costs. So ordered. Avancea, C.J., Villa-Real, Abad Santos, Imperial and Horrilleno, JJ., concur.

G.R. No. 127246 April 21, 1999 SPOUSES LUIS M. ERMITAO and MANUELITA C. ERMITAO, petitioners, vs. THE COURT OF APPEALS AND BPI EXPRESS CARD CORP., respondents.

QUISUMBING, J This petition for review under Rule 45, of the Rules of Court, seeks to set aside the decision of the Court of Appeals in C.A.-G.R. CV 1 No. 47888 reversing the trial court's judgment in Civil Case No. 61357, as well as the resolution of the Court of Appeals denying petitioners' motion for reconsideration. In dispute is the validity of the stipulation embodied in the standard application form for credit cards furnished by private respondent. The stipulation makes the cardholder liable for purchases made through his lost or stolen credit card until (a) notice of such loss or theft has been given to private respondent and (b) the latter has communicated such loss or theft to its memberestablishments. The facts, as found by the trial court, are not disputed. Petitioner Luis Ermitao applied for a credit card from private respondent BPI Express Card Corp. (BECC) on October 8, 1986 with his wife, Manuelita, as extension cardholder. The spouses were given credit cards with a credit limit of P10,000.00. They often exceeded this credit limit without protest from BECC. On August 29, 1989, Manuelita's bag was snatched from her as she was shopping at the Greenbelt Mall in Makati, Metro Manila. Among the items inside the bag was her BECC credit card. That same night she informed, by telephone, BECC of the loss. The call was received by BECC offices through a certain Gina Banzon. This was followed by a letter dated August 30, 1989. She also surrendered Luis' credit card and requested for replacement cards. In her letter, Manuelita stated that she "shall not be responsible 2 for any and all charges incurred [through the use of the lost card] after August 29, 1989. However, when Luis received his monthly billing statement from BECC dated September 20, 1989, the charges included amounts for purchases made on August 30, 1989 through Manuelita's lost card. Two purchases were made, one amounting to P2,350.05 and the other, P607.50. Manuelita received a billing statement dated October 20, 1989 which required her to immediately pay the total amount of P3,197.70 covering the same (unauthorized) purchases. Manuelita again wrote BECC disclaiming responsibility for those charges, which were made after she had served BECC with notice of the loss of her card. Despite the spouses' refusal to pay and the fact that they repeatedly exceeded their monthly credit limit, BECC sent them a notice dated December 29, 1989 stating that their cards had been renewed until March 1991. Notwithstanding this, however, BECC continued to include in the spouses' billing statements those purchases made through Manuelita's lost card. Luis protested this billing in his letter dated June 20, 1990. However, BECC, in a letter dated July 13, 1990, pointed out to Luis the following stipulation in their contract: In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in writing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft to 3 its member establishments. Pursuant to this stipulation, BECC held Luis liable for the amount of P3,197.70 incurred through the use of his wife's lost card, exclusive of interest and penalty charges. In his reply dated July 18, 1990, Luis stressed that the contract BECC was referring to was a contract of adhesion and warned that if BECC insisted on charging him and his wife for the unauthorized purchases, they will sue BECC for damages. This warning 4 notwithstanding, BECC continued to bill the spouses for said purchases.

On April 10, 1991, Luis used his credit card to purchase gasoline at a Caltex station. The latter, however, dishonored his card. In reply to Luis' demand for an explanation, BECC wrote that it transferred the balance of his old credit card to his new one, including the unauthorized charges. Consequently, his outstanding balance exceeded his credit limit of P10,00000. He was informed that his credit card had not been cancelled but, since he exceeded his credit limit, he could not avail of his credit privileges. Once more, Luis pointed out that notice of the lost card was given to BECC before the purchases were made. Subsequently, BECC cancelled the spouses' credit cards and advised them to settle the account immediately or risk being sued for collection of said account. Constrained, petitioners sued BECC for damages. The trial court ruled in their favor, stating that there was a waiver on the part of BECC in enforcing the spouses' liability, as indicated by the following circumstances: (1) Its failure to inform the spouses that the unauthorized charges on the lost card would be carried over to their replacement cards; and (2) Its act of unqualifiedly replacing the lost card and Luis' card which were both surrendered by the spouses, even after the spouses unequivocally denied liability for the unauthorized purchases. The trial court further noted that the suspension of the spouses' credit cards was based upon the "lame excuse" that the credit limit had been exceeded, despite the fact that BECC allowed the spouses previously to exceed their credit limit, even for almost two years after the loss of Manuelita's card. Moreover, the credit limit was exceeded only after BECC added the unauthorized purchases to the liability of the spouses. BECC continued to send the spouses separate billing statements that included the unauthorized purchases, with interest and penalty charges. The trial court opined that the only purpose for the suspension of the spouses' credit privileges was to compel them to pay for the unauthorized purchases. The trial court ruled that the latter portion of the condition in the parties' contract, which states that liability for purchases made after a card is lost or stolen shall be for the account of the cardholder until after notice of the loss or theft has been given to BECC and after the latter has informed its member establishments, is void for being contrary to public policy 5 and for being dependent upon the sole will of the debtor. Moreover, the trial court observed that the contract between BECC and the Ermitaos was a contract of adhesion, whose terms must be construed strictly against BECC, the party that prepared it. The dispositive portion of the trial court's decision reads: WHEREFORE, and IN VIEW OF THE ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered in favor of the plaintiffs, Spouses Luis M. Ermitao and Manuelita C. Ermitao and against defendant BPI Express Card Corporation: 1. Ordering the said defendant to pay the plaintiffs the sum of P100,000.00 as moral damages. 2. Ordering said defendant to pay the plaintiffs the sum of P50,000.00 as exemplary damages. 3. Ordering said defencant to pay the plaintiffs the sum equivalent to twenty per cent (20%) of the amounts abovementioned as and for attorney's fees and expenses of litigation, and 4. Ordering the said defendant to pay the costs of suit. SO ORDERED But, on appeal this decision was reversed. The Court of Appeals stated that the spouses should be bound by the contract, even 6 though it was one of adhesion. It also said that Luis, being a lawyer, had "all the tools to drive a hard bargain had he wanted to. It 7 cited the case of Serra v. Court of Appeals wherein this Court ruled that contracts of adhesion are as binding as ordinary contracts. The petitioner in Serra was a CPA-lawyer, "a highly educated man 8 . . . who should have been more cautious in (his) transactions. . . The Court of Appeals therefore disposed of the appeal as follows:

THE FOREGOING CONSIDERED, the contested decision is REVERSED. Plaintiffs/appellees are hereby directed to pay the defendant/appellant the amount of P3,197.70 with 3% interest per month and an additional 3% penalty equivalent to the amount due every month until full payment. Without cost. SO ORDERED.
9

Hence, this recourse by petitioners, in which they claim that the Court of Appeals gravely erred in: (i) Ruling that petitioners should be bound by the stipulations contained in the credit card application a document wholly prepared by private respondent itself taking into consideration the professional credentials of petitioner Luis M. Ermitao; (ii) Relying on the case of Serra v. Court of Appeals, 229 SCRA 60, because unlike that case, petitioners have no chance at all to contest the stipulations appearing in the credit card application that was drafted entirely by private respondent, thus, a clear contract of adhesion; (iii) Ruling that private respondent is not estopped by its subsequent acts after having been notified of the loss/theft of the credit card issued to petitioners, and (iv) Holding that the onerous and unconscionable condition in the credit card application that the cardholder continues to be liable for purchases made on lost or stolen credit cards not only after such notice has been given to appellant but also after the latter has communicated such loss/theft to its member establishments without any 10 specific time or period is valid. At the outset, we note that the contract between the parties in this case is indeed a contract of adhesion, so-called because its terms 11 are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts 12 are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. This Court, however, will not hesitate to rule out blind adherence to such contracts if they prove to be too one13 sided under the attendant facts and circumstances. The resolution of this petition, in our view, hinges on the validity and fairness of the stipulation on notice required by private respondent in case of loss or theft of a BECC-issued credit card. Because of the peculiar nature of contracts of adhesion, the validity 14 thereof must be determined in light of the circumstances under which the stipulation is intended to apply. The stipulation in question reads: In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in citing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft to its member establishments. For the cardholder to be absolved from liability for unauthorized purchases made through his lost or stolen card, two steps must be followed: (1) the cardholder must give written notice to BECC, and (2) BECC must notify its member establishments of such loss or theft, which, naturally, it may only do upon receipt of a notice from the cardholder. Both the cardholder and BECC, then, have a responsibility to perform, in order to free the cardholder from any liability arising from the use of a lost or stolen card. In this case, the cardholder, Manuelita, has complied with what was required of her under the contract with BECC. She immediately notified BECC of the loss of her card on the same day it was lost and, the following day, she sent a written notice of the loss to BECC. That she gave such notices to BECC is admitted by BECC in the letter sent to Luis by Roberto L. Maniquiz, head of BECC's Collection 15 Department. Having thus performed her part of the notification procedure, it was reasonable for Manuelita and Luis, for that matter to expect that BECC would perform its part of the procedure, which is to forthwith notify its member-establishments. It is not unreasonable to assume that BECC would do this immediately, precisely to avoid any unauthorized charges.

Clearly, what happened in this case was that BECC failed to notify promptly the establishment in which the unauthorized purchases were made with the use of Manuelita's lost card. Thus, Manuelita was being liable for those purchases, even if there is no showing that Manuelita herself had signed for said purchases, and after notice by her concerning her card's loss was already given to BECC. BECC asserts that the period that elapsed from the time of the loss of the card to the time of its unauthorized use was too short such 16 that "it would be next to impossible for respondent to notify all its member-establishments regarding the fact of the loss. Nothing, however, prevents said member-establishments from observing verification procedures including ascertaining the genuine signature and proper identification of the purported purchaser using the credit card. BECC states that, "between two persons who are negligent, the one who made the wrong possible should bear the loss." We take this to be an admission that negligence had occurred. In effect, BECC is saying that the company, and the member-establishments or the petitioners could be negligent. However, according to BECC, petitioners should be the ones to bear the loss since it was they who made possible the commission of a wrong. This conclusion, however, is self-serving and obviously untenable. From one perspective, it was not petitioners who made possible the commission of the wrong. It could be BECC for its failure to immediately notify its members-establishments, who appear lacking in care or instruction by BECC in proper procedures, regarding signatures and the identification of card users at the point of actual purchase of goods or services. For how else could an unauthorized person succeed to use Manuelita's lost card? The cardholder was no longer in control of the procedure after it has notified BECC of the card's loss or theft. It was already BECC's responsibility to inform its member-establishments of the loss or theft of the card at the soonest possible time. We note that BECC is not a neophyte financial institution, unaware of the intricacies and risks of providing credit privileges to a large number of people. It should have anticipated an occurrence such as the one in this case and devised effective ways and means to prevent it, or otherwise insure itself against such risk. Prompt notice by the cardholder to the credit card company of the loss or theft of his card should be enough to relieve the former of any liability occasioned by the unauthorized use of his lost or stolen card. The questioned stipulation in this case, which still requires the cardholder to wait until the credit card company has notified all its member-establishments, puts the cardholder at the mercy of the credit card company which may delay indefinitely the notification of its members to minimize if not to eliminate the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the credit card company may for some reason fail to promptly notify its members through absolutely no fault of the cardholder. To require the cardholder to still pay for unauthorized purchases after he has given prompt notice of the loss or theft of his card to the credit card company would simply be unfair and unjust. The 17 Court cannot give its assent to such a stipulation which could clearly run against public policy. On the matter of the damages petitioners are seeking, we must delete the award of exemplary damages, absent any clear showing that BECC acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, as required by Article 2232 of the Civil Code. We likewise reduce the amount of moral damages to P50,000.00, considering the circumstances of the parties to the case. WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 47888 is hereby REVERSED and the decision of the Regional Trial Court, Branch 157, Pasig City in Civil Case No. 61375 is REINSTATED, with the MODIFICATION that the award of exemplary damages in the amount of P50,000.00 is hereby deleted; and the amount of moral damages is reduced to P50,000.00; but private respondent is further ordered to pay P25,000 as attorney's fees and litigation expenses. Costs against private respondents.1wphi1.nt SO ORDERED. Bellosillo, Puno, Mendoza and Buena, JJ., concur.

G.R. No. L-47878

July 24, 1942

GIL JARDENIL, plaintiff-appellant, vs. HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee. Eleuterio J. Gustilo for appellant. Jose C. Robles for appellee. MORAN, J.: This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is effected? This question is, in our opinion controlled by the express stipulation of the parties. Paragraph 4 of the mortgage deed recites: Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de terreno descrita en el parrafo primero (1.) de esta escritura. Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly stipulated." (Emphasis supplied.) A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now section 58, Rule 123), and only when the wording of the written instrument appears to be contrary to the evident intention of the parties that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms employed by the parties thereto are at war with their evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the same date of execution of the deed of mortgage, an extension of one year from the date of maturity within which to make payment, without making any mention of any interest which the mortgagor should pay during the additional period (see Exhibit B attached to the complaint), indicates that the true intention of the parties was that no interest should be paid during the period of grace. What reason the parties may have therefor, we need not here seek to explore. Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced evidence to establish it and asked that the deed be reformed accordingly, under the parcel-evidence rule. We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have not been shown to belie or otherwise fail to express the true intention of the parties and that the deed has not been assailed on the ground of mutual mistake which would require its reformation, same should be given its full force and effect. When a party sues on a written contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own notions of justice or equity may dictate. Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made which we may assume to have been so made on the expiration of the year of grace, he shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935, until full payment. Thus modified judgment is affirmed, with costs against appellant.

Yulo, C.J., Ozaeta and Bocobo, JJ., concur. Separate Opinions PARAS, J., dissenting: Under the facts stated in the decision of the majority, I come to the conclusion that interest at the rate of 12 per cent per annum should be paid up to the date of payment of the whole indebtedness is made. Payment of such interest is expressly stipulated. True, it is stated in the mortgage contract that interest was to be paid up to March 31, 1934, but this date was inserted merely because it was the date of maturity. The extension note is silent as regards interest, but its payment is clearly implied from the nature of the transaction which is only a renewal of the obligation. In my opinion, the ruling of the majority is anomalous and at war with common practice and everyday business usage.

G.R. No. L-60705 June 28, 1989 INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF APPEALS,respondents. G.R. No. L-60907 June 28, 1989 OVERSEAS BANK OF MANILA, petitioner, vs. COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L. SANTOS, respondents.

REGALADO, J.: In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No. 60705), and Overseas Bank of 1 Manila (G.R. No. 60907) appeal from the decision of the Court of Appeals, the decretal portion of which states: WHEREFORE, with the modification that appellee Overseas Bank of Manila is ordered to pay to the appellant Raul Santos the sum of P 700,000.00 due under the time deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic) interest per annum from date of issue until fully paid, the appealed decision is affirmed in all other respects. In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC and Raul L. Santos (hereafter, Santos) seek the dismissal of the complaint filed by the Philippine National Bank (hereafter, PNB), or in the event that they be held liable thereunder, to revive and affirm that portion of the decision of the trial court ordering Overseas Bank of Manila (hereafter, OBM) to pay IRC and Santos 2 whatever amounts the latter will pay to PNB, with interest from the date of payment. On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds OBM liable for 3 interest on the time deposit with it of Santos corresponding to the period of its closure by order of the Central Bank. In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court, narrated the antecedents of this case in this wise: The facts of this case are not seriously disputed by any of the parties. They are set forth in the decision of the trial court as follows: Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in the amount of P 500,000.00. (Exhibit-10 OBM) and was issued a Certificate of Time Deposit No. 2308 (Exhibit 1 Santos, Exhibit D). Under date 6 February 1967 defendant Raul L. Santos also made a time deposit with defendant OBM in the amount of P 200,000.00 (Exhibit 11 OBM and was issued certificate of Time Deposit No. 2367 (Exhibit 2 Santos, Exhibit E). Under date 9 February 1967 defendant IRC thru its President-defendant Raul L. Santos, applied for a loan and/or credit line (Exhibit A) in the amount of P 700,000.00 with plaintiff bank. To secure the said loan, defendant Raul L. Santos executed on August 11, 1967 a Deed of Assignment (Exhibit C) of the two time deposits (Exhibits 1-Santos and 2 Santos, also Exhibits D and E) in favor of plaintiff. Defendant OBM gave its conformity to the assignment thru letter dated 11 August 1967 (Exhibit F). On the same date, defendant IRC thru its President Raul L. Santos, also executed a Deed of Conformity to Loan Conditions (Exhibit G). The defendant OBM after the due dates of the time deposit certificates, did not pay plaintiff PNB. Plaintiff demanded payment from defendants IRC and Raul L. Santos (Exhibit K) and from defendant OBM (Exhibit L). Defendants IRC and Raul L. Santos replied that the obligation (loan) of defendant IRC was deemed paid with the irrevocable assignment of the time deposit certificates (Exhibits 5 Santos, 6 Santos and 7 Santos).
4

On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC and Santos the loan of P 700,000.00 with interest as well as attomey's fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos' time deposit certificates with interest, plus exemplary and corrective damages, attorney's fees, and cost. In their answer to the complaint, IRC and Santos alleged that PNB has no cause of action against them because their obligation to PNB was fully paid or extinguished upon the' irrevocable' assignment of the time deposit certificates, and that they are not answerable for the insolvency of OBM They filed a counterclaim for damages against PNB and a cross-claim against OBM alleging that OBM acted fraudulently in refusing to pay the time deposit certificates to PNB resulting in the filing of the suit against them by PNB, and that, therefore, OBM should pay them whatever amount they may be ordered by the court to pay PNB with interest. They also asked that OBM be ordered to pay them compensatory, moral, exemplary and corrective damages. In its answer to the complaint, OBM denied knowledge of the time deposit certificates because the alleged time deposit of Santos 'does not appear in its books of account. Whereupon, IRC and Santos, with leave of court, filed a third-party complaint against Emerito B. Ramos, Jr., president of OBM and Rodolfo R. Sunico, treasurer of said bank, who allegedly received the time deposits of Santos and issued the certificates therefor. Answering the third-party complaint, Ramos and Sunico alleged that IRC and Santos have no cause of action against them because they received and signed the time deposit certificates as officers of OBM that the time deposits are recorded in the subsidiary ledgers of the bank and are 'civil liabilities of the defendant OBM On November 18, 1970, OBM filed an amended or supplemental answer to the complaint, acknowledging the certificates of time deposit that it issued to Santos, and admitting its failure to pay the same due to its distressed financial situation. As affirmative defenses, it alleged that by reason of its state of insolvency its operations have been suspended by the Central Bank since August 1, 1968; that the time deposits ceased to earn interest from that date; that it may not give preference to any depositor or creditor; and that payment of the plaintiffs claim is prohibited. On January 30, 1976, the lower court rendered judgment for the plaintiff, the dispositive portion of which reads as foIlows WHEREFORE, judgment is hereby rendered, ordering: 1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the plaintiff, jointly and solidarily, the total amount of P 700,000.00 plus interest at the rate of 9% per annum from maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively (Exhibits M and I), plus 1-1/ 2% additional interest effective February 28, 1968 and additional penalty interest of 1% per annum of the Id amount of P 700,000.00 from the time of maturity of Id loan up to the time the said amount of P 700,000.00 is actually paid to the plaintiff; 2. The defendants topay l0% of the amount of P 700,000.00 as and for attorney's fees; 3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and Raul L. Santos whatever amounts the latter will pay to the plaintiff with interest from date of payment; 4. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and Raul L. Santos the amount of P 10,000.00 as and for attorney's fees; 5. The third-party complaint and cross-claim dismissed; 6. The defendant Overseas Bank of Manila to pay the costs. SO ORDERED.
5

IRC Santos and OBM all appealed to the respondent Court of Appeals. As stated in limine, on March 16, 1982 respondent court promulgated its appealed decision, with a modification and the deletion of that portion of the judgment of the trial court ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest from the date of payment. Therein defendants-appellants, through separate petitions, have brought the said decision to this Court for review. 1. The first issue posed before us for resolution is whether the liability of IRC and Santos with PNB should be deemed to have been paid by virtue of the deed of assignment made by the former in favor of PNB, which reads: KNOW ALL MEN BY THESE PRESENTS; I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661 Richmond St., Mandaluyong, Rizal for and in consideration of certain loans, overdrafts and other credit accommodations granted or those that may hereafter be granted to me/us by the PHILIPPINE NATIONAL BANK, have assigned, transferred and conveyed and by these presents, do hereby assign, transfer and convey by way of security unto said PHILIPPINE NATIONAL BANK its successors and assigns the following Certificates of Time Deposit issued by the OVERSEAS BANK OF MANILA, its CONFORMITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor of RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN HUNDRED THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, .... xxx xxx xxx It is also understood that the herein Assignor/s shall remain hable for any outstanding balance of his/their obligation if the Bank is unable to actually receive or collect the above assigned sums , monies or properties 6 resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. xxx xxx xxx Respondent Court of Appeals did not consider the aforesaid assignment as payment, thus: The contention of IRC and Santos that the irrevocable assignment of the time deposit certificates to PNB constituted payment' of their obligation to the latter is not well taken. Where a certificate of deposit in a bank, payable at a future day, was handed over by a debtor to his creditor, it was not payment, unless there was an express agreement on the part of the creditor to receive it as such, and the question whether there was or was not such an agreement, was one of facts to be decided by the jury. (Downey 7 vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and Banking, p. 200). We uphold respondent court on this score. In Lopez vs. Court of appeals, et al., petitioner Benito Lopez obtained a loan for P 20,000.00 from the Prudential Bank and Trust Company. On the same day, he executed a promissory note in favor of the bank and, in addition, he executed a surety bond in which he, as principal, and Philippine American General Insurance Co., Inc. (Philamgen), as surety, bound themselves jointly and severally in favor of the bank for the payment of the loan. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed to indemnify the company against any damages which the latter may sustain in consequence of having become a surety upon the bond. At the same time, Lopez executed a deed of assignment of his shares of stock in the Baguio Military Institute, Inc. in favor of Philamgen. When Lopez' obligation matured without being settled, Philamgen caused the transfer of the shares of stocks to its name in order that it may sell the same and apply the proceeds thereof in payment of the loan to the bank. However, when no payment was still made by the principal debtor or surety, the bank filed a complaint which compelled Philamgen to pay the bank. Thereafter, Philamgen filed an action to recover the amount of the loan against Lopez. The trial court therein held that the obligation of Lopez was deemed paid when his shares of stocks were transferred in the name of Philamgen. On appeal, the Court of Appeals ruled that Lopez was still liable to Philamgen because, pending payment, Philamgen was merely holding the stock as security for the payment of Lopez' obligation. In upholding the finding therein of the Court of Appeals, We held that:
8

Notwithstanding the express terms of the 'Stock Assignment Separate from Certificate', however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P 20,000.00 from Prudential Bank, Lopez executed a promissory note for P 20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment. The indemnity agreement and stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P l,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. ... Along the same vein, in the case at bar it would not have been necessary on the part of IRC and Santos to execute promissory notes in favor of PNB if the assignment of the time deposits of Santos was really intended as an absolute conveyance. There are cogent reasons to conclude that the parties intended said deed of assignment to complement the promissory notes. In declaring that the deed of assignment did not operate as payment of the loan so as to extinguish the obligations of IRC and Santos with PNB, the trial court advanced several valid bases, to wit: a. It is clear from the Deed of Assignment that it was only by way of security; xxx xxx xxx b. The promissory notes (Exhibits H and I) were executed on August 16, 1967. If defendants IRC and Raul L. Santos, upon executing the Deed of Assignment on August 11, 1967 had already paid their loan of P 700,000.00 or otherwise extinguished the same, why were the promissory notes made on August 16, 1967 still executed by IRC and signed by Raul L. Santos as President? c. In the application for a credit line (Exhibit A),the time deposits were offered as collateral.
9

For all intents and purposes, the deed of assignment in this case is actually a pledge. Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous 10 language or other circumstances excluding an intent to pledge. The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they

be legally authorized for the purpose. The further requirement that the thing pledged be placed in the possession of the creditor, 12 or of a third person by common agreement was complied with by the execution of the deed of assignment in favor of PNB. It must also be emphasized that Santos, as assignor, made an express undertaking that he would remain liable for any outstanding balance of his obligation should PNB be unable to actually receive or collect the assigned sums resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. The term "for any cause whatsoever" is broad enough to include the situation involved in the present case. Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and Santos should be held liable to PNB for the amount of the loan with the corresponding interest thereon. 2. We find nothing illegal in the interest of one and one-half percent (1-1/2%) imposed by PNB pursuant to the resolution of its Board which presumably was done in accordance with ordinary banking procedures. Not only did IRC and Santos fail to overcome the presumption of regularity of business transactions, but they are likewise estopped from questioning the validity thereof for the first time in this petition. There is nothing in the records to show that they raised this issue during the trial by presenting countervailing evidence. What was merely touched upon during the proceedings in the court below was the alleged lack of notice to them of the board resolution, but not the veracity or validity thereof. 3. On the issue of whether OBM should be held liable for interests on the time deposits of IRC and Santos from the time it ceased operations until it resumed its business, the answer is in the negative. We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia,
13

11

that:

It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictated; this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition petition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank. We consider it of trivial consequence that the stoppage of the bank's operation by the Central Bank has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot, strictly speaking, be legally denominated as 'force majeure', as maintained by private respondent, We hold it is a matter of simple equity that it be treated as such. The Court further adjured that: Parenthetically, We may add for the guidance of those who might be concerned, and so that unnecessary litigations be avoided from further clogging the dockets of the courts, that in the light of the considerations expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure. We cannot accept the holding of the respondent Court of Appeals that the above-cited decisions apply only where the bank is in a state of liquidation. In the very case aforecited, this issue was likewise raised and We resolved:

Thus, Our task is narrowed down to the resolution of the legal problem of whether or not, for purposes of the payment of the interest here in question, stoppage of the operations of a bank by a legal order of liquidation may be equated with actual cessation of the bank's operation, not different, factually speaking, in its effects, from legal liquidation the factual cessation having been ordered by the Central Bank. In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65 Phil. 395, this Court held: As to the second assignment of error, this Court, in G.R. No. 43682, In re Liquidation of the Mercantile Bank of China, Tan Tiong Tick, claimant and appellant vs. American Apothecaries, C., et al., claimants and appellees, through Justice Imperial, held the following: 4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and this is the object of the second assignment of error, Upon this point a distinction must be made between the interest which the deposits should earn from their existence until the bank ceased to operate, and that which they may earn from the time the bank's operations were stopped until the date of payment of the deposits. As to the first-class, we hold that it should be paid because such interest has been earned in the ordinary course of the bank's businesses and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits with the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the Id claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, we hold that the said interest should not be paid. The Court of Appeals considered this ruling inapplicable to the instant case, precisely because, as contended by private respondent, the said Apothecaries case had in fact in contemplation a valid order of liquidation of the bank concerned, whereas here, the order of the Central Bank of August 13, 1968 completely forbidding herein petitioner to do business preparatory to its liquidation was first restrained and then nullified by this Supreme Court. In other words, as far as private respondent is concerned, it is the legal reason for cessation of operations, not the actual cessation thereof, that matters and is decisive insofar as his right to the continued payment of the interest on his deposit during the period of cessation is concerned. In the light of the peculiar circumstances of this particular case, We disagree. It is Our considered view, after mature deliberation, that it is utterly unfair to award private respondent his prayer for payment of interest on his deposit during the period that petitioner bank was not allowed by the Central Bank to operate. 4. Lastly, IRC and Santos claim that OBM should reimburse them for whatever amounts they may be adjudged to pay PNB by way of compensation for damages incurred, pursuant to Articles 1170 and 2201 of the Civil Code. It appears that as early as April, 1967, the financial situation of OBM had already caused mounting concern in the Central Bank. On December 5, 1967, new directors and officers drafted from the Central Bank (CB) itself, the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) were elected and installed and they took over the management and control of the 15 Overseas Bank. However, it was only on July 31, 1968 when OBM was excluded from clearing with the CB under Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968, pursuant to Resolution No. 1290 of the CB OBM's operations were 16 suspended. These CB resolutions were eventually annulled and set aside by this Court on October 4, 1971 in the decision rendered in the herein cited case of Ramos. Thus, when PNB demanded from OBM payment of the amounts due on the two time deposits which matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to the faithful compliance by OBM of its liabilities thereunder. 17 Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable for damages. When 18 respondent Santos invested his money in time deposits with OBM they entered into a contract of simple loan or mutuum, not a contract of deposit. While it is true that under Article 1956 of the Civil Code no interest shall be due unless it has been expressly stipulated in writing, 19 this applies only to interest for the use of money. It does not comprehend interest paid as damages. OBM contends that it had agreed to pay interest only up to the dates of maturity of the certificates of time deposit and that respondent Santos is not entitled to interest after the maturity dates had expired, unless the contracts are renewed. This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money, under Article 1108 of the Civil Code he has the right to recover damages resulting from the default of OBM and the measure of such damages is interest at the legal rate of six percent (6%)
14

per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts. In fine, OBM is being required to pay such interest, not as interest income stipulated in the certificates of time deposit, but as damages for failure and delay in the payment of its obligations which thereby compelled IRC and Santos to resort to the courts. The applicable rule is that legal interest, in the nature of damages for non-compliance with an obligation to pay a sum of money, is 20 recoverable from the date judicial or extra-judicial demand is made, Which latter mode of demand was made by PNB, after the 21 maturity of the certificates of time deposit, on March 1, 1968. The measure of such damages, there being no stipulation to the 22 contrary, shall be the payment of the interest agreed upon in the certificates of deposit Which is six and onehalf percent (6-1/2%). 23 Such interest due or accrued shall further earn legal interest from the time of judicial demand. We reject the proposition of IRC and Santos that OBM should reimburse them the entire amount they may be adjudged to pay PNB. It must be noted that their liability to pay the various interests of nine percent (9%) on the principal obligation, one and one-half percent (1-1/2%) additional interest and one percent (1%) penalty interest is an offshoot of their failure to pay under the terms of the two promissory notes executed in favor of PNB. OBM was never a party to Id promissory notes. There is, therefore, no privity of contract between OBM and PNB which will justify the imposition of the aforesaid interests upon OBM whose liability should be strictly confined to and within the provisions of the certificates of time deposit involved in this case. In fact, as noted by respondent court, when OBM assigned as error that portion of the judgment of the court a quo requiring OBM to make the disputed reimbursement, IRC and Santos did not dispute that objection of OBM Besides, IRC and Santos are not without fault. They likewise acted in bad faith when they refuse to comply with their obligations under the promissory notes, thus incurring liability for all 24 damages reasonably attributable to the non-payment of said obligations. WHEREFORE, judgment is hereby rendered, ordering: 1. Integrated Realty Corporation and Raul L. Santos to pay Philippine National Bank, jointly and severally, the total amount of seven hundred thousand pesos (P 700,000.00), with interest thereon at the rate of nine percent (9%) per annum from the maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively, plus one and one-half percent (1-1/2%) additional interest per annum effective February 28, 1968 and additional penalty interest of one percent (1%) per annum of the said amount of seven hundred thousand pesos (P 700,000.00) from the time of maturity of said loan up to the time the said amount of seven hundred thousand pesos (P 700,000.00) is fully paid to Philippine National Bank. 2. Integrated Realty Corporation and Raul L. Santos to pay solidarily Philippine National Bank ten percent (10%) of the amount of seven hundred thousand pesos (P 700,000.00) as and for attorney's fees. 3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos the sum of seven hundred thousand pesos (P 700,000.00) due under Time Deposit Certificates Nos. 2308 and 2367, with interest thereon of six and one-half percent (6-1/2%) per annum from their dates of issue on January 11, 1967 and February 6, 1967, respectively, until the same are fully paid, except that no interest shall be paid during the entire period of actual cessation of operations by Overseas Bank of Manila; 4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos six and one-half per cent (61/2%) interest in the concept of damages on the principal amounts of said certificates of time deposit from the date of extrajudicial demand by PNB on March 1, 1968, plus legal interest of six percent (6%) on said interest from April 6, 1968, until fifth payment thereof, except during the entire period of actual cessation of operations of said bank. 5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos ten thousand pesos (P l0,000.00) as and for attorney's fees. SO ORDERED. Melencio-Herrera, (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

[G.R. No. 123643. October 30, 1996]

PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and DR. ERLINDA G. IBARROLA,respondents. RESOLUTION FRANCISCO, J.: As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its accounts with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals Laboratories, a business operated by private [1] respondent Ibarrola. The checks were delivered to the sellers agents who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines, Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an action for a sum of money [2] and damages, docketed as Civil Case 4226-P, against theProvince of Isabela, its Treasurer, the two agents and PNB. In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil case, except the treasurer who died in the meantime, to jointly and solidarily pay Ibarrola several amounts, among which is: (1) P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until the entire amount is [3] fully paid; (Italics supplied.) PNBs appeal to the Court of Appeals (CA) and later to the Supreme Court were denied and dismissed, respectively. All the three courts, however, did not specify whether the legal rate of interest referred to in the judgment is 6% or 12%. The judgment in Civil Case 4226-P became final and executory on November 26, 1993. At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12% which PNB opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same RTC which promulgated the decision. On August 4, 1994 said court issued an order clarifying that the rate is 12%. PNBs direct appeal to this court from that order was referred to the CA which affirmed the RTC order. Hence, this petition for review under Rule 45 where two legal issues are raised: (1) whether in an action for damages, the legal rate of interest is [6] [7] 6% as provided by Article 2209 of the New Civil Code or 12% as provided by CB Circular 416 series of 1974, and (2) whether such rate shall be computed from the filing of the complaint until fully paid? The issues are not new. In the case of Eastern Shipping Lines, Inc. v. CA, this Court had provided a rule of thumb for future [9] guidance," to wit: When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at thediscretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on [10] the amount finally adjudged. (Italics ours.) The case at bench does not involve a loan. Forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for her merchandise. When an obligation arises from a contract of purchase and sale and not from a contract of loan or mutuum, the applicable rate is 6% per annum as provided in [11] Article 2209 of the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416. Indeed, PNBs liability is based only on the RTCs judgment where it was held solidarily liable with the other defendants due to its negligence when it failed to assure [12] itself if the Provincial Treasurer was properly authorized by Ibarrola to make endorsements of said checks. The rate of 12% interest referred to in Cir. 416 applies only to: *L+oan or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in
[8] [4] [5]

accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan [13] or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent. (Italics ours.) Applying the aforequoted rule, therefore , the proper rate of interest referred to in the judgment under execution is only 6%. This interest according to Eastern Shipping shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrolas agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is [14] deemed to be equivalent to a forbearance of credit. Thus, in accordance with the pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the time the judgment became final and executory until fully satisfied. The actual base for the computation of this 12% interest after the judgment in this damage suit became final shall be the amount adjudged (P98,691.90). ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a. computed from the time of the filing of the complaint until its full payment before finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% p.a. computed from the time the judgment became final and executory on November 26, 1993 until fully satisfied. SO ORDERED. Narvasa, C.J., (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concur.

G.R. No. L-33582 March 30, 1982 THE OVERSEAS BANK OF MANILA, petitioner, vs. VICENTE CORDERO and COURT OF APPEALS, respondents.

ESCOLIN, J.: Again, We are confronted with another case involving the Overseas Bank of Manila, filed by one of its depositors. This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed the judgment of the Court of First Instance of Manila, holding petitioner bank liable to respondent Vicente Cordero in the amount of P80,000.00 representing the latter's time deposit with petitioner, plus interest thereon at 6% per annum until fully paid, and costs. On July 20, 1967, private respondent opened a one-year time deposit with petitioner bank in the amount of P80,000.00 to mature on July 20, 1968 with interest at the rate of 6% per annum. However, due to its distressed financial condition, petitioner was unable to pay Cordero his said time deposit together with the interest. To enforce payment, Cordero instituted an action in the Court of First Instance of Manila. Petitioner, in its answer, raised as special defense the finding by the Monetary Board of its state of insolvency. It cited the Resolution of August 1, 1968 of the Monetary Board which authorized petitioner's board of directors to suspend all its operations, and the Resolution of August 13, 1968 of the same Board, ordering the Superintendent of Banks to take over the assets of petitioner for purposes of liquidation. Petitioner contended that although the Resolution of August 13, 1968 was then pending review before the Supreme Court, it effectively barred or abated the action of respondent for even if judgment be ultimately rendered in favor of Cordero, satisfaction thereof would not be possible in view of the restriction imposed by the Monetary Board, prohibiting petitioner from issuing manager's and cashier's checks and the provisions of Section 85 of Rep. Act 337, otherwise known as the General Banking Act, forbidding its directors and officers from making any payment out of its funds after the bank had become insolvent. It was further claimed that a judgment in favor of respondent would create a preference in favor of a particular creditor to the prejudice of other creditors and/or depositors of petitioner bank. After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss, reiterating the same defenses raised in its answer. Finding the same unmeritorious, the lower court denied the motion and proceeded with the trial on the merits. In due time, the lower court rendered the aforesaid decision. Dissatisfied, petitioner appealed to the Court of Appeals, which affirmed the decision of the lower court. Hence, this petition for review on certiorari. The issues raised in this petition are quite novel. Petitioner stands firm on its contentions that the suit filed by respondent Cordero for recovery of his time deposit is barred or abated by the state of insolvency of petitioner as found by the Monetary Board of the Central Bank of the Philippines; and that the judgment rendered in favor of respondent would in effect create a preference in his favor to the prejudice of other creditors of the bank. Certain supervening events, however, have rendered these issues moot and academic. The first of these supervening events is the letter of Julian Cordero, brother and attorney-in-fact of respondent Vicente Cordero, addressed to the Commercial Bank of Manila (Combank), successor of petitioner Overseas Bank of Manila. In this letter dated February 13, 1981, copy of which was furnished this Court, it appears that respondent Cordero had received from the Philippine Deposit Insurance Company the amount of P10,000.00. The second is a Manifestation by the same Julian Cordero dated July 3, 1981, acknowledging receipt of the sum of P73,840.00. Said Manifestation is in the nature of a quitclaim, pertinent portions of which We quote: I, the undersigned acting for and in behalf of my brother Vicente R. Cordero who resides in Canada and by virtue of a Special Power of Attorney issued by Vicente Romero, our Consul General in Vancouver, Canada, xerox copy
1

attached, do hereby manifest to this honorable court that we have decided to waive all and any damages that may be awarded to the above-mentioned case and we hereby also agree to accept the amount of Seventy Three Thousand Eight Hundred Forty Pesos (P73,840.00) representing the principal and interest as computed by the Commercial Bank of Manila. We also agree to hold free and harmless the Commercial Bank of Manila against any claim by any third party or any suit that may arise against this agreement of payment. ... We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos (P73,840.00) with our full satisfaction. ... When asked to comment on this Manifestation, counsel for Combank filed on August 12, 1981 a Comment confirming and ratifying the same, particularly the portions which state: We also agree to hold free and harmless the Commercial Bank any third party or any suit that may arise against this agreement of payment, and We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos (P73,840.00) with our full satisfaction. However, upon further examination, this Court noted the absence of the alleged special power of attorney executed by private respondent in favor of Julian Cordero. When directed to produce the same, Julian Cordero submitted the following explanatory Comment, to which was attached the special power of attorney executed by respondent Vicente Cordero: 3. This manifestation (referring to the Manifestation of July 3, 1981) applies only to third party claims, suit and other damages. It does not mean waiving the interest it should earn while the bank is closed and also the attorney's fees as decided by the lower court. It is very clear. I did not waive the attorney's fees because it belongs to our attorney and interest because it belongs to us and we are entitled to it. Thus, with the principal claim of respondent having been satisfied, the only remaining issue to be determined is whether respondent is entitled to (1) interest on his time deposit during the period that petitioner was closed and (2) to attorney's fees. We find the answer to be in the negative. The pronouncement made by this Court, per Justice Barredo, in the recent case of Overseas Bank of Manila vs. Court of Appeals is explicit and categorical. We quote: It is a matter of common knowledge which we take judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation, it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities, from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. ... Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank. We consider it of trivial consequence that the stoppage of the bank's operations by the Central Bank has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot, strictly speaking be legally denominated as "force majeure" as maintained by private respondent, We hold it is a matter of simple equity that it be treated as such. And concluding, this Court stated: Parenthetically, We may add for the guidance of those who might be concerned and so that unnecessary litigations may be avoided from further clogging the dockets of the courts that in the light of the consideration expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during
2

the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure. Neither can respondent Cordero recover attorney's fees. The trial court found that herein petitioner's refusal to pay was not due to 3 a wilful and dishonest refusal to comply with its obligation but to restrictions imposed by the Central Bank. Since respondent did not appeal from this decision, he is now barred from contesting the same. WHEREFORE, that portion of the lower court's decision ordering petitioner to pay interest on Cordero's time deposit is set aside. It appearing that the amount of the latter's time deposit had been fully paid, this case is hereby dismissed. No costs. SO ORDERED. Barredo (Chairman), Aquino, Concepcion, Jr., De Castro and Ericta, JJ., concur. Abad Santos, J., is on leave.

G.R. No. 101771 December 17, 1996 SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:p May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower? Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1 1991 by respondent Court of Appeals in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses. The Antecedent Facts Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for 2 decision on the basis of said stipulation and memoranda. The stipulation reads in part: 1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank's) Provident Fund on July 20, 1983; 2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan Agreement, . . .; 3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized representative, also executed a Real Estate Mortgage and Promissory Note, . . .; 4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank); 5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985; 6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .; 7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .; 8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B. F. Gaviola, Jr., . . .; 9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;

10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank); xxx xxx xxx The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are: a. Section I-F of Article VI of the Housing Loan Agreement, which provides that, for as long as the loan or any portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits. b. Paragraph (f) of the Real Estate Mortgage which states: The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan. c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future. The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage 5 contract. The dispositive portion of the said decision reads: WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment. xxx xxx xxx Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19, 1985. The respondent Court subsequently affirmed with modification the decision of the trial court, holding that:
6 4 3

. . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in

contracts in order to maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision. A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have agreed to in the first place. and disposed as follows:
7

WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be computed starting July 1, 1985. Dissatisfied, the petitioners had recourse to this Court. The Issues Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral increase of the interest rate and monthly amortizations of the loan 1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased; 2. . . . on the ground that the increase has no basis in the contracts between the parties; 3. . . . on the ground that the increase violates Section 7-A of the Usury Law; 4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the 8 increase are contrary to morals, good customs, public order and public policy. The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners' housing loan? The Court's Ruling Basis for Increased Interest Rate Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners. We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the 9 Mortgagee (respondent bank) may prescribe for its debtors . . . ." Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them. In Banco Filipino Savings & Mortgage Bank vs. Navarro, this Court in essence ruled that in general there is nothing inherently 11 wrong with escalation clauses. In IBAA vs. Spouses Salazar, the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.
10

Application of the Escalation to Petitioners Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could not apply as to petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitionerwife's resignation will be a ground for the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in said ManCom Resolution. They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to 12 the principle of mutuality of contracts, per Philippine National Bank vs. Court of Appeals. What is actually central to the disposition of this case is not really the validity of the escalation clause but theretroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation. In Banco Filipino, this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation. In PNB vs. Court of Appeals, this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they especially respondent bank should have included such factors in their loan agreement. ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective. We have already mentioned (and now reiterate our holding in several 15 cases ) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit. On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contractsordained in Article 1308 of the Civil Code. 16 As this Court held in PNB: In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes
14 13

its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application. To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of 1 generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 7 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts not to agreements already validly entered into. Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72. SO ORDERED. Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents. DECISION CARPIO, J.:

The Case Before us is a petition for review of the Decision of the Court of Appeals dated 27 October 1998 and its Resolution dated 11 [2] May 1999. The assailed decision reversed the Decision of the Regional Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now known as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate court denied the motion for reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.
[1]

The Facts Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting. Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account No. S/A 20016872-6. On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook. Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When [3] Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook. Calapre went back to L.C. Diaz and reported the incident to Macaraya. Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya. Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000 drawn on Philippine [4] Banking Corporation (PBC). This PBC check of L.C. Diaz was a check that it had long closed. PBC subsequently dishonored the check because of insufficient funds and because the signature in the check differed from PBCs specimen signature. Failing to get back the passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez. The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop [5] any transaction using the same passbook until L.C. Diaz could open a new account. On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.

In an Information dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992. On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money. Solidbank refused. On 25 August 1992, L.C. Diaz filed a Complaint for Recovery of a Sum of Money against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the complaint. L.C. Diaz then appealed to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its Decision reversing the decision of the trial court. On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages and attorneys fees.
[8] [7]

[6]

The Ruling of the Trial Court In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The rules state that possession of this book shall raise the presumption of ownership and any payment or payments made by the bank upon the [9] production of the said book and entry therein of the withdrawal shall have the same effect as if made to the depositor personally. At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to another officer who compared the signatures on the withdrawal slip with the specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz. The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its action. Another provision of the rules on savings account states that the depositor must keep the passbook under lock and [10] key. When another person presents the passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court ruled that the passbook presented during the [11] questioned transaction was now out of the lock and key and presumptively ready for a business transaction. Solidbank did not have any participation in the custody and care of the passbook. The trial court believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal. The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz claimed that a letter must accompany withdrawals of more thanP20,000. The letter must request Solidbank to allow the withdrawal and convert the amount to a managers check. The bearer must also have a letter authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization or any communication with Solidbank that the money be converted into a managers check. The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan. The dispositive portion of the decision of the trial court reads: IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees. With costs against plaintiff. SO ORDERED.
[12]

The Ruling of the Court of Appeals The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit: Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter. The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff. The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who was not presented by Solidbank during trial, should have called up the depositor because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and supervision of its employees. The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal. The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good father of a family. The business and functions of banks are affected with public interest. Banks are obligated to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its fiduciary relationship with L.C. Diaz. The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one entered. 1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest thereon at the rate of 12% per annum from the date of filing of the complaint until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and expenses of litigation as well as the cost of suit; and Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00 as attorneys fees.
[13]

2. SO ORDERED.

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but modified the award of [14] damages. The appellate court deleted the award of exemplary damages and attorneys fees. Invoking Article 2231 of the Civil Code, the appellate court ruled that exemplary damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of simple negligence only, the award of exemplary damages was not justified. Consequently, the award of attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows: WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation and cost of suit. SO ORDERED.
[15]

Hence, this petition.

The Issues Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OFP300,000.00 TO RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS NEGLIGENCE WAS [16] ONLY CONTRIBUTORY.

II.

III.

IV.

The Ruling of the Court The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no pre-existing contractual relationship between the parties. We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. There is a debtor-creditor relationship between the bank and its depositor. The bank is the
[17]

debtor and 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. The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA [18] 8791), which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high [19] standards of integrity and performance. This new provision in the general banking law, introduced in 2000, is a statutory [20] affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of [21] their relationship. This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father [22] of a family. Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the [23] unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already imposed on banks the same high standard of diligence required under RA No. 8791. However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure [24] to pay a simple loan, and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor. Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook. Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the same. In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present case. Solidbank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete [25] defense in culpa contractual, unlike in culpa aquiliana. The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised the high standards of integrity and performance required of Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal Another point of disagreement between the trial and appellate courts is the proximate cause of the unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its passbook under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the withdrawal without first verifying with L.C. Diaz. We do not agree with either court. Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, [26] produces the injury and without which the result would not have occurred. Proximate cause is determined by the facts of each [27] case upon mixed considerations of logic, common sense, policy and precedent. L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person. Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre. We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz. There is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so. Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the teller had no reason to be suspicious of the transaction. Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information Sheet of Emerano Ilagan: xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at

Bauan, Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse [28] racing. Ilagan was apprehended and meekly admitted his guilt. (Emphasis supplied.) L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the passbook with the withdrawal slip. We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last [29] clear opportunity to avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the [30] last fair chance to prevent the impending harm by the exercise of due diligence. We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from [31] liability. Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the [32] plaintiff but does not exculpate the defendant from his breach of contract.

Mitigated Damages Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to the circumstances. This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. In Philippine Bank of Commerce v. Court of Appeals, where the Court held the depositor guilty of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages. WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by private respondent L.C. Diaz and Company, CPAs. Proportionate costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Vitug, and Ynares-Santiago, JJ., concur. Azcuna, J., on official leave.
[33]

G.R. No. L-59096 October 11, 1985 PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners, vs. THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First Instance, Branch XI, CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and MICHAEL, INCORPORATED, respondents. Mateo Canonoy for petitioners. Reynaldo A. Pineda, Reyes, Santayana, Tayao and Picaso Law Office for respondent Shell. Marcelo Fernan & Associates for respondent Michael, Inc.

CUEVAS, J.: How much, by way of legal interest, should a judgment debtor pay the judgment creditor- is the issue raised by the REFORMINAS (herein petitioners) in this Petition for Review on certiorari of the Resolution of the Hon. respondent Judge Valeriano P. Tomol, Jr. of the then Court of First Instance of Cebu-Branch XI, issued in Civil Case No. R-11279, an action for Recovery of Damages for injury to Person and Loss of Property. The dispositive portion of the assailed Resolution reads as follows In light (sic) of the foregoing, the considered view here that by legal interest is meant six (6%) percent as provided for by Article 2209 of the Civil Code. Let a writ of execution be issued. SO ORDERED.
1

Petitioners' motion for the reconsideration of the questioned Resolution having been denied, they now come before Us through the instant petition praying for the setting aside of the said Resolution and for a declaration that the judgment in their favor should bear legal interest at the rate of twelve (12%) percent per annum pursuant to Central Bank Circular No. 416 dated July 29, 1974. Hereunder are the pertinent antecedents: On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil Case No. R-11279, the dispositive portion of which reads WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows: Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons: (a) ... xxx xxx xxx (g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita Ill together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
2

June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. On appeal to the then Court of Appeals, the trial court's judgment was modified to reads as follows WHEREFORE. the judgment appealed from is modified such that defendants-appellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby ordered to pay ... The two (2) defendants- appellants are also directed to pay P100,000.00 with legal interests from the filing of the complaint until paid as compensatory and moral damages and P41,000.00 compensation for the value of the lost boat with legal interest from the filing of the complaint until fully paid to Pacita F. Reformina and the heirs of Francisco Reformina. The liability of the two defendants for an the awards is solidary. xxx xxx xxx Except as modified above, the rest of the judgment appealed from is affirmed. The defendants-appellants shall pay costs in favor of the plaintiffs. Appellants Shell and Michael and third party defendant Anita L. Abellanosa shall shoulder their respective costs. SO ORDERED.
3

The said decision having become final on October 24, 1980, the case was remanded to the lower court for execution and this is where the controversy started. In the computation of the "legal interest" decreed in the judgment sought to be executed, petitioners claim that the "legal interest" should be at the rate of twelve (12%) percent per annum, invoking in support of their aforesaid submission, Central Bank of the Philippines Circular No. 416. Upon the other hand, private respondents insist that said legal interest should be at the rate of six (6%) percent per annum only, pursuant to and by authority of Article 2209 of the New Civil Code in relation to Articles 2210 and 2211 thereof. In support of their stand, petitioners contend that Central Bank Circular No. 416 which provides By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect immediately. (Italics supplied) includes the judgment sought to be executed in this case, because it is covered by the phrase 2nd the rate allowed in judgments in the absence of express contract as to such rate of interest ... " in the aforequoted circular. The petition is devoid of merit. Consequently, its dismissal is in order. Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury Law. The amendment from which said authority emanated reads as follows Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener than once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. (Italics supplied) Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest from that of six (6%) percent per annum originally allowed under Section I of Act No. 2655 to twelve (12%) percent per annum.

It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of any money, goods, or credits; and (3) rate allowed in judgments. The issue now iswhat kind of judgment is referred to under the said law. Petitioners maintain that it covers all kinds of monetary judgment. The contention is devoid of merit. The judgments spoken of and referred to are Judgments in litigations involving loans or forbearance of any 'money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank. The Monetary Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary intention, words and phrases in statutes should not be 4 interpreted in isolation from one another. A word or phrase in a statute is always used in association with other words or phrases 5 and its meaning may thus be modified or restricted by the latter. Another formidable argument against the tenability of petitioners' stand are the whereases of PD No. 116 which brought about the grant of authority to the Central Bank and which reads thus WHEREAS, the interest rate, together with other monetary and credit policy instruments, performs a vital role in mobilizing domestic savings and attracting capital resources into preferred areas of investments; WHEREAS, the monetary authorities have recognized the need to amend the present Usury. Law to allow for more flexible interest rate ceilings that would be more responsive to the requirements of changing economic conditions; WHEREAS, the availability of adequate capital resources is, among other factors, a decisive element in the achievement of the declared objective of accelerating the growth of the national economy. Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. The above provision remains untouched despite the grant of authority to the Central Bank by Act No. 2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than those specifically provided for by the Usury Law will make the same of doubtful constitutionality since the Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No. 116. IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition to be without merit, the same is hereby DISMISSED with costs against petitioners. SO ORDERED. Concepcion, Jr., Abad Santos, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente, Alampay and Patajo, JJ., concur. Makasiar, CJ., with separate opinion of Justice Plana. Aquino, J., concurs in the result. Separate Opinions PLANA, J., concurring and dissenting:

1. Central Bank Circular 416 dated July 29, 1974 increased the rate of interest allowed in judgments from 6% to 12% per annum. To my aknowledge,before the instant case, tha validity of CB Circular 416 had not been challenged in this Court. In Viloria vs. Court of Appeals, 123 SCRA 259, it was assumed that the Central Bank w as llegally authorized to issue the said Circular. The only issue there raisedwas whether the increase in interest rate could be given retrospective operation. 2. 1 do not believe the Central Bank authority here in question is premised on Section 1-a of Act No. 2655 (Usury Law), as inserted by Presidential Decree 116. The cited section reads: Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener than once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximumrates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The above law does not empower the Central Bank to fix the specific rate of interest to be charged for loans. It merely grants the power to prescribe the maximum interest rate, leaving it to the contracting parties to determine within the allowable limit what precisely the interest rate will be. In other Words, the provision presupposes that the parties to the loan agreement are free to fix the interest rate, the ceiling prescribed by the Central Bank operating merely to restrict the parties' freedom to stipulate. So viewed, Sec. 1-a cannot include a provision on interest to be allowed in judgments, which is not the subject of contractual stipulations and therefore cannot logically be made subject to interest (ceiling), which is all that Sec. 1-a covers. Note that Central Bank Circular 416 itself invokes as the basis for its issuance Sec. 1, rather than Sec. 1-a, of the Usury Law. 3. By purpose and operative effect, Sec. 1 of the Usury Law is different from Sec. 1-a. Section 1. The rate of interest for the loan or forbearance of any money, goods, or credits and therate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. (Italics supplied This section envisages two situations: (a) a loan or forbearance of money, goods or credit, where the parties agreed on the payment of interest but failed to fix the rate thereof; and (b) a litigation that has ended in a final judgment for the payment of money. In either case, the role of Section 1 is to fix the specific rate of interest or legal interest (6%) to be charged. It also impliedly delegates to the Central Bank the power to modify the said interest rate. Thus, the interest rate shall be 6% per annum or "such rate as may be prescribed by the Monetary Board of the Central Bank ..." 4. The authority to change the legal interest that has been delegated to the Central Bank under the quoted Section 1 is absolute and unqualified. It is true that Section 1 says that the rate of interest shall be 6 % per annum or "such rate as may be prescribed by the Monetary Board of the Central Bank ... in accordance with the authority hereby granted." But neither in the said section nor in any other section of the law is there a guideline or limitation imposed on the Central Bank. The determination of what the applicable interest rate shall be, as distinguished from interest rate ceiling, is completely left to the judgment of the Central Bank. In short, there is a total abdication of legislative power, which renders the delegation void. 5. Under the view taken above, it is unnecessary to make a distinction between judgments in litigations involving loans and judgments in litigations that have nothing to do with loans. 6. I conclude that the Central Bank authority to change the legal rate of interest allowed in judgments is constitutionally defective; and incidentally, this vice also affects its authority to change the legal interest of 6% per annum as to loans and forbearance of money, goods or credits, as envisaged in Section 1 of the Usury Law. If this conclusion be correct, it is imperative to enact a law either increasing the legal interest to a realistic level or supplying the deficiencies of the Usury Law which render the delegation of power therein constitutionally defective. Teehankee, J., concur.

G.R. No. 97412 July 12, 1994 EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents. Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner. Zapa Law Office for private respondent.

VITUG, J.: The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%). The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced: This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages. On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D). On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E). Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L). As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 8586, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said: Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it. From the evidence the court found the following: The issues are: 1. Whether or not the shipment sustained losses/damages; 2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable); 3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's preTrial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38). As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order. Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "TurnOver Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open". and thus held: WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered: A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract); 2. P3,000.00 as attorney's fees, and 3. Costs. B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation. SO ORDERED. (p. 207, Record). Dissatisfied, defendant's recourse to US. The appeal is devoid of merit. After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.) The Court of Appeals thus affirmed in toto the judgment of the court a quo. In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION; II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED. The petition is, in part, granted. In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is 1 not observed but these cases, enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be applied to this case. The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee. We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it. It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark. Let us first see a chronological recitation of the major rulings of this Court: The early case of Malayan Insurance Co., Inc., vs. Manila Port 2 3 Service, decided on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled: Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point. But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by 4 this Court in Rivera vs. Perez, L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c.Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied) The case of Reformina vs. Tomol, rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed: WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows: Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons: xxx xxx xxx (g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
5

June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.) On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) should have, instead, been applied. This Court ruled: The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank. xxx xxx xxx Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. 8 Relying on the Reformina v. Tomol case, this Court modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid. In Nakpil and Sons vs. Court of Appeals, the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus: WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per
9 7 6

cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied) A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per 10 annum imposed on the total amount of the monetary award was in contravention of law." The Court ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained: There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest. It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.) The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for 12 moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied) Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held: WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.) The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said: . . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied) The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid. Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, 15 the Court declared:
14 13 11

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply. Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.Intermediate Appellate Court (1988). In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank 16 Circular imposing the 12% interest per annum applies only to loans or forbearance of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid. The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest. Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid. The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance. I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the 19 contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining 20 the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the 21 interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest 22 from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed 23 from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded 24 25 may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on 26 unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of
18 17

damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof. SO ORDERED. Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Kapunan, JJ., concur. Mendoza, J., took no part.

[G.R. No. 127997 August 7, 1998]

FELIX VILLANUEVA, petitioner, vs. COURT OF APPEALS and ALMARIO GO MANUEL, respondents. DECISION ROMERO, J.: For the Courts resolution is the petition for review of the decision of the Court of Appeals in CA-G.R. CV 39731 entitled [1] Almario Go Manuel v. Felix Villanueva dated January 30, 1996, involving an action for sum of money. In 1991, private respondent, Almario Go Manuel filed a civil action for sum of money with damages before the Regional Trial Court of Cebu City, Branch 8 against petitioner, Felix Villanueva and his wife Melchora. The subject matter of the action involved a check dated June 30, 1991 in the amount of P167,600.00 issued by petitioner in favor of private respondent. The check supposedly represented payment of loans previously obtained by petitioner from private respondent as capital for the formers mining and fertilizer business. The check when duly represented for payment was dishonored due to insufficiency of funds. A demand was made upon petitioner to make good the check but he failed to do so. Private respondent then filed a criminal complaint for violation [2] of Batas Pambansa Bilang 22 before the Cebu City Prosecutors Office and the subject civil complaint for sum of money. Petitioner, on the other hand, avers that his principal obligation only amounts to P23,420.00. On July 27, 1992, the trial court rendered a decision in favor of private respondent, the dispositive portion of which reads: THE FOREGOING CONSIDERED, Judgment is hereby rendered in favor of the plaintiff and against co-defendant Felix Villanueva, directing the latter to pay the former P167,600.00, the dismissal of this case with respect to co-defendant Melchora Villanueva, and finally with costs against the husband. SO ORDERED.
[3]

Apparently aggrieved, both parties appealed the decision to the Court of Appeals. Petitioner prayed for the reversal of the trial courts decision and contended that his principal obligation is only P23,420.00, while private respondent sought interest of ten percent (10%) of the principal obligation; twenty-five percent (25%) as attorneys fees, as well as moral and exemplary damages. The Court of Appeals dismissed the petition and affirmed the decision of the trial court subject to the modification that petitioner was directed to additionally pay private respondent attorneys fees and litigation expenses in the amount of ten (10%) percent of P167,600.00, and the entire obligation to earn interest at six (6%) percent per annum from the filing of the [4] complaint. Petitioner now comes before this Court basically alleging the same issues raised before the Court of Appeals as follows: (a) the Court of Appeals erred in not ruling that the five (5%) and ten (10%) percent interest imposed is not enforceable due to absence of such stipulation in writing; (b) the Court of Appeals erred in not finding that petitioner is only liable for the amount P23,420.00; and (c) the Court of Appeals erred in not declaring that the Central Bank and Monetary Board has no power or authority [5] to repeal the usury law. The petition should be denied. Time and again it has been ruled that the jurisdiction of this Court in cases brought to it from the Court of Appeals is limited to the review and revision of errors of law allegedly committed by the appellate court, as its findings of fact are deemed conclusive. As such, this Court is not duty-bound to analyze and weigh all over again the evidence already considered in the proceedings [6] below. The rule, however, admits of the following exceptions: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion; and (10) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are [7] contradicted by the evidence on record. After a review of the case at bar, we consider petitioner to have failed to raise issues which would constitute sufficient ground to warrant the reversal of the findings of the trial and appellate courts.

As regards the matter of legal interest, this Court, in the case of Eastern Shipping Lines, Inc. v. Court of Appeals laid down the following guidelines: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVII on Damages of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due is that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. x x x. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. Applying the foregoing rules, since the principal obligation in the amount of P167,600.00 is a loan, the same should earn legal interest at the rate of 12% per annum computed from the time the complaint was filed until the finality of this decision. On the other hand, if the total obligation is not satisfied it shall further earn legal interest at the rate of 12% per annum computed from the finality of the decision until payment thereof, the interim period being deemed to be a forbearance of credit. WHEREFORE, premises considered, the decision of the Court of Appeals in CA-G.R. CV 39731 dated January 30, 1996 is hereby AFFIRMED with the MODIFICATION that the rate of legal interest to be paid is TWELVE PERCENT (12%) per annum of the amount due computed from the time the complaint was filed until the finality of this decision. After this decision becomes final and executory, the rate of TWELVE PERCENT (12%) per annum shall be additionally imposed on the total obligation until payment thereof is satisfied. No costs. SO ORDERED. Narvasa C. J. (Chairman), Kapunan, and Purisima, JJ. concur.

[8]

G.R. No. 91494 July 14, 1995 THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner, vs. THE HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE, INC., GEORGE KING TIM PUA and PUA KE SENG, respondents.

QUIASON, J.: This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court of the Decision of the Court of Appeals in CAG.R. CV No. 00922. I The factual antecedents, as found by the trial court and adopted by the Court of Appeals, are as follows: On April 22, 1977, defendant George King Tim Pua, in his personal capacity, applied for, and was granted, by plaintiff bank a loan for the sum of P500,000.00 for which he executed a promissory note (Exhibit 1) for the same amount, payable on August 22, 1977. On April 29, 1977, defendant George King Tim Pua, in his personal capacity applied for, and was granted, by the plaintiff bank a loan for the sum of P400,000.00, for which he executed a promissory note (Exhibit 1-A) for the same amount, payable on August 29, 1979. On May 6, 1977, defendant George King Tim Pua, in his personal capacity, gain secured a loan from the plaintiff for the sum of P400,000.00, for which he executed a promissory note (Exhibit 1-B) for the same amount, payable on September 5, 1977. On February 21, 1977, defendant George King Tim Pua, in his personal capacity, applied for, and was granted, by the plaintiff bank three (3) separate loans in the amounts of P220,000.00, P450,000.00 and P65,000.00, for which he executed three separate promissory notes (Exhibits 1-C to 1-E), payable on May 23, 1977. On January 23, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, obtained a loan of P300,000.00 from the plaintiff, for which defendant George King Tim Pua executed a promissory note (Exhibit A) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an interest of 13.23% per annum and is payable on June 22, 1979. On April 19, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, applied for, and was granted, another loan of P200,000.00 from the plaintiff bank, for which defendant George King Tim Pua executed a promissory note (Exhibit B) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an interest of 14% per annum and is payable on May 21, 1979. On August 2, 1979, defendant George and George Trade Inc., through defendant George King Tim Pua, once more secured a loan for P150,000.00, for which defendant George King Tim Pua executed a promissory note (Exhibit C) on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an interest of 14% per annum and is payable on September 17, 1979. The three promissory notes (Exhibits A, B and C) covering loans in the corporate account of defendant George and George Trade Inc. provides (sic) also that in case of default of payment, the defendants agree to pay interest at an increased rate of 14% per annum on the amount due, compounded monthly, until fully paid, as well as an additional sum equivalent to 10% of the total amount due as and for attorney's fees in addition to expenses and costs of suit, such amount to bear interest at the rate of 1% per month until paid. Under the two promissory notes (Exhibits B and C), the defendants further bound themselves to pay a penalty at the rate of 3% per annum on the amount due until fully paid.

In order to secure the payment of defendant George King Tim Pua's obligation with the plaintiff, he assigned unto the latter the proceeds of a fire insurance policy issued by the Kerr Insurance Company in the amount of P2,908,485.00 The proceeds of the insurance policy were subsequently paid to the plaintiff which applied the same to the personal account of defendant George King Tim Pua. The personal account of defendant George King Tim Pua was fully satisfied through the remittances of the fire insurance proceeds (Rollo, pp. 53-55). According to petitioner bank, after it had deducted from the insurance proceeds the entirety of respondent George King Tim Pua's personal account, there remained of the insurance proceeds the amount of P383,302.42. It then proceeded to apply said amount to the unpaid loans of respondent George and George Trade, Inc. which amounted to P671,772.22 as of September 7, 1979, thus leaving a balance of P288,469.80 of the loans. Petitioner instituted on April 7, 1980 an action (Civil Case No. 130915) against private respondents before the then Court of First Instance of Manila for the recovery of the unpaid balances on the three promissory notes, including attorney's fees equivalent to 10% of the amount recoverable. In their Answer with Special and Affirmative Defenses and Counterclaim, private respondents claimed that the loans had been extinguished by way of payment through the assignment by respondent George King Tim Pua of the fire insurance proceeds and that it was in fact petitioner which owed them by reason of its failure to return to the latter the balance of said insurance proceeds. No amicable settlement having been reached between the parties, trial ensued. On November 4, 1982, the trial court rendered judgment, finding for petitioner. The dispositive portion of the decision reads: PREMISES CONSIDERED, judgment is hereby rendered ordering defendants George and George Trade, Inc., George King Tim Pua and Pua Ke Seng, jointly and severally, to pay plaintiff, The Consolidated Bank and Trust Corporation (Solidbank) the sum of P228,469.80, with interest thereon at the legal rate from March 28, 1980, until the same is fully paid, and attorney's fees in the sum of P25,000.00, with costs of suit. For lack of merit, the counterclaim filed by the defendants is dismissed (Rollo, p. 174). On appeal by private respondents, the Court of Appeals reversed the decision of the trial court, decreeing as follows: WHEREFORE, the decision appealed from herein is REVERSED, and plaintiff-appellee Consolidated Bank and Trust Corporation (Solidbank) is instead ordered to pay appellant George King Tim Pua the amount of P466,182.39, with legal interest thereon per annum from September 8, 1979 until said amount is fully paid, plus P10,000.00 attorney's fees and the costs of this suit (Rollo, p. 14). Failing to secure a reconsideration of said decision, petitioner is now before the Court on a petition for review oncertiorari. Simply stated, the issue in this petition is whether private respondents are indebted to petitioners in the amount of P288,469.80 as held by the then Court of First Instance of Manila or whether said private respondents are entitled to reimbursement from petitioner in the amount of P466,182.39 as decreed by the Court of Appeals? The issues raised are factual. As a general rule, the findings of the Court of Appeals upon factual questions are conclusive and ought not to be disturbed. There are, however, exceptions to the rule. One of the exceptions is when the findings of fact of the Court of Appeals are contrary to those of the trial court (Massive Construction, Inc. v. Intermediate Appellate Court, 223 SCRA 1 [1993]). In the instant case, the findings of fact of the Court of Appeals are contrary to the findings of the trial court. Under such circumstance, this Court may review the findings of fact of the Court of Appeals and may scrutinize the evidence on record. The records show that respondent George King Tim Pua had two sets of accounts with petitioner bank: his personal account and his account for George and George Trade, Inc. For his personal account, he obtained from petitioner on different dates six separate loans with different due dates, viz: Loan I 22-Apr-77 Payable August 22, 1977 500,000.00

Loan II Loan III Loan IV

29-Apr-77 Payable August 29, 1977 5/6/77 Payable September 5, 1977 (a) 2/21/1977 (b) (c) Payable on May 3, 1977 TOTAL

400,000.00 400000.00 220,000.00 450,000.00 65,000.00 735,000.00 2,035,000.00 ============

All of these loans bore a 14% rate of interest, which was to be compounded monthly, in case of failure on the part of respondent George King Tim Pua to pay on maturity. In which case, he further undertook to pay an additional sum equivalent to 10% of the total amount due but in no case less than P200.00 as attorney's fees. The maturity dates of the loans were extended up to either December 1 or December 5, 1977 and all interests were paid up to March 5, 1978. Under the account of George and George Trade, Inc., respondent George King Tim Pua, together with his co-maker, respondent Pua Ke Seng, obtained the following loans: Loan A Loan B Loan C TOTAL 23-Jan-79 Payable June 22, 1979 19-Apr-79 Payable May 21, 1979 8/2/79 Payable Sept. 17, 1979 P 150,000.00 650,000.00 ============ The first loan bore an annual interest of 13.23%, which was to be increased to 14% in case of failure to pay on due date, compounded monthly, until fully paid. An additional amount equivalent to 10% of the total amount but not less than P200.00 was to be imposed in case of failure to pay on due date as attorney's fees. The second and third loans bore an interest rate of 14% per annum and carried a penalty of 3% per annum on the amount due in case of failure to pay on the date of maturity. An additional sum equivalent to 10% of the total amount due, but not less than P200.00, was to be imposed as and for attorney's fees. Interest were paid on the loans up to their date of maturity. The records further show that payments were made as follows: September 12, 1978 October 28, 1978 November 28, 1978 June 8, 1979 September 6, 1979 TOTAL PAYMENTS P P 230,000.00 149,000.00 100,000.00 525,000.00 2,383,485.00 3,387,985.00 =========== Based on the foregoing figures, the accounts of respondents George King Tim Pua and George and George Trade, Inc. with petitioner Bank should stand as of September 6, 1979, thus: 200,000.00 300,000.00

GEORGE KING TIM PUA Loan I (Promissory Note No. 55658) P 500,000.00 14% interest, compounded monthly Interest paid up to March 5, 1978 Add: Interest, March 6 to Sept. 12, 1978 37,219.46 Total P 537,219.46 Less: Payment September 12, 1978 230,000.00 Balance, September 12, 1978 P 307,219.46 Add: Interest September 13 to Oct. 28, 1978 14%, compounded monthly 5,492.63 Total P 312,712.09 Less: Payment, October 28, 1978 149,500.00 Balance, October 28, 1978 P 163,212.09 Add: Interest October 29 to Nov. 28, 1978 14%, compounded monthly 1,904.68 Total P 165,116.77 Less: Payment November 28, 1978 100,000.00 Balance, November 28, 1978 P 65,116.77 Add: Interest November 29, 1978 to June 8, 1979, 14%, compounded monthly 4,962.35 Total P 70,079.12 Loan II (Promissory Note No. 55828) P 400,000.00 14% Interest, compounded monthly Interest paid up to March 5, 1978 Add: Interest March 6, 1978 to June 8, 1979 76,587.34 Total P 476,587.34 LOANS I and II, as of June 8, 1979 Loan I P 70,079.12 Loan II 476,587.34 P 546,666.46 Less: Payment, June 8, 1979 525,000.00 Balance, June 8, 1979 P 21,666.46 Loan III (Promissory Note No. 55991) P 400,000.00

14% Interest, compounded monthly Interest paid up to March 7, 1978 Add: Interest March 8, 1978 to Sept. 6, 1979 92,634.60 Total P 492,634.60 Loan IV (Promissory Note No. 54221) P 220,000.00 (Promissory Note No. 54222) 450,000.00 (Promissory Note No. 54223) 65,000.00 P 735,000.00 14% Interest, compounded monthly Interest paid up to March 7, 1978 Add: Interest March 8, 1978 to Sept. 6, 1979 170,216.17 Total P 905,216.17 LOANS II, III and IV, as of Sept. 6, 1979 Loan II P 21,666.46 Loan III 492,634.60 Loan IV 905,216.17 P 1,419,517.23 Less: Payment, September 6, 1979 2,383,485.00 BALANCE OF INSURANCE PROCEEDS P 963,967.77 GEORGE AND GEORGE TRADE, INC Loan A (Promissory Note No. 790591) P 300,000.00 14% Interest, compounded monthly Interest paid up to June 22, 1979 Add: Interest from June 23, 1979 to Sept. 6, 1979 8,691.63 Total P 308,691.63 Balance of Insurance Proceeds after payment of Loan A P 655,276.14 Loan B (Promissory Note No. 792805) P 200,000.00 14% Interest per annum Interest paid up to May 21, 1979 Add: Interest from May 22, 1979 to Sept. 6, 1979 8,208.22 Penalty of 3% per annum 1,831.07 Total P 210,039.29

Balance of Insurance Proceeds after payment of Loan B P 445,236.85 Loan C (Promissory Note No. 794730) P 150,000.00 14% Interest per annum Interest paid up to Sept. 17, 1979 Balance of Insurance Proceeds after payment of all loans P 295,236.85 Less: Trust Receipts Obligations 291,620.00 Amount Refundable to Respondent George King Tim Pua P 3,616.85 ============ The 14% interest rate charged by petitioner was within the limits set by Section 3 of the Usury Law, as amended. The charging of compounded interest has been held as proper as long as the payment thereof has been agreed upon by the parties. In Mambulao Lumber Company v. Philippine National Bank, 22 SCRA 359 (1968), we ruled that the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest. In the instant case, private respondents agreed to the payment of 14% interest per annum, compounded monthly, should they fail to pay the principal loan on the date of maturity. As to handling charges, banks are authorized under Central Bank Circular No. 504 to collect such charges on loans over P500,000.00 with a maturity of 730 days or less at the rate of 2% per annum, on the principal or the outstanding balance thereof, whichever is lower; 1.75% on loans over P500,000.00 but not over P1,000,000.00; 1.50% on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the same Circular, however, provides that all banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of Republic Act No. 3765 otherwise known as the "Truth in Lending Act" and shall make the true and effective cost of borrowing an integral part of every loan contract. The promissory notes signed by private respondents do not contain any stipulation on the payment of handling charges. Petitioner bank cannot, therefore, charge private respondents such handling charges. The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable (Equitable Banking Corporation v. Liwanag, 32 SCRA 293 [1970]). The payment of penalty was provided for under the terms and conditions of the promissory notes for Loans B and C of George and George Trade, Inc. The penalty actually imposed, being only 3% per annum of the unpaid balance of the principal of said Loan B, is considered reasonable and proper. The same cannot, however, be said of the payment being insisted upon by petitioner of the attorney's fees stipulated in all the promissory notes, consisting of 10% of the total amount due and payable. A stipulation regarding the payment of attorney's fees is neither illegal nor immoral and is enforceable as the law between the parties as long as such stipulation does not contravene law, good morals, good customs, public order or public policy (Social Security Commission v. Almeda, 168 SCRA 474 [1988]; Reparations Commission v. Visayan Packing Corporation, 193 SCRA 531 [1991]). As stated in the promissory notes, respondent George King Tim Pua agreed to pay attorney's fees only "in addition to expenses and costs of suit." In other words, petitioner is entitled to collect from respondent George King Tim Pua the attorney's fees agreed upon only in case it was compelled to litigate with third persons or to incur expenses to protect its interest (China Airlines, Ltd. v. Intermediate Appellate Court, 169 SCRA 226 [1989]; Songcuan v. Intermediate Appellate Court, 191 SCRA 28 [1990]). These conditions are not obtaining in the case at bench. There was no need for petitioner to litigate to protect its interest inasmuch as private respondents had fully paid their obligations months before it filed the complaint for recovery of sum of money. Neither has it been shown by competent proof that petitioner had to engage the services of a lawyer or incur expenses in collecting the fire insurance proceeds from Kerr and Company. The "Tentative Computation" to which respondent George King Tim Pua allegedly affixed his initials to the item "Attorney's Fees, 10%" cannot be taken as amending the stipulation contained in the promissory notes on the payment of attorney's

fees. The failure of said Tentative Computation to express the true intent and agreement of the parties thereto was put in issue in the Amended Answer with Special and Affirmative Defenses and Counterclaim filed by private respondents before the trial court. The corresponding testimony of respondent George King Tim Pua that he did not understand the import of this item in the Tentative Computation remains unrebutted. The award of attorney's fees lies within the discretion of the court and depends upon the circumstances of each case. However, the discretion of the court to award attorney's fees under Article 2208 of the Civil Code of the Philippines demands factual, legal and equitable justification, without which the award is a conclusion without a premise and improperly left to speculation and conjecture. It becomes a violation of the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the court's decision. If it is stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of attorney's fees being an exception rather than the rule, it is necessary for the court to make findings of fact and law that would bring the case within the exception and justify the grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]). In this case, the Court of Appeals strictly followed the above-stated standard set by this Court. The award of P10,000.00 as attorney's fees to private respondents was reasonable and justified as they were compelled to litigate and incur expenses to protect their interest. WHEREFORE, the Decision of the Court of Appeals is AFFIRMED with the MODIFICATION that the amount which petitioner is ordered to reimburse respondent George King Tim Pua is reduced to THREE THOUSAND SIX HUNDRED SIXTEEN & 65/100 PESOS (P3,616.65), with legal interest thereon from September 8, 1979 until said amount is fully paid. No pronouncement as to costs. SO ORDERED. Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

[G.R. No. 113926. October 23, 1996]

SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA, respondents. DECISION HERMOSISIMA, JR., J.: Questions of law which are the first impression are sought to be resolved in this case: Should the rate of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans, in the absence of evidence justifying the impositions of a higher rate? This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by the court a quo from 23% per annum as agreed upon by the parties to 12% per annum. The undisputed facts are as follows: On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos (P100,000.00) payable in six monthly [1] installments with a stipulated interest of 23% per annum up to the fifth installments. On July 28, 1983, respondent Eusebio again executed Promissory note No TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos (P100.000.00) in six (6) monthly installments plus [2] 23% interest per annum. Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount of Sixty Five Thousand [3] Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly installments plus interest at the rate of 23% per annum. On all the abovementioned notes, private respondents Leila Ventura had signed as co-maker.
[4]

Upon maturity which fell on the different dates below, the principal balance remaining on the notes stood at: 1) PN No. TL/74/748/83 2) PN No. TL/74/1296/83 3) PN No. TL/74/1991/83 P16,665.00 as of September 1983. P83,333.00 as of August 1983 P65,000.00 as of August 1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collectible case was filed in court [5] by petitioner SBTC. On March 30, 1993, the court a quo rendered a judgment in favor of petitioner SBTC, the dispositive portion which reads: WHEREFORE, premises above-considered, and plaintiffs claim having been duly proven, judgment is hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to: 1. 2. 3. 4. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September 1983, until fully paid; Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully paid; Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully paid; Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of attorneys fees; and to

5.

Pay the cost of this suit.

[6]

SO ORDERED.

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that: (1) (2) notes; the interest rate agreed upon by the parties during the signing of the promissory notes was 23% per annum; the interests awarded should be compounded quarterly from due date as provided in three (3) promissory

(3) defendant Leila Ventura should likewise be held liable to pay the balance on the promissory notes since she has [7] signed as co-maker and as such, is liable jointly and severally with defendant Eusebio without a need for demand upon her. Consequently, an Order was issued by the court a quo denying the motion to grant the rates of interest beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with co-defendant Eusebio. Hence, this petition. The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law. We find merit in this petition. From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3) [8] promissory notes is 23% per annum. The applicable provision of law is the Central Bank Circular No. 905 which took effect [9] on December 22, 1982, particularly Sections 1 and 2 which state: Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. Sec. 2. 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 continue to be twelve per cent (12%) per annum. CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D. 1684 empowering them to prescribe the maximum rates of interest for loans and certain forbearances, to wit: SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows: SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That changes in such rates or rates may be effected gradually on scheduled dates announced in advance. In the exercise of the authority herein granted, the Monetary Board may prescribed higher maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribed different maximum rate or rates for different types of borrowings, including deposits and deposit [10] substitutes, or loans of financial intermediaries. This court has ruled in the case of Philippine National Bank v. Court of Appeals
[11]

that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend the Usury Law but simply suspended the latters effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left with no alternative but [12] to apply the same according to its clear language. As we have held in the case of Quijano v. Development Bank of the Philippines: xxx We cannot see any room for interpretation or construction in the clear and unambiguous language of the above-quoted provision of law. This Court had steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms, interpretation being called for only when such literal application is impossible. No process of interpretation or construction need be resorted to where a provision of law peremptorily calls for application. Where a requirement or condition is made in explicit and unambiguous terms, no discretion is left to the judiciary. It must see to it that its mandate is obeyed. The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not illegal. Furthermore, Article 1306 of the New Civil code provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence [13] thereof, the rate shall be 12% per annum. Hence, only in the absence of a stipulation can the court impose the 12% rate of interest. The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are binding between them. Respondent Eusebio, likewise, did not question any of the stipulations therein. In fact, in the Comment file by respondent Eusebio to this court, he chose not to question the decision and instead expressed his desire to negotiate with the petitioner bank [14] for terms within which to settle his obligation. IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be 23% per annum. SO ORDERED. Padilla (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents. DECISION PARDO, J.: The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking to set [1] [2] aside the decision of the Court of Appeals, and its resolution denying reconsideration, the dispositive portion of which decision reads as follows: "WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiff: the sum ofP500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23, 1986, until the entire amount is fully paid. "The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. SO ORDERED."
[3]

The Court required the respondents to comment on the petition, which was filed on April 3, 1998, and the petitioners to [6] reply thereto, which was filed on May 29, 1998. We now resolve to give due course to the petition and decide the case. The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows: On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986. On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the proceeds of the loan. On maturity of the two promissory notes, the borrowers failed to pay the indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity. On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. The executed a promissory note, reading as follows: "Baliwag, Bulacan July 23, 1986 "Maturity Date August 23, 1986 "P500,000.00

[4]

[5]

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service chargeper annum from date hereof until fully paid according to the amortization schedule contained herein. (Underscoring supplied) "Payment will be made in full at the maturity date. "Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of the amount due and demandable as penaltycharges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereon in full, without deductions asAttorney's Fee whether actually incurred or not, of the total amount due and demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied) "I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice although the original interest have already been collected wholly or partially unless the contrary is required by law. "It is also a special condition of this contract that the parties herein agree that the amount of peso-obligation under this agreement is based on the present value of peso, and if there be any change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of obligation. "Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or extension of payments, reserving rights against each and all indorsers and all parties to this note. "IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court." On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory note. On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including interests and other charges. In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness. In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges. After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the [7] "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum." Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows: "WHEREFORE, premises considered, judgment is hereby rendered, as follows: "1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full. "2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid; "4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees; "5. All counterclaims are hereby dismissed. "With costs against the defendants."
[8]

In due time, both plaintiffs and defendants appealed to the Court of Appeals. In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed thereon. The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any [9] interest that may be charged on the loan". The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully [10] paid' was allowed by law". Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the Regional Trial Court, disposing as follows: "WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiffs the sum ofP500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid. "The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. "SO OREDERED."
[11]

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated [12] November 25, 1997, the Court of Appeals denied the motion. Hence, defendants interposed the present recourse via petition for review on certiorari. We find the petition meritorious. Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684? We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, 13 iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed [14] [15] by the Usury Law and that the Usury Law is now "legally inexistent". In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a [17] Central Bank Circular can not repeal a law. Only a law can repeal another law." In the recent case of Florendo vs. Court of [18] Appeals , the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury [19] has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note [20] iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is [21] void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous [22] or unconscionable.
[16] [13]

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable. WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties. No pronouncement as to costs in this instance SO ORDERED. Narvasa, C.J. (Chairman), Romero, Kapunan, and Purisima, JJ., concur.

[G.R. No. 128990. September 21, 2000]

INVESTORS FINANCE CORPORATION, petitioner, vs. AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY DEVELOPMENT CORPORATION, respondents. DECISION BELLOSILLO, J.: INVESTORS FINANCE CORPORATION seeks a review of the Decision of the Court of Appeals which ruled that the financing firm had entered into a usurious loan transaction with Autoworld Sales Corporation, thus entitling the latter to reimbursement of excess [1] interest payments amounting to P2,586,035.44. Petitioner Investors Finance Corporation, then known also as FNCB Finance (now doing business under the name of Citytrust Finance Corporation), is a financing company doing business with private respondent Autoworld Sales Corporation (AUTOWORLD) since 1975. Anthony Que, president of AUTOWORLD, also held the same position at its affiliate corporation, private respondent Pio Barretto Realty Corporation (BARRETTO). Sometime in August 1980 Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for loan was denied. But sometime thereafter, FNCBs Assistant Vice President, Mr. Leoncio Araullo, informed Anthony Que that although it could not grant direct loans it could extend funds to AUTOWORLD by purchasing any of its outstanding receivables at a discount. After a series of negotiations the parties agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed.The mechanics of the proposed IPP transaction was (1) First, Pio Barretto (BARRETTO) would execute a Contract to Sell a parcel of land in favor of AUTOWORLD for P12,999,999.60 payable in sixty (60) equal monthly installments of P216,666.66. Consequently, BARRETTO would acquire P12,999,999.60 worth of receivables from AUTOWORLD; (2) FNCB would then purchase the receivables worth P12,999,999.60 from BARRETTO at a discounted value of P6,980,000.00 subject to the condition that such amount would be flowed back to AUTOWORLD; (3) BARRETTO, would in turn, execute a Deed of Assignment (in favor of FNCB) obliging AUTOWORLD to pay the installments of [2] the P12,999,999.60 purchase price directly to FNCB; and (4) Lastly, to secure the payment of the receivables under the Deed of Assignment, BARRETTO would mortgage the property subject of the sale to FNCB. On 17 November 1980 FNCB informed AUTOWORLD that its Executive Committee approved the proposed IPP [3] [4] transaction. The lawyers of FNCB then drafted the contracts needed and furnished Anthony Que with copies thereof. On 9 February 1981 the parties signed three (3) contracts to implement the IPP transaction: (1) Contract to Sell whereby BARRETTO sold a parcel of land to AUTOWORLD, situated in San Miguel, Manila, together with the improvements thereon, covered by TCT No. 129763 for the price of P12,999,999.60 payable in sixty (60) consecutive and equal monthly installments of P216,666.66. (2) Deed of Assignment whereby BARRETTO assigned and sold in favor of FNCB all its rights, title and interest to all the money and other receivables due from AUTOWORLD under the Contract to Sell, subject to the condition that the assignee (FNCB) has the right of recourse against the assignor (BARRETTO) in the event that the payor (AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the property subject of the Contract to Sell to FNCB as security [5] for payment of its obligation under the Deed of Assignment. After the three (3) contracts were concluded AUTOWORLD started paying the monthly installments to FNCB. On 18 June 1982 AUTOWORLD transacted with FNCB for the second time obtaining a loan of P3,000,000.00 with an effective [6] interest rate of 28% per annum. AUTOWORLD and BARRETTO, as co-makers, then signed a promissory note in favor of FNCB [7] worth P5,604,480.00 payable in sixty (60) consecutive monthly installments of P93,408.00. To secure the promissory note, [8] AUTOWORLD mortgaged a parcel of land located in Sampaloc, Manila, to FNCB. Thereafter, AUTOWORLD began paying the installments. In December 1982, after paying nineteen (19) monthly installments of P216,666.66 on the first transaction (IPP worth P6,980,000.00) and three (3) monthly installments of P93,408.00 on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to preterminate the two (2) transactions by paying their outstanding balances in full. It then requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78, where P6,784,551.24 was the amount to settle the first transaction while P3,242,165.54 was [9] the amount to settle the second transaction. On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the latters computation of its outstanding [10] balances. On 27 December 1982 FNCB replied that it would only be willing to reconcile its accounting records with AUTOWORLD [11] upon payment of the amounts demanded. Thus, despite its objections, AUTOWORLD reluctantly paid FNCB P10,026,736.78 [12] through its UCPB account. On 5 January 1983 AUTOWORLD asked FNCB for a refund of its overpayments in the total amount [13] of P3,082,021.84. According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00 to settle [14] the second transaction. The parties attempted to reconcile their accounting figures but the subsequent negotiations broke down prompting AUTOWORLD to file an action before the Regional Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise prayed for the nullification of the Promissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982. In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts of P2,586,035.44 as excess payment for the first transaction and P418,262.00 as excess payment for the second transaction. AUTOWORLD also asked for P500,000.00 as exemplary damages and P100,000.00 as attorneys fees. FNCB argued that the contracts dated 9 February 1981 were not executed to hide a usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally engage in as a financing company. With regard to the second transaction, the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling rates for loans having a period of more than three hundred sixty-five (365) days. FNCB also prayed for P2,000,000.00 as moral damages andP500,000.00 as attorneys fees. On 18 January 1985 FNCB filed a Third-Party Complaint against BARRETTO based on the Deed of Assignment, which expressly provided that FNCB as assignee had a right of recourse against BARRETTO as assignor in case AUTOWORLD defaulted in its [15] payments. BARRETTO countered that it could not be held liable for AUTOWORLD's alleged default in its payments since the Deed of Assignment, together with the Contract to Sell and the Real Estate Mortgage, was simulated and perfected only to facilitate a [16] usurious loan. It prayed forP1,600,000.00 as damages and P100,000.00 as attorneys fees. On 11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB declaring that the parties voluntarily and knowingly executed a legitimate "IPP" transaction or the discounting of receivables. AUTOWORLD was not entitled to any reimbursement since it was unable to prove the existence of a usurious loan. On the other hand, it was ordered to pay FNCB P50,000.00 for attorney's [17] fees. The Court of Appeals modified the decision of the trial court and concluded that the IPP transaction, comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the time it was executed the ceiling [18] rates imposed by the Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest. The appellate

court deleted the award of P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was exercised in good faith. Hence, this petition of FNCB. We stress at the outset that this petition concerns itself only with the first transaction involving the alleged "IPP" worth P6,980,000.00, which was implemented through the three (3) contracts of 9 February 1981. As to the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any interest rate. The pivotal issue therefore is whether the three (3) contracts all dated 9 February 1981 were executed to implement a legitimate Installment Paper Purchase (IPP) transaction or merely to conceal a usurious loan. Generally, the courts only need to rely on the face of written contracts to determine the intention of the parties. However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to [19] violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury. The following circumstances show that such scheme was indeed employed: First, petitioner claims that it was never a party to the Contract to Sell between AUTOWORLD and BARRETTO. As far as it was concerned, it merely purchased receivables at a discount from BARRETTO as evidenced by the Deed of Assignment dated 9 February 1981.Whether the Contract to Sell was fictitious or not would have no effect on its right to claim the receivables of BARRETTO from AUTOWORLD since the two contracts were entirely separate and distinct from each other. Curiously however, petitioner admitted that its lawyers were the ones who drafted all the three (3) contracts involved which [22] were executed on the same day. Also, petitioner was the one who procured the services of the Asian Appraisal Company to [23] determine the fair market value of the land to be sold way back in September of 1980 or six (6) months prior to the sale. If it were true that petitioner was never privy to theContract to Sell, then why was it interested in appraising the lot six (6) months prior to the sale? And why did petitioners own lawyers prepare the Contract to Sell? Obviously, petitioner actively participated in the sale to ensure that the appraised lot would serve as adequate collateral for the usurious loan it gave to AUTOWORLD. Second, petitioner insists that the 9 February 1981 transaction was a legitimate IPP transaction where it only bought the receivables of BARRETTO from AUTOWORLD amounting to P12,999,999.60 at a discounted price of P6,980,000.00. However, per instruction of petitioner in its letter to BARRETTO dated 17 November 1980 the whole purchase price of the receivables was to [24] be "flowed back" to AUTOWORLD. And in its subsequent letter of 24 February 1981 petitioner also gave instructions on how BARRETTO should apply the proceeds worthP6,980,000.00, thus Gentlemen: This serves to inform you of the various application of the proceeds (P6,980,000.00) of your real estate transaction per your authorization/letter dated 2.10.81: 1. P1,937,884.20 - Paid to Paramount Finance Corp. on Feb 16, 1981, inclusive of P2.00 SC for Managers Check. 2. P111,818.87 - Paid to Agcaoili and Associates of Feb. 16, 1981 inclusive of P2.00 SC for Managers Check for the preparation of documents, legal review , registration and transfer of ownership. 3. P3,179,700.00 - Paid to FNCB Finance on Feb. 20, 1981 for full payment of DB transaction (Account No. 06156) 4 P3,108.40 - Payment for the appraisal fee conducted by the Asian Appraisal Company. Inc. 5. P100.00 - Payment for the title search fee conducted by Agcaoili and Associates. 6. P2,500.00 - Payment for legal and professional fee (Agcaoili and Associates) 7. P638,601.60 - Payment to FNCB Finance for the partial payment of DB transaction (Account No. 40150 - sold units) 8. P122,640.00 - Payment to FNCB Finance for the partial payment of DB transaction (Account No. 406149 - sold units) 9. P983,646.93 - Balance after application, Payable to Pio Barreto Dev. Inc. P6,980,000.00 - Total
[21] [20]

Should you need any clarification on the matter, please do not hesitate to call on the undersigned. Very truly yours, L.V. Araullo, Asst Vice-President
[25]

It can be seen that out of the nine (9) items of appropriation stated above, Item Nos. 2 - 8 had to be returned to petitioner. Thus, in compliance with the aforesaid letter, BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to petitioner to [26] settle some of AUTOWORLD's previous debts to it. Any remaining amount after the application of the proceeds would then be surrendered to AUTOWORLD in compliance with the letter of 17 November 1980; none went to BARRETTO. The foregoing circumstances confirm that the P6,980,000.00 was really an indirect loan extended to AUTOWORLD so that it could settle its previous debts to petitioner. Had petitioner entered into a legitimate purchase of receivables, then BARRETTO, as seller, would have received the whole purchase price, and free to dispose of such proceeds in any manner it wanted. It would not have been obliged to follow the"Application of Proceeds" stated in petitioners letter. Third, in its 17 November 1980 letter to BARRETTO, petitioner itself designated the proceeds of the "IPP" transaction as a [27] loan. In that letter, petitioner stated that the loan proceeds amounting to P6,980,000.00 would be released to BARRETTO only upon submission of the documents it required. And as previously mentioned, one of the required documents was a letter agreement between BARRETTO and AUTOWORLD stipulating that the P6,980,000.00 should be flowed back to AUTOWORLD. If it were a genuine IPP transaction then petitioner would not have designated the money to be released as loan proceeds and BARRETTO would have been the end recipient of such proceeds with no obligation to turn them over to AUTOWORLD. Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner extended on 18 June 1982 a direct loan of P3,000,000.00 to AUTOWORLD. This time however, with no more ceiling rates to hinder it, petitioner imposed a 28% [28] effective interest rate on the loan. And no longer having a need to cloak the exorbitant interest rate, the promissory note [29] evidencing the second transaction glaringly bore the 28% interest rate on its face. We are therefore of the impression that had there been no interest rate ceilings in 1981, petitioner would not have resorted to the fictitious IPP transaction; instead, it would have directly loaned the money to AUTOWORLD with an interest rate higher than 12%. Gregorio Anonas, Senior Vice President of petitioner, effectively admitted that it only employed discounting of receivables due to the ceiling rates imposed by the Usury Law. Thus he testified Q: And is it not a fact further that FNCB Finance at the time could not or would not want to extend direct loan because of a ceiling fixed by the Usury Law on interest? A: We havent at that time giving direct loan, it is a discounting business. Q: You mean never have you extended direct loan? A: We did at a certain period of time and then we stopped, we go to discounting business because we transferred to direct loan. Q: After the ceiling was removed, ceiling on interest was removed, you again, FNCB, extended direct loan, correct? A: Yes, sir. Q: Shall we say that the reason why you did not extend direct loan was because you did not want to be confined on the ceiling on interest under Usury Law? A: Probably yes, because as you know the cost, in the operating cost of finance company is extremely different from a bank and we cannot survive, and this normally has been the case. Q: And so, therefore, the only way you could generate more income for your company would be to encourage discounting of receivables? A: That was our business. It is not to generate more income, that is our business. x x x x
[30]

Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD. Petitioner anchors its defense on Sec. 7 of the Usury Law which states Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of the Act and said purchase was not a part of the original usurious transaction. In any case

however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in any case of litigation, also the costs and such attorneys fees as may be allowed by the court. Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the provisions of the Usury Law and that the purchase was not a part of the original usurious transaction. Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in accordance with the laws on usury. In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9 February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should therefore be declared void. Having declared the transaction between the parties as void, we are now tasked to determine how much reimbursement AUTOWORLD is entitled to. The Court of Appeals, adopting the computation of AUTOWORLD in its plaintiff-appellants brief, ruled According to plaintiff-appellant, defendant-appellee was able to collect P3,921,217.78 in interests from appellant. This is not [32] denied by the appellee. Computed at 12% the effective interest should have been P1,545,400.00. Hence, appellant may [33] [34] recover P2,586,035.44, representing overpayment arising from usurious interest rate charged by appellee. While we do not dispute the appellate courts finding that the first transaction was a usurious loan, we do not agree with the amount of reimbursement awarded to AUTOWORLD. Indeed, it erred in awarding only the interest paid in excess of the 12% [35] ceiling. In usurious loans, the creditor can always recover the principal debt. However, the stipulation on the interest is considered void thus allowing the debtor to claim the whole interest paid. In a loan of P1,000.00 with interest at 20% per annum or P200.00 per year, if the borrower pays P200.00, the wholeP200.00 would be considered usurious interest, not just the portion [36] thereof in excess of the interest allowed by law. In the instant case, AUTOWORLD obtained a loan of P6,980,000.00. Thereafter, it paid nineteen (19) consecutive installments ofP216,666.66 amounting to a total of P4,116,666.54, and further paid a balance of P6,784,551.24 to settle it. All in all, it paid the aggregate amount of P10,901,217.78 for a debt of P6,980,000.00. For the 23-month period of the existence of the loan covering the [37] period February 1981 to January 1982, AUTOWORLD paid a total of P3,921,217.78 in interests. Applying the 12% interest ceiling [38] rate mandated by the Usury Law, AUTOWORLD should have only paid a total of P1,605,400.00 in interests. Hence, AUTOWORLD is entitled to recover the whole usurious interest amounting to P3, 921,217.78. We are not unaware of Sanchez v. Buenviaje where the Court allowed the usurer to recover legal interest on the principal amount loaned.But such interest arose from the debtors delay in paying the principal from the time of the creditors demand. That is the reason why legal interest was counted only from the time the creditor filed his complaint for the recovery of a debt. In this case however, the debtor was never in delay. As a matter of fact, AUTOWORLD paid the principal of P6,980,000.00 and the whole usurious interest of P3,921,217.88 upon petitioners insistent demand. Thus, the case of Sanchez v. Buenviaje herein cited will not apply to petitioner and it will not be entitled to legal interest on the amount of the principal loan. Under Sec. 6 of the Usury Law, AUTOWORLD is also entitled to reasonable attorneys fees and costs SEC. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed, to be taken or received, may recover the whole interest, commission, premiums, penalties and surcharges paid or delivered with costs and attorneys fees in such sum as may be allowed by the court in an action against a person or corporation who took or received them if such action is brought within two years after such payment or delivery (emphasis ours). Although the Court has discretion to fix the amount of attorney's fees, it has no discretion to deny it altogether. Thus, [40] in Delgado v. Valgona, we held When the right of action to recover interest paid upon a usurious contract is established, a reasonable attorneys fee should be allowed as a matter of course, the same as costs are awarded. The purpose of the law is to encourage persons who have suffered from contracts of this character to come into court and vindicate their rights, and the imposition upon the usurer of the obligation to pay attorneys fee will serve at once as an encouragement to the oppressed and as a wholesome deterrent to the taking of usurious interests.
[39] [31]

Quite obviously, Anthony Que, the President of AUTOWORLD, actively and knowingly participated in the execution of the usurious loan transaction. As a seasoned businessman he must have been aware of the consequences of his business dealings. But, [41] although we find hisactions extremely reprehensible, we must abide by the principle laid down in Go Chioco v. Martinez where we held that the pari delicto rule does not apply to usury cases which entitle the borrower to recover the whole interest paid; otherwise, the avowed policy of discouraging usurious transactions would not be served, for the mere invocation of the pari delictorule would allow the usurer to reap the benefits of his unlawful act. WHEREFORE, the assailed Decision of the Court of Appeals dated 24 May 1996 declaring the 9 February 1981 transaction as a usurious loan is AFFIRMED, subject to the MODIFICATION that petitioner Investors Finance Corporation is ordered to pay private respondent Autoworld Sales Corporation the amount of P3,921,217.78 representing the entire usurious interest it paid on the 9 February 1981 loan, as well asP50,000.00 as attorney's fees and the costs. SO ORDERED. Mendoza, Quisumbing, Buena, and De Leon, Jr., JJ., concur.

[G.R. No. 146942. April 22, 2003]

CORAZON G. RUIZ, petitioner, vs. COURT OF APPEALS and CONSUELO TORRES, respondents. DECISION PUNO, J.: On appeal is the decision of the Court of Appeals in CA-G.R. CV No. 56621 dated 25 August 2000, setting aside the [2] decision of the trial court dated 19 May 1997 and lifting the permanent injunction on the foreclosure sale of the subject lot [3] covered by TCT No. RT-96686, as well as its subsequent Resolution dated 26 January 2001, denying petitioners Motion for Reconsideration. The facts of the case are as follows: Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. She obtained loans from private respondent Consuelo Torres on different occasions, in the following amounts: P100,000.00; P200,000.00; P300,000.00; [5] and P150,000.00. Prior to their maturity, the loans were consolidated under one (1) promissory note dated March 22, 1995, which [6] reads as follows: P750,000.00 Quezon City, March 22, 1995 PROMISSORY NOTE For value received, I, CORAZON RUIZ, as principal and ROGELIO RUIZ as surety in solidum, jointly and severally promise to pay to the order of CONSUELO P. TORRES the sum of SEVEN HUNDRED FIFTY THOUSAND PESOS (P750,000.00) Philippine Currency, to earn an interest at the rate of three per cent (3%) a month, for thirteen months, payable every _____ of the month, and to start on April 1995 and to mature on April 1996, subject to renewal. If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of the principal loan, for every month default, shall be collected. Remaining balance as of the maturity date shall earn an interest at the rate of ten percent a month, compounded monthly. It is finally agreed that the principal and surety in solidum, shall pay attorneys fees at the rate of twenty-five percent (25%) of the entire amount to be collected, in case this note is not paid according to the terms and conditions set forth, and same is referred to a lawyer for collection. In computing the interest and surcharge, a fraction of the month shall be considered one full month. In the event of an amicable settlement, the principal and surety in solidum shall reimburse the expenses of the plaintiff. (Sgd.) Corazon Ruiz Principal __________________ Surety
[4] [1]

The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240-square meter lot in New Haven Village, [7] Novaliches, Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-96686, and registered in the name of petitioner. The mortgage was signed by Corazon Ruiz for herself and as attorney-in-fact of her husband Rogelio. It was executed on 20 March 1995, [8] or two (2) days before the execution of the subject promissory note.

Thereafter, petitioner obtained three (3) more loans from private respondent, under the following promissory notes: (1) [9] promissory note dated 21 April 1995, in the amount of P100,000.00; (2) promissory note dated May 23, 1995, in the amount [10] [11] of P100,000.00; and (3) promissory note dated December 21, 1995, in the amount of P100,000.00. These combined loans [12] of P300,000.00 were secured byP571,000.00 worth of jewelry pledged by petitioner to private respondent. From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on the P750,000.00 loan, amounting [14] toP270,000.00. After March 1996, petitioner was unable to make interest payments as she had difficulties collecting from her [15] clients in her jewelry business. Due to petitioners failure to pay the principal loan of P750,000.00, as well as the interest payment for April 1996, private [16] respondent demanded payment not only of the P750,000.00 loan, but also of the P300,000.00 loan. When petitioner failed to [17] pay, private respondent sought the extra-judicial foreclosure of the aforementioned real estate mortgage. On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita V. Ele, Deputy Sheriff In-Charge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a Notice of Sheriffs Sale of subject lot. The public auction was scheduled on October 8, [18] 1996. On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a complaint with the RTC of Quezon City docketed as Civil Case No. Q-96-29024, with a prayer for the issuance of a Temporary Restraining Order to enjoin the sheriff from proceeding with the foreclosure sale and to fix her indebtedness to private respondent to P706,000.00. The computed amount of P706,000.00 was based on the aggregate loan of P750,000.00, covered by the March 22, 1995 promissory note, plus the other loans of P300,000.00, covered by separate promissory notes, plus interest, minus P571,000.00 representing the amount of jewelry [19] pledged in favor of private respondent. The trial court granted the prayer for the issuance of a Temporary Restraining Order, and on 29 October 1996, issued a writ [21] of preliminary injunction. In its Decision dated May 19, 1997, it ordered the Clerk of Court and Ex-Officio Sheriff to desist with the foreclosure sale of the subject property, and it made permanent the writ of preliminary injunction. It held that the real estate mortgage is unenforceable because of the lack of the participation and signature of petitioners husband. It noted that although the subject real estate mortgage stated that petitioner was attorney-in-fact for herself and her husband, the Special Power of [22] Attorney was never presented in court during the trial. The trial court further held that the promissory note in question is a unilateral contract of adhesion drafted by private respondent. It struck down the contract as repugnant to public policy because it was imposed by a dominant bargaining party [23] (private respondent) on a weaker party (petitioner). Nevertheless, it held that petitioner still has an obligation to pay the private respondent. Private respondent was further barred from imposing on petitioner the obligation to pay the surcharge of one percent (1%) per month from March 1996 onwards, and interest of ten percent (10%) a month, compounded monthly from September 1996 to January 1997. Petitioner was thus ordered to pay the amount ofP750,000.00 plus three percent (3%) interest per month, or a [24] total of P885,000.00, plus legal interest from date of [receipt of] the decision until the total amount of P885,000.00 is paid. Aside from the foregoing, the trial court took into account petitioners proposal to pay her other obligations to private [25] respondent in the amount of P392,000.00. The trial court also recognized the expenses borne by private respondent with regard the foreclosure sale and attorneys fees. As the notice of the foreclosure sale has already been published, it ordered the petitioner to reimburse private respondent the [26] amount of P15,000.00 plus attorneys fees of the same amount. Thus, the trial court computed petitioners obligation to private respondent, as follows: Principal Loan . P 750,000.00 Interest.. 135,000.00 Other Loans..392,000.00 Publication Fees.15,000.00 Attorneys Fees 15,000.00
[20] [13]

TOTAL P1,307,000.00 with legal interest from date of receipt of decision until payment of total amount of P1,307,000.00 has been made.
[27]

Private respondents motion for reconsideration was denied in an Order dated July 21, 1997. Private respondent appealed to the Court of Appeals. The appellate court set aside the decision of the trial court. It ruled that the real estate mortgage is valid despite the non-participation of petitioners husband in its execution because the land on which it was constituted is paraphernal property of petitioner-wife. Consequently, she may encumber the lot without the consent of her [28] husband. It allowed its foreclosure since the loan it secured was not paid. Nonetheless, the appellate court declared as invalid the 10% compounded monthly interest and the 10% surcharge per [30] month stipulated in the promissory notes dated May 23, 1995 and December 1, 1995, and so too the 1% compounded monthly [31] interest stipulated in the promissory note dated 21 April 1995, for being excessive, iniquitous, unconscionable, and contrary to morals. It held that the legal rate of interest of 12% per annum shall apply after the maturity dates of the notes until full payment of [32] the entire amount due, and that the only permissible rate of surcharge is 1% per month, without compounding. The appellate court also granted attorneys fees in the amount ofP50,000.00, and not the stipulated 25% of the amount due, following the ruling in [33] the case of Medel v. Court of Appeals. Now, before this Court, petitioner assigns the following errors: (1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PROMISSORY NOTE OF P750,000.00 IS NOT A CONTRACT OF ADHESION DESPITE THE CLEAR SHOWING THAT THE SAME IS A READY-MADE CONTRACT PREPARED BY (THE) RESPONDENT CONSUELO TORRES AND DID NOT REFLECT THEIR TRUE INTENTIONS AS IT WEIGHED HEAVILY IN FAVOR OF RESPONDENT AND AGAINST PETITIONER. (2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT THE PROPERTY COVERED BY THE SUBJECT DEED OF MORTGAGE OF MARCH 20, 1995 IS A PARAPHERNAL PROPERTY OF THE PETITIONER AND NOT CONJUGAL EVEN THOUGH THE ISSUE OF WHETHER OR NOT THE MORTGAGED PROPERTY IS PARAPHERNAL WAS NEVER RAISED, NOR DISCUSSED AND ARGUED BEFORE THE TRIAL COURT. (3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DISREGARDING THE TRIAL COURTS COMPUTATION OF THE ACTUAL OBLIGATIONS OF THE PETITIONER WITH (THE) RESPONDENT TORRES EVEN THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE IT. The pertinent issues to be resolved are: (1) Whether the promissory note of P750,000.00 is a contract of adhesion; (2) Whether the real property covered by the subject deed of mortgage dated March 20, 1995 is paraphernal property of petitioner; and (3) Whether the rates of interests and surcharges on the obligation of petitioner to private respondent are valid. I We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet Lines, Inc. vs. Teves, discussed the nature of a contract of adhesion as follows:
[34] [29]

this Court

. . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the other party is the signing of his signature or his [35] adhesion thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. . . . it is drafted only by one party, usually the corporation, and is sought to be accepted or adhered to by the other party . . . who [36] cannot change the same and who are thus made to adhere hereto on the take it or leave it basis . . . In said case of Sweet Lines,
[37]

the conditions of the contract on the 4 x 6 inches passenger ticket are in fine print. Thus we held:

. . . it is hardly just and proper to expect the passengers to examine their tickets received from crowded/congested counters, more often than not during rush hours, for conditions that may be printed thereon, much less charge them with having consented to the [38] conditions, so printed, especially if there are a number of such conditions in fine print, as in this case.

We further stressed in the said case that the questioned Condition No. 14 was prepared solely by one party which was the corporation, and the other party who was then a passenger had no say in its preparation. The passengers have no opportunity to [39] examine and consider the terms and conditions of the contract prior to the purchase of their tickets. In the case at bar, the promissory note in question did not contain any fine print provision which could not have been examined by the petitioner. Petitioner had all the time to go over and study the stipulations embodied in the promissory note. Aside from the March 22, 1995 promissory note for P750,000.00, three other promissory notes of different dates and amounts were executed by petitioner in favor of private respondent. These promissory notes contain similar terms and conditions, with a little variance in the terms of interests and surcharges. The fact that petitioner and private respondent had entered into not only one but several loan transactions shows that petitioner was not in any way compelled to accept the terms allegedly imposed by [40] private respondent. Moreover, petitioner, in her complaint dated October 7, 1996 filed with the trial court, never claimed that she was forced to sign the subject note. Paragraph five of her complaint states: That on or about March 22, 1995 plaintiff was required by the defendant Torres to execute a promissory note consolidating her unpaid principal loan and interests which said defendant computed to be in the sum of P750,000.00 . . . To be required is certainly different from being compelled. She could have rejected the conditions made by private respondent. As an experienced business- woman, she ought to understand all the conditions set forth in the subject promissory note. As held by [41] [42] this Court in Lee, et al. vs. Court of Appeals, et al., it is presumed that a person takes ordinary care of his concerns. Hence, the natural presumption is that one does not sign a document without first informing himself of its contents and consequences. This presumption acquires greater force in the case at bar where not only one but several documents were executed at different times by petitioner in favor of private respondent. II We also affirm the ruling of the appellate court that the real property covered by the subject deed of mortgage is paraphernal property. The property subject of the mortgage is registered in the name of Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos. Thus, title is registered in the name of Corazon alone because the phrase married to Rogelio Ruiz is merely descriptive of the civil status of Corazon and should not be construed to mean that her husband is also a registered owner. Furthermore, registration of the property in the name of Corazon G. Ruiz, of legal age, married to Rogelio Ruiz is not proof that such property was acquired during the marriage, and thus, is presumed to be conjugal. The property could have been acquired by Corazon while she was still single, and registered only after her marriage to Rogelio Ruiz. Acquisition of title and registration thereof are two [43] different acts. The presumption under Article 116 of the Family Code that properties acquired during the marriage are presumed to be conjugal cannot apply in the instant case. Before such presumption can apply, it must first be established that the property was in fact acquired during the marriage. In other words, proof of acquisition during the marriage is a conditionsine qua non for the [44] operation of the presumption in favor of conjugal ownership. No such proof was offered nor presented in the case at bar. Thus, on the basis alone of the certificate of title, it cannot be presumed that said property was acquired during the marriage and that it is conjugal property. Since there is no showing as to when the property in question was acquired, the fact that the title is in the name [45] of the wife alone is determinative of its nature as paraphernal, i.e., belonging exclusively to said spouse. The only import of the title is that Corazon is the owner of said property, the same having been registered in her name alone, and that she is married to [46] Rogelio Ruiz. III We now resolve the issue of whether the rates of interests and surcharges on the obligation of petitioner to private respondent are legal. The four (4) unpaid promissory notes executed by petitioner in favor of private respondent are in the following amounts and maturity dates: (1) P750,000.00, dated March 22, 1995 matured on April 21, 1996; (2) P100,000.00, dated April 21, 1995 matured on August 21, 1995; (3) P100,000.00, dated May 23, 1995 matured on November 23, 1995; and (4) P100,000.00, dated December 21, 1995 matured on March 1, 1996. The P750,000.00 promissory note dated March 22, 1995 has the following provisions: (1) 3% monthly interest, from the signing of the note until its maturity date; (2) 10% compounded monthly interest on the remaining balance at maturity date;

(3) 1% surcharge on the principal loan for every month of default; and (4) 25% attorneys fees. The P100,000.00 promissory note dated April 21, 1995 has the following provisions: (1) 3% monthly interest, from the signing of the note until its maturity date; (2) 10% monthly interest on the remaining balance at maturity date; (3) 1% compounded monthly surcharge on the principal loan for every month of default; and (4) 10% attorneys fees. The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1, 1995 have the following provisions: (1) 3% monthly interest, from the signing of the note until its maturity date; (2) 10% compounded monthly interest on the remaining balance at maturity date; (3) 10% surcharge on the principal loan for every month of default; and (4) 10% attorneys fees. We affirm the ruling of the appellate court, striking down as invalid the 10% compounded monthly interest, the 10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and December 1, 1995, and the 1% compounded monthly interest stipulated in the promissory note dated April 21, 1995. The legal rate of interest of 12% per annum shall apply after the maturity dates of the notes until full payment of the entire amount due. Also, the only permissible rate of surcharge is 1% per month, without compounding. We also uphold the award of the appellate court of attorneys fees, the amount of which having been reasonably reduced from the stipulated 25% (in the March 22, 1995 promissory note) and 10% (in the other three promissory notes) of the entire amount due, to a fixed amount of P50,000.00. However, we equitably reduce the 3% per month or 36% per annum interest present in all four (4) promissory notes to 1% per month or 12% per annum interest. The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals, Garcia vs. Court of [48] [49] [50] Appeals, Bautista vs. Pilar Development Corporation, and the recent case of Spouses Solangon vs. Salazar. This Court [51] invalidated a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan in Medel and a 6% per month or 72% [52] per annum interest on aP60,000.00 loan in Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the interest rate to 12% per annum. We held that while the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their [53] [54] assets. On the other hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a 21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per annum [55] [56] [57] in Medel and 72% in Solangon it has sustained the validity of a much lower interest rate of 21% in Bautista and 24% [58] inGarcia. We still find the 36% per annum interest rate in the case at bar to be substantially greater than those upheld by this Court in the two (2) aforecited cases. The 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate [59] and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory [60] undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages [61] caused by the breach. Although the courts may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, [62] nevertheless, may be equitably reduced if it is iniquitous or unconscionable. In the instant case, the 10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and December 1, 1995 was properly reduced by the appellate court. In sum, petitioner shall pay private respondent the following: 1. Principal of loan under promissory note dated March 22, 1995 ... P750,000.00
[47]

a.

1% interest per month on principal from March 22, 1995 until fully paid, less P270,000.00 paid by petitioner as interest from April 1995 to March 1996 1% surcharge per month on principal from May 1996 until fully paid

b.

2. Principal of loan under promissory note dated April 21, 1995 .. P100,000.00 a. b. 1% interest per month on principal from April 21, 1995 until fully paid 1% surcharge per month on principal from September 1995 until fully paid

3. Principal of loan under promissory note dated May 23, 1995 .... P100,000.00 a. b. 1% interest per month on principal from May 23, 1995 until fully paid 1% surcharge per month on principal from December 1995 until fully paid

4. Principal of loan under promissory note dated December 1, 1995 ... P100,000.00 a. b. 1% interest per month on principal from December 1, 1995 until fully paid 1% surcharge per month on principal from April 1996 until fully paid

5. Attorneys fees...P 50,000.00 Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure proceedings may now proceed. IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject to the MODIFICATION that the interest rate of 36% per annum is ordered reduced to 12 % per annum. SO ORDERED. Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

G.R. No. 164358

December 20, 2006

THERESA MACALALAG, petitioner, vs. PEOPLE OF THE PHILIPPINES, respondent. DECISION CHICO-NAZARIO, J.: This Petition for Review seeks to set aside the Court of Appeals' 10 October 2003 Decision convicting petitioner Theresa Macalalag (Macalalag) of Violation of Batas Pambansa Blg. 22, and its 13 May 2004 Resolution denying her Motion for Reconsideration. The factual and procedural antecedents of this case are as follows: On two separate occasions, particularly on 30 July 1995 and 16 October 1995, petitioner Theresa Macalalag obtained loans from Grace Estrella (Estrella), each in the amount of P100,000.00, each bearing an interest of 10% per month. Macalalag consistently paid the interests starting 30 August 1995. Finding the interest rates so burdensome, Macalalag requested Estrella for a reduction of the same to which the latter agreed. On 16 April 1996 and 1 May 1996, Macalalag executed Acknowledgment/Affirmation Receipts promising to pay Estrella the face value of the loans in the total amount of P200,000.00 within two months from the date of its execution plus 6% interest per month for each loan. Under the two Acknowledgment/Affirmation Receipts, she further obligated herself to pay for the two (2) loans the total sum of P100,000.00 as liquidated damages and attorney's fees in the total sum of P40,000.00 as stipulated by the parties the moment she breaches the terms and conditions thereof. As security for the payment of the aforesaid loans, Macalalag issued two Philippine National Bank (PNB) Checks (Check No. C-889835 and No. 889836) on 30 June 1996, each in the amount of P100,000.00, in favor of Estrella. However, when Estrella presented said checks for payment with the drawee bank, the same were dishonored for the reason that the account against which the same was drawn was already closed. Estrella sent a notice of dishonor and demand to make good the said checks to Macalalag, but the latter failed to do so. Hence, Estrella filed two criminal complaints for Violation of Batas Pambansa Blg. 22 before the Municipal Trial Court in Cities (MTCC) of Bacolod City, docketed as Criminal Cases No. 76367 and No. 76368. When arraigned, Macalalag entered a plea of "not guilty." On trial, Macalalag admitted her indebtedness and the issuance of the two PNB checks. She, however, stated that she already made payments over and above the value of the said checks. According to her, she made a total payment of P355,837.98, including the payment ofP199,837.98 made during the pendency of the cases. Estrella admitted the payment of P199,837.98 but claimed that the same amount was applied to the payment of the interest. On 5 February 2001, the MTCC of Bacolod City rendered its Decision, disposing of the case as follows: WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered declaring the accused Theresa Macalalag guilty beyond reasonable doubt of the crime charged. Pursuant however to Eduardo Vaca vs. Court of Appeals case (G.R. No. 131714, November 16, 1998[,] 298 SCRA 656) and the Rosa Lim vs. People x x x case (G.R. No. 130038, September 18, 2000) where the Supreme Court deleted these penalty of imprisonment, the penalty therefore imposable is a fine of P100,000.00 for each of the two (2) checks and subsidiary imprisonment in case of insolvency or failure to pay said fine. As she is criminally liable, she is likewise ordered to pay as civil indemnity the total amount of P200,000.00 with interest at the legal rate from the time of the filing of the informations until the amount is fully paid; less whatever amount was thus 2 far paid and validly deducted from the principal sum originally claimed. Petitioner Macalalag appealed with the Regional Trial Court (RTC) of Bacolod City, which affirmed in toto the MTCC Decision. Petitioner Macalalag appealed anew with the Court of Appeals, which affirmed the RTC and the MTCC decisions with modification to
1

the effect that, among other things, accused was convicted only of one (1) count of Violation of Batas Pambansa Blg. 22, corresponding to the issuance of the second check. The decretal portion of the Court of Appeals Decision reads: WHEREFORE, foregoing premises considered, the petition is PARTLY GRANTED. Accordingly, the dispositive portion of the February 9, 2001 Decision of the Municipal Trial Court in Cities of Bacolod City, Branch 3, as affirmed by the Regional Trial Court of Bacolod City, Branch 43, is hereby MODIFIED to read as follows: "WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered declaring the accused Theresa Macalalag guilty beyond reasonable doubt of the crime charged. Pursuant however to Eduardo Vaca vs. Court of Appeals case (G.R. No. 131714, November 16, 1998[,] 298 SCRA 659) and the Rosa Lim vs. People of the Philippines case (G.R. No. 130038, September 18, 2000) where the Supreme Court deleted the penalty of imprisonment, the penalty therefore imposable is a fine of P100,000.00 for the second check and subsidiary imprisonment in case of insolvency or failure to pay said fine. As she is criminally liable, she is likewise ordered to pay civil indemnity in the amount of P100,000.00 with interest at the legal rate from the time of the filing of the information until the amount is fully paid; less P195,837.98, the 3 amount credited to the accused after paying the first loan, to be applied to the second loan." In acquitting petitioner Macalalag of one count of violation of Batas Pambansa Blg. 22, the Court of Appeals reversed the RTC ruling 4 which held that Medel v. Court of Appeals is not applicable as it applies only in civil cases where the validity of the interest rate is in 5 issue, and cannot be applied in criminal cases for violation of Batas Pambansa Blg. 22. In Medel, we held that, while the Usury Law is now legally inexistent, the stipulated rate of interest at 5.5% per month is iniquitous or unconscionable, which the court could equitably reduce. The Court of Appeals was correct in applying Medel to the case at bar. The criminal action for violation of Batas Pambansa Blg. 22 is 6 7 deemed to include the corresponding civil action. In fact, no reservation to file such civil action shall be allowed. Verily then, whether the interest is unconscionable or not can be determined in the instant case. Furthermore, in all criminal prosecutions, any doubt should be resolved in favor of the accused and strictly against the State. Following this principle, the issue of whether the Medel case should be applied in favor of Macalalag should be resolved in her favor. The stipulated interest of 10% per month, and even the reduced rate of 6% per month, are higher than the interest rates declared unconscionable in Medel and in several other cases with allegations of unconscionable interests. Such cases were synthesized by 8 then Associate Justice (now Chief Justice) Reynato Puno in Ruiz v. Court of Appeals : The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar Development Corporation, and the recent case of Spouses Solangon vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan in Medel and a 6% per month or 72% per annum interest on a P60,000.00 loan in Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the interest rate to 12% per annum. We held that while the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. On the other hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a 21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per annum in Medel and 72% in Solangon it has sustained the validity of a much lower interest rate of 21% in Bautista and 24% in Garcia. We still find the 36% per annum interest rate in the case at bar to be substantially greater than those upheld by this Court in the two (2) aforecited cases. Applying Medel, therefore, the Court of Appeals convicted petitioner Macalalag of one count of Batas Pambansa Blg. 22 and computed her civil liability as follows: Thus, applying the Medel doctrine, the interest rate imposed by Estrella on the loans of Macalalag should be reduced to 12% per annum only plus 1% a month penalty charge as liquidated damages on each loan. We now proceed to the determination of whether Macalalag had already paid her obligations to Estrella.

There is no dispute that Macalalag obtained the first P100,000.00 loan from Estrella on July 30, 1995. The said amount multiplied by 1% interest per month until July 1, 1996, the time the check representing the said amount was dishonored (P100,000.00 x 1% x 11 + P100,000.00), would be P111,000.00. The second loan of P100,000.00 was obtained on October 16, 1995 and the check that was issued for the payment of the said loan was also dishonored on July 1, 1996. Using the above formula (P100,000.00 x 1% x 8.5 + P100,000.00), Macalalag's obligation would only be P108,500.00. Thus, when the checks were dishonored, Macalalag's total obligation to Estrella was P219,500.00. In the instant case, it has been established that Macalalag made a total payment of P355,837.98 (P199,837.98 plus P156,000.00) (See 275-276, Records). The P156,000.00 was paid starting August 30, 1995 until June 15, 1996 while the amount of P199,837.98 was paid to complainant sometime in 1997 considering that the acknowledgment receipt was dated January 5, 1998. In the Acknowledgment/Affirmation Receipts, Macalalag promised to pay Estrella the principal loans within two (2) months after the execution of said documents. Thus, the two (2) loans of P100,000.00 each, or a total of P200,000.00, were demandable only on June 16, 1996 and July 1, 1996, respectively. Hence, the total amount of P156,000.00 already paid by Macalalag to Estrella could very well be applied to the face value of the first loan which fell due on June 16, 1996, including the 1% interest rate per month on the two (2) loans or a total of 2% per month. Thus, Macalalag could no longer be held liable for violation of B.P. Blg. 22 insofar as the first check is concerned since the same was already paid prior to its presentment for payment. However, with respect to the second check, there is no doubt that Macalalag is liable under B.P. Blg. 22. Macalalag admitted having issued the said check and that said check, when presented for payment for payment with the drawee bank bounced for the reason "account closed". Despite notice of dishonor, Macalalag failed to make good the said check. All the elements of violation of B.P. Blg. 22, viz: a) the making, drawing or issuance of any check to apply to account or for value; b) the knowledge of the maker[,] drawer, or issuer that at the time of the issue he does not have sufficient funds in, or credit with, the drawee bank for the payment of the check in full upon its presentment; and, c) the subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit, or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment (Sycip, Jr. vs. Court of Appeals, 328 SCRA 447), are, therefore, present. In view of the foregoing, the penalty imposed on Macalalag by the trial court should be modified. In accordance with the Vaca vs. Court of Appeals (294 SCRA 656) case, Macalalag should be meted the penalty of fine amounting to P100,000.00 only corresponding to the face value of the second check with subsidiary imprisonment in case of insolvency. Likewise, Macalalag should pay the civil indemnity in the total amount of P100,000.00 with interest at the legal rate from the time of the filing of the Information until fully satisfied less the amount of P195,837.98 which amount should be credited to her. This amount represents the balance after full payment of the first loan computed as follows: P355,837.98 - total amount paid by petitioner to private complainant (P199,837.98 and P156,000.00)

LESS: P160,000.00 - to fully pay the first loan (P100,000.00 face value of the loan plus interests at P21,000.00 and P39,000.00) - amount to be credited to petitioner to be applied to pay the second loan.
9

P195,837.98

We have repeatedly held that there is no violation of Batas Pambansa Blg. 22 if the complainant was actually told by the drawer that 10 he has no sufficient funds in a bank. Where, as in the case at bar, the checks were issued as security for a loan, payment by the accused of the amount of the check prior to its presentation for payment would certainly serve the same purpose. Batas Pambansa Blg. 22 was not intended to shelter or favor nor encourage users of the banking system to enrich themselves 11 through the manipulation and circumvention of the noble purpose and objectives of the law. Such manipulation is manifest when payees of checks issued as security for loans present such checks for payment even after the payment of such loans.

Petitioner Macalalag, however, claims that she should not be convicted of even one count of Violation of Batas Pambansa Blg. 22. Petitioner Macalalag claims that: (1) the payment of the accounts before the checks became due and demandable and/or before the 12 same are presented for payment would exempt the petitioner from Violation of Batas Pambansa Blg. 22; (2) the redeemable value 13 of the check is limited only to its face value and does not include interest; and (3) partial redemption of the check will exempt the 14 accused from criminal liability for Violation of Batas Pambansa Blg. 22. Petitioner Macalalag claims that, considering that she had already paid P156,000.00 at the time the subject checks were presented for payment, the amount of P100,000.00 should be applied for redemption of the first check and the remaining amount of P56,000.00 should be treated as partial redemption of the second check. Petitioner Macalalag posits that said partial redemption exempts her from criminal liability because it was made before the check was presented for payment. The petition must fail. Even if we agree with petitioner Macalalag that the interests on her loans should not be imputed to the face value of the checks she issued, petitioner Macalalag is still liable for Violation of Batas Pambansa Blg. 22. Petitioner Macalalag herself declares that before the institution of the two cases against her, she has made a total payment of P156,000.00. Applying this amount to the first check (No. C-889835), what will be left is P56,000.00, an amount insufficient to cover her obligation with respect to the second check. As stated above, when Estrella presented the checks for payment, the same were dishonored on the ground that they were drawn against a closed account. Despite notice of dishonor, petitioner Macalalag failed to pay the full face value of the second check issued. Only a full payment of the face value of the second check at the time of its presentment or during the five-day grace period could have exonerated her from criminal liability. A contrary interpretation would defeat the purpose of Batas Pambansa Blg. 22, that of 16 safeguarding the interest of the banking system and the legitimate public checking account user, as the drawer could very well have himself exonerated by the mere expediency of paying a minimal fraction of the face value of the check. Neither could petitioner Macalalag's subsequent payment of P199,837.98 during the pendency of the cases against her before the MTCC result in freeing her from criminal liability because the same had already attached after the check was dishonored. Said subsequent payments can only affect her civil, not criminal, liability. A subsequent payment by the accused would not obliterate the 17 criminal liability theretofore already incurred. It is well to note that the gravamen of Batas Pambansa Blg. 22 is the issuance of a check, not the nonpayment of an obligation. The 19 law has made the act of issuing a bum check a malum prohibitum. Consequently, the lack of criminal intent on the part of the 20 accused is irrelevant, and the accused will be convicted for violation thereof as long as the following elements are proven: 1. The accused makes, draws or issues any check to apply to account or for value; 2. The accused knows at the time of the issuance that he or she does not have sufficient funds in, or credit with, the drawee bank for the payment of the check in full upon its presentment; and 3. The check is subsequently dishonored by the drawee bank for insufficiency of funds or credit, or it would have been dishonored 21 for the same reason had not the drawer, without any valid reason, ordered the bank to stop payment. All these elements have been conclusively proven in Court, the second element by the prima facie evidence established by Section 2 of Batas Pambansa Blg. 22, which provides: SEC. 2. Evidence of knowledge of insufficient funds. the making, drawing and issuance of a check payment of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee. WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated 10 October 2003 and Resolution dated 13 May 2004, affirming the conviction of petitioner Theresa Macalalag of one count of Violation of Batas Pambansa Blg. 22, are AFFIRMED. No costs. SO ORDERED.
18 15

Ynares-Santiago, (Working Chairman) Austria-Martinez and Callejo, Sr., JJ., concur. Panganiban, CJ, retired as of 7 December 2006.

G.R. No. 168736

April 19, 2006

SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, Petitioners, vs. SPOUSES RENATO CUYCO and FILIPINA CUYCO, Respondents. DECISION YNARES-SANTIAGO, J.: This petition for review on certiorari assails the Decision of the Court of Appeals (CA) in CA G.R. CV No. 62352 dated November 5, 2 2003 which modified the Decision of the Regional Trial Court (RTC) of Quezon City, Branch 105 in Civil Case No. Q-97-32130 dated 3 January 27, 1999, as well as the Resolution dated June 28, 2005 denying the motion for reconsideration thereof. The facts of the case are as follows: Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the amount of P1,500,000.00 from respondents, spouses 4 Renato and Filipina Cuyco, payable within one year at 18% interest per annum, and secured by a Real Estate Mortgage over a parcel 5 of land with improvements thereon situated in Cubao, Quezon City covered by TCT No. RT-43723 (188321). Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000.00, broken down as follows: (1) P150,000.00 on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3) P500,000.00 on September 5, 1992; (4) 6 P200,000.00 on October 29, 1992; and (5) P250,000.00 on January 13, 1993. Petitioners made payments amounting to P291,700.00, but failed to settle their outstanding loan obligations. Thus, on September 8 10, 1997, respondents filed a complaint for foreclosure of mortgage with the RTC of Quezon City, which was docketed as Civil Case No. Q-97-32130. They alleged that petitioners loans were secured by the real estate mortgage; that as of August 31, 1997, their indebtedness amounted to P6,967,241.14, inclusive of the 18% interest compounded monthly; and that petitioners refusal to settle the same entitles the respondents to foreclose the real estate mortgage. Petitioners filed a motion to dismiss on the ground that the complaint states no cause of action which was denied by the RTC for lack of merit. In their answer, petitioners admitted their loan obligations but argued that only the original loan of P1,500,000.00 was secured by the real estate mortgage at 18% per annum and that there was no agreement that the same will be compounded monthly. On January 27, 1999, the RTC rendered judgment in favor of the respondents, the dispositive portion of which reads: WHEREFORE, in the light of the foregoing, the Court renders judgment on the Complaint in favor of the plaintiffs and hereby orders the defendants to pay to the Court or to the plaintiffs the amounts of P6,332,019.84, plus interest until fully paid, P25,000.00 as attorneys fees, and costs of suit, within a period of one hundred and twenty (120) days from the entry of judgment, and in case of default of such payment and upon proper motion, the property shall be ordered sold at public auction to satisfy the judgment. Further, defendants*+ counterclaim is dismissed. SO ORDERED.
13 12 11 9 10 7 1

Petitioners appealed to the CA reiterating their previous claim that only the amount of P1,500,000.00 was secured by the real estate 14 mortgage. They also contended that the RTC erred in ordering the foreclosure of the real estate mortgage to satisfy the total

indebtedness of P6,532,019.84, as of January 10, 1999, plus interest until fully paid, and in imposing legal interest of 12% per annum 15 on the stipulated interest of 18% from the filing of the case until fully paid. On November 5, 2003, the CA partially granted the petition and modified the RTC decision insofar as the amount of the loan obligations secured by the real estate mortgage. It held that by express intention of the parties, the real estate mortgage secured the original P1,500,000.00 loan and the subsequent loans of P150,000.00 and P500,000.00 obtained on July 1, 1992 and September 5, 1992, respectively. As regards the loans obtained on May 31, 1992, October 29, 1992 and January 13, 1993 in the amounts of P150,000.00, P200,000.00 and P250,000.00, respectively, the appellate tribunal held that the parties never intended the same to be secured by the real estate mortgage. The Court of Appeals also found that the trial court properly imposed 12% legal interest on the stipulated interest from the date of filing of the complaint. The dispositive portion of the Decision reads: WHEREFORE, the instant appeal is PARTIALLY GRANTED. The assailed decision of the Regional Trial Court of Quezon City, Branch 105, in Civil Case No. Q-97-32130 is hereby MODIFIED to read: "WHEREFORE, in the light of the foregoing, the Court renders judgment on the Complaint in favor of the plaintiffs and hereby orders the defendants to pay to the Court or to the plaintiffs the amount of P2,149,113.92[,] representing the total outstanding principal loan of the said defendants, plus the stipulated interest at the rate of 18% per annum accruing thereon until fully paid, within a period of one hundred and twenty days from the entry of judgment, and in case of default of such payment and upon motion, the property, subject of the real estate mortgage contract, shall be ordered sold at public auction in satisfaction of the mortgage debts.1avvphil.net Defendants are further, ordered to pay the plaintiffs the following: 1. the legal interest at the rate of 12% per annum on the stipulated interest of 18% per annum, computed from the filing of the complaint until fully paid; 2. the sum of P25,000.00 as and for attorneys fees; and 3. the costs of suit." SO ORDERED.
16

Hence, the instant petition for review on the sole issue: WHETHER OR NOT PETITIONERS MUST PAY RESPONDENTS LEGAL INTEREST OF 12% PER ANNUM ON THE STIPULATED INTEREST OF 17 18% PER ANNUM, COMPUTED FROM THE FILING OF THE COMPLAINT UNTIL FULL PAID. Petitioners contend that the imposition of the 12% legal interest per annum on the stipulated interest of 18% per annum computed from the filing of the complaint until fully paid was not provided in the real estate mortgage contract, thus, the same has no legal basis. We are not persuaded. While a contract is the law between the parties, it is also settled that an existing law enters into and forms part of a valid contract 19 without the need for the parties expressly making reference to it. Thus, the lower courts correctly applied Article 2212 of the Civil Code as the basis for the imposition of the legal interest on the stipulated interest due. It reads: Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest 20 enunciated by the Court in Eastern Shipping Lines, Inc. v. Court of Appeals, to wit: 1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
18

annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. (Emphasis supplied) In the case at bar, the evidence shows that petitioners obtained several loans from the respondent, some of which as held by the CA were secured by real estate mortgage and earned an interest of 18% per annum. Upon default thereof, respondents demanded payment from the petitioners by filing an action for foreclosure of the real estate mortgage. Clearly, the case falls under the rule stated in paragraph 1. Applying the rules in the computation of interest, the principal amount of loans subject of the real estate mortgage must earn the stipulated interest of 18% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the date of the filing of the complaint on September 10, 1997 until finality of the Courts Decision. Such interest is not due to 21 stipulation but due to the mandate of the law as embodied in Article 2212 of the Civil Code. From such date of finality, the total 22 amount due shall earn interest of 12% per annum until satisfied. Certainly, the computed interest from the filing of the complaint on September 10, 1997 would no longer be true upon the finality of this Courts decision. In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals, we derive the 23 following formula for the RTCs guidance: TOTAL AMOUNT DUE = [principal + interest + interest on interest] - partial payments made Interest = principal x 18 % per annum x no. of years from due date until finality of judgment Interest on interest = Interest computed as of the filing of the complaint (September 10, 1997) x 12% x no. of years until finality of judgment Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid. In Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing Corporation, this Court held that the total amount due on the contracts of loan may be easily determined by the trial court through a simple mathematical computation based on the formula specified above. Mathematics is an exact science, the application of which needs no further proof from the parties. As regards what loans were secured by the real estate mortgage, respondents contended that all five additional loans were intended by the parties to be secured by the real estate mortgage. Thus, the CA erred in ruling that only two of the five additional loans were secured by the real estate mortgage when the documents evidencing said loans would show at least three loans were secured by the real estate mortgage, namely: (1) P150,000.00 obtained on May 31, 1992; (2) P150,000.00 obtained on July 1, 1992; and (3) 25 P500,000.00 obtained on September 5, 1992. In their Reply, petitioners alleged that their petition only raised the sole issue of interest on the interest due, thus, by not filing their own petition for review, respondents waived their privilege to bring matters for the Courts review that do not deal with the sole issue raised. Procedurally, the appellate court in deciding the case shall consider only the assigned errors, however, it is equally settled that the Court is clothed with ample authority to review matters not assigned as errors in an appeal, if it finds that their consideration is 26 necessary to arrive at a just disposition of the case.
24

Moreover, as an exception to the rule that findings of facts of the CA are conclusive and binding on the Court, an independent 28 evaluation of facts may be done by it when the findings of facts are conflicting, as in this case. The RTC held that all the additional loans were secured by the real estate mortgage, thus: There is, therefore, a preponderance of evidence to show that the parties agreed that the additional loans would be against the mortgaged property. It is of no moment that the Deed of Mortgage (Exh. B) was not amended and thereafter annotated at the back of the title (Exh. C) because under Article 2125 of the Civil Code, if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. It is extremely difficult for the court to perceive that the plaintiffs required the defendants to execute a mortgage on the first loan and thereafter fail to do so on the succeeding loans. Such contrary behavior is 29 unlikely. The CA modified the RTC decision holding that: However, the real estate mortgage contract was supplemented by the express intention of the mortgagors (defendants-appellants) to secure the subsequent loans they obtained from the mortgagees (plaintiffs-appellees), on 01 July 1992, in the amount of P150,000.00, and on 05 September 1992, in the amount of P500,000.00. The mortgagors (defendants-appellants) intention to secure a larger amount than that stated in the real estate mortgage contract was unmistakable in the acknowledgment receipts they issued on the said loans. The acknowledgment receipts read: "July 1, [1]992 "Received from Mr. & Mrs. Renato Q. Cuyco PCIB Ck # 498243 in the amount of P150,000.00 July 1/92 as additional loan against mortgaged property TCT No. RT-43723 (188321) Q.C. (SGD) Adelina S. Cuyco" "Sept. 05/92 "Received from Mr. R. Cuyco the amount of P500,000.00 (five hundred thousand) PCIB Ck # 468657 as additional loan from mortgage property TCT RT-43723. (SGD) Adelina S. Cuyco" In such case, the specific amount mentioned in the real estate mortgage contract no longer controls. By express intention of the mortgagors (defendants-appellants) the real estate mortgage contract, as supplemented, secures the P1,500,000.00 loan obtained on 25 November 1991; the P150,000.00 loan obtained on 01 July 1992; and the P500,000.00 loan obtained on 05 September 1992. All these loans are subject to stipulated interest of 18% per annum provided in the real estate mortgage contract. With respect to the other subsequent loans of the defendants-appellants in the amount of P150,000.00, obtained on 31 May 1992; in the amount of P200,000.00, obtained on 29 October 1992; and, in the amount of P250,000.00, obtained on 13 January 1993, nothing in the records remotely suggests that the mortgagor (defendants-appellants), likewise, intended the said loans to be secured by the real estate mortgage contract. Consequently, we rule that the trial court did err in declaring said loans to be secured 30 by the real estate mortgage contract. As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding 32 between the parties and is known in American Jurisprudence as the "blanket mortgage clause," also known as a "dragnet clause." A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, 33 recording fees, et cetera.
31

27

While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the 34 mortgage contract. The pertinent provisions of the November 26, 1991 real estate mortgage reads: That the MORTGAGOR is indebted unto the MORTGAGEE in the sum of ONE MILLION FIVE THOUSAND PESOS (sic) (1,500,000.00) Philippine Currency, receipt whereof is hereby acknowledged and confessed, payable within a period of one year, with interest at the rate of eighteen percent (18%) per annum; That for and in consideration of said indebtedness, the MORTGAGOR does hereby convey and deliver by way of MORTGAGE unto said MORTGAGEE, the latters heirs and assigns, the following realty together with all the improvements thereon and situated at Cubao, Quezon City, and described as follows: xxxx PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law. It is clear from a perusal of the aforequoted real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be secured by the same real estate mortgage, as shown in the acknowledgement receipts, it is not sufficient in law to bind the realty for it was not made substantially in the form prescribed by law. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not constituted by a private document, even if such mortgage be accompanied 35 with delivery of possession of the mortgage property. Besides, by express provisions of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed. It is required, among other things, that the document be signed by the mortgagor executing the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary public. A mortgage constituted by means of a private document obviously does not comply with such legal 36 requirements. What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. Lastly, the CA held that to discharge the real estate mortgage, payment only of the principal and the stipulated interest of 18% per annum is sufficient as the mortgage document does not contain a stipulation that the legal interest on the stipulated interest due, 37 attorneys fees, and costs of suit must be paid first before the same may be discharged. We do not agree. Section 2, Rule 68 of the Rules of Court provides: SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (Emphasis added)

Indeed, the above provision of the Rules of Court provides that the mortgaged property may be charged not only for the mortgage debt or obligation but also for the interest, other charges and costs approved by the court. Thus, to discharge the real estate mortgage, petitioners must pay the respondents (1) the total amount due, as computed in accordance with the formula indicated above, that is, the principal loan of P1,500,000.00, the stipulated interest of 18%, the interest on the stipulated interest due of 12% computed from the filing of the complaint until finality of the decision less partial payments made, (2) the 12% legal interest on the total amount due from finality until fully satisfied, (3) the reasonable attorneys fees of P25,000.00 and (4) the costs of suit, within the period specified by the Rules. Should the petitioners default in the payment thereof, the property shall be sold at public auction to satisfy the judgment. WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals in CA G.R. CV No. 62352 dated November 5, 2003, which modified the Decision of the Regional Trial Court of Quezon City, Branch 105, in Civil Case No. Q-97-32130, is AFFIRMED with the MODIFICATIONS that petitioners are ordered to pay the respondents (1) the total amount due, as computed by the RTC in accordance with the formula specified above, (2) the legal interest of 12% per annum on the total amount due from such finality until fully paid, (3) the reasonable amount of P25,000.00 as attorneys fees, and (4) the costs of suit, within a period of not less than 90 days nor more than 120 days from the entry of judgment, and in case of default of such payment the property shall be sold at public auction to satisfy the judgment. SO ORDERED.

ILEANA DR. MACALINAO, Petitioner,

G.R. No. 175490 Present:

- versus -

BANK OF THE PHILIPPINEISLANDS, Respondent. .

YNARES-SANTIAGO, J., Chairperson, CHICO-NAZARIO, VELASCO, JR., NACHURA, and PERALTA, JJ. Promulgated:

September 17, 2009 x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to reverse and set aside the June [1] [2] 30, 2006 Decision of the Court of Appeals (CA) and its November 21, 2006 Resolution denying petitioners motion for reconsideration.

The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of respondent [3] Bank of the Philippine Islands (BPI). Petitioner Macalinao made some purchases through the use of the said credit card and defaulted in paying for said purchases. She subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of the amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos (PhP 141,518.34), as follows:

Statement Date 10/27/2002 11/27/2002 12/31/2002 1/27/2003 2/27/2003 3/27/2003

Previous Balance 94,843.70 98,465.41 86,351.02 119,752.28 124,234.58 129,263.13

Purchases (Payments) (15,000) 30,308.80

(18,000.00)

Penalty Interest 559.72 0 259.05 618.23 990.93 298.72

Finance Charges 3,061.99 2,885.61 2,806.41 3,891.07 4,037.62 3,616.05

Balance Due 98,456.41 86,351.02 119,752.28 124,234.58 129,263.13 115,177.90

4/27/2003 5/27/2003 6/29/2003 7/27/2003 8/27/2003 9/28/2003 10/28/2003 11/28/2003 12/28/2003 1/27/2004

115,177.90 119,565.44 113,540.10 118,833.49 123,375.65 128,435.56

(10,000.00) 8,362.50 (7,000.00)

644.26 402.95 323.57 608.07 1,050.20 1,435.51

3,743.28 3,571.71 3,607.32 3,862.09 4,009.71 4,174.16

119,565.44 113,540.10 118,833.49 123,375.65 128,435.56 134,045.23

141,518.34

8,491.10

4,599.34

154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month. Particularly:

8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly Statement of Account (SOA) and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20) days from the date of the said SOA, and such payment due date may be changed to an earlier date if the Cardholders account is considered overdue and/or with balances in excess of the approved credit limit, or to such other date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a holiday, the last day for the payment automatically becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the SOA of the Cardholder, the latter shall pay any and all charges made through the use of the CARD within thirty (30) days from date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD within the payment period as stated in the SOA or within thirty (30) days from actual date or dates of purchase whichever occur earlier, shall render him in default without the necessity of demand from BCC, which the Cardholder expressly waives. The charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a months delay. PROVIDED that if there occurs any change on the prevailing market rates, BCC shall have the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior notice to the cardholder. The Cardholder hereby authorizes BCC to correspondingly increase the rate of such interest [in] the event of changes in the prevailing market rates, and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing statement date shall automatically be suspended, and those with accounts unpaid after ninety (90) days from said original billing/statement date shall automatically be cancel (sic), without prejudice to BCCs right to suspend or cancel any card anytime and for whatever reason. In case of default in his obligation as provided herein, Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty charges aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency or attorney; (b) service fee for every dishonored check issued by the cardholder in payment of his account without prejudice, however, to BCCs right of considering Cardholders account, and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial cost, if the payment of the account is enforced though court action. Venue of all civil suits to enforce this Agreement or any other suit directly or indirectly arising from the relationship between the parties as established herein, whether arising from crimes, negligence or breach thereof, shall be in the process of courts of the City of Makati or in other courts at the [4] option of BCC. (Emphasis supplied.)

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as Civil Case No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and [5] Danilo SJ. Macalinao.

In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total amount due as attorneys fees, and of the [6] cost of suit.

After the summons and a copy of the complaint were served upon petitioner Macalinao and her husband, they failed to file [7] their Answer. Thus, respondent BPI moved that judgment be rendered in accordance with Section 6 of the Rule on Summary [8] [9] Procedure. This was granted in an Order dated June 16, 2004. Thereafter, respondent BPI submitted its documentary [10] evidence.

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty charges of 2% per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported by documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against defendantspouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former jointly and severally the following:

1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2% per month from January 05, 2004 until fully paid; 2. P10,000.00 as and by way of attorneys fees; and 3. Cost of suit. SO ORDERED.
[11]

Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004, the RTC affirmed in toto the decision of the MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a recomputation at the reduced rate of 2% per month. Note that the total amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late payment charge of 6% per month. WHEREFORE, the appealed decision is hereby affirmed in toto. No pronouncement as to costs. SO ORDERED.
[12]

Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total amount due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay respondent Bank of the Philippine Islands the following: 1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004 until fully paid;

2. 3.

P10,000.00 as and by way of attorneys fees; and Cost of Suit.

[13]

SO ORDERED.

Although sued jointly with her husband, petitioner Macalinao was the only one who filed the petition before the CA since [14] her husband already passed away on October 18, 2005.

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the reduced interest rate as previous higher interest rates were already incorporated in the said amount. Thus, the said amount should not be made as basis in computing the total obligation of petitioner Macalinao. Further, the CA also emphasized that respondent BPI should not compound the interest in the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general public. It explained that contracts of adhesion are not invalid per se and are not entirely prohibited.

Petitioner Macalinaos motion for reconsideration was denied by the CA in its Resolution dated November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.

II.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

III.

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE, REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.

Our Ruling

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by the CA is [15] iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are based on the Terms and Conditions Governing the [16] Issuance and Use of the BPI Credit Card.

We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of [17] 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. (Emphasis supplied.)

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce [18] the interest rate as reason and equity demand.

The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. 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. In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of [19] each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.

In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as [20] indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case, Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the principal obligation. Thus, this allegedly necessitates a reexamination of the evidence presented by the parties. For this reason, petitioner Macalinao further contends that the dismissal of the case or its remand to the lower court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy of the complaint were served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file their Answer despite such service. Thus, respondent BPI [21] moved that judgment be rendered accordingly. Consequently, a decision was rendered by the MeTC on the basis of the evidence submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary Procedure, which states:

Sec. 6. Effect of failure to answer. Should the defendant fail to answer the complaint within the period above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment as may be warranted by the facts alleged in the complaint and limited to what is prayed for therein: Provided, however, that the court may in its discretion reduce the amount of damages and attorneys fees claimed for being excessive or otherwise unconscionable. This is without prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner Macalinaos 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.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-computation of the interest considering that this was the first amount which appeared on the Statement of Account of petitioner Macalinao. There is no other amount on which the re-computation could be based, as can be gathered from the evidence on record. Furthermore, barring a showing that the factual findings complained of are totally devoid of support in the record or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this Court is not expected or required to examine or contrast [22] the evidence submitted by the parties.

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the beginning balance of PhP 94,843.70, this Court finds the following computation more appropriate:

Statement Date

Previous Balance

Purchases (Payments)

Balance

Interest (1%)

Penalty Charge (1%) 948.44 798.44 1,101.53 1,101.53 1,101.53 921.53 921.53 821.53 835.15

10/27/2002 11/27/2002 12/31/2002 1/27/2003 2/27/2003 3/27/2003 4/27/2003 5/27/2003 6/29/2003

94,843.70 94,843.70 79,843.70 110,152.50 110,152.50 110,152.50 92,152.50 92,152.50 82,152.50

(15,000) 30,308.80

(18,000.00) (10,000.00) 8,362.50

94,843.70 79,843.70 110,152.50 110,152.50 110,152.50 92,152.50 92,152.50 82,152.50 83,515.00

948.44 798.44 1,101.53 1,101.53 1,101.53 921.53 921.53 821.53 835.15

Total Amount Due for the Month 96,740.58 81,440.58 112,355.56 112,355.56 112,355.56 93,995.56 93,995.56 83,795.56 85,185.30

(7,000.00) 7/27/2003 8/27/2003 9/28/2003 10/28/2003 11/28/2003 12/28/2003 1/27/2004 TOTAL 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 83,515.00 835.15 835.15 835.15 835.15 835.15 835.15 835.15 14,397.26 835.15 835.15 835.15 835.15 835.15 835.15 835.15 14,397.26 85,185.30 85,185.30 85,185.30 85,185.30 85,185.30 85,185.30 85,185.30 112,309.52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following: (1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two centavos (PhP 112,309.52)plus interest and penalty charges of 2% per month from January 5, 2004 until fully paid; (2) PhP 10,000 as and by way of attorneys fees; and (3) Cost of suit. SO ORDERED.