CREDIT TRANSACTIONS (digested cases)

1. 2. 3. 4. 5.

Canlas vs. CA, 326 SCRA 415 Republic vs. CA and Cuaycong, 65 SCRA 186 YHT Realty et. al. Vs. CA, et. al, 451 SCRA 186 Almeda vs. CA, 256 SCRA 292 Cebu International Finance Corp. vs. CA 316 SCRA 488

misrepresented themselves as the spouses Canlas. As a result Maosca was granted a loan by the respondent Asian Savings Bank (ASB) with the use of subject parcels of land as security. When the loan it extended was not paid, the bank extrajudicially foreclosed the mortgage. The spouses Canlas wrote a letter informing the bank (ASB) that the execution of subject mortgage over the two parcels of land in question was without their authority, and request that steps be taken to annul and/or revoke the questioned mortgage. Canlas also wrote the office of Sheriff Contreras asking that the scheduled auction sale be cancelled or held in abeyance. Sheriff Contreras and the Asian Savings Bank refused to heed petitioner Canlas' stance and proceeded with the scheduled auction sale. Consequently, the Canlas spouses instituted an action for the annulment of the deed of real estate mortgage with prayer for the issuance of a writ of preliminary injunction. The trial court issued an Order restraining the sheriff from issuing the corresponding Certificate of Sheriff's Sale. For failure to file his answer, despite several motions for extension of time for the filing Maosca was declared in default. The lower court came up with a decision annulling the deed of mortgage and declaring the public auction sale involving the spouses properties as null and void. The court also ordered Maosca to pay the bank the proceeds of the loan secured by the void mortgage plus interest at the legal rate starting from the date when the original complaint was filed until the amount is fully paid. ASB appealed the case to the CA. The CA reversed the lower courts decision (It held that the mortgage was valid, that the spouses Canlas are not entitled to relief because they were negligent, and that ASB exercised due diligence in granting the loan to Maosca.). ISSUE(S):

1. Canlas vs. CA FACTS: Canlas and Maosca decided to venture in business and to raise the capital needed therefor. Canlas executed a Special Power of Attorney authorizing Maosca to mortgage 2 parcels of land in his name (Canlas). Subsequently, Canlas agreed to sell the said parcels of land to Maosca, for and in consideration of P850,000.00, P500,000.00 of which payable within one week, and the balance of P350,000.00 to serve as his (Canlas) investment in the business. Canlas delivered to Maosca the transfer certificates of title of the parcels of land involved. Maosca, as his part of the transaction, issued two postdated checks in favor of Canlas in the amounts of P40,000.00 and P460,000.00, respectively, but it turned out that the check covering the bigger amount was not sufficiently funded. Maosca subsequently mortgaged the same parcels of land to a certain Attorney Magno, with the help of impostors who

 HELD:

Whether or not the mortgage is valid. Whether or not ASB exercised due diligence. Whether or not ASB should bear the loss.

exercise the necessary care and prudence in dealing even on a registered or titled property. The business of a bank is affected with public interest, holding in trust the money of the depositors, which bank deposits the bank should guard against loss due to negligence or bad faith, by reason of which the bank would be denied the protective mantle of the land registration law, accorded only to purchasers or mortgagees for value and in good faith. In the case under consideration, from the evidence on hand it can be gleaned unerringly that respondent bank did not observe the requisite diligence in ascertaining or verifying the real identity of the couple who introduced themselves as the spouses Canlas. It is worthy to note that not even a single identification card was exhibited by the said impostors to show their true identity; and yet, the bank acted on their representations simply on the basis of the residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land in question. Evidently, the efforts exerted by the bank to verify the identity of the couple posing as Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank to observe more than the diligence of a good father of a family. The negligence of respondent bank was magnified by the fact that the previous deed of mortgage (which was used as the basis for checking the genuineness of the signatures of the supposed Canlas spouses) did not bear the tax account number of the spouses, as well as the Community Tax Certificate of Angelina Canlas. But such fact notwithstanding, the bank did not require the impostors to submit additional proof of their true identity. ASB should bear the loss. Under the doctrine of last clear chance, which is applicable here, the ASB must suffer the resulting loss. In essence, the doctrine of

The mortgage is invalid. Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the property mortgaged; a mortgage, constituted by an impostor is void. Considering that it was established indubitably that the contract of mortgage sued upon was entered into and signed by impostors who misrepresented themselves as the spouses Canlas, the Court is of the ineluctible conclusion and finding that subject contract of mortgage is a complete nullity. The bank did not exercise due diligence. Art. 1173 of the Civil Code, provides: Art. 1173. The fault or negligence of the obligor consist in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104) The degree of diligence required of banks is more than that of a good father of a family; in keeping with their responsibility to

last clear chance is to the effect that where both parties are negligent but the negligent act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose fault or negligence brought about the occurrence of the incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with the consequences arising therefrom. Stated differently, the rule is that the antecedent negligence of a person does not preclude recovery of damages caused by the supervening negligence of the latter, who had the last fair chance to prevent the impending harm by the exercise of due diligence. Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the opportunity to perpetrate the fraud, by entrusting to latter the owner's copy of the transfer certificates of title of subject parcels of land, it cannot be denied that the bank had the last clear chance to prevent the fraud, by the simple expedient of faithfully complying with the requirements for banks to ascertain the identity of the persons transacting with them. 2. Republic vs. CA and Cuaycong FACTS: Shortly after the liberation of the Philippines in 1945, all the assets belonging to the Japanese government, its agencies and institutions, were confiscated by the Government of the United States. The assets located in the Philippines were turned over to the Government of the Republic of the Philippines. Among these assets are certain promissory notes secured by a chattel mortgage executed by a certain Luis Cuaycong in favor of the Bank of Taiwan. The 20 promissory notes, subject of the present action by the Government, were executed by Cuaycong between April 16, 1943 and March 25, 1944. During that time there has been a so-called

"Farmers Rehabilitation Fund." The Fund allowed the planters to borrow money therefrom, against their respective deposits, in order to finance new plantings of sugar cane and cotton in their haciendas. The subject promissory notes were acquired through this scheme. Cuaycong's stocks of sugar were mortgaged at the time with the Philippine National Bank (the PNB, at the beginning of the Japanese occupation, was taken over by the Bank of Taiwan) to guarantee payment of a likewise undetermined amount of crop loan(s) granted prior to the outbreak of the war. The Republic of the Philippines brought suit against Luis D. Cuaycong (now deceased and substituted by his son) in the CFI of Manila, for recovery of the value of 20 promissory notes executed by the deceased Cuaycong in favor of the Bank of Taiwan during the Japanese occupation of the Philippines. The trial court rendered a judgment in favor of the Government and ordered Cuaycong to pay the sum a certain sum plus interest at 6% per annum, compounded quarterly, from October 1, 1961 until payment shall have been fully made. Cuaycong was also ordered to pay the Government attorney's fees. Cuaycong appealed. The CA rendered a judgment in his favour by dismissing the Governments complaint. According to the CA (a) the right of action of the Government against Cuaycong has already prescribed, and (b) Cuaycong's indebtedness to the Bank of Taiwan may be considered set off against the proceeds of the sale of his sugar retained by the same bank. The Government disputes these rulings. ISSUE(S): Whether or not the Governments right of action against Cuaycong has already prescribed.

Whether or not Cuaycongs indebtedness to the Bank of Taiwan may be set off against the proceeds of the sale of his sugar retained by the same bank. HELD: No. The Government can still bring an action against Cuaycong. In the case of Republic vs. Grijaldo the Supreme Court held that the statute of limitations does not operate against the Government as to bar it from collecting the sums owing to the Bank of Taiwan during the last war for, in recovering these loans, the Government is merely acting "in the exercise of its sovereign functions to protect the interests of the State over a public property. Yes. Cuaycongs indebtedness to the Bank of Taiwan may be set off. The Court of Appeals is correct in allowing a set-off of Cuaycong's indebtedness to the Bank of Taiwan against his money-deposit with the same bank. No record of Cuaycong's deposit is available but the inference drawn by the Court of Appeals as to the existence and extent of such deposit cannot be flawed. The fact is clear that all the proceeds derived from the sale or confiscation of the sugar stocks belonging to the planters in Negros Occidental were retained as deposits by the Bank of Taiwan and made part of the "Farmers Rehabilitation Fund." Planters like Cuaycong were allowed to borrow money from the Fund but only to the extent of their deposits with the Bank of Taiwan or, as the military directive adverted to states, "Within the limit of the proceeds of sugar sale of each planter." The conclusion is logical and inevitable that the sums covered by the promissory notes drawn by Cuaycong were well within the size of his then existing deposit.

And since the relation between a depositor in a bank and the bank is that of creditor and debtor, Cuaycong has every right to apply his credit with the Bank of Taiwan against the loans he had obtained from his deposit. All the elements necessary for a set-off are present, and under the law then obtaining, compensation takes place ipso jure from the day all the necessary requisites concur, without need of any conscious intent on the part of the parties. Moreover, the Court is satisfied with the explanation proffered by Cuaycong that, under the abnormal conditions then prevailing, the only way by which he could utilize the proceeds from the sale of the stocks of sugar seized from him was for him to make use of the loans made available by the very agency that arbitrarily retained the said proceeds. In ultimate effect, it was as though Cuaycong had merely withdrawn his deposits with the Bank of Taiwan.

3. YHT Realty vs. CA FACTS: Respondent McLoughlin would stay at Tropicana Hotel every time he is here in the Philippines and would rent a safety deposit box. The safety deposit box could only be opened through the use of 2 keys, one of which is given to the registered guest, and the other remaining in the possession of the management of the hotel. McLoughlin allegedly placed the following in his safety deposit box 2 envelopes containing US Dollars, one envelope containing Australian Dollars, Letters, credit cards, bankbooks and a checkbook. When he went abroad, a few dollars were missing and the jewelry he bought was likewise missing. Eventually, he confronted Lainez and Paiyam who admitted that Tan opened the safety deposit box with the key assigned to him. McLoughlin went

up to his room where Tan was staying and confronted her. Tan admitted that she had stolen McLouglins key and was able to open the safety deposit box with the assistance of Lopez, Paiyam and Lainez. Lopez also told McLoughlin that Tan stole the key assigned to McLouglin while the latter was asleep. McLoughlin insisted that it must be the hotel who must assume responsibility for the loss he suffered. Lopez refused to accept responsibility relying on the conditions for renting the safety deposit box entitled Undertaking For the Use of Safety Deposit Box ISSUE:

or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guests knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003, CC for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for any cause whatsoever. Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. 4. Almeda vs. CA

Whether the hotels Undertaking is valid? FACTS: HELD: NO. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carriers business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called undertakings that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. In an early case (De Los Santos v. Tan Khey), CA ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Almeda several loan/credit accommodations totalling P18.0 Million pesos payable in a period of six years at an interest rate of 21 % per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. The credit agreement between the 2 parties contains a special condition that PNB reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in

the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. Between 1981 and 1984, the spouses made several partial payments on the loan totalling P7,735,004.66, a substantial portion of which was applied to accrued interest. On March 31, 1984, PNB, over petitioners protestations, raised the interest rate to 28%, allegedly pursuant to its credit agreement. Said interest rate thereupon increased from 21% to a high of 68% between March of 1984 to September, 1986. The spouses protested the increase in interest rates, to no avail. Before the loan was to mature, the spouses filed a petition praying for a writ of preliminary injunction and temporary restraining order with the RTC. In said petition, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreements escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, issued a writ of preliminary injunction enjoining PNB from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations. ISSUE(S): Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement. HELD: No. The bank is not authorized to do so. PNB vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement

of the parties. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is plainly obvious from the facts of the case PNB unilaterally altered the terms of its contract by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that No interest shall be due unless it has been expressly stipulated in writing. What has been stipulated in writing from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement. Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase interest rate agreed upon, in reference to the original 21% interest rate. In PNB v. CA it was held that unilaterally raising the interest rate in the borrowers loan violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code.
ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license 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. Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be within the limits allowed by law. Under PD 1684 (Usury Law), escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. The spouses never agreed in writing to pay the increased interest rates demanded by PNB in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations, respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored. 5. Cebu International Corp. vs. CA FACTS: Petitioner is a quasi-banking institution involved in money market transactions. Alegre invested with petitioner P500,000. Petitioner issued then a promissory note, which would mature approximately after a month. The note covered for Alegres placement plus interest. On the maturity of the note, petitioner issued a check payable to Alegre, covering the whole amount due. It was drawn from petitioners current account in BPI. When the wife of Alegre tried to deposit the check, the bank dishonored the check. Petitioner was notified of this matter and Alegre demanded the immediate payment in cash. In turn, petitioner promised to replace the check on the impossible premise that the first issued be returned to them. This prompted Alegre to file a complaint against petitioner and petitioner in turn, filed a case against BPI for allegedly unlawfully deducting from its account counterfeit checks. The trial court decided in favor of Alegre. ISSUE: Whether or not the Negotiable Instruments Law is applicable to the money market transaction held between petitioner and Alegre?

HELD: Considering the nature of the money market transaction, Article 1249 of the CC is the applicable provision should be applied. A money market has been defined to be a market dealing in standardized short-term credit instruments where lenders and borrowers dont deal directly with each other but through a middleman or dealer in the open market. In a money market transaction, the investor is the lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but when he tried to encash it, it was dishonored. The holder has an immediate recourse against the drawer, and consequently could immediately file an action for the recovery of the value of the check.

Further, in a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not legal tender, and therefore cannot constitute valid tender of payment.