1

CREDIT TRANSACTIONS for November 23, 2013

R.A. 3765 Truth in Lending Act

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness
of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.

Section 3. As used in this Act, the term
(1) "Board" means the Monetary Board of the Central Bank of the Philippines.
(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract
to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of
the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or
for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any
obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar
purpose or effect.
(3) "Finance charge" includes interest, fees, service charges, discounts, and such other charges incident to the
extension of credit as the Board may be regulation prescribe.
(4) "Creditor" means any person engaged in the business of extending credit (including any person who as a regular
business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as
principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge.
(5) "Person" means any individual, corporation, partnership, association, or other organized group of persons, or the
legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or
any other government, or of any of its political subdivisions, or any agency of the foregoing.
Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a
clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the
Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but
which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.

Section 5. The Board shall prescribe such rules and regulations as may be necessary or proper in carrying out the provisions of
this Act. Any rule or regulation prescribed hereunder may contain such classifications and differentiations as in the judgment of
the Board are necessary or proper to effectuate the purposes of this Act or to prevent circumvention or evasion, or to facilitate
the enforcement of this Act, or any rule or regulation issued thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount
equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under
this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court
costs as determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or
any regulation thereunder shall affect the validity or enforceability of any contract or transactions.

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than
P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political
subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfull y
violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party
against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the
parties thereto.

Section 7. This Act shall become effective upon approval.

Approved: June 22, 1963

2

Central Bank Circular 158
CB Circular No. 158-63, dated October 29, 1963
Section 4 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as creditor, is obliged to furnish a
client with a clear statement, in writing, setting forth, to the extent applicable and in accordance with the rules and regul ations prescribed
by the Monetary Board of the Central Bank of the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.


Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in the contract
covering the credit transaction or any other document to be acknowledged and signed by the debtor, thus:

The contract covering the credit transaction, or any other document to be acknowledged and signed by the
debtor, shall indicate the above seven items of information. In addition, the contract or document shall specify
additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor.

Furthermore, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations
in the contract are not met by the debtor. If the borrower is not duly informed of the data required by the law prior to the consummation of
the availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the promissory
note.However, such failure shall not affect the validity or enforceability of any contract or transaction.

In the case of DBP vs. Arcilla, DBP failed to disclose the requisite information in the disclosure statement form authorized by the
Central Bank, but did so in the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to
collect or collected any interest, penalty or other charges, from Arcilla other than those disclosed in the said deeds/documents.

The FRIA Law (Financial Rehabilitation and Insolvency Act)
AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY DISTRESSED ENTERPRISES AND
INDIVIDUALS
Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:
CHAPTER I
GENERAL PROVISIONS
Section 1. Title. - This Act shall be known as the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010".
Section 2. Declaration of Policy. - It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to
collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely,
fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to
ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When
rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the
settlement of their obligations.
Section 3. Nature of Proceedings. - The proceedings under this Act shall be in rem. Jurisdiction over all persons affected by the
proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of
general circulation in the Philippines in the manner prescribed by the rules of procedure to be promulgated by the Supreme Court.
3

The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared policies of this Act and in
accordance with the rules of procedure that the Supreme Court may promulgate.
Section 4. Definition of Terms. - As used in this Act, the term:
(a) Administrative expenses shall refer to those reasonable and necessary expenses:
(1) incurred or arising from the filing of a petition under the provisions of this Act;
(2) arising from, or in connection with, the conduct of the proceedings under this Act, including those incurred for the
rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of business of the debtor after the commencement date;
(4) for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the
debtor;
(5) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals engaged by them; and
(6) that are otherwise authorized or mandated under this Act or such other expenses as may be allowed by the
Supreme Court in its rules.
(b) Affiliate shall refer to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under
the common control of another corporation.
(c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but
not limited to; (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties; and (2)
claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the
scope of their authority:Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities.
(d) Commencement date shall refer to the date on which the court issues the Commencement Order, which shall be retroactive
to the date of filing of the petition for voluntary or involuntary proceedings.
(e) Commencement Order shall refer to the order issued by the court under Section 16 of this Act.
(f) Control shall refer to the power of a parent corporation to direct or govern the financial and operating policies of an enterprise
so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through
subsidiaries or affiliates, more than one-half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it
can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns
one-half (1/2) or less of the voting power of an enterprise when there is power:
(1) over more than one-half (1/2) of the voting rights by virtue of an agreement with investors;
(2) to direct or govern the financial and operating policies of the enterprise under a statute or an agreement;
(3) to appoint or remove the majority of the members of the board of directors or equivalent governing body; or
(4) to cast the majority votes at meetings of the board of directors or equivalent governing body.
(g) Court shall refer to the court designated by the Supreme Court to hear and determine, at the first instance, the cases brought
under this Act.
(h) Creditor shall refer to a natural or juridical person which has a claim against the debtor that arose on or before the
commencement date.
(i) Date of liquidation shall refer to the date on which the court issues the Liquidation Order.
(j) Days shall refer to calendar days unless otherwise specifically stated in this Act.
(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole proprietorship duly registered with the
Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a
corporation duly organized and existing under Philippine laws, or an individual debtor who has become insolvent as defined
herein.
(l) Encumbered property shall refer to real or personal property of the debtor upon which a lien attaches.
(m) General unsecured creditor shall refer to a creditor whose claim or a portion thereof its neither secured, preferred nor
subordinated under this Act.
4

(n) Group of debtors shall refer to and can cover only: (1) corporations that are financially related to one another as parent
corporations, subsidiaries or affiliates; (2) partnerships that are owned more than fifty percent (50%) by the same person; and (3)
single proprietorships that are owned by the same person. When the petition covers a group of debtors, all reference under these
rules to debtor shall include and apply to the group of debtors.
(o) Individual debtor shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent as
defined herein.
(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in
the ordinary course of business or has liabilities that are greater than its or his assets.
(q) Insolvent debtor's estate shall refer to the estate of the insolvent debtor, which includes all the property and assets of the
debtor as of commencement date, plus the property and assets acquired by the rehabilitation receiver or liquidator after that
date, as well as all other property and assets in which the debtor has an ownership interest, whether or not these property and
assets are in the debtor's possession as of commencement date: Provided, That trust assets and bailment, and other property
and assets of a third party that are in the possession of the debtor as of commencement date, are excluded therefrom.
(r) Involuntary proceedings shall refer to proceedings initiated by creditors.
(s) Liabilities shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the
debtor's audited financial statements as advances for future subscriptions.
(t) Lien shall refer to a statutory or contractual claim or judicial charge on real or personal property that legality entities a creditor
to resort to said property for payment of the claim or debt secured by such lien.
(u) Liquidation shall refer to the proceedings under Chapter V of this Act.
(v) Liquidation Order shall refer to the Order issued by the court under Section 112 of this Act.
(w) Liquidator shall refer to the natural person or juridical entity appointed as such by the court and entrusted with such powers
and duties as set forth in this Act: Provided, That, if the liquidator is a juridical entity, it must designated a natural person who
possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity
and the representative are solidarity liable for all obligations and responsibilities of the liquidator.
(x) Officer shall refer to a natural person holding a management position described in or contemplated by a juridical entity's
articles of incorporation, bylaws or equivalent documents, except for the corporate secretary, the assistant corporate secretary
and the external auditor.
(y) Ordinary course of business shall refer to transactions in the pursuit of the individual debtor's or debtor's business operations
prior to rehabilitation or insolvency proceedings and on ordinary business terms.
(z) Ownership interest shall refer to the ownership interest of third parties in property held by the debtor, including those covered
by trust receipts or assignments of receivables.
(aa) Parent shall refer to a corporation which has control over another corporation either directly or indirectly through one or more
intermediaries.
(bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured creditors' committee, a stakeholder, a party with
an ownership interest in property held by the debtor, a secured creditor, the rehabilitation receiver, liquidator or any other juridical
or natural person who stands to be benefited or injured by the outcome of the proceedings and whose notice of appearance is
accepted by the court.
(cc) Possessory lien shall refer to a lien on property, the possession of which has been transferred to a creditor or a
representative or agent thereof.
(dd) Proceedings shall refer to judicial proceedings commenced by the court's acceptance of a petition filed under this Act.
(ee) Property of others shall refer to property held by the debtor in which other persons have an ownership interest.
(ff) Publication notice shall refer to notice through publication in a newspaper of general circulation in the Philippines on a
business day for two (2) consecutive weeks.
(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
(hh) Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as such by the court pursuant to
this Act and which shall be entrusted with such powers and duties as set forth herein.
5

(ii) Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of an insolvent debtor can be restored
using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization,
dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of new business
entity as prescribed in Section 62 hereof, or other similar arrangements as may be approved by the court or creditors.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(kk) Secured creditor shall refer to a creditor with a secured claim.
(ll) Secured party shall refer to a secured creditor or the agent or representative of such secured creditor.
(mm) Securities market participant shall refer to a broker dealer, underwriter, transfer agent or other juridical persons transacting
securities in the capital market.
(nn) Stakeholder shall refer, in addition to a holder of shares of a corporation, to a member of a nonstock corporation or
association or a partner in a partnership.
(oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled
directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation.
(pp) Unsecured claim shall refer to a claim that is not secured by a lien.
(qq) Unsecured creditor shall refer to a creditor with an unsecured claim.
(rr) Voluntary proceedings shall refer to proceedings initiated by the debtor.
(ss) Voting creditor shall refer to a creditor that is a member of a class of creditors, the consent of which is necessary for the
approval of a Rehabilitation Plan under this Act.
Section 5. Exclusions. - The term debtor does not include banks, insurance companies, pre-need companies, and national and local
government agencies or units.
For purposes of this section:
(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or actually subject to conservatorship, receivership
or liquidation proceedings under the New Central Bank Act (Republic Act No. 7653) or successor legislation;
(b) Insurance company shall refer to those companies that are potentially or actually subject to insolvency proceedings under the
Insurance Code (Presidential Decree No. 1460) or successor legislation; and
(c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to sell pre-need plans.
Provided, That government financial institutions other than banks and government-owned or controlled corporations shall be covered by
this Act, unless their specific charter provides otherwise.
Section 6. Designation of Courts and Promulgation of Procedural Rules. - The Supreme Court shall designate the court or courts that will
hear and resolve cases brought under this Act and shall promulgate the rules of pleading, practice and procedure to govern the
proceedings brought under this Act.
Section 7. Substantive and Procedural Consolidation. - Each juridical entity shall be considered as a separate entity under the
proceedings in this Act. Under these proceedings, the assets and liabilities of a debtor may not be commingled or aggregated with those of
another, unless the latter is a related enterprise that is owned or controlled directly or indirectly by the same interests: Provided,
however, That the commingling or aggregation of assets and liabilities of the debtor with those of a related enterprise may only be allowed
where:
(a) there was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of
the proceedings;
(b) the debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than
separately;
(c) the related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with
the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes
the objectives of rehabilitation.
Provided, finally, That nothing in this section shall prevent the court from joining other entities affiliated with the debtor as parties pursuant
to the rules of procedure as may be promulgated by the Supreme Court.
6

Section 8. Decisions of Creditors. - Decisions of creditors shall be made according to the relevant provisions of the Corporation Code in
the case of stock or nonstock corporations or the Civil Code in the case of partnerships that are not inconsistent with this Act.
Section 9. Creditors Representatives. - Creditors may designate representatives to vote or otherwise act on their behalf by filing notice of
such representation with the court and serving a copy on the rehabilitation receiver or liquidator.
Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers. - Individual
debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor shall be liable for double the value of
the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher to be recovered for
benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that
proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts:
(a) Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or
approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or
(b) Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the
debtor.
The court shall determine the extent of the liability of an owner, partner, director or officer under this section. In this connection, in case of
partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner,
director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such
partner, director or debtor in the actual management of the operations of the debtor.
Section 11. Authorization to Exchange Debt for Equity. - Notwithstanding applicable banking legislation to the contrary, any bank, whether
universal or not, may acquire and hold an equity interest or investment in a debtor or its subsidiaries when conveyed to such bank in
satisfaction of debts pursuant to a Rehabilitation or Liquidation Plan approved by the court: Provided, That such ownership shall be subject
to the ownership limits applicable to universal banks for equity investments and: Provided, further, That any equity investment or interest
acquired or held pursuant to this section shall be disposed by the bank within a period of five (5) years or as may be prescribed by the
Monetary Board.
CHAPTER II
COURT-SUPERVISED REHABILITATION
(A) Initiation Proceedings.
(1) Voluntary Proceedings.
Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by the owner in case of a sole proprietorship, or by a
majority of the partners in case of a partnership, or in case of a corporation, by a majority vote of the board of directors or trustees and
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock
corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose, an
insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds
hereinafter specifically provided. The petition shall be verified to establish the insolvency of the debtor and the viability of its rehabilitation,
and include, whether as an attachment or as part of the body of the petition, as a minimum the following:
(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and
collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated
by the Supreme Court.
A group of debtors may jointly file a petition for rehabilitation under this Act when one or more of its members foresee the impossibility of
meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or
7

operations of the other members of the group and/or the participation of the other members of the group is essential under the terms and
conditions of the proposed Rehabilitation Plan.
(2) Involuntary Proceedings.
Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any creditor or group of creditors with a claim of, or the
aggregate of whose claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital
stock or partners' contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for
rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due and demandable payments thereon
have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from
paying its debts as they become due or will render it insolvent.
Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition for rehabilitation shall be verified to establish the
substantial likelihood that the debtor may be rehabilitated, and include:
(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under Section 13 of this Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
(e) the names of at least three (3) nominees to the position of rehabilitation receiver;
(f) other information that may be required under this Act depending on the form of relief requested; and
(g) other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated
by the Supreme Court.
(B) Action on the Petition and Commencement of Proceedings.
Section 15. Action on the Petition. - If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition
deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or
supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the
five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the
amended or supplemental petition or the submission of such documents.
Section 16. Commencement of Proceedings and Issuance of a Commencement Order. - The rehabilitation proceedings shall commence
upon the issuance of the Commencement Order, which shall:
(a) identify the debtor, its principal business or activity/ies and its principal place of business;
(b) summarize the ground/s for initiating the proceedings;
(c) state the relief sought under this Act and any requirement or procedure particular to the relief sought;
(d) state the legal effects of the Commencement Order, including those mentioned in Section 17 hereof;
(e) declare that the debtor is under rehabilitation;
(f) direct the publication of the Commencement Order in a newspaper of general circulation in the Philippines once a week for at
least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;
(g) If the petitioner is the debtor direct the service by personal delivery of a copy of the petition on each creditor holding at least
ten percent (10%) of the total liabilities of the debtor as determined from the schedule attached to the petition within five (5) days;
if the petitioner/s is/are creditor/s, direct the service by personal delivery of a copy of the petition on the debtor within five (5)
days;
(h) appoint a rehabilitation receiver who may or not be from among the nominees of the petitioner/s and who shall exercise such
powers and duties defined in this Act as well as the procedural rules that the Supreme Court will promulgate;
(i) summarize the requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to
their claims with the court at least five (5) days before the initial hearing;
8

(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor its comment on or opposition to the petition or its
claim/s against the debtor under such procedures as the Supreme Court provide;
(k) prohibit the debtor's suppliers of goods or services from withholding the supply of goods and services in the ordinary course
of business for as long as the debtor makes payments for the services or goods supplied after the issuance of the
Commencement Order;
(l) authorize the payment of administrative expenses as they become due;
(m) set the case for initial hearing, which shall not be more than forty (40) days from the date of filing of the petition for the
purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated;
(n) make available copies of the petition and rehabilitation plan for examination and copying by any interested party;
(o) indicate the location or locations at which documents regarding the debtor and the proceedings under Act may be reviewed
and copied;
(p) state that any creditor or debtor who is not the petitioner, may submit the name or nominate any other qualified person to the
position of rehabilitation receiver at least five (5) days before the initial hearing;
(q) include s Stay or Suspension Order which shall:
(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in
the ordinary course of business; and
(4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as
may be provided herein.
Section 17. Effects of the Commencement Order. - Unless otherwise provided for in this Act, the court's issuance of a Commencement
Order shall, in addition to the effects of a Stay or Suspension Order described in Section 16 hereof:
(a) vest the rehabilitation with all the powers and functions provided for this Act, such as the right to review and obtain records to
which the debtor's management and directors have access, including bank accounts or whatever nature of the debtor subject to
the approval by the court of the performance bond filed by the rehabilitation receiver;
(b) prohibit or otherwise serve as the legal basis rendering null and void the results of any extrajudicial activity or process to
seize property, sell encumbered property, or otherwise attempt to collection or enforce a claim against the debtor after
commencement date unless otherwise allowed in this Act, subject to the provisions of Section 50 hereof;
(c) serve as the legal basis for rendering null and void any setoff after the commencement date of any debt owed to the debtor by
any of the debtor's creditors;
(d) serve as the legal basis for rendering null and void the perfection of any lien against the debtor's property after the
commencement date; and
(e) consolidate the resolution of all legal proceedings by and against the debtor to the court Provided. However, That the court
may allow the continuation of cases on other courts where the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor outside these proceedings shall be sufficient to support a finding of indirect
contempt of court.
Section 18. Exceptions to the Stay or Suspension Order. - The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court as of commencement date Provided, That any final and executory
judgment arising from such appeal shall be referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any
final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;
(c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation
mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation
receiver;
9

(d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and
securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market
participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and
its implementing rules and regulations;
(f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly
authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the
SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the
debtor; and
(g) any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any
proceeding commend under this Act.
Section 19. Waiver of taxes and Fees Due to the National Government and to Local Government Units (LGUs). - Upon issuance of the
Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the
imposition of all taxes and fees including penalties, interests and charges thereof due to the national government or to LGUs shall be
considered waived, in furtherance of the objectives of rehabilitation.
Section 20. Application of Stay or Suspension Order to Government Financial Institutions. - The provisions of this Act concerning the
effects of the Commencement Order and the Stay or Suspension Order on the suspension of rights to foreclose or otherwise pursue legal
remedies shall apply to government financial institutions, notwithstanding provisions in their charters or other laws to the contrary.
Section 21. Effectivity and Duration of Commencement Order. - Unless lifted by the court, the Commencement Order shall be for the
effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully
rehabilitated. In determining whether there is substantial likelihood for the debtor to be successfully rehabilitated, the court shall ensure that
the following minimum requirements are met:
(a) The proposed Rehabilitation Plan submitted complies with the minimum contents prescribed by this Act;
(b) There is sufficient monitoring by the rehabilitation receiver of the debtor's business for the protection of creditors;
(c) The debtor has met with its creditors to the extent reasonably possible in attempts to reach consensus on the proposed
Rehabilitation Plan;
(d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying assumptions and the
goals stated in the petitioner's Rehabilitation Plan are realistic reasonable and reasonable or if not, there is, in any case, a
substantial likelihood for the debtor to be successfully rehabilitated because, among others:
(1) there are sufficient assets with/which to rehabilitate the debtor;
(2) there is sufficient cash flow to maintain the operations of the debtor;
(3) the debtor's, partners, stockholders, directors and officers have been acting in good faith and which due diligence;
(4) the petition is not s sham filing intended only to delay the enforcement of the rights of the creditor's or of any group
of creditors; and
(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;
(e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially false or misleading statement;
(f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths (3/4) of its total
obligations to the extent reasonably possible and made a good faith effort to reach a consensus on the proposed Rehabilitation
Plan if the petitioner/s is/are a creditor or group of creditors, that/ the petitioner/s has/have met with the debtor and made a good
faith effort to reach a consensus on the proposed Rehabilitation Plan; and
(g) The debtor has not committed acts misrepresentation or in fraud of its creditor/s or a group of creditors.
Section 22. Action at the Initial Hearing. - At the initial hearing, the court shall:
(a) determine the creditors who have made timely and proper filing of their notice of claims;
(b) hear and determine any objection to the qualifications of the appointment of the rehabilitation receiver and, if necessary
appoint a new one in accordance with this Act;
(c) direct the creditors to comment on the petition and the Rehabilitation Plan, and to submit the same to the court and to the
rehabilitation receiver within a period of not more than twenty (20) days; and
10

(d) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to the court within
forty (40) days from initial hearing the report provided in Section 24 hereof.
Section 23. Effect of Failure to File Notice of Claim. - A creditor whose claim is not listed in the schedule of debts and liabilities and who
fails to file a notice of claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled to
participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom.
Section 24. Report of the Rehabilitation Receiver. - Within forty (40) days from the initial hearing and with or without the comments of the
creditors or any of them, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations
on whether:
(a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or acts committed by the owner/s of a
sole proprietorship partners of a partnership or directors or officers of a corporation in contemplation of the insolvency of the
debtor or which may have contributed to the insolvency of the debtor;
(b) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the petitioner's
Rehabilitation Plan are realistic, feasible and reasonable;
(c) there is a substantial likelihood for the debtor to be successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or liquidated.
Section 25. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings. - Within ten (10) days from receipt of the report
of the rehabilitation receiver mentioned in Section 24 hereof the court may:
(a) give due course to the petition upon a finding that:
(1) the debtor is insolvent; and
(2) there is a substantial likelihood for the debtor to be successfully rehabilitated;
(b) dismiss the petition upon a finding that:
(1)debtor is not insolvent;
(2) the petition i8 a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of
creditors;
(3)the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading
statements; or
(4)the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors;
(c)convert the proceedings into one for the liquidation of the debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for the debtor to be successfully rehabilitated as determined in accordance with the
rules to be promulgated by the Supreme Court.
Section 26.Petition Given Due Course. - If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise
and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of not more than ninety
(90) days.
The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other
modes of dispute resolution, as provided for under Republic Act No. 9285, Or the Alternative Dispute Resolution Act of 2004, should it
determine that such mode will resolve the dispute more quickly, fairly and efficiently than the court.
Section 27.Dismissal of Petition. - If the petition is dismissed pursuant to paragraph (b) of Section 25 hereof, then the court may, in its
discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the
filing of the petition, to the extent of any such injury.
(C) The Rehabilitation Receiver, Management Committee and Creditors' Committee.
Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified natural or juridical person may serve as a rehabilitation
receiver: Provided, That if the rehabilitation receiver is a juridical entity, it must designate a natural person/s who possess/es all the
qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative/s
are solidarily liable for all obligations and responsibilities of the rehabilitation receiver.
11

Section 29.Qualifications of a Rehabilitation Receiver. - The rehabilitation receiver shall have the following minimum qualifications:
(a)A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding his nomination;
(b)Of good moral character and with acknowledged integrity, impartiality and independence;
(c)Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant
training and/or experience that may be necessary to enable him to properly discharge the duties and obligations of a
rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest may be waived, expressly or impliedly, by a party who may
be prejudiced thereby.
Other qualifications and disqualifications of the rehabilitation receiver shall be set forth in procedural rules, taking into consideration the
nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.
Section 30.Initial Appointment of the Rehabilitation Receiver. - The court shall initially appoint the rehabilitation receiver, who mayor may
not be from among the nominees of the petitioner, However, at the initial hearing of the petition, the creditors and the debtor who are not
petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially appointed or appoint
another who mayor may not be from among those nominated.
In case the debtor is a securities market participant, the court shall give priority to the nominee of the appropriate securities or investor
protection fund.
If a qualified natural person or entity is nominated by more than fifty percent (50%) of the secured creditors and the general unsecured
creditors, and satisfactory evidence is submitted, the court shall appoint the creditors' nominee as rehabilitation receiver.
Section 31.Powers, Duties and Responsibilities of the Rehabilitation Receiver. - The rehabilitation receiver shall be deemed an officer of
the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings,
determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and
implementing the approved Rehabilitation Plan, To this end, and without limiting the generality of the foregoing, the rehabilitation receiver
shall have the following powers, duties and responsibilities:
(a)To verify the accuracy of the factual allegations in the petition and its annexes;
(b)To verify and correct, if necessary, the inventory of all of the assets of the debtor, and their valuation;
(c)To verify and correct, if necessary, the schedule of debts and liabilities of the debtor;
(d)To evaluate the validity, genuineness and true amount of all the claims against the debtor;
(e)To take possession, custody and control, and to preserve the value of all the property of the debtor;
(f)To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor;
(g)To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its
rehabilitation;
(h) To sue and recover, with the. approval of the court, all property or money of the debtor paid, transferred or disbursed in fraud
of the debtor or its creditors, or which constitute undue preference of creditor/s;
(i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other
than in the ordinary course of business;
(j) With the court's approval, to engage the services of or to employ persons or entities to assist him in the discharge of his
functions;
(k) To determine the manner by which the debtor may be best rehabilitated, to review) revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to the court for approval;
(1) To implement the Rehabilitation Plan as approved by the court, if 80 provided under the Rehabilitation Plan;
(m) To assume and exercise the powers of management of the debtor, if directed by the court pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and
To submit a status report on the rehabilitation proceedings every quarter or as may be required by the courtmotu proprio. or upon
motion of any creditor. or as may be provided, in the Rehabilitation Plan.
12

Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall not take over the management and
control of the debtor but may recommend the appointment of a management committee over the debtor in the cases provided by
this Act.
Section 32.Removal of the Rehabilitation Receiver. The rehabilitation receiver may be removed at any time by the court either motu
proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the
rules of procedure may provide which shall include, but are not limited to, the following:
(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his
duties and powers;
(b) Lack of a particular or specialized competency required by the specific case;
(c) Illegal acts or conduct in the performance of his duties and powers;
(d) Lack of qualification or presence of any disqualification;
(e) Conflict of interest that arises after his appointment; and
(f) Manifest lack of independence that is detrimental to the general body of the stakeholders.
Section 33.Compensation and Terms of Service. The rehabilitation receiver and his direct employees or independent contractors shall be
entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and
hearing. Prior to such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based
on quantum meruit. Such costs shall be considered administrative expenses.
Section 34.Oath and Bond of the Rehabilitation Receiver. Prior to entering upon his powers, duties and responsibilities, the rehabilitation
receiver shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of
his powers, duties and responsibilities.
Section 35.Vacancy. - Incase the position of rehabilitation receiver is vacated for any reason whatsoever. the court shall direct the debtor
and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees. or any other
person qualified for the position.
Section 36.Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. Upon motion of any
interested party, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint
a management committee that will undertake the management of the debtor. upon clear and convincing evidence of any of the following
circumstances:
(a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtors assets or other properties;
(b) Paralyzation of the business operations of the debtor; or
(c) Gross mismanagement of the debtor. or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act
by. existing management of the debtor Or the owner, partner, director, officer or representative/s in management of the debtor.
In case the court appoints the rehabilitation receiver to assume the powers of management of the debtor. the court may:
(1) require the rehabilitation receiver to post an additional bond;
(2) authorize him to engage the services or to employ persona or entities to assist him in the discharge of his managerial
functions; and
(3) authorize a commensurate increase in his compensation.
Section 37.Role of the Management Committee. When appointed pursuant to the foregoing section, the management committee shall
take the place of the management and the governing body of the debtor and assume their rights and responsibilities.
The specific powers and duties of the management committee, whose members shall be considered as officers of the court, shall be
prescribed by the procedural rules.
Section 38.Qualifications of Members of the Management Committee. - The qualifications and disqualifications of the members of the
management committee shall be set forth in the procedural rules, taking into consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
Section 39.Employment of Professionals. - Upon approval of the court, and after notice and hearing, the rehabilitation receiver or the
management committee may employ specialized professionals and other experts to assist each in the performance of their duties. Such
professionals and other experts shall be considered either employees or independent contractors of the rehabilitation receiver or the
management committee, as the case may be. The qualifications and disqualifications of the professionals and experts may be set forth in
13

procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders
concerned.
Section 40.Conflict of Interest. - No person may be appointed as a rehabilitation receiver, member of a_ management committee, or be
employed by the rehabilitation receiver or the management committee if he has a conflict of interest.
An individual shall be deemed to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment
for or against any party to the proceedings. Without limiting the generality of the foregoing, an individual shall be deemed to have a conflict
of interest if:
(a) he is a creditor, owner, partner or stockholder of the debtor;
(b) he is engaged in a line of business which competes with that of the debtor;
(c) he is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or
any of the creditors, or the auditor or accountant of the debtor;
(d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor;
(e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sale
proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer, employee or underwriter of a
corporation-debtor; or
(f) he has any other direct or indirect material interest in the debtor or any of the creditors.
Any rehabilitation receiver, member of the management committee or persons employed or contracted by them possessing any conflict of
interest shall make the appropriate disclosure either to the court or to the creditors in case of out-of-court rehabilitation proceedings. Any
party to the proceeding adversely affected by the appointment of any person with a conflict of interest to any of the positions enumerated
above may however waive his right to object to such appointment and, if the waiver is unreasonably withheld, the court may disregard the
conflict of interest, taking into account the general interest of the stakeholders.
Section 41.Immunity. - The rehabilitation receiver and all persons employed by him, and the members of the management committee and
all persons employed by it, shall not be subject to any action. claim or demand in connection with any act done or omitted to be done by
them in good faith in connection with the exercise of their powers and functions under this Act or other actions duly approved by the
court.1awp++il
Section 42.Creditors' Committee. - After the creditors' meeting called pursuant to Section 63 hereof, the creditors belonging to a class may
formally organize a committee among
themselves. In addition, the creditors may, as a body, agree to form a creditors' committee composed of a representative from each class
of creditors, such as the following:
(a) Secured creditors;
(b) Unsecured creditors;
(c) Trade creditors and suppliers; and
(d) Employees of the debtor.
In the . election of the creditors' representatives, the rehabilitation receiver or his representative shall attend such meeting and extend the
appropriate assistance as may be defined in the procedural rules.
Section 43.Role of Creditors' Committee. - The creditors' committee when constituted pursuant to Section 42 of this Act shall assist the
rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the
creditors. The creditors' committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically
authorized in writing by such creditor. The creditors' committee may be authorized by the court or by the rehabilitation receiver to perform
such other tasks and functions as may be defined by the procedural rules in order to facilitate the rehabilitation process.
(D) Determination of Claims.
Section 44.Registry of Claims. - Within twenty (20) days from his assumption into office, the rehabilitation receiver shall establish a
preliminary registry of claims. The rehabilitation receiver shall make the registry available for public inspection and provide
publication notice to the debtor, creditors and stakeholders on where and when they may inspect it. All claims included in the registry of
claims must be duly supported by sufficient evidence.
Section 45.Opposition or Challenge of Claims. Within thirty (30) days from the expiration of the period stated in the immediately
preceding section, the debtor, creditors, stakeholders and other interested parties may submit a challenge to claim/s to the court, serving a
certified copy on the rehabilitation receiver and the creditor holding the challenged claim/so Upon the expiration of the thirty (30)-day
14

period, the rehabilitation receiver shall submit to the court the registry of claims which shall include undisputed claims that have not been
subject to challenge.
Section 46.Appeal. - Any decision of the rehabilitation receiver regarding a claim may be appealed to the court.
(E) Governance.
Section 47.Management. - Unless otherwise provided herein, the management of the juridical debtor shall remain with the existing
management subject to the applicable law/s and agreement/s, if any, on the election or appointment of directors, managers Or managing
partner. However, all disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property , or any other act
affecting title or interest in property, shall be subject to the approval of the rehabilitation receiver and/or the court, as provided in the
following subchapter.
(F) Use, Preservation and Disposal of Assets and Treatment of Assets and Claims after Commencement Date.
Section 48.Use or Disposition of Assets. - Except as otherwise provided herein, no funds or property of the debtor shall he used or
disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the
rehabilitation proceedings.
Section 49.Sale of Assets. - The court, upon application of the rehabilitation receiver, may authorize the sale of unencumbered property of
the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is
perishable, costly to maintain, susceptible to devaluation or otherwise injeopardy.
Section 50.Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties Held by Debtor.The court may authorize
the sale, transfer, conveyance or disposal of encumbered property of the debtor, or property of others held by the debtor where there is a
security interest pertaining to third parties under a financial, credit or other similar transactions if, upon application of the rehabilitation
receiver and with the consent of the affected owners of the property, or secured creditor/s in the case of encumbered property of the debtor
and, after notice and hearing, the court determines that:
(a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor's business; and
(b) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for
the counter-party's claim or right.
Provided, That properties held by the debtor where the debtor has authority to sell such as trust receipt or consignment arrangements may
be sold or disposed of by the .debtor, if such sale or disposal is necessary for the operation of the debtor's business, and the debtor has
made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party's claim or
right.
Sale or disposal of property under this section shall not give rise to any criminal liability under applicable laws.
Section 51.Assets of Debtor Held by Third Parties. In the case of possessory pledges, mechanic's liens or similar claims, third parties
who have in their possession or control property of the debtor shall not transfer, conveyor otherwise dispose of the same to persons other
than the debtor, unless upon prior approval of the rehabilitation receiver. The rehabilitation receiver may also:
(a) demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other
person, subject to payment of the claims secured by any possessory Iien/s thereon;
(b) allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the
value of the property in question or the total value of the assets of the debtor; or
(c) undertake any otI1er disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and
hearing, and approval of the court.
Section 52.Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. - The court may rescind or declare as null and void
any sale, payment, transfer or conveyance of the debtor's unencumbered property or any encumbering thereof by the debtor or its agents
or representatives after the commencement date which are not in the ordinary course of the business of the debtor: Provided,
however, That the unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and
hearing:
(a) if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation
Plan;
(b) in order to provide a substitute lien, mortgage or pledge of property under this Act;
(c) for payments made to meet administrative expenses as they arise;
(d) for payments to victims of quasi delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the
debtor for the payments made;
15

(e) for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under. This Act;
or
(f) for payments made to reclaim property of the debtor held pursuant to a possessory lien.
Section 53.Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. - Upon the application of a secured creditor
holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence,
depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable
steps necessary to prevent the depreciation. If depreciation cannot be avoided and such depreciation is jeopardizing the security or
property interest of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between
the debtor and the secured creditor, applicable rules of procedure and relevant legislation: Provided. That the proceeds of the
sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits; or
(b) upon motion of, or with the consent of the affected secured creditor or interest owner. order the conveyance of a lien against
or ownership interest in substitute property of the debtor to the secured creditor: Provided. That other creditors holding liens on
such property, if any, do not object thereto, or, if such property is not available;
(c) order the conveyance to the secured creditor or holder . of an ownership interest of a lien on the residual funds from the sale
of encumbered property during the proceedings; or
(d) allow the sale or disposition of the property: Provided. That the sale or disposition will maximize the value of the property for
the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order
prescribed under the rules of concurrence and preference of credits.
Section 54.Post-commencement Interest. - The rate and term of interest, if any, on secured and unsecured claims shall be determined
and provided for in the approved Rehabilitation Plan.
Section 55.Post-commencement Loans and Obligations. - With the approval of the court upon the recommendation of the rehabilitation
receiver, the debtor, in order to enhance its
rehabilitation. may:
(a) enter into credit arrangements; or
(b) enter into credit arrangements, secured by mortgages of its unencumbered property or secondary mortgages of encumbered
property with the approval of senior secured parties with regard to the encumbered property; or
(c) incur other obligations as may be essential for its rehabilitation.
The payment of the foregoing obligations shall be considered administrative expenses under this Act.
Section 56.Treatment of Employees, Claims. Compensation of employees required to carry on the business shall be considered an
administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre-
ommencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative
expense.
Section 57.Treatment of Contracts. - Unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the
issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending, all
valid and subbsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in
force: Provided, That within ninety (90)days following the commencement of proceedings, the debtor, with the consent of the rehabilitation
receiver, shall notify each contractual counter-party of whether it is confirming the particular contract. Contractual obligations of the debtor
arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not
confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising as a result of the election
to terminate a contract shall be considered a pre-commencement claim against the debtor. Nothing contained herein shall prevent the
cancellation or termination of any contract of the debtor for any ground provided by law.
(G) Avoidance Proceedings.
Section 58.Rescission or Nullity of Certain Pre-commencement Transactions. Any transaction occurring prior to commencement date
entered into by the debtor or involving its funds or assets may be rescinded or declared null and void on the ground that the same was
executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. Without limiting the generality of
the foregoing, a disputable presumption of such design shall arise if the transaction:
(a) provides unreasonably inadequate consideration to the debtor and is executed within ninety (90) days prior to the
commencement date;
(b) involves an accelerated payment of a claim to a creditor within ninety (90) days prior to the commencement date;
16

(c) provides security or additional security executed within ninety (90) days prior to the commencement date;
(d) involves creditors, where a creditor obtained, or received the benefit of, more than its pro rata share in the assets of the
debtor, executed at a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the creditors to collect claims where the effect of the transaction is to put
assets of the debtor beyond the reach of creditors or to otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the court from rescinding or declaring as null and void a transaction on other
grounds provided by relevant legislation and jurisprudence: Provided, further, That the provisions of the Civil Code on rescission shall in
any case apply to these transactions.
Section 59.Actions for Rescission or Nullity. - (a) The rehabilitation receiver or, with his conformity, any creditor may initiate and prosecute
any action to rescind, or declare null and void any transaction described in Section 58 hereof. If the rehabilitation receiver does not consent
to the filing or prosecution of such action,
(b) If leave of court is granted under subsection (a), the rehabilitation receiver shall assign and transfer to the creditor all rights, title and
interest in the chose in action or subject matter of the proceeding, including any document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to subsection (a), to the extent of his claim and the costs, belongs exclusively to
the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.
(d) Where, before an order is made under subsection (a), the rehabilitation receiver (or liquidator) signifies to the court his readiness to
institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, m that case, the benefit
derived from the proceeding, if instituted within the time limits so fixed, belongs to the estate.
(H) Treatment of Secured Creditors.
Section 60.No Diminution of Secured Creditor Rights. The issuance of the Commencement Order and the Suspension or Stay Order, and
any other provision of this Act, shall not be
deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to
enforce said security or lien may be suspended during the term of the Stay Order.
The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce his security or lien, or
foreclose upon property of the debtor
securing his/its claim, if the said property is not necessary for the rehabilitation of the debtor. The secured creditor and/or the other lien
holders shall be admitted to the rehabilitation proceedings only for the balance of his claim, if any.
Section 61.Lack of Adequate Protection. - The court, on motion or motu proprio, may terminate, modify or set conditions for the
continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that: (a) a creditor does not have
adequate protection over property securing its claim; or
(b) the value of a claim secured by a lien on property which is not necessary for rehabilitation of the debtor exceeds the fair market value of
the said property.
For purposes of this section, a creditor shall be deemed to lack adequate protection if it can be shown that:
(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured;
(b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or
(c) the property has depreciated to an extent that the creditor is under secured.
Upon showing of a lack of protection, the court shall order the debtor or the rehabilitation receiver to make arrangements to provide for the
insurance or maintenance of the property; or to make payments or otherwise provide additional or replacement security such that the
obligation is fully secured. If such arrangements are not feasible, the court may modify the Stay Order to allow the secured creditor lacking
adequate protection to enforce its security claim against the debtor: Provided, however, That the court may deny the creditor the remedies
in this paragraph if the property subject of the enforcement is required for the rehabilitation of the debtor.
(i) Administration of Proceedings.
Section 62.Contents of a Rehabilitation Plan. The Rehabilitation Plan shall, as a minimum:
(a) specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals;
(b) compare the amounts expected to be received by the creditors under the Rehabilitation Plan with those that they will receive
if liquidation ensues within the next one hundred twenty (120) days;
17

(c) contain information sufficient to give the various classes of creditors a reasonable basis for determining whether supporting
the Plan is in their financial interest when compared to the immediate liquidation of the debtor, including any reduction of
principal interest and penalties payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has been granted by the court;
(f) indicate how the insolvent debtor will be rehabilitated including, but not limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization. dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going
concern, or setting-up of a new business entity or other similar arrangements as may be necessary to restore the financial well-
being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in subsections (d) and (e);
(h) provide for equal treatment of all claims within the same class or subclass, unless a particular creditor voluntarily agrees to
less favorable treatment;
(i) ensure that the payments made under the plan follow the priority established under the provisions of the Civil Code on
concurrence and preference of credits and other applicable laws;
(j) maintain the security interest of secured creditors and preserve the liquidation value of the security unless such has been
waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof;
(1) describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled
valid or its amount adjusted;
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan;
(o) identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their
affiliation with the debtor and their remuneration;
(p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative expenses as a condition to the Plan's approval unless such condition
has been waived in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise
settlement with the BlR Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR;
(u) include a valid and binding r(,solution of a meeting of the debtor's stockholders to increase the shares by the required amount
in cases where the Plan contemplates an additional issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation receiver after the approval of the Plan; and
(w) contain provisions for conciliation and/or mediation as a prerequisite to court assistance or intervention in the event of any
disagreement in the interpretation or implementation of the Rehabilitation Plan.
Section 63.Consultation with Debtor and Creditors. if the court gives due course to the petition, the rehabilitation receiver shall confer
with the debtor and all the classes of creditors, and may consider their views and proposals ill the review, revision or preparation of a new
Rehabilitation Plan.
Section 64.Creditor Approval of Rehabilitation Plan. The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is
ready for their examination. Within twenty (2Q) days from the said notification, the rehabilitation receiver shall convene the creditors, either
as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless approved by all
classes of creditors w hose rights are adversely modified or affected by the Plan. For purposes of this section, the Plan is deemed to have
been approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total claims of the said
class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their respective claims based on the
registry of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the following circumstances
are present:
18

(a)The Rehabilitation Plan complies with the requirements specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the
Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present value
greater than that which they would have received if the debtor were under liquidation.
Section 65.Submission of Rehabilitation Plan to the Court. - 1fthe Rehabilitation Plan is approved, the rehabilitation receiver shall submit
the same to the court for confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall notify the creditors that the
Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation Plan and that any creditor
may file an objection thereto.
Section 66.Filing of Objections to Rehabilitation Plan. A creditor may file an objection to the Rehabilitation Plan within twenty (20) days
from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan
shall be limited to the following:
(a) The creditors' support was induced by fraud;
(b)The documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or
(c)The Rehabilitation Plan is in fact not supported by the voting creditors.
Section 67.Hearing on the Objections. - If objections have been submitted during the relevant period, the court shall issue an order setting
the time and date for the hearing or hearings on the objections.
If the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the
court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into
one for the liquidation of the debtor under Chapter V of this Act.
Section 68.Confirmation of the Rehabilitation Plan. If no objections are filed within the relevant period or, if objections are filed, the court
finds them lacking in merit, or determines that the basis for the objection has been cured, or determines that the debtor has complied with
an order to cure the objection, the court shall issue an order confirming the Rehabilitation Plan.
The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made
adequate provisions for paying such claims.
For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or
implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent
debtor: Provided, That the terms thereof are necessary to restore the financial well-being and viability of the insolvent debtor.
Section 69.Effect of Confirmation of the Rehabilitation Plan, - The confirmation of the Rehabilitation Plan by the court shall result in the
following:
(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all persons who may be affected by . it,
including the creditors, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or
whether or not their claims have been scheduled;
(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all actions necessary to carry out the
Plan;
(c) Payments shall be made to the creditors in accordance with the provisions of the Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the
extent that they do not conflict with the provisions of the Rehabilitation Plan;
(e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of
whether or not the Plan is successfully implement; and
(f) Claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to any Suspension Order.
The Order confirming the Plan shall comply with Rules 36 of the Rules of Court: Provided, however, That the court may maintain
jurisdiction over the case in order to resolve claims against the debtor that remain contested and allegations that the debtor has breached
the Plan.
Section 70. Liability of General Partners of a Partnership for Unpaid Balances Under an Approved Plan. - The approval of the Plan shall
not affect the rights of creditors to pursue actions against the general partners of a partnership to the extent they are liable under relevant
legislation for the debts thereof.
19

Section 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. - Amounts of any indebtedness or obligations
reduced or forgiven in connection with a Plan's approval shall not be subject to any tax in furtherance of the purposes of this Act.
Section 72. Period for Confirmation of the Rehabilitation Plan. - The court shall have a maximum period of one (1) year from the date of
the filing of the petition to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said period, the proceedings may upon motion or motu propio, be converted into one for
the liquidation of the debtor .
Section 73. Accounting Discharge of Rehabilitation Receiver. - Upon the confirmation of the Rehabilitation Plan, the rehabilitation receiver
shall provide a final report and accounting to the court. Unless the Rehabilitation Plan specifically requires and describes the role of the
rehabilitation receiver after the approval of the Rehabilitation Plan, the court shall discharge the rehabilitation receiver of his duties.
(j) Termination of Proceedings
Section 74. Termination of Proceedings. - The rehabilitation proceedings under Chapter II shall, upon motion by any stakeholder or the
rehabilitation receiver be terminated by order of the court either declaring a successful implementation of the Rehabilitation Plan or a
failure of rehabilitation.
There is failure of rehabilitation in the following cases:
(a) Dismissal of the petition by the court;
(b) The debtor fails to submit a Rehabilitation Plan;
(c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be rehabilitated
within a reasonable period;
(d) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor fails to
perform its obligations thereunder or there is a failure to realize the objectives, targets or goals set forth therein, including the
timelines and conditions for the settlement of the obligations due to the creditors and other claimants;
(e) The commission of fraud in securing the approval of the Rehabilitation Plan or its amendment; and
(f) Other analogous circumstances as may be defined by the rules of procedure.
Upon a breach of, or upon a failure of the Rehabilitation Plan the court, upon motion by an affected party may:
(1) Issue an order directing that the breach be cured within a specified period of time, falling which the proceedings may be
converted to a liquidation;
(2) Issue an order converting the proceedings to a liquidation;
(3) Allow the debtor or rehabilitation receiver to submit amendments to the Rehabilitation Plan, the approval of which shall be
governed by the same requirements for the approval of a Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach consistent with the present regulation, other applicable law and the best interests
of the creditors; or
(5) Enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.
Section 75. Effects of Termination. - Termination of the proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his submission of a final accounting; and
(b) The lifting of the Stay Order and any other court order holding in abeyance any action for the enforcement of a claim against
the debtor.
Provided, however, That if the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than
technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92 of this Act.
CHAPTER III
PRE-NEGOTIATED REHABILITATION
Section 76. Petition by Debtor. - An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for
the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of
the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor
and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. The petition shall include as a
minimum:
20

(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver;
and
(d) a summary of disputed claims against the debtor and a report on the provisioning of funds to account for appropriate
payments should any such claims be ruled valid or their amounts adjusted.
Section 77. Issuance of Order. - Within five (5) working days, and after determination that the petition is sufficient in form and substance,
the court shall issue an Order which shall;
(a) identify the debtor, its principal business of activity/ies and its principal place of business;
(b) declare that the debtor is under rehabilitation;
(c) summarize the ground./s for the filling of the petition;
(d) direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;
(e) direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least ten
percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days;
(f) state that copies of the petition and the Rehabilitation Plan are available for examination and copying by any interested party;
(g) state that creditors and other interested parties opposing the petition or Rehabilitation Plan may file their objections or
comments thereto within a period of not later than twenty (20) days from the second publication of the Order;
(h) appoint a rehabilitation receiver, if provided for in the Plan; and
(i) include a Suspension or Stay Order as described in this Act.
Section 78. Approval of the Plan. - Within ten (10) days from the date of the second publication of the Order, the court shall approve the
Rehabilitation Plan unless a creditor or other interested party submits an objection to it in accordance with the next succeeding section.
Section 79. Objection to the Petition or Rehabilitation Plan. - Any creditor or other interested party may submit to the court a verified
objection to the petition or the Rehabilitation Plan not later than eight (8) days from the date of the second publication of the Order
mentioned in Section 77 hereof. The objections shall be limited to the following:
(a) The allegations in the petition or the Rehabilitation Plan or the attachments thereto are materially false or misleading;
(b) The majority of any class of creditors do not in fact support the Rehabilitation Plan;
(c) The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim in not categorically declared as
a contested claim; or
(d) The support of the creditors, or any of them was induced by fraud.
Copies of any objection to the petition of the Rehabilitation Plan shall be served on the debtor, the rehabilitation receiver (if applicable), the
secured creditor with the largest claim and who supports the Rehabilitation Plan, and the unsecured creditor with the largest claim and who
supports the Rehabilitation Plan.
Section 80. Hearing on the Objections. - After receipt of an objection, the court shall set the same for hearing. The date of the hearing
shall be no earlier than twenty (20) days and no later than thirty (30) days from the date of the second publication of the Order mentioned
in Section 77 hereof. If the court finds merit in the objection, it shall direct the debtor, when feasible to cure the detect within a reasonable
period. If the court determines that the debtor or creditors supporting the Rehabilitation Plan acted in bad faith, or that the objection is non-
curable, the court may order the conversion of the proceedings into liquidation. A finding by the court that the objection has no substantial
merit, or that the same has been cured shall be deemed an approval of the Rehabilitation Plan.
Section 81. Period for Approval of Rehabilitation Plan. - The court shall have a maximum period of one hundred twenty (120) days from
the date of the filing of the petition to approve the Rehabilitation Plan. If the court fails to act within the said period, the Rehabilitation Plan
shall be deemed approved.
Section 82. Effect of Approval. - Approval of a Plan under this chapter shall have the same legal effect as confirmation of a Plan under
Chapter II of this Act.
CHAPTER IV
OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS OR REHABILITATION PLANS
21

Section 83. Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. - An out-of-curt or informal restructuring
agreement or Rehabilitation Plan that meets the minimum requirements prescribed in this chapter is hereby recognized as consistent with
the objectives of this Act.
Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. - For an out-of-court
or informal restructuring/workout agreement or Rehabilitation Plan to qualify under this chapter, it must meet the following minimum
requirements:
(a) The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-seven (67%) of the secured obligations of the debtor;
(c) It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor;
and
(d) It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of
the debtor.
Section 85. Standstill Period. - A standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-
court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only
against the contracting parties but also against the other creditors: Provided, That (a) such agreement is approved by creditors
representing more than fifty percent (50%) of the total liabilities of the debtor; (b) notice thereof is publishing in a newspaper of general
circulation in the Philippines once a week for two (2) consecutive weeks; and (c) the standstill period does not exceed one hundred twenty
(120) days from the date of effectivity. The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or
restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in
Section 84 of this Act are met.
Section 86. Cram Down Effect. - A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal
workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The
notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at least three (3) consecutive weeks
in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse
of fifteen (15) days from the date of the last publication of the notice thereof.
Section 87. Amendment or Modification. - Any amendment of an out-of-court restructuring/workout agreement or Rehabilitation Plan must
be made in accordance with the terms of the agreement and with due notice on all creditors.
Section 88. Effect of Court Action or Other Proceedings. - Any court action or other proceedings arising from, or relating to, the out-of-
court or informal restructuring/workout agreement or Rehabilitation Plan shall not stay its implementation, unless the relevant party is able
to secure a temporary restraining order or injunctive relief from the Court of Appeals.
Section 89. Court Assistance. - The insolvent debtor and/or creditor may seek court assistance for the execution or implementation of a
Rehabilitation Plan under this Chapter, under such rules of procedure as may be promulgated by the Supreme Court.
CHAPTER V
LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS
Section 90. Voluntary Liquidation. - An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court. The
petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of
the petition;
(a) a schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and
collaterals, or securities, if any;
(b) an inventory of all its assets including receivables and claims against third parties; and
(c) the names of at least three (3) nominees to the position of liquidator.
At any time during the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the debtor may also initiate liquidation
proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings
into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph,
and state that the debtor is seeking immediate dissolution and termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order mentioned in
Section 112 hereof.
Section 91. Involuntary Liquidation. - Three (3) or more creditors the aggregate of whose claims is at least either One million pesos
(Php1,000,000,00) or at least twenty-five percent (25%0 of the subscribed capital stock or partner's contributions of the debtor, whichever
is higher, may apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of the debtor with the court. The
petition shall show that:
22

(a) there is no genuine issue of fact or law on the claims/s of the petitioner/s, and that the due and demandable payments
thereon have not been made for at least one hundred eighty (180) days or that the debtor has failed generally to meet its
liabilities as they fall due; and
(b) there is no substantial likelihood that the debtor may be rehabilitated.
At any time during the pendency of or after a rehabilitation court-supervised or pre-negotiated rehabilitation proceedings, three (3) or more
creditors whose claims is at least either One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed
capital or partner's contributions of the debtor, whichever is higher, may also initiate liquidation proceedings by filing a motion in the same
court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion
shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the movants are seeking
the immediate liquidation of the debtor.
If the petition or motion is sufficient in form and substance, the court shall issue an Order:
(1) directing the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive
weeks; and
(2) directing the debtor and all creditors who are not the petitioners to file their comment on the petition or motion within fifteen
(15) days from the date of last publication.
If, after considering the comments filed, the court determines that the petition or motion is meritorious, it shall issue the Liquidation Order
mentioned in Section 112 hereof.
Section 92. Conversion by the Court into Liquidation Proceedings. - During the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings pursuant to (a)
Section 25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section 90 of this Act; or at any other time upon
the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible. Thereupon, the court shall issue the
Liquidation Order mentioned in Section 112 hereof.
Section 93. Powers of the Securities and Exchange Commission (SEC). - The provisions of this chapter shall not affect the regulatory
powers of the SEC under Section 6 of Presidential Decree No. 902-A, as amended, with respect to any dissolution and liquidation
proceeding initiated and heard before it.
CHAPTER VI
INSOLVENCY OF INDIVIDUAL DEBTORS
(A) Suspension of Payments.
Section 94. Petition. - An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the impossibility of
meeting them when they respectively fall due, may file a verified petition that he be declared in the state of suspension of payments by the
court of the province or city in which he has resides for six (6) months prior to the filing of his petition. He shall attach to his petition, as a
minimum: (a) a schedule of debts and liabilities; (b) an inventory of assess; and (c) a proposed agreement with his creditors.
Section 95. Action on the Petition. - If the court finds the petition sufficient in form and substance, it shall, within five (5) working days from
the filing of the petition, issue an Order:
(a) calling a meeting of all the creditors named in the schedule of debts and liabilities at such time not less than fifteen (15) days
nor more than forty (40) days from the date of such Order and designating the date, time and place of the meeting;
(b) directing such creditors to prepare and present written evidence of their claims before the scheduled creditors' meeting;
(c) directing the publication of the said order in a newspaper of general circulation published in the province or city in which the
petition is filed once a week for two (2) consecutive weeks, with the first publication to be made within seven (7) days from the
time of the issuance of the Order;
(d) directing the clerk of court to cause the sending of a copy of the Order by registered mail, postage prepaid, to all creditors
named in the schedule of debts and liabilities;
(e) forbidding the individual debtor from selling, transferring, encumbering or disposing in any manner of his property, except
those used in the ordinary operations of commerce or of industry in which the petitioning individual debtor is engaged so long as
the proceedings relative to the suspension of payments are pending;
(f) prohibiting the individual debtor from making any payment outside of the necessary or legitimate expenses of his business or
industry, so long as the proceedings relative to the suspension of payments are pending; and
(g) appointing a commissioner to preside over the creditors' meeting.
Section 96. Actions Suspended. - Upon motion filed by the individual debtor, the court may issue an order suspending any pending
execution against the individual debtor. Provide, That properties held as security by secured creditors shall not be the subject of such
23

suspension order. The suspension order shall lapse when three (3) months shall have passed without the proposed agreement being
accepted by the creditors or as soon as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition for suspension of
payments and for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the
debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and
(b) secured creditors.
Section 97. Creditors' Meeting. - The presence of creditors holding claims amounting to at least three-fifths (3/5) of the liabilities shall be
necessary for holding a meeting. The commissioner appointed by the court shall preside over the meeting and the clerk of court shall act
as the secretary thereof, subject to the following rules:
(a) The clerk shall record the creditors present and amount of their respective claims;
(b) The commissioner shall examine the written evidence of the claims. If the creditors present hold at least three-fifths (3/5) of
the liabilities of the individual debtor, the commissioner shall declare the meeting open for business;
(c) The creditors and individual debtor shall discuss the propositions in the proposed agreement and put them to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the same proposition; and
(2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total liabilities of the
debtor mentioned in the petition; and
(e) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and the
commissioner and the individual debtor together with all creditors taking part in the voting shall sign the affirmed propositions.
No creditor who incurred his credit within ninety (90) days prior to the filing of the petition shall be entitled to vote.
Section 98. Persons Who May Refrain From Voting. - Creditors who are unaffected by the Suspension Order may refrain from attending
the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they
should join in the voting they shall be bound in the same manner as are the other creditors.
Section 99. Rejection of the Proposed Agreement. - The proposed agreement shall be deemed rejected if the number of creditors required
for holding a meeting do not attend thereat, or if the two (2) majorities mentioned in Section 97 hereof are not in favor thereof. In such
instances, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which
may correspond to them.
Section 100. Objections. - If the proposal of the individual debtor, or any amendment thereof made during the creditors' meeting, is
approved by the majority of creditors in accordance with Section 97 hereof, any creditor who attended the meeting and who dissented from
and protested against the vote of the majority may file an objection with the court within ten (10) days from the date of the last creditors'
meeting. The causes for which objection may be made to the decision made by the majority during the meeting shall be: (a) defects in the
call for the meeting, in the holding thereof and in the deliberations had thereat which prejudice the rights of the creditors; (b) fraudulent
connivance between one or more creditors and the individual debtor to vote in favor of the proposed agreement; or (c) fraudulent
conveyance of claims for the purpose of obtaining a majority. The court shall hear and pass upon such objection as soon as possible and
in a summary manner.
In case the decision of the majority of creditors to approve the individual debtor's proposal or any amendment thereof made during the
creditors' meeting is annulled by the court, the court shall declare the proceedings terminated and the creditors shall be at liberty to
exercise the rights which may correspond to them.
Section 101. Effects of Approval of Proposed Agreement. - If the decision of the majority of the creditors to approve the proposed
agreement or any amendment thereof made during the creditors' meeting is uphold by the court, or when no opposition or objection to said
decision has been presented, the court shall order that the agreement be carried out and all parties bound thereby to comply with its terms.
The court may also issue all orders which may be necessary or proper to enforce the agreement on motion of any affected party. The
Order confirming the approval of the proposed agreement or any amendment thereof made during the creditors' meeting shall be binding
upon all creditors whose claims are included in the schedule of debts and liabilities submitted by the individual debtor and who were
properly summoned, but not upon: (a) those creditors having claims for personal labor, maintenance, expenses of last illness and funeral
of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and (b) secured creditors
who failed to attend the meeting or refrained from voting therein.
Section 102. Failure of Individual Debtor to Perform Agreement. - If the individual debtor fails, wholly or in part, to perform the agreement
decided upon at the meeting of the creditors, all the rights which the creditors had against the individual debtor before the agreement shall
revest in them. In such case the individual debtor may be made subject to the insolvency proceedings in the manner established by this
Act.
24

(B) Voluntary Liquidation.
Section 103. Application. - An individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five
hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing a verified petition with the
court of the province or city in which he has resided for six (6) months prior to the filing of such petition. He shall attach to his petition a
schedule of debts and liabilities and an inventory of assets. The filing of such petition shall be an act of insolvency.
Section 104. Liquidation Order. - If the court finds the petition sufficient in form and substance it shall, within five (5) working days issue
the Liquidation Order mentioned in Section 112 hereof.
(C) In voluntary Liquidation.
Section 105. Petition; Acts of Insolvency. - Any creditor or group of creditors with a claim of, or with claims aggregating at least Five
hundred thousand pesos (Php500, 000.00) may file a verified petition for liquidation with the court of the province or city in which the
individual debtor resides.
The following shall be considered acts of insolvency, and the petition for liquidation shall set forth or allege at least one of such acts:
(a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering
or delaying the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying
the liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of
his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to
hinder or delay the liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate,
property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty
(30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a
fiduciary; and
(m) That an execution having been issued against him on final judgment for money, he shall have been found to be without
sufficient property subject to execution to satisfy the judgment.
The petitioning creditor/s shall post a bond in such as the court shall direct, conditioned that if the petition for liquidation is dismissed by the
court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the proceedings and attorney's fees.
Section 106. Order to Individual Debtor to Show Cause. - Upon the filing of such creditors' petition, the court shall issue an Order requiring
the individual debtor to show cause, at a time and place to be fixed by the said court, why he should not be adjudged an insolvent. Upon
good cause shown, the court may issue an Order forbidding the individual debtor from making payments of any of his debts, and
transferring any property belonging to him. However, nothing contained herein shall affect or impair the rights of a secured creditor to
enforce his lien in accordance with its terms.
Section 107. Default. - If the individual debtor shall default or if, after trial, the issues are found in favor of the petitioning creditors the court
shall issue the Liquidation Order mentioned in Section 112 hereof.
Section 108. Absent Individual Debtor. - In all cases where the individual debtor resides out of the Republic of the Philippines; or has
departed therefrom; or cannot, after due diligence, be found therein; or conceals himself to avoid service of the Order to show cause, or
any other preliminary process or orders in the matter, then the petitioning creditors, upon submitting the affidavits requisite to procedure an
25

Order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the individual debtor, shall
be entitled to an Order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a
sufficient amount of property of the individual debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings.
Upon receiving such Order of the court to take into custody of the property of the individual debtor, it shall be the duty of the sheriff to take
possession of the property and effects of the individual debtor, not exempt from execution, to an extent sufficient to cover the amount
provided for and to prepare within three (3) days from the time of taking such possession, a complete inventory of all the property so taken,
and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good
cause shown to the court. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due
each, from the books of the debtor, or from such other papers or data of the individual debtor available as may come to his possession,
and shall file such schedule or list of creditors and inventory with the clerk of court.
Section 109. All Property Taken to be Held for All Creditors; Appeal Bonds; Exemptions to Sureties. - In all cases where property is taken
into custody by the sheriff, if it does not embrace all the property and effects of the debtor not exempt from execution, any other creditor or
creditors of the individual debtor, upon giving bond to be approved by the court in double the amount of their claims, singly or jointly, shall
be entitled to similar orders and to like action, by the sheriff; until all claims be provided for, if there be sufficient property or effects. All
property taken into custody by the sheriff by virtue of the giving of any such bonds shall be held by him for the benefit of all creditors of the
individual debtor whose claims shall be duly proved as provided in this Act. The bonds provided for in this section and the preceding
section to procure the order for custody of the property and effects of the individual debtor shall be conditioned that if, upon final hearing of
the petition in insolvency, the court shall find in favor of the petitioners, such bonds and all of them shall be void; if the decision be in favor
of the individual debtor, the proceedings shall be dismissed, and the individual debtor, his heirs, administrators, executors or assigns shall
be entitled to recover such sum of money as shall be sufficient to cover the damages sustained by him, not to exceed the amount of the
respective bonds. Such damages shall be fixed and allowed by the court. If either the petitioners or the debtor shall appeal from the
decision of the court, upon final hearing of the petition, the appellant shall be required to give bond to the successful party in a sum double
the amount of the value of the property in controversy, and for the costs of the proceedings.
Any person interested in the estate may take exception to the sufficiency of the sureties on such bond or bonds. When excepted to the
petitioner's sureties, upon notice to the person excepting of not less than two (2) nor more than five (5) days, must justify as to their
sufficiency; and upon failure to justify, or of others in their place fail to justify at the time and place appointed the judge shall issue an Order
vacating the order to take the property of the individual debtor into the custody of the sheriff, or denying the appeal, as the case may be.
Section 110. Sale Under Execution. - If, in any case, proper affidavits and bonds are presented to the court or a judge thereof, asking for
and obtaining an Order of publication and an Order for the custody of the property of the individual debtor and thereafter the petitioners
shall make it appear satisfactorily to the court or a judge thereof that the interest of the parties to the proceedings will be subserved by a
sale thereof, the court may order such property to be sold in the same manner as property is sold under execution, the proceeds to de
deposited in the court to abide by the result of the proceedings.
CHAPTER VII
PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF INDIVIDUAL AND JURIDICAL DEBTORS
Section 111. Use of Term Debtor. - For purposes of this chapter, the term debtor shall include both individual debtor as defined in Section
4(o) and debtor as defined in Section 4(k) of this Act.
(A) The Liquidation Order.
Section 112. Liquidation Order. - The Liquidation Order shall:
(a) declare the debtor insolvent;
(b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
(c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from
execution;
(d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive
weeks;
(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;
(f) prohibit payments by the debtor and the transfer of any property by the debtor;
(g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;
(h) authorize the payment of administrative expenses as they become due;
(i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of
liquidator; and
(j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor
more than forty-five (45) days from the date of the last publication.
Section 113. Effects of the Liquidation Order. - Upon the issuance of the Liquidation Order:
26

(a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
(b) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed
vested in the liquidator or, pending his election or appointment, with the court;
(c) all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the
date of his assumption of office, declares otherwise and the contracting party agrees;
(d) no separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred
to the Liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear
and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any
final and executor judgment therein for a claim against the debtor shall be filed and allowed in court; and
(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.
Section 114. Rights of Secured Creditors. - The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in
accordance with the applicable contract or law. A secured creditor may:
(a) waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the
assets of the debtor; or
(b) maintain his rights under the security or lien:
If the secured creditor maintains his rights under the security or lien:
(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the
property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be
admitted in the liquidation proceedings as a creditor for the balance. If its value exceeds the claim secured, the liquidator may
convey the property to the creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of the sale; or
(3) the secure creditor may enforce the lien or foreclose on the property pursuant to applicable laws.
(B) The Liquidator.
Section 115. Election of Liquidator. - Only creditors who have filed their claims within the period set by the court, and whose claims are not
barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote,
unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the
liquidator, and is admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of
amount of claims, ad who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.
Section 116. Court-Appointed Liquidator. - The court may appoint the liquidator if:
(a) on the date set for the election of the liquidator, the creditors do not attend;
(b) the creditors who attend, fail or refuse to elect a liquidator;
(c) after being elected, the liquidator fails to qualify; or
(d) a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead set another hearing
of the election of the liquidator.
Provided further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior
to the commencement of the liquidation, from being appointed as a liquidator.
Section 117. Oath and Bond of the Liquidator. -Prior to entering upon his powers, duties and responsibilities, the liquidator shall take an
oath and file a bond, In such amount to be fixed by the court, conditioned upon the proper and faithful discharge of his powers, duties and
responsibilities.
Section 118. Qualifications of the Liquidator. - The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be
removed at any time by the court for cause, either motu propio or upon motion of any creditor entitled to vote for the election of the
liquidator.
Section 119. Powers, Duties and Responsibilities of the Liquidator. - The liquidator shall be deemed an officer of the court with the
principal duly of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and
discharging to the extent possible all the claims against the debtor. The powers, duties and responsibilities of the liquidator shall include,
but not limited to:
27

(a) to sue and recover all the assets, debts and claims, belonging or due to the debtor;
(b) to take possession of all the property of the debtor except property exempt by law from execution;
(c) to sell, with the approval of the court, any property of the debtor which has come into his possession or control;
(d) to redeem all mortgages and pledges, and so satisfy any judgement which may be an encumbrance on any property sold by
him;
(e) to settle all accounts between the debtor and his creditors, subject to the approval of the court;
(f) to recover any property or its value, fraudulently conveyed by the debtor;
(g) to recommend to the court the creation of a creditors' committee which will assist him in the discharge of the functions and
which shall have powers as the court deems just, reasonable and necessary; and
(h) upon approval of the court, to engage such professional as may be necessary and reasonable to assist him in the discharge
of his duties.
In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall have the right and duty to take all reasonable steps to
manage and dispose of the debtor's assets with a view towards maximizing the proceedings therefrom, to pay creditors and stockholders,
and to terminate the debtor's legal existence. Other duties of the liquidator in accordance with this section may be established by
procedural rules.
A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation receiver.
Section 120. Compensation of the Liquidator. - The liquidator and the persons and entities engaged or employed by him to assist in the
discharge of his powers and duties shall be entitled to such reasonable compensation as may determined by the liquidation court, which
shall not exceed the maximum amount as may be prescribed by the Supreme Court.
Section 121. Reporting Requiremen5ts. - The liquidator shall make and keep a record of all moneys received and all disbursements mad
by him or under his authority as liquidator. He shall render a quarterly report thereof to the court , which report shall be made available to
all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final
report at the end of the liquidation proceedings.
Section 122. Discharge of Liquidator. - In preparation for the final settlement of all the claims against the debtor , the liquidator will notify
all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that will
apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting
with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will
discharge the liquidator.
(C) Determination of Claims
Section 123. Registry of Claims. - Within twenty (20) days from his assumption into office the liquidator shall prepare a preliminary registry
of claims of secured and unsecured creditors. Secured creditors who have waived their security or lien, or have fixed the value of the
property subject of their security or lien by agreement with the liquidator and is admitted as a creditor for the balance , shall be considered
as unsecured creditors. The liquidator shall make the registry available for public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the partners of the partnership-debtor and shareholders or members of the
corporation-debtor, on where and when they may inspect it. All claims must be duly proven before being paid.
Section 124. Right of Set-off. - If the debtor and creditor are mutually debtor and creditor of each other one debt shall be set off against the
other, and only the balance, if any shall be allowed in the liquidation proceedings.
Section 125. - Opposition or Challenge to Claims. - Within thirty (30 ) days from the expiration of the period for filing of applications for
recognition of claims, creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners of the partnership-debtor and
shareholders or members of the corporation -debtor and other interested parties may submit a challenge to claim or claims to the court,
serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the (30) day period, the
rehabilitation receiver shall submit to the court the registry of claims containing the undisputed claims that have not been subject to
challenge. Such claims shall become final upon the filling of the register and may be subsequently set aside only on grounds or fraud,
accident, mistake or inexcusable neglect.
Section 126. Submission of Disputed to the Court. - The liquidator shall resolve disputed claims and submit his findings thereon to the
court for final approval. The liquidator may disallow claims.
(D) Avoidance Proceedings.
Section 127. Rescission or Nullity of Certain Transactions. - Any transaction occurring prior to the issuance of the Liquidation Order or, in
case of the conversion of the rehabilitation proceedings prior to the commencement date, entered into by the debtor or involving its assets,
may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors or
which constitute undue preference of creditors. The presumptions set forth in Section 58 hereof shall apply.
28

Section 128. Actions for Rescission or Nullity. - (a) The liquidator or, with his conformity, a creditor may initiate and prosecute any action to
rescind, or declare null and void any transaction described in the immediately preceding paragraph. If the liquidator does not consent to the
filling or prosecution of such action, any creditor may seek leave of the court to commence said action.
(b) if leave of court is granted under subsection (a) hereof, the liquidator shall assign and transfer to the creditor all rights, title
and interest in the chose in action or subject matter of the proceeding, including any document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to subsection (a) hereof, to the extent of his claim and the costs,
belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.
(d) Where, before an orders is made under subsection (a) hereof, the liquidator signifies to the court his readiness to the institute
the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, in that case the benefit
derived from the proceedings, if instituted within the time limits so fixed, belongs to the estate.
(E) The Liquidation Plan.
Section 129. The Liquidation Plan. - Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan
to the court. The Liquidation Plan shall, as a minimum enumerate all the assets of the debtor and a schedule of liquidation of the assets
and payment of the claims.
Section 130. Exempt Property to be Set Apart. - It shall be the duty of the court, upon petition and after hearing, to exempt and set apart,
for the use and benefit of the said insolvent, such real and personal property as is by law exempt from execution, and also a homestead;
but no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the application therefor has been duly
given by the clerk, by causing such notice to be posted it at least three (3) public places in the province or city at least ten (10) days prior to
the time of such hearing, which notice shall set forth the name of the said insolvent debtor, and the time and place appointed for the
hearing of such application, and shall briefly indicate the homestead sought to be exempted or the property sought to be set aside; and the
decree must show that such proof was made to the satisfaction of the court, and shall be conclusive evidence of that fact.
Section 131. Sale of Assets in Liquidation. - The liquidator may sell the unencumbered assets of the debtor and convert the same into
money. The sale shall be made at public auction. However, a private sale may be allowed with the approval of the court if; (a) the goods to
be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or
(b) the private sale is for the best interest of the debtor and his creditors.
With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part
thereof.
Section 132. manner of Implementing the Liquidation Plan. - The Liquidator shall implement the Liquidation Plan as approved by the court.
Payments shall be made to the creditors only in accordance with the provisions of the Plan.
Section 133. Concurrence and Preference of Credits. - The Liquidation Plan and its Implementation shall ensure that the concurrence and
preference of credits as enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right. For purposes of this chapter, credits for services rendered by employees or laborers to the
debtor shall enjoy first preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under Article 2241 and 2242
thereof.
Section 134. Order Removing the Debtor from the List of Registered Entitles at the Securities and Exchange Commission. - Upon
determining that the liquidation has been completed according to this Act and applicable law, the court shall issue an Order approving the
report and ordering the SEC to remove the debtor from the registry of legal entities.
Section 135. Termination of Proceedings. - Upon receipt of evidence showing that the debtor has been removed from the registry of legal
entities at the SEC. The court shall issue an Order terminating the proceedings.
(F) Liquidation of a Securities Market Participant.
Section 136. Liquidation of a Securities Market Participant. - The foregoing provisions of this chapter shall be without prejudice to the
power of a regulatory agency or self- regulatory organization to liquidate trade-related claims of clients or customers of a securities market
participant which, for purposes of investor protection, are hereby deemed to have absolute priority over other claims of whatever nature or
kind insofar as trade-related assets are concerned.
For purposes of this section, trade -related assets include cash, securities, trading right and other owned and used by the securities market
participant in the ordinary course of this business.
CHAPTER VIII
PROCEEDINGS ANCILLARY TO OTHER INSOLVENCY OR REHABILITAION PROCEEDINGS
(A) Banks and Other Financial Institutions Under Rehabilitation Receivership Pursuant to a State-funded or State-mandated
Insurance System.
Section 137. Provision of Assistance. - The court shall issue orders, adjudicate claims and provide other relief necessary to assist in the
liquidation of a financial under rehabilitation receivership established by a state-funded or state-mandated insurance system.
29

Section 138. Application of Relevant Legislation. - The liquidation of bank, financial institutions, insurance companies and pre-need
companies shall be determined by relevant legislation. The provisions in this Act shall apply in a suppletory manner.
(B) Cross-Border Insolvency Proceedings.
Section 139. Adoption of Uncitral Model Law on Cross-Border Insolvency. - Subject to the provision of Section 136 hereof and the rules of
procedure that may be adopted by the Supreme Court, the Model Law on Cross-Border Insolvency of the United Nations Center for
International Trade and Development is hereby adopted as part of this Act.
Section 140. Initiation of Proceedings. - The court shall set a hearing in connection with an insolvency or rehabilitation proceeding taking
place in a foreign jurisdiction, upon the submission of a petition by the representative of the foreign entity that is the subject of the foreign
proceeding.
Section 141. Provision of Relief. - The court may issue orders:
(a) suspending any action to enforce claims against the entity or otherwise seize or foreclose on property of the foreign entity
located in the Philippines;
(b) requiring the surrender property of the foreign entity to the foreign representative; or
(c) providing other necessary relief.
Section 142. Factors in Granting Relief. - In determining whether to grant relief under this subchapter, the court shall consider;
(a) the protection of creditors in the Philippines and the inconvenience in pursuing their claim in a foreign proceeding;
(b) the just treatment of all creditors through resort to a unified insolvency or rehabilitation proceedings;
(c) whether other jurisdictions have given recognition to the foreign proceeding;
(d) the extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a manner substantially
in accordance with the manner prescribed in this Act; and
(e) the extent that the foreign proceeding has recognized and shown deference to proceedings under this Act and previous
legislation.
CHAPTER IX
FUNDS FOR REHABILITATION OF GOVERNMENT-OWNED AND CONTROLLED CORPORATIONS
Section 143. Funds for Rehabilitation of Government -owned and Controlled Corporations. - Public funds for the rehabilitation of
government-owned and controlled corporations shall be released only pursuant to an appropriation by Congress and shall be supported by
funds actually available as certified by the National Treasurer.
The Department of Finance, in collaboration with the Department of Budget and Management, shall promulgate the rules for the use and
release of said funds.
CHAPTER X
MISCELLANEOUS PROVISIOS
Section 144. Applicability of Provisions. - The provisions in Chapter II, insofar as they are applicable, shall likewise apply to proceedings in
Chapters II and IV.
Section 145. Penalties. - An owner, partner, director, officer or other employee of the debtor who commits any one of the following acts
shall, upon conviction thereof, be punished by a fine of not more than One million pesos (Php 1, 000,000.00) and imprisonment for not less
than three(3) months nor more than five (5) years for each offense;
(a) if he shall, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to
be commented, or in contemplation of the proceedings hide or conceal, or destroy or cause to be destroyed or hidden any
property belonging to the debtor or if he shall hide, destroy, after mutilate or falsify, or cause to be hidden, destroyed, altered,
mutilated or falsified, any book, deed, document or writing relating thereto; if he shall, with intent to defraud the creditors of the
debtor, make any payment sale, assignment, transfer or conveyance of any property belongings to the debtor
(b) if he shall, having knowledge belief of any person having proved a false or fictitious claim against the debtor, fail to disclose
the same to the rehabilitation receiver of liquidator within one (1) month after coming to said knowledge or belief; or if he shall
attempt to account for any of the debtors property by fictitious losses or expense; or
(c) if he shall knowingly violate a prohibition or knowingly fail to undertake an obligation established by this Act.
Section 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. - This Act shall govern all petitions
filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending, except
30

to the extent that in opinion of the court their application would not be feasible or would work injustice, in which event the procedures set
forth in prior laws and regulations shall apply.
Section 147. Application to Pending Contracts. - This Act shall apply to all contracts of the debtor regardless of the date of perfection.
Section 148. Repeating Clause. - The Insolvency Law (Act No. 1956). As amended is hereby repealed. All other laws, orders, rules and
regulations or parts thereof inconsistent with any provision of this Act are hereby repealed or modified accordingly.
Section 149. Separability Clause. - If any provision of this Act shall be held invalid, the remainder of this Act not otherwise affected shall
remain in full force effect
Section 150. Effectivity Clause. - This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at
least two (2) national newspaper of general circulation.
Approved,

(Sgd.) JUAN PONCE ENRILE
President of the Senate
(Sgd.) PROSPERO C. NOGRALES
Speaker of the House of Representatives
This Act which is a consolidation of House Bill No. 7090 and Senate Bill No. 61 was finally passed by the House of Representatives and
the Senate on February 1. 2010 and February 2, 2010, respectively.

(Sgd.) EMMA LIRIO-REYES
Secretary of Senate
(Sgd.) MARILYN B. BARUA-YAP
Secretary General
House of Representatives

(Sgd.) GLORIA MACAPAGAL-ARROYO
President of the Philippines

Philippine Star - August 16, 2010 The

The Usury Law (R.A. 2655)
AN ACT FIXING RATES OF INTEREST UPON LOANS AND DECLARING THE EFFECT OF RECEIVING OR TAKING USURIOUS
RATES AND FOR OTHER PURPOSES
SECTION 1. 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 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.
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.
In the exercise of the authority herein granted, the Monetary Board may prescribe 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 prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial
intermediaries.
SECTION 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in
action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal
thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a
mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or an interest therein, than
twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof
or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by
the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary
Board.
31

SECTION 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in money or other property, real
or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits where such loan or forbearance
is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the
Monetary Board and in force at the time the loan or forbearance is granted.
SECTION 4. No pawnbroker or pawnbrokers agent shall directly or indirectly stipulate, charge, demand, take or receive any higher rate or
greater sum or value for any loan or forbearance than two and one-half per centum per month when the sum lent is less than one hundred
pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen
per centum per annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the Monetary Board
and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbrokers agent shall be considered such, for the benefits
of this Act, only if he be duly licensed and has an establishment open to the public.
It shall be unlawful for a pawnbroker or pawnbrokers agent to divide the pawn offered by a person into two or more fractions in order to
collect greater interest than the permitted by this section.
It shall also be unlawful for a pawnbroker or pawnbrokers agent to require the pawner to pay an additional charge as insurance premium
for the safekeeping and conservation of the article pawned.
SECTION 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of
loans or renewals thereof or forbearances of money, goods, or credit, whenever warranted by prevailing economic and social conditions.
SECTION 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the Monetary Board shall be
guided by the following:
1. The existing economic conditions in the country and the general requirements of the national economy;
2. The supply of and demand for credit;
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board may adopt.
SECTION 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be
reckoned, except by agreement: Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the
creditor shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is
judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary
Board. No person or corporation shall require interest to be paid in advance for a period of more than one year: Provided, however, That
whenever interest is paid in advance, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum
rate prescribed by the Monetary Board.
SECTION 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, commissions, 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
the person or corporation who took or received them if such action is brought within two years after such payment or delivery: Provided,
however, That the creditor shall not be obliged to return the interest, commissions and premiums for a period of not more than one year
collected by him in advance when the debtor shall have paid the obligation before it is due, provided such interest, and commissions and
premiums do not exceed the rates fixed in this Act.
SECTION 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of
debts, and all deposits of goods or other things, whereupon or whereby there shall be stipulated, charged, demanded, reserved, secured,
taken, or received, directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance of money, goods, or
credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of interest, made
without intent to evade any of the provisions of this Act, shall render a contract void: Provided, further, That parties to a loan agreement,
the proceeds of which may be availed of partially or fully at some future time, may stipulate that the rate of interest agreed upon at the time
the loan agreement is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the Monetary Board: And 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 this 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 case of litigation, also the costs and such attorneys fees as may be
allowed by the court.
32

SECTION 8. All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be
null and void unless they provide that such products or seed or other commodities shall 6e appraised at the time when the obligation falls
due at the current local market price: Provided, That unless otherwise stated in a document written in a language or dialect intelligible to
the debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be repaid later in agricultural
products or seed or any other kind of commodities shall be understood to be a loan, and any person or corporation having paid otherwise
shall be entitled in case action is brought within two years after such payment or delivery to recover all the products or seed delivered as
interest, or the value thereof, together with the costs and attorneys fees in such sum as may be allowed by the court. Nothing contained in
this section shall be construed to prevent the lender from taking interest for the money lent, provided such interest be not in excess of the
rates herein fixed.
SECTION 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person
or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or
received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the
facts contained in the latter.
SECTION 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to implement effectively the
provisions of this Act.
SECTION 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and regulations promulgated by
the Monetary Board shall be subject to criminal prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less
than fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the
discretion of the court, and to return the entire sum received as interest from the party aggrieved, and in the case of non-payment, to suffer
subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations, associations, societies, or
companies the manager, administrator or gerent or the person who has charge of the management or administration of the business shall
be criminally responsible for any violation of this Act.
SECTION 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed.
SECTION 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen.
Enacted, February 24, 1916.

Central Bank Circular 905 (repealed the Usury Law)

On January 1, 1983, CB Circular No. 905, series of 1982, took effect. This Circular declared that the rate of interest on any loan or
forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
30
In short, Circular No. 905 removed the ceiling on interest rates
for secured and unsecured loans, regardless of maturity.

December 10, 1982
CBP CIRCULAR NO. 905-82
The Monetary Board, in its Resolution No. 2224 dated December 3, 1982, approved the following regulations governing interest rates on
loans or forbearance of money, goods or credit and the amendment of Books I to IV of the Manual of Regulations for Banks and Other
Financial Intermediaries:
General Provisions
SECTION 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 juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
SECTION 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.
SECTION 3. Loans denominated or payable in a foreign currency shall continue to be subject to Central Bank regulations on foreign
borrowings.
BOOK I
Commercial Banks
SECTION 4. Subsection 1254.3 of the Manual of Regulations is hereby deleted.
33

SECTION 5. Section 1303 of the Manual of Regulations is hereby amended to read as follows:
SECTION 1303. Interest and Other Charges. The rate of interest, including commissions, premiums, fees and other charges, on any
loan, or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
SECTION 6. Subsection 1303.3 of the Manual of Regulations is hereby deleted.
SECTION 7. The first paragraph of Subsection 1303.4 of the Manual of Regulations is hereby amended to read as follows:
The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a reference rate plus a margin as may
be agreed upon by the parties.
SECTION 8. Subsection 1303.6 of the Manual of Regulations is hereby amended to read as follows:
Subsection 1303.6. Short-term rate. Expanded commercial banks, commercial banks and specialized government banks shall post their
respective short-term prime rates in a conspicuous place in their principal offices, branches and other banking offices. Expanded
commercial banks and the Land Bank of the Philippines shall publish every other Monday their respective prevailing short-term prime rates
in at least one daily newspaper of general circulation throughout the Philippines and on the effective date of any change of at least one-half
per cent (%) per annum from the last published rate, in at least one daily newspaper of general circulation throughout the Philippines. For
purposes of this subsection, the short-term prime rate shall be the lowest effective rate which a bank will charge on availments of
P500,000.00 and above with a maturity of 90 days, more of less , against credit lines of the banks more established clients, provided that
such availments are not eligible for rediscounting with the Central Bank at preferential rates and that the borrowers are not directors,
officers and stockholders, including their related interest, of the lending bank.
Likewise, for purposes of this subsection, more established clients is defined as client who has been availing himself of the facilities of the
bank for number of years, by maintaining substantial deposit balances, utilizing foreign exchange facilities such as exports, imports and
remittances on a regular basis, or availing himself of other fee-based services.
For statistical and monitoring purposes, banks shall report these rates monthly to the Department of Economic Research, Domestic,
Central Bank of the Philippines. Changes in these rates shall also be reported to said Department on the day the changes are to be
effective.
Banks shall report monthly to the Department of Economic Research-Domestic the volume and interest of availments of P500,000.00 and
above with a maturity of 90 days, more or less, against credit lines of their clients.
SECTION 9. Item d of Section 1349 of the Manual of Regulations is hereby amended to read as follows:
d. Terms, interest and charges. The maximum term of loans money shops may grant shall in no case exceed 180 days and the rate of
interest on such loans, inclusive of commissions, premiums, fees and other charges, shall not be subject to any ceilings prescribed under
or pursuant to the Usury Laws, as amended.
SECTION 10. Subsection 1388.1 of the Manual of Regulations is hereby amended to read as follows:
The rate of yield, including commissions, premiums, fees, and other charges, from the purchase of receivables and other obligations,
regardless of maturity, that may be charged or received by banks authorized to engage in quasi-banking functions or by non-bank financial
intermediaries authorized to engage in quasi-banking functions, shall not be subject to any regulatory ceiling.
Data on the volume and interest rates of domestic loans and discounts with original maturities of more than 365 days shall be reported by
expanded commercial banks and commercial banks to the Department of Economic Research, Domestic, Central Bank of the Philippines,
not later than the 15th banking day after end of reference month.
BOOK II
Thrift Banks
SECTION 11. Subsection 2254.3 of the Manual of Regulations is hereby deleted.
SECTION 12. Section 2303 of the Manual of Regulations is hereby amended to read as follows:
SECTION 2303. Interest and other Charges. 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, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
SECTION 13. Subsection 2303.3 of the Manual of Regulations is hereby deleted.
SECTION 14. The first paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended to read as follows:
The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a reference rate plus a margin as may
be agreed upon by the parties.:
SECTION 15. The last paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended to read as follows:
34

Where the loan agreement provides for a floating interest rate, the interest period, which shall be such period of time for which the rate of
interest is fixed, shall be such period as may be agreed upon by the parties.
SECTION 16. The first paragraph of Subsection 2303.6 of the Manual of Regulations is hereby deleted.
SECTION 17. Item c of Section 2349 of the Manual of Regulations is hereby amended to read as follows:
C. Terms, interest and charges. The maximum term of loans money shops may grant shall in no case exceed 180 days and the
rate of interest on such loans, inclusive of commission, premiums, fees and other charges, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
SECTION 18. Subsection 2388.1 of the Manual of Regulations is hereby ended to read as follows:
Subsection 2388.1. Yields on purchases of receivables. The rate of yield, including commissions, premiums, fees and other
charges, from the purchase of receivables and other obligations, regardless of maturity, that may be charged or received by banks
authorized to engage in quasi-banking functions or by non-bank financial intermediaries authorized to engage in quasi-banking functions,
shall not be subject to any regulatory ceiling.
BOOK III
Rural Banks
SECTION 19. Item c of Subsection 3152.3 of the Manual of Regulations is hereby amended to read as follows:
c. Terms, interest and charges. The maximum term of loans money shops may grant shall in no case exceed 180 days and the rate of
interest on such loans, inclusive of commissions, premiums, fees and other charges, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
SECTION 20. Subsection 3254.2 of the Manual of Regulations is hereby deleted.
SECTION 21. Paragraph a of Subsection 3303.1 of the Manual of Regulations is hereby amended to read as follows:
a. Interest rate. 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, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
SECTION 22. Item b of Subsection 3303.1 of the Manual of Regulations is hereby deleted and items c, d, f and g of the same
Subsection are hereby relettered as items b, c, d and e, respectively.
SECTION 23. The first paragraph of Subsection 3303.2 of the Manual of Regulations is hereby deleted.
SECTION 24. Subsection 3303.5 of the Manual of Regulations is hereby amended to read as follows:
Subsection 3303.5. Floating rates of interest. The rate of interest on a floating rate loan during each interest period shall be stated on
the basis of a reference rate plus a margin as may be agreed upon by the parties.
Reference rates for various interest periods shall be determined and announced by the Central Bank every week and shall be based on
the weighted average of the interest rates paid during the immediately preceding week by the ten (10) commercial banks with the highest
levels of outstanding deposit substitutes on promissory notes issued by such banks, with maturities corresponding to the interest periods
for which such reference rates are being determined. The commercial banks to be included for purposes of computing the reference rates
shall be reviewed and determined at the beginning of every calendar semester on the basis of the levels of their outstanding deposit
substitutes as of May 31 or November 30, as the case may be.
The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to be determined on the basis of the
reference rate obtained from the weighted average of the interest rates paid by the five banks with the largest volume of business
transacted during the immediately preceding thirty (30) days, on time deposits with maturities of more than seven hundred thirty (730)
days, which shall be announced by the Central Bank every month for as long as such loans are existing and outstanding: Provided,
however, That the parties to such existing floating rate loans agreements are not precluded from amending or modifying their loan
agreements by adopting a floating rate of interest determined on the basis of the reference rate mentioned in the preceding paragraph.
Where the loan agreement provides for a floating interest rate, the interest period, which shall be such period of time for which the rate of
interest is fixed, shall be such period as may be agreed upon by the parties.
BOOK IV
Non-Bank Financial Intermediaries
SECTION 25. The last paragraph of Subsection 4283Q.1 of the Manual of Regulations is hereby amended to read as follows:
Procedures for demand deposits of NBQBs with the Central Bank as provided in Appendix 14 shall be followed.
SECTION 26. Subsection 4303Q.1 to 4303Q.9 of the Manual of Regulations are hereby amended to read as follows:
35

Subsection 4303Q.1. Purchase of Receivables. The rate of yield, including commissions, premiums, fees and other charges, from the
purchase of receivables and other obligations, regardless of maturity, that may be charged or received by NBQBs shall not be subject to
any regulatory ceiling.
Receivables and other obligations shall include claims collectible in money of any amount and maturity from domestic and foreign
sources. The Monetary Board shall determine in doubtful cases whether a particular claim is included within said phrase.
Subsection 4303Q.2. Loans. The rate of interest, including commissions, premiums, fees and other charges, on loan transactions,
regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury
Law, as amended.
Subsection 4303Q.3. Floating rate of interest. The rate of interest on a floating rate loan during each interest period shall be stated on
the basis of a reference rate plus a margin as may be agreed upon by the parties.
Reference rates for various interest periods shall be determined and announced by the Central Bank every week and shall be based on
the weighted average of the interest rates paid during the immediately preceding week by the ten (10) commercial banks with the highest
levels of outstanding deposit substitutes on promissory notes issued by such banks, with maturities corresponding to the interest periods
for which such references rates are being determined. The commercial banks to be included for purposes of computing the reference rates
shall be reviewed and determined at the beginning of every calendar semester on the basis of the levels of their outstanding deposit
substitutes as of May 31 or November 30, as the case may be.
The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to be determined on the basis of the
reference rate obtained from the weighted average of the interest rates paid by the five banks with the largest volume of business
transacted during the immediately preceding thirty (30) days, on time deposits with maturities of more than seven hundred thirty (730)
days, which shall be announced by the Central Bank every month for as long as such loans are existing and outstanding: Provided,
however, That the parties to such existing floating rate loan agreements are not precluded from amending or modifying their loan
agreements by adopting a floating rate of interest determined on the basis of the reference rate mentioned in the next preceding
paragraph.
Where the loan agreement provides for a floating interest rate, the interest period, which shall be such period of time for which the rate of
interest is fixed, shall be such period as may be agreed upon by the parties.
Subsection 4303Q.4. Effect of prepayment. If there is no agreement on the rebate of interest in the event of prepayment of the loan, the
creditor is not under any legal obligation to return the interest corresponding to the period from date of prepayment to the stipulated
maturity date of the loan. Any prepayment made by the debtor should not, therefore, affect the computation of the effective rate stipulated
in the loan contract.
SECTION 27. Subsections 4303Q.10 and 4303Q.11 of the Manual of Regulations are hereby renumbered as Subsections 4303Q.5.
and 4303Q.6, respectively.
SECTION 28. Subsection 4303N.1 of the Manual of Regulations is hereby amended to read as follows:
Subsection 4303N.1. Interest Rates. The rate of interest including commissions, premiums, fees and other charges on loans and
forbearance of money, regardless of maturity and whether secured or unsecured, shall not be subject to any ceilings prescribed under or
pursuant to the Usury Law, as amended.
SECTION 29. Subsections 4303N.2, 4303N.4 and 4303N.5 of the Manual of Regulations are hereby deleted, and Subsections
4303N.3, 4303N.6, and 4303N.7 thereof are hereby renumbered as Subsections 4303N.2, 4303N.3 and 4303N.4, respectively.
SECTION 30. Section 4303P of the Manual of Regulations is hereby amended to read as follows:
SECTION 4303P. Interest, Fees and Other Charges. The rate of interest including commissions, premiums, fees and other charges on
any loan or forbearance of money extended by a pawnshop, pawnbroker or pawnbrokers agent, regardless of maturity, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
No pawnshop shall collect interest on loans in advance for a period of more than a year.
SECTION 31. Subsection 4303P.1 of the Manual of Regulations is hereby deleted.
SECTION 32. Whenever any person or entity violated any of the provisions of this Circular, the person or entity responsible for such
violation shall be subject to the penalties prescribed in the first paragraph of Section 34 of Republic Act No. 265, as amended, and/or the
penalties prescribed in Section 10 of Act No. 2655, without prejudice to the imposition of administrative sanctions under Sections 34-A and
34-B of Republic Act No. 265, as amended.
SECTION 33. This Circular shall take effect on January 1, 1983.
FOR THE MONETARY BOARD:
(SGD.) JAIME C. LAYA
Governor
36


http://www.interaksyon.com/article/67089/mel-sta-maria--bangko-sentral-circular-799-imposing-new-interest-
rates-may-be-illegal
The Bangko Sentral Issued Circular No. 799 Series of 2013 dated July 1, 2013. It provides:
The Monetary Board in its Resolution No. 796 dated May 16, 2013 approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2of Circular No. 905,
Series of 1982:
Section 1. The Rate of interest for the loan or forebearance of any money, goods or credit and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3, and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on July 1, 2013
This circular is highly questionable. It is an imposition which is not allowed by law. It is illegal and therefore void
ab initio.
It is well entrenched that, in the Philippines, there is a hierarchy of laws. The most important law is the
Constitution. Coming second are statutes made by Congress and approved by the President. And the last are
rules and regulations such as circulars. Accordingly, Article 7 of the Civil Code of the Philippines is very clear
when it provides that laws are repealed only by subsequent ones and declares that administrative or executive
orders and regulations shall be valid only when they are not contrary to the laws or the
Constitution. Consequently, Article 5 of the same Civil Code provides that acts executed against the provisions
of mandatory or prohibitory laws shall be void, except when the law itself authorizes its validity.
Circular No.799 mandates a new monetary interest rate. It provides that the rate of interest for the loan or
forebearance of any money, goods or credit in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum. This mere circular cannot repeal the law on monetary interest, which is
Article 1956 of the Civil Code providing that, no interest shall be due unless it has been expressly stipulated in
writing. Article 1956 is a mandatory law as it uses the word shall connoting a command. It is likewise a
prohibitory law as it starts with the phrase no interest. Thus, in accordance with Article 5 of the Civil Code,
Circular No. 799 may be considered void. It may be considered to have no effect.
As the Supreme Court said in Sebastian Siga-An vs. Villanueva (G.R. No. 173227 January 20, 2009), collection
of interest without any stipulation therefor in writing is prohibited by law. The Bangko Sentral just issued a circular
which is prohibited by law.
37

Likewise Circular No. 799 provides that the rate allowed in judgments, in the absence of an express contract as
to such rate of interest, shall be six percent (6%) per annum. This is what is called compensatory interest, which
is currently governed by Article 2209 of the Civil Code. Again in the case of Sebastian Siga-An vs.
Villanueva (G.R. No. 173227 January 20, 2009), the Supreme Court said:
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the
Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
Given the pronouncement of the Supreme Court which cited Article 2209 of the Civil Code providing a legal
interest of 12% per annum as rate allowed in judgments, how then could a mere Bangko Sentral Circular
repeal this rate of 12% and make it at 6%?
Circular No. 799 must be withdrawn. Our regulators must know and follow the law. They cannot substitute their
own discretionary and official acts and decisions over norms and rules mandated by law. Given their important
government positions, it is unforgivable for them not to know the substantive law precisely having a great bearing
on their official functions, thereby resulting in the issuance of legally improper circulars impacting our economy
and prejudicing our business people. Not even the Bangko Sentral or the Monetary Board can usurp legislative
sovereign functions which are the exclusive domain of the legislature. A mere circular cannot amend an act of
Congress. Such circular likewise cannot revise an interpretation of the law made by the Supreme Court. The
Bangko Sentral and the Monetary Board must know their places in our political and constitutional system. They
cannot act ultra vires.



Articles 1933-1995 Civil Code of the Philippines

TITLE XI
LOAN

General Provisions
Article 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)
Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

CHAPTER 1
Commodatum

SECTION 1
Nature of Commodatum
Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him
who acquires the use, the contract ceases to be a commodatum. (1941a)
Article 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object,
as when it is merely for exhibition. (n)
Article 1937. Movable or immovable property may be the object of commodatum. (n)
38

Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)
Article 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's
household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing
forbids such use. (n)
Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

SECTION 2
Obligations of the Bailee
Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a)
Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been
constituted;
(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;
(4) If he lends or leases the thing to a third person, who is not a member of his household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745)
Article 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (1746)
Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by
reason of expenses. However, the bailee has a right of retention for damages mentioned in article 1951. (1747a)
Article 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

SECTION 3
Obligations of the Bailor
ARTICLE 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of
the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (1749a)
Article 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)
Article 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in article 765.
(n)
Article 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the
bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the
notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they
shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)
Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in articles 1941 and
1949, he is not entitled to reimbursement. (n)
39

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for
the damages which he may suffer by reason thereof. (1752)
Article 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n)

CHAPTER 2
Simple Loan or Mutuum
Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality. (1753a)
Article 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the
latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)
Article 1955. The obligation of a person who borrows money shall be governed by the provisions of articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it
should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid.
(1754a)
Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)
Article 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void.
The borrower may recover in accordance with the laws on usury. (n)
Article 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or
goods at the time and place of payment. (n)
Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n)
Article 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio
indebiti, or natural obligations, shall be applied, as the case may be. (n)
Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this
Code. (n)

TITLE XII
DEPOSIT

CHAPTER 1
Deposit in General and its Different Kinds
Article 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no
deposit but some other contract. (1758a)
Article 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the delivery of the thing. (n)
Article 1964. A deposit may be constituted judicially or extrajudicially. (1759)
Article 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the depositary is engaged in
the business of storing goods. (1760a)
Article 1966. Only movable things may be the object of a deposit. (1761)
Article 1967. An extrajudicial deposit is either voluntary or necessary. (1762)

CHAPTER 2
Voluntary Deposit
40


SECTION 1
General Provisions
Article 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or
more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the
one to whom it belongs. (1763)
Article 1969. A contract of deposit may be entered into orally or in writing. (n)
Article 1970. If a person having capacity to contract accepts a deposit made by one who is incapacitated, the former shall be subject to all
the obligations of a depositary, and may be compelled to return the thing by the guardian, or administrator, of the person who made the
deposit, or by the latter himself if he should acquire capacity. (1764)
Article 1971. If the deposit has been made by a capacitated person with another who is not, the depositor shall only have an action to
recover the thing deposited while it is still in the possession of the depositary, or to compel the latter to pay him the amount by which he
may have enriched or benefited himself with the thing or its price. However, if a third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery. (1765a)

SECTION 2
Obligations of the Depositary
Article 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss
of the thing, shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. (1766a)
Article 1973. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a third person. If deposit with a third
person is allowed, the depositary is liable for the loss if he deposited the thing with a person who is manifestly careless or unfit. The
depositary is responsible for the negligence of his employees. (n)
Article 1974. The depositary may change the way of the deposit if under the circumstances he may reasonably presume that the depositor
would consent to the change if he knew of the facts of the situation. However, before the depositary may make such change, he shall notify
the depositor thereof and wait for his decision, unless delay would cause danger. (n)
Article 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes. (n)
Article 1976. Unless there is a stipulation to the contrary, the depositary may commingle grain or other articles of the same kind and
quality, in which case the various depositors shall own or have a proportionate interest in the mass. (n)
Article 1977. The depositary cannot make use of the thing deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires its use, it must be used but only for that purpose. (1767a)
Article 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a
loan or commodatum, except where safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence must be proved. (1768a)
Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have been authorized to use the same. (n)
41

Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan. (n)
Article 1981. When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition, and he shall be
liable for damages should the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is proof to the contrary.
As regards the value of the thing deposited, the statement of the depositor shall be accepted, when the forcible opening is imputable to the
depositary, should there be no proof to the contrary. However, the courts may pass upon the credibility of the depositor with respect to the
value claimed by him.
When the seal or lock is broken, with or without the depositary's fault, he shall keep the secret of the deposit. (1769a)
Article 1982. When it becomes necessary to open a locked box or receptacle, the depositary is presumed authorized to do so, if the key
has been delivered to him; or when the instructions of the depositor as regards the deposit cannot be executed without opening the box or
receptacle. (n)
Article 1983. The thing deposited shall be returned with all its products, accessories and accessions.
Should the deposit consist of money, the provisions relative to agents in article 1896 shall be applied to the depositary. (1770)
Article 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all
responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return
the same. (1771a)
Article 1985. When there are two or more depositors, if they are not solidary, and the thing admits of division, each one cannot demand
more than his share.
When there is solidarity or the thing does not admit of division, the provisions of articles 1212 and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors, the depositary shall return it only to the person designated. (1772a)
Article 1986. If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights. (1773)
Article 1987. If at the time the deposit was made a place was designated for the return of the thing, the depositary must take the thing
deposited to such place; but the expenses for transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made where the thing deposited may be, even if it should not be the same place
where the deposit was made, provided that there was no malice on the part of the depositary. (1774)
Article 1988. The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return
may have been fixed.
This provision shall not apply when the thing is judicially attached while in the depositary's possession, or should he have been notified of
the opposition of a third person to the return or the removal of the thing deposited. In these cases, the depositary must immediately inform
the depositor of the attachment or opposition. (1775)
Article 1989. Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons for not keeping the thing
deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may
secure its consignation from the court. (1776a)
Article 1990. If the depositary by force majeure or government order loses the thing and receives money or another thing in its place, he
shall deliver the sum or other thing to the depositor. (1777a)
Article 1991. The depositor's heir who in good faith may have sold the thing which he did not know was deposited, shall only be bound to
return the price he may have received or to assign his right of action against the buyer in case the price has not been paid him. (1778)

SECTION 3
Obligations of the Depositor
42

Article 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the expenses he may have incurred for
the preservation of the thing deposited. (1779a)
Article 1993. The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited, unless at the time
of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing, or unless
he notified the depositary of the same, or the latter was aware of it without advice from the depositor. (n)
Article 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. (1780)
Article 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary. (n)

CASES
1. Republic vs. CA 146 SCRA 15
G.R. No. L-46145 November 26, 1986
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,
vs.
THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by RICARDO BALOY, ET AL., respondents.
Pelaez, Jalondoni, Adriano and Associates for respondents.

PARAS, J.:p
This case originally emanated from a decision of the then Court of First Instance of Zambales in LRC Case No. 11-0, LRC Record No. N-
29355, denying respondents' application for registration. From said order of denial the applicants, heirs of Domingo Baloy, represented by
Ricardo P. Baloy, (herein private respondents) interposed on appeal to the Court of Appeals which was docketed as CA-G.R. No. 52039-
R. The appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a decision dated February 3,
1977 reversing the decision appealed from and thus approving the application for registration. Oppositors (petitioners herein) filed their
Motion for Reconsideration alleging among other things that applicants' possessory information title can no longer be invoked and that they
were not able to prove a registerable title over the land. Said Motion for Reconsideration was denied, hence this petition for review on
certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which had been translated in Exhibit F-1) coupled with their
continuous, adverse and public possession over the land in question. An examination of the possessory information title shows that the
description and the area of the land stated therein substantially coincides with the land applied for and that said possessory information
title had been regularly issued having been acquired by applicants' predecessor, Domingo Baloy, under the provisions of the Spanish
Mortgage Law. Applicants presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public land thru the operation of Act 627 of the Philippine
Commission. On November 26, 1902 pursuant to the executive order of the President of the U.S., the area was declared within the U.S.
Naval Reservation. Under Act 627 as amended by Act 1138, a period was fixed within which persons affected thereby could file their
application, (that is within 6 months from July 8, 1905) otherwise "the said lands or interest therein will be conclusively adjudged to be
public lands and all claims on the part of private individuals for such lands or interests therein not to presented will be forever barred."
Petitioner argues that since Domingo Baloy failed to file his claim within the prescribed period, the land had become irrevocably public and
could not be the subject of a valid registration for private ownership.
Considering the foregoing facts respondents Court of Appeals ruled as follows:
... perhaps, the consequence was that upon failure of Domingo Baloy to have filed his application within that period the land had become
irrevocably public; but perhaps also, for the reason that warning was from the Clerk of the Court of Land Registration, named J.R. Wilson
and there has not been presented a formal order or decision of the said Court of Land Registration so declaring the land public because of
that failure, it can with plausibility be said that after all, there was no judicial declaration to that effect, it is true that the U.S. Navy did
occupy it apparently for some time, as a recreation area, as this Court understands from the communication of the Department of Foreign
Affairs to the U.S. Embassy exhibited in the record, but the very tenor of the communication apparently seeks to justify the title of herein
applicants, in other words, what this Court has taken from the occupation by the U.S. Navy is that during the interim, the title of applicants
was in a state of suspended animation so to speak but it had not died either; and the fact being that this land was really originally private
from and after the issuance and inscription of the possessory information Exh. F during the Spanish times, it would be most difficult to
sustain position of Director of Lands that it was land of no private owner; open to public disposition, and over which he has control; and
since immediately after U.S. Navy had abandoned the area, applicant came in and asserted title once again, only to be troubled by first
Crispiniano Blanco who however in due time, quitclaimed in favor of applicants, and then by private oppositors now, apparently originally
tenants of Blanco, but that entry of private oppositors sought to be given color of ownership when they sought to and did file tax declaration
in 1965, should not prejudice the original rights of applicants thru their possessory information secured regularly so long ago, the
43

conclusion must have to be that after all, applicants had succeeded in bringing themselves within the provisions of Sec. 19 of Act 496, the
land should be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment appealed from the application is approved, and
once this decision shall have become final, if ever it would be, let decree issue in favor of applicants with the personal circumstances
outlined in the application, costs against private oppositors.
Petitioner now comes to Us with the following:
ASSIGNMENT OF ERRORS:
1. Respondent court erred in holding that to bar private respondents from asserting any right under their possessory information title there
is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents' rights by virtue of their possessory information title was lost by
prescription.
3. Respondent court erred in concluding that applicants have registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any affected land can "be conclusively adjudged
to be public land." Sec. 3, Act 627 reads as follows:
SEC. 3. Immediately upon receipt of the notice from the civil Governor in the preceeding section mentioned it shall be the duty of the judge
of the Court of Land Registration to issue a notice, stating that the lands within the limits aforesaid have been reserved for military
purposes, and announced and declared to be military reservations, and that claims for all private lands, buildings, and interests therein,
within the limits aforesaid, must be presented for registration under the Land Registration Act within six calendar months from the date of
issuing the notice, and that all lands, buildings, and interests therein within the limits aforesaid not so presented within the time therein
limited will be conclusively adjudged to be public lands and all claims on the part of private individuals for such lands, buildings, or an
interest therein not so presented will be forever barred. The clerk of the Court of Land Registration shall immediately upon the issuing of
such notice by the judge cause the same to be published once a week for three successive weeks in two newspapers, one of which
newspapers shall be in the English Language, and one in the Spanish language in the city or province where the land lies, if there be no
such Spanish or English newspapers having a general circulation in the city or province wherein the land lies, then it shall be a sufficient
compliance with this section if the notice be published as herein provided, in a daily newspaper in the Spanish language and one in the
English language, in the City of Manila, having a general circulation. The clerk shall also cause a duly attested copy of the notice in the
Spanish language to be posted in conspicuous place at each angle formed by the lines of the limits of the land reserved. The clerk shall
also issue and cause to be personally served the notice in the Spanish language upon every person living upon or in visible possession of
any part of the military reservation. If the person in possession is the head of the family living upon the hand, it shall be sufficient to serve
the notice upon him, and if he is absent it shall be sufficient to leave a copy at his usual place of residence. The clerk shall certify the
manner in which the notices have been published, posted, and served, and his certificate shall be conclusive proof of such publication,
posting, and service, but the court shall have the power to cause such further notice to be given as in its opinion may be necessary.
Clearly under said provisions, private land could be deemed to have become public land only by virtue of a judicial declaration after due
notice and hearing. It runs contrary therefore to the contention of petitioners that failure to present claims set forth under Sec. 2 of Act 627
made the land ipso facto public without any deed of judicial pronouncement. Petitioner in making such declaration relied on Sec. 4 of Act
627 alone. But in construing a statute the entire provisions of the law must be considered in order to establish the correct interpretation as
intended by the law-making body. Act 627 by its terms is not self-executory and requires implementation by the Court of Land Registration.
Act 627, to the extent that it creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly construed so as to
safeguard private respondents' rights. Significantly, petitioner does not even allege the existence of any judgment of the Land Registration
court with respect to the land in question. Without a judgment or order declaring the land to be public, its private character and the
possessory information title over it must be respected. Since no such order has been rendered by the Land Registration Court it
necessarily follows that it never became public land thru the operation of Act 627. To assume otherwise is to deprive private respondents
of their property without due process of law. In fact it can be presumed that the notice required by law to be given by publication and by
personal service did not include the name of Domingo Baloy and the subject land, and hence he and his lane were never brought within
the operation of Act 627 as amended. The procedure laid down in Sec. 3 is a requirement of due process. "Due process requires that the
statutes which under it is attempted to deprive a citizen of private property without or against his consent must, as in expropriation cases,
be strictly complied with, because such statutes are in derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508,
511).
We also find with favor private respondents' views that court judgments are not to be presumed. It would be absurd to speak of a judgment
by presumption. If it could be contended that such a judgment may be presumed, it could equally be contended that applicants'
predecessor Domingo Baloy presumably seasonably filed a claim, in accordance with the legal presumption that a person takes ordinary
care of his concerns, and that a judgment in his favor was rendered.
The finding of respondent court that during the interim of 57 years from November 26, 1902 to December 17, 1959 (when the U.S. Navy
possessed the area) the possessory rights of Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit
"U," a communication or letter No. 1108-63, dated June 24, 1963, which contains an official statement of the position of the Republic of the
Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs have been
in continuous possession of said land since 1894 as attested by an "Informacion Possessoria" Title, which was granted by the Spanish
Government. Hence, the disputed property is private land and this possession was interrupted only by the occupation of the land by the
U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of the late Domingo P. Baloy,
are now in actual possession, and this has been so since the abandonment by the U.S. Navy. A new recreation area is now being used by
the U.S. Navy personnel and this place is remote from the land in question.
44

Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of a commodatum. It cannot therefore
militate against the title of Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost by prescription by reason
of another's possession if such possession be under claim of ownership, not where the possession is only intended to be transient, as in
the case of the U.S. Navy's occupation of the land concerned, in which case the owner is not divested of his title, although it cannot be
exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed decision is hereby AFFIRMED.
SO ORDERED.
Feria (Chairman), Alampay and Feliciano, * JJ., concur.
Gutierrez, Jr., J., concurs in the results.
Fernan J., took no part.
Footnotes
* Feliciano was designated in lieu of J. Fernan.







2. Catholic Vicar Apostolic of Mt. Province vs. CA 165 SCRA 515
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be
considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of Appeals
1
in
CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession,
which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case
No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain
Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the
same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p.
36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the Court of
Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2
and 3 in question; that the two lots were possessed by the predecessors-in-interest of private respondents under claim of ownership in
good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when
petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven
years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession
45

without; that the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that
those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV-
05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started when the
defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court
of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title
over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet,
docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high
school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22,
1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on
Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the
land registration court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio
Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land
registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of
Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration
court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of
oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the
first lot being presently occupied by the convent and the second by the women's dormitory and the
sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of
Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on
May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration
praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and
Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed
by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio
Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court
of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court
of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on
the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon
the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the
Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion For
Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The
Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the
ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of
Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for
certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano
vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals
dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil
Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan
Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession
of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness,
Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-
interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to
them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar
presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant
46

dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the
witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole
issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot
2, which in effect declared the plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership
and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of
Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession
and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and
affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar
maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and
ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the
decision, and not its body, is the controlling pronouncement of the Court of Appeals.
2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT
DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN
IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2
AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF
PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY
UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10
YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE
SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT
PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF
OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN
COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION
AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830.
3

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

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this
Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be
altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division
5
in CA-G.R. No. 38830-R, shows that it reversed the
trial court's Decision
6
finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and
conclusion of facts.
47

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and
3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The
appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same
and the alleged purchases were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent
Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned
lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings
standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951.
The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed
only in 1951 and the new convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3
were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent
were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not
ripen into title by way of ordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good
faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in
1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become
incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the
Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R.
No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in
CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

3. Tolentino vs. Gonzales Sy Chian 50 Phil 558
August 12, 1927
G.R. No. 26085
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,
vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Araneta and Zaragoza for appellants.
Eusebio Orense for appelle.
Johnson, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a certain amount per month as rent,
may such rent render such a contract usurious when the amount paid as rent, computed upon the purchase price, amounts to a higher rate
of interest upon said amount than that allowed by law?
(c) May the contract in the present case may be modified by parol evidence?
48

ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with
the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay
therefor in three installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the second installment of
P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the
30th day of November, 1922. One of the conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and
appellants) to pay the balance of said purchase price or any of the installments on the date agreed upon, the property bought would revert
to the original owner.
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record shows upon the due dates. The
balance of P15,000 due on said contract of purchase was paid on or about the 1st day of December, 1922, in the manner which will be
explained below. On the date when the balance of P15,000 with interest was paid, the vendor of said property had issued to the
purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title from
No. 40, which shows that said land was originally registered in the name of the vendor on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter to the appellant Potenciana
Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness was not paid, an action would be brought for the
purpose of recovering the property, together with damages for non compliance with the condition of the contract of purchase. The pertinent
parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos judicialmente contra Vd. para reclamar la
devolucion del camarin y los daos y perjuicios ocasionados a la compaia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable upon said contract of
purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of said property of November 7,
1922, the purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began to make an effort to borrow
money with which to pay the balance due, began to make an effort to borrow money with which to pay the balance of their indebtedness on
the purchase price of the property involved. Finally an application was made to the defendant for a loan for the purpose of satisfying their
indebtedness to the vendor of said property. After some negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the
sum of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of P16,965.09. The defendant, in
addition to said amount paid by check, delivered to the plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid
to the attorneys for drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and for the plaintiffs of
P17,500 upon the execution and delivery of said contract. Said contracts was dated the 28th day of November, 1922, and is in the words
and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad, residentes en el Municipio de Calumpit,
Provincia de Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de
edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:
49

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la cantidad de diecisiete mil quinientos pesos
(P17,500) moneda filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos,
vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que, segun el
Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de Luzon Rice Mills
Company Limited que al incorporarse se donomino y se denomina Luzon Rice Mills Inc., y que esta corporacion nos ha transferido en
venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac. Linda por el O. y N. con propiedad de
Manuel Urquico; por el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el
plano, cuyo punto se halla al N. 41 gds. 17 E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde
dicho punto 1 N. 81 gds. 31 O., 77 m. al punto 2; desde este punto N. 4 gds. 22 E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17
E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42 E., 61.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil
doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre el
terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L.
S. B. L.: la orientacion seguida es la verdadera, siendo la declinacion magnetica de 0 gds. 45 E. y la fecha de la medicion, 1. de
febrero de 1913.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados desde el dia 1. de diciembre de 1922,
devolvemos al expresado Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado
dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco aos sin ejercitar el
derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a condiciones
siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, era de
trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como tambien la prima del
seguro contra incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la terminacion de este arrendamieno y a la
perdida del derecho de retracto que nos hemos reservado, como si naturalmente hubiera expirado el termino para ello, pudiendo en su
virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos terminos en que la dejan otorgada
los conyuges Severino Tolentino y Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado en Manila, hoy a 28 de noviembre de
1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows clearly that it is a pacto de retro and not a
mortgage. There is no pretension on the part of the appellant that said contract, standing alone, is a mortgage. The pertinent language of
the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados desde el dia 1. de diciembre de 1922,
devolvemos al expresado Don Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado
dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5) aos sin ejercitar
al derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.
50

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can certainly be not doubt as to
the purpose of the plaintiff to sell the property in question, reserving the right only to repurchase the same. The intention to sell with the
right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of the property, entered into a
contract with the purchaser by virtue of which she became the tenant of the purchaser. That contract of rent appears in said quoted
document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a condiciones
siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, sera de
trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como tambien la prima del
seguro contra incendios, si le conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an absolute sale of the property
with the right to repurchase and not a mortgage; and, second, that by virtue of the said contract the vendor became the tenant of the
purchaser, under the conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the same to be a mortgage and
not a sale whenever the interpretation of such a contract justifies that conclusion. There must be something, however, in the language of
the contract or in the conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a mortgage and
not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs.
Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.
Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not construe an instrument to one of
sale with pacto de retro, with the stringent and onerous effect which follows, unless the terms of the document and the surrounding
circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a contract, but when an issue is
squarely presented that a contract does not express the intention of the parties, courts will, when a proper foundation is laid therefor, hear
evidence for the purpose of ascertaining the true intention of the parties.
In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They admit that they signed it.
They admit they sold the property in question with the right to repurchase it. The terms of the contract quoted by the plaintiffs to the
defendant was a sale with pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us in construing
said contract to be a mere loan with guaranty. In every case in which this court has construed a contract to be a mortgage or a loan
instead of a sale with pacto de retro, it has done so, either because the terms of such contract were incompatible or inconsistent with the
theory that said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34
Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the conveyance of the land was pledged
instead of sold. In the case of Manlagnit vs. Dy Puico, while the vendor used to the terms sale and transfer with the right to repurchase,
yet in said contract he described himself as a debtor the purchaser as a creditor and the contract as a mortgage. In the case of
Rodriguez vs. Pamintuan and De Jesus the person who executed the instrument, purporting on its face to be a deed of sale of certain
parcels of land, had merely acted under a power of attorney from the owner of said land, authorizing him to borrow money in such amount
and upon such terms and conditions as he might deem proper, and to secure payment of the loan by a mortgage. In the case of Villa vs.
Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was executed, the supposed vendor remained in possession
of the land and invested the money he had obtained from the supposed vendee in making improvements thereon, which fact justified the
court in holding that the transaction was a mere loan and not a sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser
accepted partial payments from the vendor, and such acceptance of partial payments is absolutely incompatible with the idea of
irrevocability of the title of ownership of the purchaser at the expiration of the term stipulated in the original contract for the exercise of the
right of repurchase.
Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting opinion of Chief Justice
Cayetano S. Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar Estates Development Co., which case was
51

appealed to the Supreme Court of the United States and the contention of the Chief Justice in his dissenting opinion was affirmed and the
decision of the Supreme Court of the Philippine Islands was reversed. (See decision of the Supreme Court of the United States, June 3,
1918.)1 The Chief Justice said in discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties, consideration must chiefly be paid to
those acts executed by said parties which are contemporary with and subsequent to the contract. And according to article 1283, however
general the terms of a contract may be, they must not be held to include things and cases different from those with regard to which the
interested parties agreed to contract. The Supreme Court of the Philippine Islands held the parol evidence was admissible in that case to
vary the terms of the contract between the Government of the Philippine Islands and the Philippine Sugar Estates Development Co. In the
course of the opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the court, said:
It is well settled that courts of equity will reform a written contract where, owing to mutual mistake, the language used therein did not fully or
accurately express the agreement and intention of the parties. The fact that interpretation or construction of a contract presents a question
of law and that, therefore, the mistake was one of law is not a bar to granting relief. . . . This court is always disposed to accept the
construction which the highest court of a territory or possession has placed upon a local statute. But that disposition may not be yielded to
where the lower court has clearly erred. Here the construction adopted was rested upon a clearly erroneous assumption as to an
established rule of equity. . . . The burden of proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence.
It is settled that relief by way of reformation will not be granted unless the proof of mutual mistake be of the clearest and most satisfactory
character.
The evidence introduced by the appellant in the present case does not meet with that stringent requirement. There is not a word, a phrase,
a sentence or a paragraph in the entire record, which justifies this court in holding that the said contract of pacto de retro is a mortgage and
not a sale with the right to repurchase. Article 1281 of the Civil Code provides: If the terms of a contract are clear and leave no doubt as to
the intention of the contracting parties, the literal sense of its stipulations shall be followed. Article 1282 provides: in order to judge as to
the intention of the contracting parties, attention must be paid principally to their conduct at the time of making the contract and
subsequently thereto.
We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that very well reasoned decision of
the late Chief Justice Arellano, one of the greatest jurists of his time. He said, in discussing the question whether or not the contract, in the
case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: Don Macarion Berenguer declares and states that he is the proprietor in fee
simple of two parcels of fallow unappropriated crown land situated within the district of his pueblo. The first has an area of 73 quiones, 8
balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of
Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc.
In the executory part of the said instrument, it is stated:
That under condition of right to repurchase (pacto de retro) he sells the said properties to the aforementioned Doa Cornelia Laochangco
for P4,000 and upon the following conditions: First, the sale stipulated shall be for the period of two years, counting from this date, within
which time the deponent shall be entitled to repurchase the land sold upon payment of its price; second, the lands sold shall, during the
term of the present contract, be held in lease by the undersigned who shall pay, as rental therefor, the sum of 400 pesos per annum, or the
equivalent in sugar at the option of the vendor; third, all the fruits of the said lands shall be deposited in the sugar depository of the vendee,
situated in the district of Quiapo of this city, and the value of which shall be applied on account of the price of this sale; fourth, the deponent
acknowledges that he has received from the vendor the purchase price of P4,000 already paid, and in legal tender currency of this country
. . .; fifth, all the taxes which may be assessed against the lands surveyed by competent authority, shall be payable by and constitute a
charge against the vendor; sixth, if, through any unusual event, such as flood, tempest, etc., the properties hereinbefore enumerated
should be destroyed, wholly or in part, it shall be incumbent upon the vendor to repair the damage thereto at his own expense and to put
them into a good state of cultivation, and should he fail to do so he binds himself to give to the vendee other lands of the same area,
quality and value.
x x x x x x x x x
The opponent maintained, and his theory was accepted by the trial court, that Berenguers contract with Laochangco was not one of sale
with right of repurchase, but merely one of loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as well as their possession,
which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario Berenguer, the text of which has been
transcribed in this decision, is very clear. Berenguers heirs may not go counter to the literal tenor of the obligation, the exact expression of
52

the consent of the contracting contained in the instrument, Exhibit C. Not because the lands may have continued in possession of the
vendor, not because the latter may have assumed the payment of the taxes on such properties, nor yet because the same party may have
bound himself to substitute by another any one of the properties which might be destroyed, does the contract cease to be what it is, as set
forth in detail in the public instrument. The vendor continued in the possession of the lands, not as the owner thereof as before their sale,
but as the lessee which he became after its consummation, by virtue of a contract executed in his favor by the vendee in the deed itself,
Exhibit C. Right of ownership is not implied by the circumstance of the lessees assuming the responsibility of the payment is of the taxes
on the property leased, for their payment is not peculiarly incumbent upon the owner, nor is such right implied by the obligation to
substitute the thing sold for another while in his possession under lease, since that obligation came from him and he continues under
another character in its possession-a reason why he guarantees its integrity and obligates himself to return the thing even in a case of
force majeure. Such liability, as a general rule, is foreign to contracts of lease and, if required, is exorbitant, but possible and lawful, if
voluntarily agreed to and such agreement does not on this account involve any sign of ownership, nor other meaning than the will to
impose upon oneself scrupulous diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers the ownership and other rights in the thing sold. A
pacto de retro, or sale with right to repurchase, is nothing but a personal right stipulated between the vendee and the vendor, to the end
that the latter may again acquire the ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is likewise true that in practice many
cases occur where the consummation of a pacto de retro sale means the financial ruin of a person; it is also, unquestionable that in pacto
de retro sales very important interests often intervene, in the form of the price of the lease of the thing sold, which is stipulated as an
additional covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the sale with right of repurchase, made by Berenguer in
favor of Laonchangco is rather a mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is, stating the same in another form: May a tenant charge
his landlord with a violation of the Usury Law upon the ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest? When the vendor of property under a pacto de retro rents the property and agrees to pay a rental
value for the property during the period of his right to repurchase, he thereby becomes a tenant and in all respects stands in the same
relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of the right to repurchase, or the sum of P375 per
month, based upon the value of the property, amounted to usury. Usury, generally speaking, may be defined as contracting for or receiving
something in excess of the amount allowed by law for the loan or forbearance of money-the taking of more interest for the use of money
than the law allows. It seems that the taking of interest for the loan of money, at least the taking of excessive interest has been regarded
with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and
especially the English Church, entertained the opinion, then, current in Europe, that the taking of any interest for the loan of money was a
detestable vice, hateful to man and contrary to the laws of God. (3 Cokes Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: If we look back upon history, we shall find that there is scarcely any
people, ancient or modern, that have not had usury laws. . . . The Romans, through the greater part of their history, had the deepest
abhorrence of usury. . . . It will be deemed a little singular, that the same voice against usury should have been raised in the laws of China,
in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether
Greek or Barbarian.
The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and
2992). But is it unlawful for the owner of a property to enter into a contract with the tenant for the payment of a specific amount of rent for
the use and occupation of said property, even though the amount paid as rent, based upon the value of the property, might exceed the
rate of interest allowed by law? That question has never been decided in this jurisdiction. It is one of first impression. No cases have been
found in this jurisdiction answering that question. Act No. 2655 is An Act fixing rates of interest upon loans and declaring the effect of
receiving or taking usurious rates.
It will be noted that said statute imposes a penalty upon a loan or forbearance of any money, goods, chattels or credits, etc. The central
idea of said statute is to prohibit a rate of interest on loans. A contract of loan, is very different contract from that of rent. A loan, as
that term is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a
promise to return the same thing. To loan, in general parlance, is to deliver to another for temporary use, on condition that the thing or its
equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind shall be returned with a compensation for its
use. The word loan, however, as used in the statute, has a technical meaning. It never means the return of the same thing. It means the
53

return of an equivalent only, but never the same thing loaned. A loan has been properly defined as an advance payment of money, goods
or credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with the terms of the
contract. Under the contract of loan, as used in said statute, the moment the contract is completed the money, goods or chattels given
cease to be the property of the former owner and becomes the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the moment the
contract is executed, cease to be the property of the former owner and becomes the absolute property of the obligor.
A contract of loan differs materially from a contract of rent. In a contract of rent the owner of the property does not lose his ownership.
He simply loses his control over the property rented during the period of the contract. In a contract of loan the thing loaned becomes the
property of the obligor. In a contract of rent the thing still remains the property of the lessor. He simply loses control of the same in a
limited way during the period of the contract of rent or lease. In a contract of rent the relation between the contractors is that of landlord
and tenant. In a contract of loan of money, goods, chattels or credits, the relation between the parties is that of obligor and obligee. Rent
may be defined as the compensation either in money, provisions, chattels, or labor, received by the owner of the soil from the occupant
thereof. It is defined as the return or compensation for the possession of some corporeal inheritance, and is a profit issuing out of lands or
tenements, in return for their use. It is that, which is to paid for the use of land, whether in money, labor or other thing agreed upon. A
contract of rent is a contract by which one of the parties delivers to the other some nonconsumable thing, in order that the latter may use
it during a certain period and return it to the former; whereas a contract of loan, as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in which cases it is
called merely a loan. In the case of a contract of rent, under the civil law, it is called a commodatum.
From the foregoing it will be seen that there is a while distinction between a contract of loan, as that word is used in the statute, and a
contract of rent even though those words are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and occupation of the property
may depend upon a thousand different conditions; as for example, farm lands of exactly equal productive capacity and of the same
physical value may have a different rental value, depending upon location, prices of commodities, proximity to the market, etc. Houses may
have a different rental value due to location, conditions of business, general prosperity or depression, adaptability to particular purposes,
even though they have exactly the same original cost. A store on the Escolta, in the center of business, constructed exactly like a store
located outside of the business center, will have a much higher rental value than the other. Two places of business located in different
sections of the city may be constructed exactly on the same architectural plan and yet one, due to particular location or adaptability to a
particular business which the lessor desires to conduct, may have a very much higher rental value than one not so located and not so well
adapted to the particular business. A very cheap building on the carnival ground may rent for more money, due to the particular
circumstances and surroundings, than a much more valuable property located elsewhere. It will thus be seen that the rent to be paid for
the use and occupation of property is not necessarily fixed upon the value of the property. The amount of rent is fixed, based upon a
thousand different conditions and may or may not have any direct reference to the value of the property rented. To hold that usury can be
based upon the comparative actual rental value and the actual value of the property, is to subject every landlord to an annoyance not
contemplated by the law, and would create a very great disturbance in every business or rural community. We cannot bring ourselves to
believe that the Legislature contemplated any such disturbance in the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale with the right only to repurchase. During the period of
redemption the purchaser was the absolute owner of the property. During the period of redemption the vendor was not the owner of the
property. During the period of redemption the vendor was a tenant of the purchaser. During the period of redemption the relation which
existed between the vendor and the vendee was that of landlord and tenant. That relation can only be terminated by a repurchase of the
property by the vendor in accordance with the terms of the said contract. The contract was one of rent. The contract was not a loan, as that
word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts for parties. They made their
own contract in the present case. There is not a word, a phrase, a sentence or paragraph, which in the slightest way indicates that the
parties to the contract in question did not intend to sell the property in question absolutely, simply with the right to repurchase. People who
make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence, sufficiently answers the third questions
presented above. The language of the contract is explicit, clear, unambiguous and beyond question. It expresses the exact intention of the
parties at the time it was made. There is not a word, a phrase, a sentence or paragraph found in said contract which needs explanation.
The parties thereto entered into said contract with the full understanding of its terms and should not now be permitted to change or modify
it by parol evidence.
54

With reference to the improvements made upon said property by the plaintiffs during the life of the contract, Exhibit C, there is hereby
reserved to the plaintiffs the right to exercise in a separate action the right guaranteed to them under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law applicable thereto, that the
judgment appealed from should be and is hereby affirmed, with costs. So ordered.
Avancea, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.
Separate Opinions
MALCOLM, J., dissenting:
I regret to have to dissent from the comprehensive majority decision. I stand squarely on the proposition that the contract executed by the
parties was merely a clever device to cover up the payment of usurious interest. The fact that the document purports to be a true sale with
right of repurchase means nothing. The fact that the instrument includes a contract of lease on the property whereby the lessees as
vendors apparently bind themselves to pay rent at the rate of P375 per month and whereby Default in the payment of the rent agreed for
two consecutive months will terminate this lease and will forfeit our right of repurchase, as though the term had expired naturally does
mean something, and taken together with the oral testimony is indicative of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655,
sec. 7, as amended; Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard
[1851], 53 U. S., 139 Monagas vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Espaol, 3rd ed., p. 318.) The
transaction should be considered as in the nature of an equitable mortgage. My vote is for a modification of the judgment of the trial court.

4. Saura Import-Export Co. Inc. vs. DBP 44 SCRA 445
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant
Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the
amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00.
The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its
conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for
the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit
extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying
the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on
the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms
spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
55

T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the
promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the
construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed
of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China
Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that
Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for
certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability
of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at
the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the
necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the
reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own
committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new
conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No.
145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of
the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736
proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present,
it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00
to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura
Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special
reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and
after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to
P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and
conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally
with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it was concerned. A
follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which
added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the
China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time
reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that
China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the Department of
Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate
vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the
certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is
to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the
subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags
from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao
Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenafmill plant, to manufacture copra
56

and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page
1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its
Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to
provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January
21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this
year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient
jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan under
consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to time, subject to availability of funds towards the end
that the sack factory shall be placed in actual operating status. We shall be able to act on your
request for revised purpose and manner of releases upon re-appraisal of the securities offered for
the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources certify
that the raw materials needed are available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the requirements of the factory, we wish to
reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis
of the locally available raw materials. Your statement that you will have to rely on the importation of
jute and your request that we give you assurance that your company will be able to bring in
sufficient jute materials as may be necessary for the operation of your factory, would not be in line
with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to
cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over
the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year
within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced
the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was
guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed,
57

or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff
itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by
resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the
basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would
utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when
RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate
vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The
imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There
was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely
"that the proceeds of the loan shall be utilizedexclusively for the following purposes: for construction of factory building P250,000.00; for
payment of the balance of purchase price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently Saura,
Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will
not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be
released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage
contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of
the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and
insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955.
The action thus taken by both parties was in the nature cf mutual desistance what Manresa terms "mutuo disenso"
1
which is a mode
of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even
point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights
it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its
own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said agreement
had been extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the
parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.
Makasiar, J., took no part.

5. Liwanag vs. CA 281 SCRA 225 (check @ library)
Article 315, Revised Penal Code; Liwanag vs. Court of Appeals, 281 SCRA 225, 229 [1997].
Estafa is a crime committed by a person who defrauds another, causing him to suffer damages by means of unfaithfulness or abuse of
confidence, or of false pretenses or of fraudulent acts.
ART. 315. Swindling (estafa).- Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over
12,000 pesos but does not exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this paragraph shall
be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such case, and in connection with the accessory penalties which may be imposed and for the purpose of the
other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over 6,000 pesos but does not
exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such amount is over 200 pesos
but does not exceed 6,000 pesos; and
58

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that in the four cases
mentioned, the fraud be committed by any of the following means.
The penalty prescribed by law for the estafa charge against appellant is prision correccional maximum to prision mayor minimum, the
penalty next lower would then be prision correccionalminimum to medium. Applying the Indeterminate Sentence Law,
[22]
the minimum term
of the indeterminate sentence should be anywhere within six (6) months and one (1) day, to four (4) years and two (2) months; while the
maximum term of the indeterminate sentence should at least be six (6) years and one (1) day and because the amounts involved
exceeded P22,000.00, an additional one (1) year imprisonment should be imposed for each additional P10,000.00.

6. Ermitao vs. CA 306 SCRA 218

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 No.
47888 reversing the trial court's
1
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 member-establishments.
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 for any and all charges incurred
[through the use of the lost card] after August 29, 1989.
2

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 its
member establishments.
3

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 notwithstanding,
BECC continued to bill the spouses for said purchases.
4

59

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 and for being dependent
upon the sole will of the debtor.
5

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 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.
6
It cited the case
of Serra v. Court of Appeals
7
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
. . . who should have been more cautious in (his) transactions. . .
8
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;
60

(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 specific
time or period is valid.
10

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 are
prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto.
11
Such contracts are not void
in themselves.
12
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 one-sided under the attendant
facts and circumstances.
13

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 thereof must be
determined in light of the circumstances under which the stipulation is intended to apply.
14

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
Department.
15

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 that
"it would be next to impossible for respondent to notify all its member-establishments regarding the fact of the loss.
16
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
61

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 Court cannot give its assent to such a
stipulation which could clearly run against public policy.
17

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.

7. Tai Tong Chuache vs. Insurance Commission 158 SCRA 366
G.R. No. L-55397 February 29, 1988
TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:
This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367
1
dismissing the
complaint
2
for recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent
insurance company in favor of petitioner-intervenor.
The facts of the case as found by respondent Insurance Commission are as follows:
Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at San Rafael Village,
Davao City. Complainants assumed the mortgage of the building in favor of S.S.S., which building was insured with
respondent S.S.S. Accredited Group of Insurers for P25,000.00.
On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of P100,000.00. To
secure the payment of the loan, a mortgage was executed over the land and the building in favor of Tai Tong Chuache
& Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio Chua, representative of Thai Tong Chuache & Co. insured the
latter's interest with Travellers Multi-Indemnity Corporation for P100,000.00 (P70,000.00 for the building and
P30,000.00 for the contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").
On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"), covering the building for
P50,000.00 with respondent Zenith Insurance Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459
(Exhibit "B") was procured from respondent Philippine British Assurance Company, covering the same building for
P50,000.00 and the contents thereof for P70,000.00.
On July 31, 1975, the building and the contents were totally razed by fire.
Adjustment Standard Corporation submitted a report as follow
xxx xxx xxx
... Thus the apportioned share of each company is as follows:
Policy No.. Company Risk Insures Pays
MIRO Zenith Building P50,000 P17,610.93
F-02500 Insurance
62

Corp.
F-84590 Phil. Household 70,000 24,655.31
British
Assco.
Co.

Inc. FFF & F5 50,000 39,186.10
Policy No. Company Risk Insures Pays
FIC-15381 SSSAccre
dited
Group

of
Insurers
Building P25,000 P8,805.47
Totals P195,000 P90,257.81
We are showing hereunder another apportionment of the loss which includes the Travellers Multi-Indemnity policy for
reference purposes.
Po
lic
y
No
.
Com
pany
Risk Injur
es
Pays
MI
R
O/
Zenit
h

F-
02
50
0
Insur
ance

Corp. Buildi
ng
P50,
000
P11,87
7.14
F-
84
59
0
Phil.
Britis
h

Assc
o.
Co.
I-
Buildi
ng
70,0
00
16,628
.00
II-
Buildi
ng

63

FFF &
PE
50,0
00
24,918
.79
P
V
C-
15
18
1
SSS Accre
dited

Grou
p of

Insur
ers
Buildi
ng
25,0
00
5,938.
50
F-
59
9
D
V
Insur
ers
I-Ref 30,0
00
14,467
.31
Multi II-
Buildi
ng
70,0
00
16,628
.00
Totals P295
.000
P90,25
7.81
Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents, Zenith Insurance, Phil.
British Assurance and S.S.S. Accredited Group of Insurers, paid their corresponding shares of the loss. Complainants
were paid the following: P41,546.79 by Philippine British Assurance Co., P11,877.14 by Zenith Insurance Corporation,
and P5,936.57 by S.S.S. Group of Accredited Insurers (Par. 6. Amended Complaint). Demand was made from
respondent Travellers Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants
demanded from the other three (3) respondents the balance of each share in the loss based on the computation of the
Adjustment Standards Report excluding Travellers Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith
Insurance: P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused, hence, this action.
In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the material allegations in the
complaint, but denied liability on the ground that the claim of the complainants had already been waived, extinguished
or paid. Both companies set up counterclaim in the total amount of P 91,546.79.
Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter of July 22, 1977
that the herein claim of complainants for the balance had been paid in the amount of P 5,938.57 in full, based on the
Adjustment Standards Corporation Report of September 22, 1975.
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its special and
affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the furniture and building of
complainants was secured by a certain Arsenio Chua, mortgage creditor, for the purpose of protecting his mortgage
credit against the complainants; that the said policy was issued in the name of Azucena Palomo, only to indicate that
she owns the insured premises; that the policy contains an endorsement in favor of Arsenio Chua as his mortgage
interest may appear to indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire
policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of the fire Insurance
Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity.
Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not entitled to indemnity
under its Fire Insurance Policy for lack of insurable interest before the loss of the insured premises and that the
complainants, spouses Pedro and Azucena Palomo, had already paid in full their mortgage indebtedness to the
intervenor.
3

As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground that the insurance policy
subject of the complaint was taken out by Tai Tong Chuache & Company, petitioner herein, for its own interest only as mortgagee of the
64

insured property and thus complainant as mortgagors of the insured property have no right of action against herein respondent. It likewise
dismissed petitioner's complaint in intervention in the following words:
We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenor-mortgagee. The
complainant testified that she was still indebted to Intervenor in the amount of P100,000.00. Such allegation has not
however, been sufficiently proven by documentary evidence. The certification (Exhibit 'E-e') issued by the Court of First
Instance of Davao, Branch 11, indicate that the complainant was Antonio Lopez Chua and not Tai Tong Chuache &
Company.
4

From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise denied hence, the
present petition.
It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the pleadings of the parties in
that it ruled that a certain Arsenio Lopez Chua is the one entitled to the insurance proceeds and not Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering the manner it was
written.
5
As correctly pointed out by respondent insurance commission in their comment, the decision did not pronounce that it was
Arsenio Lopez Chua who has insurable interest over the insured property. Perusal of the decision reveals however that it readily absolved
respondent insurance company from liability on the basis of the commissioner's conclusion that at the time of the occurrence of the peril
insured against petitioner as mortgagee had no more insurable interest over the insured property. It was based on the inference that the
credit secured by the mortgaged property was already paid by the Palomos before the said property was gutted down by fire. The
foregoing conclusion was arrived at on the basis of the certification issued by the then Court of First Instance of Davao, Branch II that in a
certain civil action against the Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache & Company.
We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted by his own affirmative
allegations. Under Section 1, Rule 131
6
each party must prove his own affirmative allegations by the amount of evidence required by law
which in civil cases as in the present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the
affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain favorable
judgment.
7
Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent insurance company to
avoid liability under the policy by setting up an affirmative defense of lack of insurable interest on the part of the petitioner must prove its
own affirmative allegations.
It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out by petitioner over the
mortgaged property. Neither did it deny that the said property was totally razed by fire within the period covered by the insurance.
Respondent, as mentioned earlier advanced an affirmative defense of lack of insurable interest on the part of the petitioner that before the
occurrence of the peril insured against the Palomos had already paid their credit due the petitioner. Respondent having admitted the
material allegations in the complaint, has the burden of proof to show that petitioner has no insurable interest over the insured property at
the time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted no effort to present
any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the decision must be adverse to it.
However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from liability on the basis of
the certification issued by the then Court of First Instance of Davao, Branch II, that in a certain civil action against the Palomos, Arsenio
Lopez Chua stands as the complainant and not Tai Tong Chuache. From said evidence respondent commission inferred that the credit
extended by herein petitioner to the Palomos secured by the insured property must have been paid. Such is a glaring error which this
Court cannot sanction. Respondent Commission's findings are based upon a mere inference.
The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as evidence the contract of
mortgage (Exh. 1) which has not been cancelled nor released. It has been held in a long line of cases that when the creditor is in
possession of the document of credit, he need not prove non-payment for it is presumed.
8
The validity of the insurance policy taken b
petitioner was not assailed by private respondent. Moreover, petitioner's claim that the loan extended to the Palomos has not yet been paid
was corroborated by Azucena Palomo who testified that they are still indebted to herein petitioner.
9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo by petitioner the same
should have been brought by Tai Tong Chuache or by its representative in its own behalf. From the above premise respondent concluded
that the obligation secured by the insured property must have been paid.
The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2
10
respondent pointed out that the action must be brought in the
name of the real party in interest. We agree. However, it should be borne in mind that petitioner being a partnership may sue and be sued
in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not questioned.
Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the partnership was corroborated by respondent
insurance company.
11
Thus Chua as the managing partner of the partnership may execute all acts of administration
12
including the right
to sue debtors of the partnership in case of their failure to pay their obligations when it became due and demandable. Or at the very least,
Chua being a partner of petitioner Tai Tong Chuache & Company is an agent of the partnership. Being an agent, it is understood that he
acted for and in behalf of the firm.
13
Public respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as personal
creditor of spouses Palomo has no basis.
The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal force and effect at the
time of the fire, it is bound by its terms and conditions. Upon its failure to prove the allegation of lack of insurable interest on the part of the
petitioner, respondent insurance company is and must be held liable.
65

IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER judgment is rendered order private
respondent Travellers Multi-Indemnity Corporation to pay petitioner the face value of Insurance Policy No. 599-DV in the amount of
P100,000.00. Costs against said private respondent.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Grio-Aquino, JJ., concur.

8. Jardenil vs. Solas 73 Phil 626

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.
66


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.

9. Sangrador vs. Valderrama 168 SCRA 215
G.R. No. 79552 November 29, 1988
EVELYN J. SANGRADOR, joined by her husband RODRIGO SANGRADOR, SR., petitioners,
vs.
SPOUSES FRANCISCO VALDERRAMA and TERESITA M. VALDERRAMA, respondents.
Enrique G. Arguelles for petitioners.
Rex Suiza Castillon for respondents.

PADILLA, J.:
This is a petition for review on certiorari of the decision
1
of the Court of Appeals in CA-G.R. CV No. 08813, dated 13 August 1987, which
modified the decision
2
of the Regional Trial Court of Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn J. Sangrador, joined
by her husband, Rodrigo Sangrador, Plaintiffs, versus Spouses Francisco Valderrama and Teresita Valderrama, Defendants."
The factual background of the case is narrated in the decision of the Court of Appeals as follows:
On April 11, 1983 the defendants-spouses Francisco and Teresita Valderrama obtained a P500,000 loan from Manuel
Asencio payable on or before April 12, 1984, and secured by a real estate mortgage on their house and lot (actually 3
lots) in front of the Jaro Plaza in Iloilo City (Exh. 9).
Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the loan, the
defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their
mortgage to Asencio.
Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000 loan from the
plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed from
Asencio. The loan is evidenced by the following promissory note (Exh. B) dated April 6, 1 984 providing for the
payment of P1,400,000 to the creditor eight months after date'.
FOR VALUE RECEIVED, we jointly and severally promise to pay EVELYN J. SANGRADOR, or
order, at her address at No. 2 Locsin Street, Molo, Iloilo City, Philippines, the sum of ONE MILLION
FOUR HUNDRED THOUSAND PESOS (P1,400,000.00) Philippine Currency, EIGHT (8) MONTHS
after date without need of demand.
Should we default in the payment of the obligation or in the manner of performance thereof and it shall become
necessary to enforce and collect on this note by or through an attorney, the makers shall jointly and severally pay
TWENTY (20) PER CENTUM of the amount due, principal and interest and charges then unpaid, which in no case
shall be less than P1,000.00.
The makers hereby submit to the jurisdiction of the Municipal Trial Court of Iloilo or the Regional Trial Court of Iloilo,
Sixth Judicial Region, Iloilo City, as the case may be, in the event of litigation arising from this note.
The makers of this note, jointly and severally undertake that in the event that an extraordinary inflation of the Philippine
Peso should supervene between now and eight (8) months after date, then the value of the Philippine Peso at the time
of the establishment of this obligation, shall be the basis of payment pursuant to Art. 1250 of the Civil Code of the
Philippines, and for this purpose, we hereby acknowledge the official exchange rate of the Philippine Peso to the US
Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be made in the event
that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening
inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private
transactions, shall be the basis of this adjustment.
67

This note is secured by a Real Estate Mortgage over three (3) parcels of residential land, Lots 700, 701 and 750, of the
Cadastral Survey of Jaro, covered by TCT Nos. T-41719, T41721 and T-41720, respectively, of the Registry of Deeds
for the City of Iloilo, together with the improvements thereon.
In case of judicial execution of this obligation or any part thereof, the debtors waive all their rights under the provisions
of Rule 39, Sec. 12, of the Rules of Court.
EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984.
(SGD) TERESITA MONTINOLA-VALDERRAMA
Maker
(SGD) FRANCISCO VALDERRAMA
Maker
Signed in the presence of.
(illegible) (illegible)
(Exh. B)
The debtors allege that the amount actually received by them was only P1,000,000 the disposition of which was
itemized by the broker, Wilson Jesena a, on a memo pad of "Jesena Realty" as follows:
From the desk of:
REALTOR WILSON G. Jesena, Jr.
President & Gen. Manager
EXPENSES
P625,000.00Manuel Asencio
50,000.00Commission Boy
4,000.00Atty. Arguelles
13,398.69Transfer fees
Register of Deeds and B.I.R.
P692,398.69
P1,000,000.00
692,398.69
P307,601.40 Balance (Exh. 1)
Accordingly, a Prudential Bank Cashier's check for P625,000 was issued by Sangrador to Asencio to redeem the
defendants' property from him. A receipt for that check was issued by the Valderramas to the plaintiff as follows:


R E C E I P T
Date April 6, 1984
Received from EVELYN JESENA SANGRADOR the amount of SIX HUNDRED TWENTY FIVE
THOUSAND PESOS (625,000.00) Bank Prudential Bank Cashier's Check No. 14937. The balance
of THREE HUNDRED SEVENTY FIVE THOUSAND PESOS (P375,000.00) is to be paid to the
undersigned after deducting all expenses incurred in payment of real estate taxes, attorney's fees,
commission, Bureau of Internal Revenue fees and Register of Deeds fees. All expenses are to be
supported by receipts.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA
(Exh. 2)
Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the debtors (Exh. 5) and submitted it to them (22
t.s.n., May 7, 1985). Payment of Atty. Arguelles' attorney's fees was duly acknowledged by him (Exh. 8). Jesena issued
the following receipt to the defendants for his 5% commission in procuring the loan for them;
R E C E I P T
68

Received from Spouses Francisco Valderrama and Teresita Montinola Valderrama the amount of
FIFTY THOUSAND PESOS (P50,000.00) representing commission for my efforts and expertise in
effecting the procurement of a loan from a financier for the amount of ONE MILLION PESOS
(P1,000,000.00).
(SGD) REALTOR WILSON JESENA, JR.
REB License No. 3441-R
(Exh. 3)
The balance of P307,601.40 was paid to the defendants by means of another Prudential Bank check for which the
corresponding receipt (Exh. 4) was also signed by the mortgagors:
R E C E I P T
April 7, 1984
Received from EVELYN J. SANGRADOR the amount of THREE HUNDRED SEVEN THOUSAND SIX HUNDRED
ONE PESOS AND FORTY CENTAVOS (P307,601.40) representing full payment per Promissory Note dated April
6,1984.
(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA
Paid byPrudential Bank Chk.
#144358-2April 7, 1984 P307,601.40
c/o #0033-00022-0 paid byEvelyn J. Sangrador
(Exh. 4)
Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued to her by the defendants (14, 21 t.s.n., May 7,
1985).
When the defendants failed to pay the sum of P1,400,000 stated in the promissory note on December 6, 1984 despite
the plaintiffs' written demands (Exhs. C and D) a complaint for judicial foreclosure of the real estate mortgage was filed
against them on December 21, 1984.
(Exh. G).
The defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and
that the additional P400,000 represented usurious interest.
At the trial, the plaintiff testified that the sum of P1,400,000 was received by the defendants. She alleged that besides
the expenses of P67,398.69 itemized in Jesena's and her lists (Exhs. 1 and 5), the check of P625,000 for Asencio and
the check of P307,601.40 which she issued to the defendants for the balance of the loan, she gave to the defendants
the amount of P400,000 in cash for which no receipt was issued by them.
On the other hand Francisco Valderrama testified that he thought all along that the promissory note (Exh. B) and deed
of real estate mortgage (Exh. A) provided for a loan of only P1 million since that was the amount which they borrowed
and received from the plaintiffs. He allegedly did not notice that both documents provided for a loan of P1,400,000.
After the trial, the court rendered judgment on November 7, 1985 binding the debtors to the terms of the promissory
note and mortgage deed.
3

The dispositive part of the trial court's judgment reads as follows:
WHEREFORE, in the light of the foregoing, considerations and findings of this Court, judgment is hereby rendered:
1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh. 'A');
2) Ordering the defendants to pay the mortgage obligation in the amount of P1,400,000.00 plus the sum of
P569,718.61 pursuant to the escalation clause contained in paragraph 14 of the Deed of Real Estate Mortgage; to pay
attorney's fees equivalent to twenty (20%) percentum of the total indebtedness including costs, plus 12% interest per
annum from December 18,1984 until fully paid, all of which shall be paid into Court within 90 days from date of the
service of the order;
3) In default of such payment, ordering the mortgaged properties to be sold at public auction to realize the mortgage
debt and costs.
SO ORDERED.
4

69

Private respondents, defendants in the trial court, appealed to the Court of Appeals, where the appeal was docketed as CA G.R. CV No.
08813. On 12 August 1987, respondent Court of Appeals promulgated its decision
5
modifying the decision of the trial court, the dispositive
part of which reads, as follows:
WHEREFORE, the appealed decision is hereby modified by ordering the defendants, within (90) days from date of
service of this decision, to pay to the plaintiffs the principal loan of P1,000,000 with 12% interest per annum from April
6,1984 until fully paid, P50,000 as attorney's fees, and the costs of this suit. In default of such payment, the mortgaged
property shall be sold at public auction to realize the sums due to plaintiffs under this judgment.
SO ORDERED.
6

Hence, the present petition for review on certiorari of the decision of the Court of Appeals. Petitioners present the following
ASSIGNMENT OF ERRORS
1. FIRST ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN NULLIFYING THE ESCALATION CLAUSE
AS FOUND BY THE TRIAL COURT ORDERING THE PAYMENT BY RESPONDENTS OF THE
SUM OF P569,718.61.
2. SECOND ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THE PRINCIPAL LOAN TO BE IN
THE SUM OF P1,000,000.00 INSTEAD OF P1,400,000.00 AS FOUND BY THE LOWER COURT.
3. THIRD ASSIGNED ERROR:
THE HONORABLE COURT OF APPEALS ERRED IN REDUCING PETITIONER'S AWARD OF
ATTORNEY'S FEES TO P50,000.00 INSTEAD OF 20% OF THE TOTAL INDEBTEDNESS AS
FOUND BY THE TRIAL COURT.
7

The pivotal issue to be resolved in this case is whether or not the loan obtained by private respondents from petitioners was in the amount
of P1,400,000.00 or P1,000,000.00 only.
In resolving this issue, the Court of Appeals in its decision under review, held:
After carefully reviewing the evidence, We are convinced that the trial court erred in finding that the loan was
P1,400,000 as stated in the promissory note (Exh. B) and deed of mortgage. Like the trial court, We do not believe
defendant Valderrama's allegation that he did not notice that the amount stated in the promissory note was
P1,400,000, instead of only P1,000,000, until demands for payment were sent to him by the plaintiffs' counsel. But
neither do We believe the plaintiff Evelyn Sangrador's allegation that besides the sum of P1,000,000 admittedly
received by the defendants and evidenced by checks and receipts, she also gave them P400,000.00 in cash without
receipt. This is a case, therefore, where both parties prevaricated.
The documentary evidence preponderantly proves that the loan was only P1,000,000, not P1,400,000. The checks and
receipts and the broker's computations found in Exhibit 'l' show clearly that the loan was only P1,000,000. Even the
broker's P50,000 commission was computed on the basis of 5% of P1 million. The circumstance that the alleged
payment of P400,000 in cash to the debtors is not evidenced by a receipt, is conclusive proof that it was not a part of
the loan. The loan was only P1 million.
Obviously, the P400,000 that was added to the principal represents a hidden interest charge for the promissory note
contains no express provision fixing the rate of interest on the loan.
8

Petitioners assail the foregoing findings and conclusions of the Court of Appeals, contending that the amount of the loan as clearly and
expressly stated in the Deed of Real Estate Mortgage
9
and the Promissory Note,
10
is P1,400,000.00 and not P1,000,000.00 only.
Because the findings of the trial court and the Court of Appeals differ on this crucial factual issue, we have carefully reviewed and
examined the evidence. The finding of the Court of Appeals that the loan is in the amount of P1,000,000.00 only is supported by
substantial evidence.
The Promissory Note (Exh- B) and the Deed of Real Estate Mortgage (Exh. A) executed by the respondents in favor of the petitioners
indeed state that the loan is in the amount of P1,400,000.00. However, the other documents executed by the parties contemporaneously
with said Promissory Note and Deed of Real Estate Mortgage clearly show that the actual loan, i.e. the amount received by respondents,
was only P1,000,000.00. Thus, for the payment made by the petitioners for the account of the respondents to Manuel Asencio, thereby
releasing the mortgage on the property, so that it could in turn be mortgaged to the petitioners, the respondents signed a receipt in favor of
the petitioners in the amount of P625,000.00 (Exh. 2). The respondents executed another receipt in favor of the petitioners for the amount
of P307,601.40," representing full payment per promissory note dated 6 April 1984" (Exh. 4). The broker who arranged for the loan signed
a receipt in favor of the respondents for the amount of P50,000.00 representing his commission in effecting the loan "for the amount of
P1,000,000.00" (Exh. 3).<re||an1w> The attorney who assisted in the transaction was paid attorney's fees in the amount of P4,000.00
(Exh. 8). The petitioners submitted a list of expenses chargeable to the respondents, totalling P13,398.69 covering transfer fees, expenses
70

in the Register of Deeds and payments to the BIR (Exh. 5). All told, the loan of P1,000,000.00 obtained by the respondents from the
petitioners was applied or used in the following manner at the time the loan was obtained:
P625,00.00 to pay Manuel Asencio (first creditor)
50,000.00 to pay Wilson Jesena (for broker's commission)
4,000.00 to pay Atty. Enrique Arguelles (for attorney's fees)
13,398.69 to pay transfer fees and other expenses in Register of Deeds and BIR
307,601.40 to pay respondents as balance of the loan
P1,000,000.09 TOTAL
The above itemization tallies with the breakdown of the proceeds of the loan, made by the loan broker Wilson Jesena (Exh. 1).
Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00 was delivered by them to the respondents in cash
and that this delivery was not evidenced by a receipt because, anyway, said amount (P400,000.00) is already included in the statement of
the loan amount in the promissory note and the deed of real estate mortgage, which is P1,400,000.00. We find this contention to be quite
incredible, to say the least. It is contrary to ordinary human experience. Normally, in delivering a hefty sum like P400,000.00 in cash, one
would require some sort of receipt or acknowledgment from the recipient.
Moreover, if petitioners were careful enough to require from the respondents the separate receipts above-mentioned, there was no reason
why they would not require another receipt from the respondents for said amount of P400,000.00. And if, as petitioners now allege, they
did not anymore require a receipt for the P400,000.00 allegedly delivered by them in cash to the respondents because the loan amount
stated in the promissory note and the real estate mortgage already included said amount of P400,000.00, then, by the same reasoning,
there was no need for requiring the other separate receipts abovementionedas the amounts they referred to were already a part of the
loan amount stated in the promissory note and real estate mortgageand yet, said separate receipts were required by petitioners of the
respondents.
In short, we agree with the finding of the Court of Appeals that the disputed amount of P400,000.00 was a hidden interest that the
petitioners had required the respondents to pay at the maturity of the loan, but said amount of P400,000.00 was not received by or
delivered to the respondents. This conclusion is strengthened by the fact that the promissory note and the deed of real estate mortgage
(Exhs. B and A), strangely enough, do not contain any express stipulation on interest, or rate of interest, when the loan involved therein is
in the substantial amount of allegedly P1,400,000.00.
Petitioners may conceivably argue that, granting that the disputed amount of P400,000.00 is interest on the loan of P1,000,000.00, yet, in
line with this Court's decision in Liam Law vs. Oriental Sawmill Co., et al.,
11
there is no longer any ceiling on interest or interest rates on
loans. This may be so in a situation where the parties openly and expressly agree on a specific rate of interest to accrue on the loan but,
as the Court of Appeals in its decision under review correctly pointed out, in the case at bar, no interest rate is expressly stipulated in the
promissory note and deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides:
Section 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 juridical, shall not be subject to any ceiling prescribed under or pursuant to
the Usury law, as amended.
Section 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 (1 2%)
per annum. (Emphasis supplied)
The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall continue
therefore to be twelve per cent (12%) per annum.
12

Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%) interest per annum computed from 6 April
1984 when the loan was obtained by the respondents from the petitioners until paid.
Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the Deed of Real Estate Mortgage and Promissory Note.
Under such escalation clause, sustained by the trial court, the amount of P569,718.61 was awarded to herein petitioners by way of
adjustment of the loan of P1,400,000.00 after the eight (8) month period of the loan.
13

The Deed of Real Estate Mortgage provides, among others, as follows:
14. That in the event that an extra-ordinary inflation of the Philippine peso should supervene, it is hereby stipulated that
the value of the currency at the time of the establishment of the obligation shall be the basis of payment pursuant to
Art. 1250 of the New Civil Code of the Philippines. For this purpose, MORTGAGORS hereby recognize the official
exchange rate of the Philippine Peso to the US dollar at 14.002 to one. The corresponding adjustment in the value of
the Philippine Peso shall be made should at the time of the maturity of this obligation, the rate of exchange will have
changed as a result of the supervening inflation. It is further agreed that the official rate of exchange as set by the
Central Bank for private transactions shall be the basis of this adjustment. (Emphasis supplied).
A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage (similar stipulation is contained in the Promissory
Note) shows that the escalation clause takes effect "in the event that an extraordinary inflation of the Philippine Peso should supervene,"
between the date the loan was granted and the date of its maturity, in which case, the value of the (peso) currency at the time of the
71

establishment of the obligation shall be the basis of payment. To give meaning to the "value of the currency at the time of the
establishment of the obligation," the parties agreed that on 6 April 1984 (date of loan), the exchange rate of the peso to the US dollar was
14.002 to one.
Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in the value of the Philippine Peso" at the maturity of
the obligation crucially depends upon the supervening of an extraordinary inflation in the sense contemplated in Article 1250 of the Civil
Code of the Philippines.
14

In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority,
15
this Court held:
Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the Philippine currency
which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could
not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.)
An example of extraordinary inflation is the following description of what happened to the deutschmark in 1920:
More recently, in the 1920's Germany experience a case of hyper-inflation. In early 1921, the value
of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to
the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to
the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition].
As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a
day so that they could rush out and exchange their money for something of value before what little purchasing power
was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of
the windows to their waiting wives, who would rush to unload the nearly worthless paper. A postage stamp cost
millions of marks and a loaf of bread, billions," (Sidney Rutberg, "The Money Baloon" New York; Simon and Schuster,
1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd Ed.)
While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of
the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal
trend that has not spared our country.
16

Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984no proofs were
presented on how much, for instance, the price index of goods and services had risen during the intervening periodan extraordinary
inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the
settlement of respondents' obligation.
Finally, the Court of Appeals did not commit any error in reducing the award of attorney's fees to P50,000.00. The contractual provision for
attorney's fees may be modified by the courts in the exercise of their sound judicial discretion.
17

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated 12 August 1987 is AFFIRMED. With costs against
petitioners.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, and Regalado, JJ., concur.
Sarmiento, J., took no part.

10. Integrated Realty Corporation vs. PNB 174 SCRA 295
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 Manila
(G.R. No. 60907) appeal from the decision of the Court of Appeals,
1
the decretal portion of which states:
72

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 whatever amounts
the latter will pay to PNB, with interest from the date of payment.
2

On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds OBM liable for
interest on the time deposit with it of Santos corresponding to the period of its closure by order of the Central Bank.
3

In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court,
4
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).
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
73

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 resulting from any
agreements, orders or decisions of the court or for any other cause whatsoever.
6

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 vs. Hicks, 55
U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and Banking, p. 200).
7

We uphold respondent court on this score.
In Lopez vs. Court of appeals, et al.,
8
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.
74

In upholding the finding therein of the Court of Appeals, We held that:
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 language or other circumstances excluding
an intent to pledge.
10

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.
11
The further requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement
12
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.
75

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
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.
76

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.
14
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 Overseas
Bank.
15
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 suspended.
16
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. Consequently,
for having incurred in delay in the performance of its obligation, OBM should be held liable for damages.
17
When respondent Santos
invested his money in time deposits with OBM they entered into a contract of simple loan or mutuum,
18
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, this
applies only to interest for the use of money. It does not comprehend interest paid as damages.
19
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%) 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
recoverable from the date judicial or extra-judicial demand is made,
20
Which latter mode of demand was made by PNB, after the maturity
of the certificates of time deposit, on March 1, 1968.
21
The measure of such damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon in the certificates of deposit
22
Which is six and onehalf percent (6-1/2%). Such interest due or
accrued shall further earn legal interest from the time of judicial demand.
23

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 damages reasonably attributable to the non-payment of said
obligations.
24

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 (6-
1/2%) 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.
77

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.

11. PNB vs. CA 263 SCRA 766

[G.R. No. 123643. October 30, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and DR. ERLINDA G. IBARROLA, respondents.
R E S O L U T I O N
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 respondent
Ibarrola. The checks were delivered to the sellers agents
[1]
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, 1974before the Regional Trial Court (RTC) an action for a sum of money and damages, docketed as Civil Case 4226-
P,
[2]
against the Province 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 fully
paid;
[3]
(Italics supplied.)
PNBs appeal to the Court of Appeals (CA)
[4]
and later to the Supreme Court
[5]
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% as provided by Article 2209
[6]
of the New Civil Code
or 12% as provided by CB Circular 416 series of 1974,
[7]
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,
[8]
this Court had provided a rule of thumb for future
guidance,"
[9]
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 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.
[10]
(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 Article 2209 of the
NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416.
[11]
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 itself if the Provincial Treasurer
was properly authorized by Ibarrola to make endorsements of said checks.
[12]

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 accordance with Art. 2209 of
the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the
proper imposable rate of interest is six (6%) per cent.
[13]
(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
78

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 deemed to be equivalent to a
forbearance of credit.
[14]
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.