CREDIT TRANSACTIONS (digested

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

1. Canlas vs. CA
FACTS:

Canlas and Maosca decided to venture in business

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

Maosca subsequently mortgaged the same parcels of

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

ASB appealed the case to the CA. The CA reversed the

lower courts decision (It held that the mortgage was
valid, that the spouses Canlas are not entitled to relief
because they were negligent, and that ASB exercised
due diligence in granting the loan to Maosca.).
ISSUE(S):

Whether or not the mortgage is valid.

Whether or not ASB exercised due diligence.

Whether or not ASB should bear the loss.

HELD:
The mortgage is invalid.
Settled is the rule that a contract of mortgage must be
constituted only by the absolute owner on the property
mortgaged; a mortgage, constituted by an impostor is
void. Considering that it was established indubitably
that the contract of mortgage sued upon was entered
into and signed by impostors who misrepresented
themselves as the spouses Canlas, the Court is of the
ineluctible conclusion and finding that subject contract
of mortgage is a complete nullity.
The bank did not exercise due diligence.
Art. 1173 of the Civil Code, provides:
Art. 1173. The fault or negligence of the obligor
consist in the omission of that diligence which
is required by the nature of the obligation and
corresponds with the circumstances of the
persons, of the time and of the place. When

negligence shows bad faith, the provisions of

articles 1171 and 2201, paragraph 2, shall
apply.
If the law or contract does not state the
diligence which is to be observed in the
performance, that which is expected of a good
father of a family shall be required. (1104)
The degree of diligence required of banks is
more than that of a good father of a family; in
keeping with their responsibility to exercise the
necessary care and prudence in dealing even on
a registered or titled property. The business of a
bank is affected with public interest, holding in trust
the money of the depositors, which bank deposits the
bank should guard against loss due to negligence or
bad faith, by reason of which the bank would be
denied the protective mantle of the land registration
law, accorded only to purchasers or mortgagees for
value and in good faith.
In the case under consideration, from the evidence on
hand it can be gleaned unerringly that respondent
bank did not observe the requisite diligence in
ascertaining or verifying the real identity of the couple
who introduced themselves as the spouses Canlas. It is
worthy to note that not even a single identification
card was exhibited by the said impostors to show their
true identity; and yet, the bank acted on their
representations simply on the basis of the residence
certificates bearing signatures which tended to match
the signatures affixed on a previous deed of mortgage
to a certain Atty. Magno, covering the same parcels of
land in question.

Evidently, the efforts exerted by the bank to verify the

identity of the couple posing as Osmundo Canlas and
Angelina Canlas fell short of the responsibility of the
bank to observe more than the diligence of a good
father of a family. The negligence of respondent bank
was magnified by the fact that the previous deed of
mortgage (which was used as the basis for checking
the genuineness of the signatures of the supposed
Canlas spouses) did not bear the tax account number
of the spouses, as well as the Community Tax
Certificate of Angelina Canlas. But such fact
notwithstanding, the bank did not require the
impostors to submit additional proof of their true
identity.
ASB should bear the loss.
Under the doctrine of last clear chance, which is
applicable here, the ASB must suffer the resulting loss.
In essence, the doctrine of last clear chance is to
the effect that where both parties are negligent but
the negligent act of one is appreciably later in point of
time than that of the other, or where it is impossible to
determine whose fault or negligence brought about
the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm but
failed to do so, is chargeable with the consequences
arising therefrom. Stated differently, the rule is that
the antecedent negligence of a person does not
preclude recovery of damages caused by the
supervening negligence of the latter, who had the last
fair chance to prevent the impending harm by the
exercise of due diligence.
Assuming that Osmundo Canlas was negligent in
giving Vicente Maosca the opportunity to perpetrate
the fraud, by entrusting to latter the owner's copy of

the transfer certificates of title of subject parcels of

land, it cannot be denied that the bank had the last
clear chance to prevent the fraud, by the simple
expedient
of
faithfully
complying
with
the
requirements for banks to ascertain the identity of the
persons transacting with them.
2. Republic vs. CA and Cuaycong
FACTS:
Shortly after the liberation of the Philippines in 1945,
all the assets belonging to the Japanese government,
its agencies and institutions, were confiscated by the
Government of the United States. The assets located in
the Philippines were turned over to the Government of
the Republic of the Philippines. Among these assets
are certain promissory notes secured by a chattel
mortgage executed by a certain Luis Cuaycong in favor
of the Bank of Taiwan.
The 20 promissory notes, subject of the present action
by the Government, were executed by Cuaycong
between April 16, 1943 and March 25, 1944. During
that time there has been a so-called "Farmers
Rehabilitation Fund." The Fund allowed the planters to
borrow money therefrom, against their respective
deposits, in order to finance new plantings of sugar
cane and cotton in their haciendas. The subject
promissory notes were acquired through this scheme.
Cuaycong's stocks of sugar were mortgaged at the
time with the Philippine National Bank (the PNB, at the
beginning of the Japanese occupation, was taken over
by the Bank of Taiwan) to guarantee payment of a

likewise undetermined amount of crop loan(s) granted

prior to the outbreak of the war.
The Republic of the Philippines brought suit against
Luis D. Cuaycong (now deceased and substituted by
his son) in the CFI of Manila, for recovery of the value
of 20 promissory notes executed by the deceased
Cuaycong in favor of the Bank of Taiwan during the
Japanese occupation of the Philippines.
The trial court rendered a judgment in favor of the
Government and ordered Cuaycong to pay the sum a
certain sum plus interest at 6% per annum,
compounded quarterly, from October 1, 1961 until
payment shall have been fully made. Cuaycong was
also ordered to pay the Government attorney's fees.
Cuaycong appealed. The CA rendered a judgment in
his favour by dismissing the Governments complaint.
According to the CA (a) the right of action of the
Government against Cuaycong has already prescribed,
and (b) Cuaycong's indebtedness to the Bank of
Taiwan may be considered set off against the proceeds
of the sale of his sugar retained by the same bank. The
Government disputes these rulings.
ISSUE(S):
Whether or not the Governments right of action
against Cuaycong has already prescribed.
Whether or not Cuaycongs indebtedness to the Bank
of Taiwan may be set off against the proceeds of the
sale of his sugar retained by the same bank.

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

covered by the promissory notes drawn by Cuaycong

were well within the size of his then existing deposit.

registered guest, and the other remaining in the

possession of the management of the hotel.

And since the relation between a depositor in a bank

and the bank is that of creditor and debtor, Cuaycong
has every right to apply his credit with the Bank of
Taiwan against the loans he had obtained from his
deposit. All the elements necessary for a set-off are
present, and under the law then obtaining,
compensation takes place ipso jure from the day all
the necessary requisites concur, without need of any
conscious intent on the part of the parties.

McLoughlin allegedly placed the following in his safety

deposit box 2 envelopes containing US Dollars, one
envelope containing Australian Dollars, Letters, credit
cards, bankbooks and a checkbook. When he went
abroad, a few dollars were missing and the jewelry he
bought was likewise missing. Eventually, he confronted
Lainez and Paiyam who admitted that Tan opened the
safety deposit box with the key assigned to him.
McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen
McLouglins key and was able to open the safety
deposit box with the assistance of Lopez, Paiyam and
Lainez. Lopez also told McLoughlin that Tan stole the
key assigned to McLouglin while the latter was asleep.

Moreover, the Court is satisfied with the explanation

proffered by Cuaycong that, under the abnormal
conditions then prevailing, the only way by which he
could utilize the proceeds from the sale of the stocks
of sugar seized from him was for him to make use of
the loans made available by the very agency that
arbitrarily retained the said proceeds. In ultimate
effect, it was as though Cuaycong had merely
withdrawn his deposits with the Bank of Taiwan.

McLoughlin insisted that it must be the

hotel who must assume responsibility for
the loss he suffered. Lopez refused to
accept responsibility relying on the conditions for
renting the safety deposit box entitled Undertaking
For the Use of Safety Deposit Box
ISSUE:

3. YHT Realty vs. CA

Whether the hotels Undertaking is valid?

FACTS:

HELD:

Respondent McLoughlin would stay at Tropicana Hotel

every time he is here in the Philippines and would rent
a safety deposit box.
The safety deposit box could only be opened through
the use of 2 keys, one of which is given to the

NO. Article 2003 was incorporated in the New Civil

Code as an expression of public policy precisely to
apply to situations such as that presented in this case.
The hotel business like the common carriers business
is imbued with public interest. Catering to the public,

hotelkeepers are bound to provide not only lodging for

hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of
the business. The law in turn does not allow such duty
to the public to be negated or diluted by any contrary
stipulation in so-called undertakings that ordinarily
appear in prepared forms imposed by hotel keepers on
guests for their signature.
In an early case (De Los Santos v. Tan Khey), CA ruled
that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their
employees. It is enough that such effects are within
the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the
missing items are taken without the guests knowledge
and consent from a safety deposit box provided by the
hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly
contravene Article 2003, CC for they allow Tropicana to
be released from liability arising from any loss in the
contents and/or use of the safety deposit box for any
cause whatsoever. Evidently, the undertaking was
intended to bar any claim against Tropicana for any
loss of the contents of the safety deposit box whether
or not negligence was incurred by Tropicana or its
employees.

several loan/credit accommodations totalling P18.0

Million pesos payable in a period of six years at an
interest rate of 21 % per annum. To secure the loan,
the spouses Almeda executed a Real Estate Mortgage
Contract covering a 3,500 square meter parcel of land,
together with the building erected thereon (the Marvin
Plaza) located at Pasong Tamo, Makati, Metro Manila.
The credit agreement between the 2 parties contains a
special condition that PNB reserves the right to
increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may
adopt in the future; provided, that the interest rate on
this/these accommodations shall be correspondingly
decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in
the interest rate agreed upon shall take
effect on the effectivity date of the
increase or decrease of the maximum
interest rate.
Between 1981 and 1984, the spouses made several
partial payments on the loan totalling P7,735,004.66, a
substantial portion of which was applied to accrued
interest. On March 31, 1984, PNB, over petitioners
protestations, raised the interest rate to 28%,
allegedly pursuant to its credit agreement. Said
interest rate thereupon increased from 21% to a high
of 68% between March of 1984 to September, 1986.

4. Almeda vs. CA
FACTS:
On various dates in 1981, the Philippine National Bank
granted to herein petitioners, the spouses Almeda

The spouses protested the increase in interest rates, to

no avail. Before the loan was to mature, the spouses
filed a petition praying
for a writ of preliminary
injunction and temporary restraining order with the
RTC. In said petition, the spouses sought clarification

as to whether or not the PNB could unilaterally raise

interest rates on the loan, pursuant to the credit
agreements escalation clause, and in relation to
Central Bank Circular No. 905. As a preliminary
measure, the lower court, issued a writ of preliminary
injunction enjoining PNB from enforcing an interest
rate above the 21% stipulated in the credit agreement.
By this time the spouses were already in default of
their loan obligations.
ISSUE(S):
Whether or not respondent bank was authorized to
raise its interest rates from 21% to as high as 68%
under the credit agreement.
HELD:
No. The bank is not authorized to do so.
PNB vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and
arbitrary, it argues that the escalated rates of interest
it imposed was based on the agreement of the parties.
The binding effect of any agreement between
parties to a contract is premised on two settled
principles: (1) that any obligation arising from
contract has the force of law between the parties; and
(2) that there must be mutuality between the parties
based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of
the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the
validity or compliance of the contract which is
left solely to the will of one of the parties, is
likewise, invalid.

It is plainly obvious from the facts of the case PNB

unilaterally altered the terms of its contract by
increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil
Code when it provides, in Article 1956 that No
interest shall be due unless it has been expressly
stipulated in writing. What has been stipulated in
writing from a perusal of interest rate provision of the
credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest,
subject to a possible escalation or de-escalation, when
1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3)
upon agreement. Indeed, the interest rate which
appears to have been agreed upon by the parties to
the contract in this case was the 21% rate stipulated in
the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit
agreement because the same plainly uses the phrase
interest rate agreed upon, in reference to the
original 21% interest rate.
In PNB v. CA it was held that unilaterally
raising the interest rate in the
borrowers loan violated the principle
of mutuality of contracts expressed in
Article 1308 of the Civil Code.
ART. 1308. The contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them.

In order that obligations arising from contracts

may have the force of law between the parties,
there must be mutuality between the parties based on

their essential equality. A contract containing a

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

obligations,
respondent
bank
was
demanding
P58,377,487.00 over and above those amounts
already previously paid by the spouses.
Escalation clauses are not basically wrong or
legally objectionable so long as they are not
solely potestative but based on reasonable and
valid grounds. Here, as clearly demonstrated above,
not only the increases of the interest rates on the basis
of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and
reasonable standards upon which the increases are
anchored.
5. Cebu International Corp. vs. CA
FACTS:
Petitioner
is
a
quasi-banking
institution
involved in money market transactions. Alegre
invested with petitioner P500,000. Petitioner issued
then a promissory note, which would mature
approximately after a month. The note covered for
Alegres placement plus interest. On the maturity of
the note, petitioner issued a check payable to Alegre,
covering the whole amount due. It was drawn from
petitioners current account in BPI. When the wife of
Alegre tried to deposit the check, the bank
dishonored the check.
Petitioner was notified of this matter and Alegre
demanded the immediate payment in cash.
In turn, petitioner promised to replace the check on
the impossible premise that the first issued be
returned to them. This prompted Alegre to file a
complaint against petitioner and petitioner in turn,
filed a case against BPI for allegedly unlawfully

deducting from its account counterfeit checks. The

trial court decided in favor of Alegre.

loans his money to a borrower through a middleman

or dealer.

ISSUE:
Whether or not the Negotiable Instruments Law is
applicable to the money market transaction
held between petitioner and Alegre?

In the case at bar, the transaction is in the

nature of a loan. Petitioner accepted the check but
when he tried to encash it, it was dishonored. The
holder has an immediate
recourse
against
the
drawer, and consequently could immediately file an
action for the recovery of the value of the check.

HELD:
Considering the nature of the money
market transaction, Article 1249 of the
CC is the applicable provision should be applied. A
money market has been defined to be a market
dealing
in
standardized
short-term
credit
instruments where lenders and borrowers dont
deal directly with each other but through a
middleman or dealer in the open market. In a money
market transaction, the investor is the lender who

Further, in a loan transaction, the obligation to pay a

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