G.R. No.

175139

April 18, 2012

HERMOJINA ESTORES, Petitioner,

vs.
SPOUSES ARTURO and LAURA SUPANGAN, Respondents.
DECISION
DEL CASTILLO, J.:
The only issue posed before us is the propriety of the imposition of interest and attorneys fees.
Assailed in this Petition for Review1 filed under Rule 45 of the Rules of Court is the May 12, 2006 Decision2 of the
Court of Appeals (CA) in CA-G.R. CV No. 83123, the dispositive portion of which reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The
award of attorneys fees is hereby reduced to P100,000.00. Costs against the defendants-appellants.
SO ORDERED.3
Also assailed is the August 31, 2006 Resolution4 denying the motion for reconsideration.
Factual Antecedents
On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered into a
Conditional Deed of Sale5 whereby petitioner offered to sell, and respondent-spouses offered to buy, a parcel of land
covered by Transfer Certificate of Title No. TCT No. 98720 located at Naic, Cavite for the sum of P4.7 million. The
parties likewise stipulated, among others, to wit:
1. Vendor will secure approved clearance from DAR requirements of which are (sic):
a) Letter request
b) Title
c) Tax Declaration
d) Affidavit of Aggregate Landholding Vendor/Vendee
e) Certification from the Provl. Assessors as to Landholdings of Vendor/Vendee
f) Affidavit of Non-Tenancy
g) Deed of Absolute Sale

xxxx
4. Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of the
documents.
6. Regarding the house located within the perimeter of the subject [lot] owned by spouses [Magbago], said
house shall be moved outside the perimeter of this subject property to the 300 sq. m. area allocated for [it].
Vendor hereby accepts the responsibility of seeing to it that such agreement is carried out before full
payment of the sale is made by vendee.
7. If and after the vendor has completed all necessary documents for registration of the title and the vendee
fails to complete payment as per agreement, a forfeiture fee of 25% or downpayment, shall be applied.
However, if the vendor fails to complete necessary documents within thirty days without any sufficient
reason, or without informing the vendee of its status, vendee has the right to demand return of full amount
of down payment.
9. As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall be informed
immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.
After almost seven years from the time of the execution of the contract and notwithstanding payment of P3.5 million
on the part of respondent-spouses, petitioner still failed to comply with her obligation as expressly provided in
paragraphs 4, 6, 7, 9 and 10 of the contract. Hence, in a letter7 dated September 27, 2000, respondent-spouses
demanded the return of the amount of P3.5 million within 15 days from receipt of the letter. In reply,8 petitioner
acknowledged receipt of the P3.5 million and promised to return the same within 120 days. Respondent-spouses
were amenable to the proposal provided an interest of 12% compounded annually shall be imposed on the P3.5
million.9 When petitioner still failed to return the amount despite demand, respondent-spouses were constrained to
file a Complaint10 for sum of money before the Regional Trial Court (RTC) of Malabon against herein petitioner as
well as Roberto U. Arias (Arias) who allegedly acted as petitioners agent. The case was docketed as Civil Case No.
3201-MN and raffled off to Branch 170. In their complaint, respondent-spouses prayed that petitioner and Arias be
ordered to:
1. Pay the principal amount of P3,500,000.00 plus interest of 12% compounded annually starting October
1, 1993 or an estimated amount of P8,558,591.65;
2. Pay the following items of damages:
a) Moral damages in the amount of P100,000.00;
b) Actual damages in the amount of P100,000.00;
c) Exemplary damages in the amount of P100,000.00;
d) [Attorneys] fee in the amount of P50,000.00 plus 20% of recoverable amount from the
[petitioner].
e) [C]ost of suit.11

In their Answer with Counterclaim,12 petitioner and Arias averred that they are willing to return the principal amount
of P3.5 million but without any interest as the same was not agreed upon. In their Pre-Trial Brief, 13 they reiterated
that the only remaining issue between the parties is the imposition of interest. They argued that since the Conditional
Deed of Sale provided only for the return of the downpayment in case of breach, they cannot be held liable to pay
legal interest as well.14
In its Pre-Trial Order15 dated June 29, 2001, the RTC noted that "the parties agreed that the principal amount of 3.5
million pesos should be returned to the [respondent-spouses] by the [petitioner] and the issue remaining [is] whether
x x x [respondent-spouses] are entitled to legal interest thereon, damages and attorneys fees."16
Trial ensued thereafter. After the presentation of the respondent-spouses evidence, the trial court set the presentation
of Arias and petitioners evidence on September 3, 2003.17 However, despite several postponements, petitioner and
Arias failed to appear hence they were deemed to have waived the presentation of their evidence. Consequently, the
case was deemed submitted for decision.18
Ruling of the Regional Trial Court
On May 7, 2004, the RTC rendered its Decision19 finding respondent-spouses entitled to interest but only at the rate
of 6% per annum and not 12% as prayed by them.20 It also found respondent-spouses entitled to attorneys fees as
they were compelled to litigate to protect their interest.21
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent-spouses] and ordering
the [petitioner and Roberto Arias] to jointly and severally:
1. Pay [respondent-spouses] the principal amount of Three Million Five Hundred Thousand pesos (P3,500,000.00)
with an interest of 6% compounded annually starting October 1, 1993 and attorneys fee in the amount of Fifty
Thousand pesos (P50,000.00) plus 20% of the recoverable amount from the defendants and cost of the suit.
The Compulsory Counter Claim is hereby dismissed for lack of factual evidence.
SO ORDERED.22
Ruling of the Court of Appeals
Aggrieved, petitioner and Arias filed their notice of appeal.23 The CA noted that the only issue submitted for its
resolution is "whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of
money in the absence of stipulation of the parties."24
On May 12, 2006, the CA rendered the assailed Decision affirming the ruling of the RTC finding the imposition of
6% interest proper.25 However, the same shall start to run only from September 27, 2000 when respondent-spouses
formally demanded the return of their money and not from October 1993 when the contract was executed as held by
the RTC. The CA also modified the RTCs ruling as regards the liability of Arias. It held that Arias could not be held
solidarily liable with petitioner because he merely acted as agent of the latter. Moreover, there was no showing that
he expressly bound himself to be personally liable or that he exceeded the limits of his authority. More importantly,
there was even no showing that Arias was authorized to act as agent of petitioner.26 Anent the award of attorneys

fees, the CA found the award by the trial court (P50,000.00 plus 20% of the recoverable amount) excessive27 and
thus reduced the same to P100,000.00.28
The dispositive portion of the CA Decision reads:
WHEREFORE, the appealed decision is MODIFIED. The rate of interest shall be six percent (6%) per annum,
computed from September 27, 2000 until its full payment before finality of the judgment. If the adjudged principal
and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve percent
(12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied. The
award of attorneys fees is hereby reduced to P100,000.00. Costs against the [petitioner].
SO ORDERED.29
Petitioner moved for reconsideration which was denied in the August 31, 2006 Resolution of the CA.
Hence, this petition raising the sole issue of whether the imposition of interest and attorneys fees is proper.
Petitioners Arguments
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional Deed of Sale only
provided for the return of the downpayment in case of failure to comply with her obligations. Petitioner also argues
that the award of attorneys fees in favor of the respondent-spouses is unwarranted because it cannot be said that the
latter won over the former since the CA even sustained her contention that the imposition of 12% interest
compounded annually is totally uncalled for.
Respondent-spouses Arguments
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that
petitioner failed to return the amount upon demand and had been using the P3.5 million for her benefit. Moreover, it
is undisputed that petitioner failed to perform her obligations to relocate the house outside the perimeter of the
subject property and to complete the necessary documents. As regards the attorneys fees, they claim that they are
entitled to the same because they were forced to litigate when petitioner unjustly withheld the amount. Besides, the
amount awarded by the CA is even smaller compared to the filing fees they paid.
Our Ruling
The petition lacks merit.
Interest may be imposed even in the absence of stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of
stipulation in the contract. Article 2210 of the Civil Code expressly provides that "[i]nterest may, in the discretion of
the court, be allowed upon damages awarded for breach of contract." In this case, there is no question that petitioner
is legally obligated to return the P3.5 million because of her failure to fulfill the obligation under the Conditional
Deed of Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that she was willing
to return the full amount of P3.5 million but has not actually done so. Petitioner enjoyed the use of the money from
the time it was given to her30 until now. Thus, she is already in default of her obligation from the date of demand,
i.e., on September 27, 2000.

The interest at the rate of 12% is applicable in the instant case.

Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in accordance with
the stipulation of the parties."31 Absent any stipulation, the applicable rate of interest shall be 12% per annum "when
the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent
(6%)."32 In this case, the parties did not stipulate as to the applicable rate of interest. The only question remaining
therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular
No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract
provides that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the
conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as the seller (petitioner) has
admitted this. Notwithstanding demand by the buyer (respondent-spouses), the seller (petitioner) has failed to return
the money and
should be considered in default from the time that demand was made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money
be considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals,33 "forbearance" was defined as a "contractual obligation of lender or
creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then
due and payable." This definition describes a loan where a debtor is given a period within which to pay a loan or
debt. In such case, "forbearance of money, goods or credits" will have no distinct definition from a loan. We believe
however, that the phrase "forbearance of money, goods or credits" is meant to have a separate meaning from a loan,
otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil
Code.34 Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements,
where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events
or fulfillment of certain conditions. In this case, the respondent-spouses parted with their money even before the
conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their
money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending
fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the
principal amount paid, but also to compensation for the use of their money. And the compensation for the use of
their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or
deprivation of funds is similar to a loan.
Petitioners unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is 12%
per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals,35cited in Crismina Garments, Inc. v. Court of
Appeals,36 the Court suggested the following guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages
of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.37
Eastern Shipping Lines, Inc. v. Court of Appeals38and its predecessor case, Reformina v. Tongol39 both involved torts
cases and hence, there was no forbearance of money, goods, or credits. Further, the amount claimed (i.e., damages)
could not be established with reasonable certainty at the time the claim was made. Hence, we arrived at a different
ruling in those cases.
Since the date of demand which is September 27, 2000 was satisfactorily established during trial, then the interest
rate of 12% should be reckoned from said date of demand until the principal amount and the interest thereon is fully
satisfied.1wphi1
The award of attorneys fees is warranted.
Under Article 2208 of the Civil Code, attorneys fees may be recovered:
xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
xxxx
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.

Considering the circumstances of the instant case, we find respondent-spouses entitled to recover attorneys fees.
There is no doubt that they were forced to litigate to protect their interest, i.e., to recover their money. However, we
find the amount of P50,000.00 more appropriate in line with the policy enunciated in Article 2208 of the Civil Code
that the award of attorneys fees must always be reasonable.
WHEREFORE, the Petition for Review is DENIED. The May 12, 2006 Decision of the Court of Appeals in CAG.R. CV No. 83123 is AFFIRMED with MODIFICATIONS that the rate of interest shall be twelve percent (12%)
per annum, computed from September 27, 2000 until fully satisfied. The award of attorneys fees is further reduced
to P50,000.00.
SO ORDERED.
G.R. No. 181045

July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important
component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not
agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that
what the other party has been doing all along is improper or illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals (CA) in CAG.R. CV No. 79650, which affirmed with modifications the February 28, 2003 Decision3 and the June 4, 2003
Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a
department store and buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in August
1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title
No. (TCT) T-14250. In July 1988,the credit line was increased to P1.8 million and the mortgage was
correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the same credit line,
which was increased to P2.5 million, and additional security was given in the form of a 134-square meter lot covered
by TCT T-16208. In addition, petitioners issued eight Promissory Notes8 and signed a Credit Agreement.9 This July
1989 Credit Agreement contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in
advance every one hundred twenty days at the rate prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the
fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum,
which is equal to the Banks spread over the current floating interest rate, the Borrower hereby agrees that the Bank
may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce
interest rates "within the limits allowed by law or by the Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time
depending on whatever policy PNB may adopt in the future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the following stipulation
regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each
Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes,
which petitioners settled except the last (the note covering the principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;

7. 15th Promissory Note dated November 17, 1993 21%;

8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes including PN 9707237, which is the 26th promissory
note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by
law or the Monetary Board of the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have
the option top repay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting
Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes,
religiously paying the interests without objection or fail. But in 1997, petitioners faltered when the interest rates
soared due to the Asian financial crisis. Petitioners sole outstanding promissory note for P2.5 million PN 9707237
executed in July 1997 and due 120 days later or on October 28, 1997 became past due, and despite repeated
demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute
default and in such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against
me/us by the Bank, the outstanding principal of this note, at the option of the Bank and without prior notice of
demand, shall immediately become due and payable and shall be subject to a penalty charge of twenty four percent
(24%) per annum based on the defaulted principal amount. x x x19 (Emphasis supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and demandable from
petitioners in the total amount of P3,620,541.60, broken down as follows:
Principal

P 2,500,000.00

Interest

538,874.94

Penalties

581,666.66

Total

P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on
January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the amount of P4,324,172.96.21 The
sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the
foreclosure sale and an accounting of the PNB credit. Petitioners theorized that after the first promissory note where
they agreed to pay 19.5% interest, the succeeding stipulations for the payment of interest in their loan agreements
with PNB which allegedly left to the latter the sole will to determine the interest rate became null and void.
Petitioners added that because the interest rates were fixed by respondent without their prior consent or agreement,
these rates are void, and as a result, petitioners should only be made liable for interest at the legal rate of 12%. They
claimed further that they overpaid interests on the credit, and concluded that due to this overpayment of steep
interest charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208
became unnecessary and wrongful. As for the imposed penalty of P581,666.66, petitioners alleged that since the
Real Estate Mortgage and the Supplement thereto did not include penalties as part of the secured amount, the same
should be excluded from the foreclosure amount or bid price, even if such penalties are provided for in the final
Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made during the period
August 21, 1991 to March 5, 1998,resulting from respondents imposition of the alleged illegal and steep interest
rates. They also prayed to be awarded P200,000.00 by way of attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without
prior notice, PNB may modify interest rates depending on future policy adopted by it; and that the imposition of
penalties was agreed upon in the Credit Agreement. It added that the imposition of penalties is supported by the allinclusive clause in the Real Estate Mortgage agreement which provides that the mortgage shall stand as security for
any and all other obligations of whatever kind and nature owing to respondent, which thus includes penalties
imposed upon default or non-payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement,
Real Estate Mortgage and the Supplement thereto were all prepared by respondent PNB and were presented to her
and her husband Eduardo only for signature; that she was told by PNB that the latter alone would determine the
interest rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up the interest rate
portion thereof; that at the time the parties executed the said Credit Agreement, she was not informed about the
applicable spread that PNB would impose on her account; that the interest rate portion of all Promissory Notes she
and Eduardo issued were always left in blank when they executed them, with respondents mere assurance that it
would be the one to enter or indicate thereon the prevailing interest rate at the time of availment; and that they

agreed to such arrangement. She further testified that the two Real Estate Mortgage agreements she signed did not
stipulate the payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNBs actions
were improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation of their outstanding
obligation; and when PNB did not oblige, they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other
individuals and another bank; that it was only with banks that she was asked to sign loan documents with no
indicated interest rate; that she did not bother to read the terms of the loan documents which she signed; and that she
received several PNB statements of account detailing their outstanding obligations, but she did not complain; that
she assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on
cross-examination that as a practice, the determination of the prime rates of interest was the responsibility solely of
PNBs Treasury Department which is based in Manila; that these prime rates were simply communicated to all PNB
branches for implementation; that there are a multitude of considerations which determine the interest rate, such as
the cost of money, foreign currency values, PNBs spread, bank administrative costs, profitability, and the practice in
the banking industry; that in every repricing of each loan availment, the borrower has the right to question the rates,
but that this was not done by the petitioners; and that anything that is not found in the Promissory Note may be
supplemented by the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate
at any time depending on whatever policy it may adopt in the future, it likewise allows for the decrease at
any time of the same. Thus, such stipulation authorizing both the increase and decrease of interest rates as
may be applicable is valid,31 as was held in Consolidated Bank and Trust Corporation (SOLIDBANK) v.
Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan, prevails over the Credit
Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the Promissory Note prevail over
those mentioned in the Credit Agreement and the Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners obligation is correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the
principal, interest and penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the
petitioners by DISMISSING the latters petition.

Costs against the petitioners.

SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted only a modification
in the award of attorneys fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner
the excess in attorneys fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as
well as the extra-judicial foreclosure proceedings and the Certificate of Sale. However, respondent is directed to
refund to the petitioner the amount of P356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the
Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No.
9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of P377,505.99
which is the difference between the total amount due [PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its award of
attorneys fees. It simply raised the issue in its appellees brief in the CA, and included a prayer for the reversal of
said Order.
In effect, the CA limited petitioners appeal to the following issues:
1) Whether x x x the interest rates on petitioners outstanding obligation were unilaterally and arbitrarily
imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of
P3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5 million principal
obligation. And this is exclusive of payments for insurance premiums, documentary stamp taxes, and penalty. All the
while, petitioners did not complain nor object to the imposition of interest; they in fact paid the same religiously and
without fail for seven years. The appellate court ruled that petitioners are thus estopped from questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest
rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of P736.56
in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated
the inclusion of the PN 9707237-stipulated 24% penalty in the amount to be secured by the mortgaged property, thus

For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the
MORTGAGEE and to secure the payment of the same and those others that the MORTGAGEE may extend to the
MORTGAGOR, including interest and expenses, and other obligations owing by the MORTGAGOR to the
MORTGAGEE, whether direct or indirect, principal or secondary, as appearing in the accounts, books and records
of the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage unto the
MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the mortgagor to the
mortgagee" and should thus be added to the amount secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and T16208, which came as a necessary result of petitioners failure to pay the outstanding obligation upon demand.45
The CA saw fit to increase the trial courts award of 1% to 10%, finding the latter rate to be reasonable and citing the
Real Estate Mortgage agreement which authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference between PNBs bid
price of P4,324,172.96 and petitioners total computed obligation as of January 14, 1999, or the date of the auction
sale, in the amount of P3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT
NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED
JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT AGREEMENT
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST
RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF
THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND
PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM
THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF
THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN
NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT
THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS
OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S]
FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT
OF THE PRINCIPAL OF P2,500,000.[00] LEAVING AN OVERPAYMENT OFP984,287.00

REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER

ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE
INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND
THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH
REDUCED THE ATTORNEYS FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X
EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement
should be declared null and void, for they relegated to PNB the sole power to fix interest rates based on arbitrary
criteria or factors such as bank policy, profitability, cost of money, foreign currency values, and bank administrative
costs; spaces for interest rates in the two Credit Agreements and the promissory notes were left blank for PNB to
unilaterally fill, and their consent or agreement to the interest rates imposed thereafter was not obtained; the interest
rate, which consists of the prime rate plus the bank spread, is determined not by agreement of the parties but by
PNBs Treasury Department in Manila. Petitioners conclude that by this method of fixing the interest rates, the
principle of mutuality of contracts is violated, and public policy as well as Circular 90549 of the then Central Bank
had been breached.
Petitioners question the CAs application of the principle of estoppel, saying that no estoppel can proceed from an
illegal act. Though they failed to timely question the imposition of the alleged illegal interest rates and continued to
pay the loan on the basis of these rates, they cannot be deemed to have acquiesced, and hence could recover what
they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of
July 1997; moreover, it would appear that they even made an over payment to the bank in the amount of
P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the
secured amount, the penalty of 24% authorized in PN 9707237, such amount of P581,666.66 could not be made
answerable by or collected from the mortgages covering TCTs T-14250 and T-16208. Claiming support from
Philippine Bank of Communications [PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other
obligations owing by the mortgagor to the mortgagee"52 in the mortgage agreements cannot embrace the
P581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge does not belong to the species of
obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty";53
while the mortgages are the accessory contracts, what items are secured may only be determined from the provisions
of the mortgage contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees should be maintained, given that in
foreclosures, a lawyers work consists merely in the preparation and filing of the petition, and involves minimal
study.54 To allow the imposition of a staggering P396,211.00 for such work would be contrary to equity. Petitioners
state that the purpose of attorneys fees in cases of this nature "is not to give respondent a larger compensation for
the loan than the law already allows, but to protect it against any future loss or damage by being compelled to retain

counsel x x x to institute judicial proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were unilaterally fixed by it, taking relief in the
CA pronouncement that petitioners are deemed estopped by their failure to question the imposed rates and their
continued payment thereof without opposition. It adds that because the Credit Agreement and promissory notes
contained both an escalation clause and a de-escalation clause, it may not be said that the bank violated the principle
of mutuality. Besides, the increase or decrease in interest rates have been mutually agreed upon by the parties, as
shown by petitioners continuous payment without protest. Respondent adds that the alleged unilateral imposition of
interest rates is not a proper subject for review by the Court because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for the reasons that 1) the Credit
Agreements and the promissory notes were signed in blank; 2) interest rates were at short periods; 3) no interest
rates could be charged where no agreement on interest rates was made in writing; 4) PNB fixed interest rates on the
basis of arbitrary policies and standards left to its choosing; and 5) interest rates based on prime rate plus applicable
spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank Respondent claims
that this issue was never raised in the lower court. Besides, documentary evidence prevails over testimonial
evidence; Lydia Silos testimony in this regard is self-serving, unsupported and uncorroborated, and for
being the lone evidence on this issue. The fact remains that these documents are in proper form, presumed
regular, and endure, against arbitrary claims by Silos who is an experienced business person that she
signed questionable loan documents whose provisions for interest rates were left blank, and yet she
continued to pay the interests without protest for a number of years.56
b. That interest rates were at short periods Respondent argues that the law which governs and prohibits
changes in interest rates made more than once every twelve months has been removed57 with the issuance
of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates was made in writing in
violation of Article 1956 of the Civil Code, which provides that no interest shall be due unless it has been
expressly stipulated in writing Respondent insists that the stipulated 25% per annum as embodied in PN
9707237 should be imposed during the interim, or the period after the loan became due and while it
remains unpaid, and not the legal interest of 12% as claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing
According to respondent, interest rates were fixed taking into consideration increases or decreases as
provided by law or by the Monetary Board, the banks overall costs of funds, and upon agreement of the
parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary On this
score, respondent submits there are various factors that influence interest rates, from political events to
economic developments, etc.; the cost of money, profitability and foreign currency transactions may not be
discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that during pre-trial, petitioners admitted that
the Statement of Account as of October 12, 1998 which detailed and included penalty charges as part of the total
outstanding obligation owing to the bank was correct. Respondent justifies the imposition and collection of a
penalty as a normal banking practice, and the standard rate per annum for all commercial banks, at the time, was
24%.

Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the
obligation and substitute for damages and the payment of interest in the event of non-compliance.62 And the
promissory note being the principal agreement as opposed to the mortgage, which is a mere accessory should
prevail. This being the case, its inclusion as part of the secured amount in the mortgage agreements is valid and
necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its
ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to question the
foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership
over these properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the propriety of the CAs
ruling on the following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237
should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the difference
between the total amount due to PNB and the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate evidence
adduced by the parties in the proceedings below. The rule admits of certain well-recognized exceptions, though, as
when the lower courts findings are not supported by the evidence on record or are based on a misapprehension of
facts, or when certain relevant and undisputed facts were manifestly overlooked that, if properly considered, would
justify a different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts First Division denying respondents
petition in G.R. No. 181046, due to late filing, failure to attach the required affidavit of service of the petition on the
trial court and the petitioners, and submission of a defective verification and certification of non-forum shopping.
On June 25, 2008, the Court issued another Resolution denying with finality respondents motion for reconsideration
of the March 5, 2008 Resolution. And on August 15, 2008, entry of judgment was made. This thus settles the issues,
as above-stated, covering a) the interest rate or 12% per annum that applies upon expiration of the first 30 days
interest period provided under PN 9707237, and b)the CAs decree that PNB should reimburse petitioner the excess
in the bid price of P377,505.09.
It appears that respondents practice, more than once proscribed by the Court, has been carried over once more to the
petitioners. In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to,
or required of, its borrowers which allow the bank to increase or decrease interest rates "within the limits allowed by
law at any time depending on whatever policy it may adopt in the future." Thus, in Philippine National Bank v.
Court of Appeals,64 such stipulation and similar ones were declared in violation of Article 130865 of the Civil
Code. In a second case, Philippine National Bank v. Court of Appeals,66 the very same stipulations found in the
credit agreement and the promissory notes prepared and issued by the respondent were again invalidated. The Court
therein said:
The Credit Agreement provided inter alia, that
(a) The BANK 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 accommodation shall be
correspondingly decreased in the event that the applicable maximum interest 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 in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the
provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law,
as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their
credit agreement which provides, as follows:
The Bank 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 and provided, that, the interest rate on this accommodation 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 in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655
("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is
increased bylaw or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the
rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum
rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary Board to prescribe the maximum rates of
interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank
(C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby
amended to read as follows:
Sec. 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.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the
stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the
interest rate without the others consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than
if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the
case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement, and would negate the element of
mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we
held
x x x The unilateral action of the PNB in increasing the interest rate on the private respondents loan violated the
mutuality of contracts ordained 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 . . . . Hence,
even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker partys (the debtor) participation being reduced to the alternative "to take it or leave it" . . . .
Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very same provisions
in the respondents prepared Credit Agreement, declaring thus:
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, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the
terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter.
In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956
that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the
21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of
the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original
21% interest rate. x x x

etitioners never agreed in writing to pay the increased interest rates demanded by respondent bank 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 [are] 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.
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to
agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso
loan to an amount way over three times that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the
PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND
ONLY (P15,000.00), Philippine Currency, together with interest thereon at the rate of 12% per annum until paid,
which interest rate the Bank may at any time without notice, raise within the limits allowed by law, and I/we also
agree to pay jointly and severally ____% per annum penalty charge, by way of liquidated damages should this note
be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all
extensions hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert the
outstanding balance into a medium or long-term obligation as the case may be and give the Bank the right to charge
the interest rates prescribed under its policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the
life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx

To begin with, PNBs argument rests on a misapprehension of the import of the appellate courts ruling. The Court
of Appeals nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684
by providing for a de-escalation, but because the absence of such provision made the clause so one-sided as to make
it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that
although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must
nevertheless be a de-escalation clause to mitigate the one-sidedness of the escalation clause. Indeed because of
concern for the unequal status of borrowers vis--vis the banks, our cases after Banco Filipino have fashioned the
rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of agreement
between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the
stipulated interest per annum" within the limits allowed by law at any time depending on whatever policy [PNB]
may adopt in the future; Provided, that the interest rate on this note shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the Monetary Board." The real estate mortgage
likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%.
This Court declared the increases unilaterally imposed by [PNB] to be in violation of the principle of mutuality as
embodied in Art.1308 of the Civil Code, which provides that "[t]he contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them." As the Court explained:
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 (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that case
provided:
The BANK 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 accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary
Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum
became, after only two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents loan. That would completely take away from private

respondents the right to assent to an important modification in their agreement, and would negate the element of
mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it
had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would
either enslave its borrowers or lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases
in the interest rate. Private respondents assent to the increases can not be implied from their lack of response to the
letters sent by PNB, informing them of the increases. For as stated in one case, no one receiving a proposal to
change a contract is obliged to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine
National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion and without
giving prior notice to and securing the consent of the borrowers. This unilateral authority is anathema to the
mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has been
effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of money.
Furthermore, excessive interests, penalties and other charges not revealed in disclosure statements issued by banks,
even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act.73 (Emphasis
supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above pronouncements were
reiterated to debunk PNBs repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and
Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the
increased interest rates is no different from the escalation clause assailed in the 1996 PNB case; in both, the interest
rates were increased from the agreed 12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to contest the increased interest
rates that were purportedly reflected in the statements of account and the demand letters sent by the bank amounted
to their implied acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest rates prompted the lower
courts to declare excessive and illegal the interest rates imposed. Togo around this lower court finding, PNB alleges
that the P206,297.47 deficiency claim was computed using only the original 12% per annum interest rate. We find
this unlikely. Our examination of PNBs own ledgers, included in the records of the case, clearly indicates that PNB
imposed interest rates higher than the agreed 12% per annum rate. This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the rule that findings of the RTC, when
affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions found in respondents credit
agreements and promissory notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent
contained the following stipulation on interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be payable in
advance every one hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the
fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum which
is equal to the Banks spread over the current floating interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest rates
"within the limits allowed by law or the Monetary Board"77 and the Real Estate Mortgage agreement included the
same right to increase or reduce interest rates "at any time depending on whatever policy PNB may adopt in the
future."78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and
respondent later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding
interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each
Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory
notes in blank, for the respondent to later on enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
11th Promissory Note dated July 11, 1992 23%;
12th Promissory Note dated November 10, 1992 21%;

13th Promissory Note dated March 15, 1993 21%;

14th Promissory Note dated July 12, 1993 17.5%;
15th Promissory Note dated November 17, 1993 21%;
16th Promissory Note dated March 28, 1994 21%;
17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
23rd Promissory Note dated July 22, 1996 18.5%;
24th Promissory Note dated November 25, 1996 18%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x x."82 On the other hand, the 18th up to the 26th
promissory notes which includes PN 9707237 carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by
law or the Monetary Board of the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have
the option to prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting
Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these
cases is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the
petitioners has been made obvious by the fact that they signed the promissory notes in blank for the respondent to
fill. We find credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its witness
PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in
Manila, which were then simply communicated to all PNB branches for implementation. If this were the case, then
this would explain why petitioners had to sign the promissory notes in blank, since the imposable interest rates have
yet to be determined and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest rates PNB fixes such as cost of money,
foreign currency values, bank administrative costs, profitability, and considerations which affect the banking
industry it can be seen that considerations which affect PNBs borrowers are ignored. A borrowers current
financial state, his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign currency

values or fluctuations on his business or borrowing, etc. these are not factors which influence the fixing of interest
rates to be imposed on him. Clearly, respondents method of fixing interest rates based on one-sided, indeterminate,
and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed standard
or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by
UCPB of interest rates on the obligations of the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among
others the prevailing financial and monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the lender.
Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the above
provision, UCPB may give as much weight as it desires to each of the following considerations: (1) the prevailing
financial and monetary condition;(2) the rate of interest and charges which other banks or financial institutions
charge or offer to charge for similar accommodations; and/or(3) the resulting profitability to the LENDER (UCPB)
after due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the
interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to
be imposed, as both options violate the principle of mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates,
must be made with the consent of the contracting parties.1wphi1 The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties
shall agree upon the interest rate to be fixed; -instead, they are worded in such a way that the borrower shall agree to
whatever interest rate respondent fixes. In credit agreements covered by the above-cited cases, it is provided that:
The Bank 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 accommodation 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 in maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the
fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum,
which is equal to the Banks spread over the current floating interest rate, the Borrower hereby agrees that the Bank
may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each
Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely
lacking, which makes respondents unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel cannot be
predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which was
enacted "to protect x x x citizens from a lack of awareness of the true cost of credit to the user by using a full
disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy."89 The law "gives a detailed enumeration of the specific information required to be disclosed, among
which are the interest and other charges incident to the extension of credit."90 Section 4 thereof provides that a
disclosure statement must be furnished prior to the consummation of the transaction, thus:
SEC. 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.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of
credit such as interest or discounts, collection fees, credit investigation fees, attorneys fees, and other service
charges. The total finance charge represents the difference between (1) the aggregate consideration (down payment
plus installments) on the part of the debtor, and (2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally
filling them up later on, respondent violated the Truth in Lending Act, and was remiss in its disclosure obligations.
In one case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their
execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending
Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be
furnished prior to the consummation of the transaction:

SEC. 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.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof,
proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of
interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors
by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract,
and to properly evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit
will too often not be able to reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not
sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently
indicate with particularity the interest rate to be applied to the loan covered by said promissory notes.92 (Emphases
supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed
evidently prescribed long ago, or sometime in 2001, one year after petitioners received the March 2000 demand
letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its outstanding obligations does not
cure respondents breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of
an already consummated business decision.93
Neither may the statements be considered proposals sent to secure the petitioners conformity; they were sent after
the imposition and application of the interest rate, and not before. And even if it were to be presumed that these are
proposals or offers, there was no acceptance by petitioners. "No one receiving a proposal to modify a loan contract,
especially regarding interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but
actually accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest
rates unilaterally, without the consent of the borrower, and depending on complex and subjective factors. Because
they have been lured into these contracts by initially low interest rates, borrowers get caught and stuck in the web of
subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally
dread legal complications and cannot afford court litigation; they succumb to whatever charges the lenders impose.
At the very least, borrowers should be charged rightly; but then again this is not possible in a one-sided credit

system where the temptation to abuse is strong and the willingness to rectify is made weak by the eternal desire for
profit.
Given the above supposition, the Court cannot subscribe to respondents argument that in every repricing of
petitioners loan availment, they are given the right to question the interest rates imposed. The import of
respondents line of reasoning cannot be other than that if one out of every hundred borrowers questions
respondents practice of unilaterally fixing interest rates, then only the loan arrangement with that lone complaining
borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable practice will
continue unchecked, and respondent will continue to reap the profits from such unscrupulous practice. The Court
can no more condone a view so perverse. This is exactly what the Court meant in the immediately preceding cited
case when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision;"95 as to the 99 borrowers who did not or could not complain, the illegal act shall
have become a fait accompli to their detriment, they have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances,
irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful
that any borrower who finds himself in petitioners position would dare question respondents power to arbitrarily
modify interest rates at any time. In the second place, on what basis could any borrower question such power, when
the criteria or standards which are really one-sided, arbitrary and subjective for the exercise of such power are
precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory
notes, petitioners are granted the option to prepay the loan or credit facility without penalty within 10 calendar days
from the Interest Setting Date if they are not agreeable to the interest rate fixed. It has been shown that the
promissory notes are executed and signed in blank, meaning that by the time petitioners learn of the interest rate,
they are already bound to pay it because they have already pre-signed the note where the rate is subsequently
entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to choose
whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all
along is improper or illegal.
Thus said, respondents arguments relative to the credit documents that documentary evidence prevails over
testimonial evidence; that the credit documents are in proper form, presumed regular, and endure, against arbitrary
claims by petitioners, experienced business persons that they are, they signed questionable loan documents whose
provisions for interest rates were left blank, and yet they continued to pay the interests without protest for a number
of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan
is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal
interest at the rate of 12% per annum. This is the uniform ruling adopted in previous cases, including those cited
here.96 The interests paid by petitioners should be applied first to the payment of the stipulated or legal and unpaid
interest, as the case may be, and later, to the capital or principal.97 Respondent should then refund the excess
amount of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by
petitioners when they had no obligation to do so."98 Thus, the parties original agreement stipulated the payment of
19.5% interest; however, this rate was intended to apply only to the first promissory note which expired on
November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan.
Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12%
interest shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% per
annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng Pilipinas-Monetary Board
Circular No. 799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall
constitute default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be
imposed. Petitioners claim that this penalty should be excluded from the foreclosure amount or bid price because the
Real Estate Mortgage and the Supplement thereto did not specifically include it as part of the secured amount.
Respondent justifies its inclusion in the secured amount, saying that the purpose of the penalty or a penal clause is to
ensure the performance of the obligation and substitute for damages and the payment of interest in the event of noncompliance.100 Respondent adds that the imposition and collection of a penalty is a normal banking practice, and
the standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as part of the secured
amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as part of the secured amount. Having
found the credit agreements and promissory notes to be tainted, we must accord the same treatment to the
mortgages. After all, "[a] mortgage and a note secured by it are deemed parts of one transaction and are construed
together."101 Being so tainted and having the attributes of a contract of adhesion as the principal credit documents,
we must construe the mortgage contracts strictly, and against the party who drafted it. An examination of the
mortgage agreements reveals that nowhere is it stated that penalties are to be included in the secured amount.
Construing this silence strictly against the respondent, the Court can only conclude that the parties did not intend to
include the penalty allowed under PN 9707237 as part of the secured amount. Given its resources, respondent could
have if it truly wanted to conveniently prepared and executed an amended mortgage agreement with the
petitioners, thereby including penalties in the amount to be secured by the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed upon the issue since it was not raised by
the petitioners in their appeal; it was the respondent that improperly brought it up in its appellees brief, when it
should have interposed an appeal, since the trial courts Decision on this issue is adverse to it. It is an elementary
principle in the subject of appeals that an appellee who does not himself appeal cannot obtain from the appellate
court any affirmative relief other than those granted in the decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make counter
assignments of error in ordinary actions, when the purpose is merely to defend himself against an appeal in which
errors are alleged to have been committed by the trial court both in the appreciation of facts and in the interpretation
of the law, in order to sustain the judgment in his favor but not when his purpose is to seek modification or reversal
of the judgment, in which case it is necessary for him to have excepted to and appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA possessed no authority to pass upon it
at the instance of respondent. The ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the respondent as creditor and to the
petitioners who are entitled to a refund as a consequence of overpayment considering that they paid more by way of
interest charges than the 12% per annum103 herein allowed the case should be remanded to the lower court for
proper accounting and computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate
of only 12% per annum.104 Thus, interest payment made in excess of 12% on the 2nd promissory note
shall immediately be applied to the principal, and the principal shall be accordingly reduced. The reduced
principal shall then be subjected to the 12%105 interest on the 3rd promissory note, and the excess over
12% interest payment on the 3rd promissory note shall again be applied to the principal, which shall again
be reduced accordingly. The reduced principal shall then be subjected to the 12% interest on the 4th
promissory note, and the excess over12% interest payment on the 4th promissory note shall again be
applied to the principal, which shall again be reduced accordingly. And so on and so forth;

3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a) still have
an OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR
TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest
from October 28, 1997 until January 14, 1999, which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August 14,
1997 until January 14, 1999. But from this total penalty, the petitioners previous payment of penalties in
the amount of P202,000.00made on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1%
attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96. The penalties (5.) are not included because they are not
included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and
1% attorneys fees (6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an
OVERPAYMENT, the interest (4.), penalties (5.), and the award of 1% attorneys fees (6.) shall be
DEDUCTED from the overpayment. There is no outstanding balance/obligation precisely because
petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorneys
fees (6.), the excess shall be RETURNED to the petitioners, with legal interest, under the principle of
solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorneys fees
(6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys fees (6.) exceed petitioners
overpayment, then the excess shall be DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorneys fees (6.)]
shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding
penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made
payments exceeding what they actually owe by way of principal, interest, and attorneys fees, then the
mortgaged properties need not answer for any outstanding secured amount, because there is not any; quite
the contrary, respondent must refund the excess to petitioners.1wphi1 In such case, the extrajudicial
foreclosure and sale of the properties shall be declared null and void for obvious lack of basis, the case
being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners overpayments in
interests do not exceed their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be to return the difference

between its bid price (P4,324,172.96) and petitioners total obligation outstanding except penalties after
applying the latters overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals
in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED
NULL AND VOID, and such notes shall instead be subject to interest at the rate of twelve percent (12%)
per annum up to June 30, 2013, and starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts
secured by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the
computation of overpayments made by petitioners spouses Eduardo and Lydia Silos to respondent
Philippine National Bank, taking into consideration the foregoing dispositions, and applying the procedure
hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial
foreclosure and sale, declaring the same null and void in case of overpayment and ordering the release and
return of Transfer Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering the
delivery to the petitioners of the difference between the bid price and the total remaining obligation of
petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to
Transfer Certificates of Title Nos. T-14250 and T-16208 until all the steps in the procedure above set forth
have been taken and applied;
7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine National
Bank is ordered to reimburse petitioners, should be HELD IN ABEYANCE until the true amount owing to
or owed by the parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings, albeit
uncomplicated, are required, the trial court is ORDERED to proceed with dispatch.
SO ORDERED.
G.R. No. L-78519 September 26, 1989
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC.,
respondents.
Francisco A. Lara, Jr. for petitioner.
D. T. Ramos and Associates for respondent Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:
This is a petition for review on certiorari to annul and set aside the Court of Appeals' decision dated
October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of the trial court in favor of the
private respondents in an action to recover the petitioners' time deposits in the respondent Family
Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading
Enterprises, Inc. (hereafter "CAMS Trading" for brevity). To guaranty payment for her cement withdrawals,
she executed in favor of Cams Trading deeds of assignment of her time deposits in the total sum of
P320,000 in the Family Savings Bank (hereafter the Bank). Except for the serial numbers and the dates of
the time deposit certificates, the deeds of assignment, which were prepared by her own lawyer, uniformly
provided
... That the assignment serves as a collateral or guarantee for the payment of my
obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my cement
withdrawal from said company, per separate contract executed between us.
On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the sum
of P314,639.75. It asked that it be allowed to encash the time deposit certificates which had been
assigned to it by Mrs. Chu. It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu admitting that
her outstanding account with Cams Trading was P404,500. After verbally advising Mrs. Chu of the
assignee's request to encash her time deposit certificates and obtaining her verbal conformity thereto, the
Bank agreed to encash the certificates.It delivered to Cams Trading the sum of P283,737.75 only, as one
time deposit certificate (No. 0048120954) lacked the proper signatures. Upon being informed of the
encashment, Mrs. Chu demanded from the Bank and Cams Trading that her time deposit be restored.
When neither complied, she filed a complaint to recover the sum of P283,737.75 from them. The case
was docketed in the Regional Trial Court of Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX),
as Civil Case No. 38861.
In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal of her
complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates as a pactum
commissorium; and
2. In not finding that the obligations secured by her time deposits had already been paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the collateral
was also money or an exchange of "peso for peso," the provision in Article 2112 of the Civil Code for the
sale of the thing pledged at public auction to convert it into money to satisfy the pledgor's obligation, did

not have to be followed. All that had to be done to convert the pledgor's time deposit certificates into cash
was to present them to the bank for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a pacto commissorio which is prohibited under Art.
2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the pledged
or mortgaged property by the creditor in payment of the loan upon its maturity. The prohibition against a
pacto commissorio is intended to protect the obligor, pledgor, or mortgagor against being overreached by
his creditor who holds a pledge or mortgage over property whose value is much more than the debt.
Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is
even less than the debt, it was not illegal for the creditor to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's consent.
Whether the debt had already been paid as now alleged by the debtor, is a factual question which the
Court of Appeals found not to have been proven for the evidence which the debtor sought to present on
appeal, were receipts for payments made prior to July 18, 1980. Since the petitioner signed on July 18,
1980 a letter admitting her indebtedness to be in the sum of P404,500, and there is no proof of payment
made by her thereafter to reduce or extinguish her debt, the application of her time deposits, which she
had assigned to the creditor to secure the payment of her debt, was proper. The Court of Appeals did not
commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.
G.R. No. 158755

June 18, 2012

SPOUSES FRANCISCO and MERCED RABAT, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
BERSAMIN, J.:
The inadequacy of the bid price in an extrajudicial foreclosure sale of mortgaged properties will not per se invalidate
the sale. Additionally, the foreclosing mortgagee is not precluded from recovering the deficiency should the
proceeds of the sale be insufficient to cover the entire debt.
Antecedents
The parties are before the Court a second time to thresh out an issue relating to the foreclosure sale of the
petitioners mortgaged properties. The first time was in G.R. No. 134406 entitled Philippine National Bank v.
Spouses Francisco and Merced Rabat, decided on November 15, 2000.1 In G.R. No. 134406, the Court observed that

The RABATs did not appeal from the decision of the trial court. As a matter of fact, in their Appellees Brief filed
with the Court of Appeals they prayed that said decision be affirmed in toto. As against the RABATs the trial courts
findings of fact and conclusion are already settled and final. More specifically, they are deemed to have

unqualifiedly agreed with the trial court that the foreclosure proceedings were valid in all respects, except as to the
bid price.2
Accordingly, we extract the antecedent facts from the narrative of the decision in G.R. No. 134406, as follows:
On 25 August 1979, respondent spouses Francisco and Merced Rabat (hereafter RABATs) applied for a loan with
PNB. Subsequently, the RABATs were granted on 14 January 1980 a medium-term loan of P4.0 Million to mature
three years from the date of implementation.
On 28 January 1980, the RABATs signed a Credit Agreement and executed a Real Estate Mortgage over twelve (12)
parcels of land which stipulated that the loan would be subject to interest at the rate of 17% per annum, plus the
appropriate service charge and penalty charge of 3% per annum on any amount remaining unpaid or not renewed
when due.
On 25 September 1980, the RABATs executed another document denominated as "Amendment to the Credit
Agreement" purposely to increase the interest rate from 17% to 21% per annum, inclusive of service charge and a
penalty charge of 3% per annum to be imposed on any amount remaining unpaid or not renewed when due. They
also executed another Real Estate Mortgage over nine (9) parcels of land as additional security for their mediumterm loan of Four Million (P4.0 M). These parcels of land are agricultural, commercial and residential lots situated
in Mati, Davao Oriental.
The several availments of the loan accommodation on various dates by the RABATs reached the aggregate amount
of THREE MILLION FIVE HUNDRED SEVENTEEN THOUSAND THREE HUNDRED EIGHTY (P3,517,380),
as evidenced by the several promissory notes, all of which were due on 14 March 1983.
The RABATs failed to pay their outstanding balance on due date.
In its letter of 24 July 1986, in response to the letter of the RABATs of 16 June 1986 requesting for more time within
which to arrive at a viable proposal for the settlement of their account, PNB informed the RABATs that their request
has been denied and gave the RABATs until 30 August 1986 to settle their account. The PNB sent the letter to 197
Wilson Street, San Juan, Metro Manila.
For failure of the RABATs to pay their obligation, the PNB filed a petition for the extrajudicial foreclosure of the
real estate mortgage executed by the RABATs. After due notice and publication, the mortgaged parcels of land were
sold at a public auction held on 20 February 1987 and 14 April 1987. The PNB was the lone and highest bidder with
a bid of P3,874,800.00.
As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs, the PNB sent
anew demand letters. The letter dated 15 November 1990 was sent to the RABATs at 197 Wilson Street, San Juan,
Metro Manila; while another dated 30 August 1991 was sent to the RABATs at 197 Wilson Street, Greenhills, San
Juan, Metro Manila, and also in Mati, Davao Oriental.
Upon failure of the RABATs to comply with the demand to settle their remaining outstanding obligation which then
stood at P14,745,398.25, including interest, penalties and other charges, PNB eventually filed on 5 May 1992 a
complaint for a sum of money before the Regional Trial Court of Manila. The case was docketed as Civil Case No.
92-61122, which was assigned to Branch 14 thereof.

The RABATs filed their answer with counterclaim on 28 July 1992 to which PNB filed its Reply and Answer to
Counterclaim. On 2 January 1993, the RABATs filed an amended answer. The RABATs admitted their loan
availments from PNB and their default in the payment thereof. However, they assailed the validity of the auction
sales for want of notice to them before and after the foreclosure sales.
They further added that as residents of Mati, Davao Oriental since 1970 up to the present, they never received any
notice nor heard about the foreclosure proceeding in spite of the claim of PNB that the foreclosure proceeding had
been duly published in the San Pedro Times, which is not a newspaper of general circulation.
The RABATs likewise averred that the bid price was grossly inadequate and unconscionable.
Lastly, the RABATs attacked the validity of the accumulated interest and penalty charges because since their
properties were sold in 1987, and yet PNB waited until 1992 before filing the case. Consequently, the RABATs
contended that they should not be made to suffer for the interest and penalty charges from May 1987 up to the
present. Otherwise, PNB would be allowed to profit from its questionable scheme.
The PNB filed on 5 February 1993 its Reply to the Amended Answer and Answer to Counterclaim.3
On June 14, 1994, the Regional Trial Court, Branch 14, in Manila (RTC) rendered its decision in Civil Case No. 9261122,4 disposing thus:
WHEREFORE, and in view of the foregoing considerations, judgment is hereby rendered dismissing the complaint.
On the counterclaim, the two (2) auction sales of the mortgaged properties are hereby set aside and ordering the
plaintiff to reconvey to the defendants the remaining properties after the sale [of] sufficient properties for the
satisfaction of the obligation of the defendants.
The parties will bear their respective cost.
So ordered.
Only PNB appealed to the CA (CA-G.R. CV No. 49800), assigning the following two errors to the RTC,5 to wit:
I
WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE SHERIFF'S AUCTION
SALE ON THE GROUND THAT THE PNBS WINNING BID IS VERY LOW.
II
WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANTSAPPELLEES ARE NOT LIABLE TO PAY INTEREST AND PENALTY CHARGES AFTER THE
AUCTION SALES UP TO THE FILING OF THIS CASE.
On their part, the Spouses Rabat simply urged in their appellees brief that the decision of the RTC be entirely
affirmed.6

On June 29, 1998, the CA upheld the RTCs decision to nullify the foreclosure sales but rested its ruling upon a
different ground,7 in that the Spouses Rabat could not have known of the foreclosure sales because they had not
actually received personal notices about the foreclosure proceedings. The CA concluded:
An examination of the exhibits show that the defendant-appellees given address is Mati, Davao Oriental and not 197
Wilson Street, Greenhills, San Juan, Metro Manila as alleged by the plaintiff-appellant (Exhibit C to J, pp. 208, 217,
220, 229, 236-239, Records). Records further show that all subsequent communications by plaintiff-appellant was
sent to defendant-appellees address at Wilson Street, Greenhills, San Juan. This was the very reason why defendantappellees were not aware of the foreclosure proceedings.
As correctly found out by the trial court, there is a need for the setting aside of the two (2) auction sales hence, there
is yet no deficiency judgment to speak of.
WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby affirmed in toto.
SO ORDERED.
PNB appealed in due course (G.R. No. 134406),8 positing:
WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS UPON THE TRIAL COURTS
FINDING AND CONCLUSION ON AN ISSUE WHICH WAS NEVER RAISED ON APPEAL, AND,
THEREFORE, HAD ATTAINED FINALITY.
1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS WHEN IT DECIDED AND RESOLVED A QUESTION OR
ISSUE NOT RAISED IN PETITIONER PNBS APPEAL;
2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT
REVERSED THE FINDING AND CONCLUSION OF THE TRIAL COURT ON AN ISSUE WHICH
HAD ALREADY ATTAINED FINALITY.
PNB argued that it had not raised the issue of lack of notice about the foreclosure sales because the fact that the
Spouses Rabat had not appealed the RTCs ruling as regards the lack of notice but had in fact prayed for the
affirmance of the RTCs judgment had rendered final the RTCs rejection of their allegation of lack of personal
notice; and that, consequently, the CA had committed grave abuse of discretion in still resolving the issue of lack of
notice despite its not having been raised during the appeal.9
On November 15, 2000, the Court promulgated its decision in G.R. No. 134406, decreeing:
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals of 29 July 1998 in CA-G.R. CV
No. 49800 is hereby SET ASIDE. The Court of Appeals is directed to DECIDE, with reasonable dispatch, CA-G.R.
CV No. 49800 on the basis of the errors raised by petitioner Philippine National Bank in its Appellants Brief.
No pronouncement as to costs.
SO ORDERED.10

To conform to the decision in G.R. No. 134406, the CA amended its decision on January 24, 2003 by resolving the
errors specifically assigned by PNB in its appellants brief.11 The CA nonetheless affirmed the RTCs decision,
declaring that the bid price had been very low and observing that the mortgaged properties might have been sold for
a higher value had PNB first conducted a reappraisal of the properties.
Upon PNBs motion for reconsideration, however, the CA promulgated its questioned second amended decision on
March 26, 2003,12 holding and ruling as follows:
After a thorough and conscientious review of the records and relevant laws and jurisprudence, We find the motion
for reconsideration to be meritorious.
While indeed no evidence was presented by appellant as to whether a reappraisal of the mortgaged properties was
conducted by it before submitting the bid price of P 3,874,800.00 at the auction sale, said amount approximates the
loan value under its original appraisal in 1980, which was P 4 million.
There is no dispute that mere inadequacy of price per se will not set aside a judicial sale of real property.
Nevertheless, where the inadequacy of the price is purely shocking to the conscience such that the mind revolts at it
and such that a reasonable man would neither directly nor indirectly be likely to consent to it, the sale shall be
declared null and void. Said rule, however, does not strictly apply in the case of extrajudicial foreclosure sales so
that when a supposed "unconscionably low price" paid by the bank-mortgagee for the mortgaged properties at the
public auction sale is assailed, the sale is not thereby readily set aside on account of such low purchase price. It is
well-settled that alleged gross inadequacy of price is not material "when the law gives the owner the right to redeem
as when a sale is made at a public auction, upon the theory that the lesser the price the easier it is for the owner to
effect the redemption." In fact, the property may be sold for less than its fair market value.
Here, it may be that after the lapse of seven (7) years, the mortgaged properties may have indeed appreciated in
value but under the general rule cited above which had been consistently applied to extrajudicial foreclosure sales.
We are not inclined to invalidate the auction sale of appellees mortgaged properties solely on the alleged gross
inadequacy of purchase price of P 3,874,800.00 which is actually almost the equivalent of the loan value of
appellees twenty-one (21) parcels of land under the "Real Estate Mortgage" executed in favor of appellant PNB in
1980. It has been held that no such disadvantage is suffered by the mortgagor as he stands to gain with a reduced
price because he possesses the right of redemption. Thus, the re-appraisal of the mortgaged properties resulting in
the appellant PNBs bid price of approximately the original loan value of their mortgaged properties is beneficial
rather than harmful considering the right of redemption granted to appellees under the law. The claim of financial
hardship or losses in their business is not an excuse for appellees-mortgagors to evade their clear obligation to the
bank-mortgagee.
Further, the fact that the mortgaged property is sold at an amount less than its actual market value should not militate
against the right of appellant PNB to the recovery of the deficiency in the loan obligation of appellees. Our Supreme
Court had ruled in several cases that in extrajudicial foreclosure of mortgage, where the proceeds of the sale are
insufficient to pay the debt, the mortgagee has the right to recover the deficiency from the debtor. A claim of
deficiency arising from the extrajudicial foreclosure sale is allowed. As to appellees claim of allegedly excessive
penalty interest charges, the same is without merit. We note that the promissory notes expressly provide for a penalty
charge of 3% per annum to be imposed on any unpaid amount on due date.
WHEREFORE, premises considered, the present motion for reconsideration is hereby GRANTED. Consequently,
Our Amended Decision of January 24, 2003 is hereby SET ASIDE and a new one is hereby entered GRANTING the
appeal of plaintiff PNB. The decision appealed from in Civil Case No. 92-61122 is hereby REVERSED and SET

ASIDE. Judgment is hereby rendered ordering the appellees to pay, jointly and severally, to appellant PNB: (1) the
amount of P 14,745,398.25 plus accrued interest, service charge and penalty charge of 3% per annum from February
29, 1992 until the same shall have been fully paid; (2) Ten Percent (10%) of the total amount due as attorneys fees;
and (3) the costs of suit.
No pronouncement as to costs.
SO ORDERED.13
The Spouses Rabat thereafter moved for the reconsideration of the second amended decision, but the CA denied
their motion.14
Hence, this appeal by the Spouses Rabat.
Issues
The Spouses Rabat frame the following issues for this appeal, thuswise:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE
SUBJECT AUCTION SALES AND ADJUDGING PAYMENT OF DEFICIENCY SUM, INTERESTS,
PENALTY AND SERVICE CHARGES AND ATTORNEYS FEES, IN COMPLETE AND ABSOLUTE
DISREGARD OF ITS EARLIER PRONOUNCEMENTS, THE ARGUMENTS OF HEREIN
PETITIONERS AND EVIDENCE BORNE IN THE RECORDS OF THE INSTANT CASE.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN DEPARTING FROM ITS FINDING OF
FACTS AND CONCLUSIONS OF LAW AS STATED IN THE EARLIER RENDERED FIRST
AMENDED DECISION DATED 24 JANUARY 2003.15
The Spouses Rabat insist that the CAs reversal of the amended decision was unjustified. They pray that the
amended decision of the CA (which affirmed the RTCs judgment) be reinstated. They contend that PNB was not
entitled to recover any deficiency due to the invalidity of the forced sales.16
In its comment,17 PNB counters that the petition for review does not raise a valid question of law; and that the CAs
second amended decision was regularly promulgated because the CA thereby acted well within its right to correct
itself considering that the amended decision did not yet attain finality under the pertinent rules and jurisprudence.
Accordingly, the Court must pass upon and resolve three distinct issues. The first is whether the inadequacy of the
bid price of PNB invalidated the forced sale of the properties. The second is whether PNB was entitled to recover
any deficiency from the Spouses Rabat. The third is whether the CA validly rendered its second amended decision.
Ruling
The appeal has no merit.
Anent the first issue, we rule against the Spouses Rabat. We have consistently held that the inadequacy of the bid
price at a forced sale, unlike that in an ordinary sale, is immaterial and does not nullify the sale; in fact, in a forced
sale, a low price is considered more beneficial to the mortgage debtor because it makes redemption of the property
easier.18

In Bank of the Philippine Islands, etc. v. Reyes,19 the Court discoursed on the effect of the inadequacy of the price in
a forced sale, stating:
Throughout a long line of jurisprudence, we have declared that unlike in an ordinary sale, inadequacy of the price at
a forced sale is immaterial and does not nullify a sale since, in a forced sale, a low price is more beneficial to the
mortgage debtor for it makes redemption of the property easier.
In the early case of The National Loan and Investment Board v. Meneses, we also had the occasion to state that:
As to the inadequacy of the price of the sale, this court has repeatedly held that the fact that a property is sold at
public auction for a price lower than its alleged value, is not of itself sufficient to annul said sale, where there has
been strict compliance with all the requisites marked out by law to obtain the highest possible price, and
where there is no showing that a better price is obtainable. (Government of the Philippines vs. De Asis, G. R.
No. 45483, April 12, 1939; Guerrero vs. Guerrero, 57 Phil., 442; La Urbana vs. Belando, 54 Phil., 930; Bank of the
Philippine Islands v . Green, 52 Phil., 491.) (Emphases supplied.)
In Hulst v. PR Builders, Inc., we further elaborated on this principle:
[G]ross inadequacy of price does not nullify an execution sale. In an ordinary sale, for reason of equity, a transaction
may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks ones conscience as to
justify the courts to interfere; such does not follow when the law gives the owner the right to redeem as when a sale
is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption.
When there is a right to redeem, inadequacy of price should not be material because the judgment debtor
may re-acquire the property or else sell his right to redeem and thus recover any loss he claims to have
suffered by reason of the price obtained at the execution sale. Thus, respondent stood to gain rather than be
harmed by the low sale value of the auctioned properties because it possesses the right of redemption. x x x
(Emphasis supplied.)
It bears also to stress that the mode of forced sale utilized by petitioner was an extrajudicial foreclosure of real estate
mortgage which is governed by Act No. 3135, as amended. An examination of the said law reveals nothing to the
effect that there should be a minimum bid price or that the winning bid should be equal to the appraised value of the
foreclosed property or to the amount owed by the mortgage debtor. What is clearly provided, however, is that a
mortgage debtor is given the opportunity to redeem the foreclosed property "within the term of one year from and
after the date of sale." In the case at bar, other than the mere inadequacy of the bid price at the foreclosure sale,
respondent did not allege any irregularity in the foreclosure proceedings nor did she prove that a better price could
be had for her property under the circumstances.
At any rate, we consider it notable enough that PNBs bid price of P 3,874,800.00 might not even be said to be
outrageously low as to be shocking to the conscience. As the CA cogently noted in the second amended decision, 20
that bid price was almost equal to both the P 4,000,000.00 applied for by the Spouses Rabat as loan, and to the total
sum of P 3,517,380.00 of their actual availment from PNB.
Resolving the second issue, we rule that PNB had the legal right to recover the deficiency amount. In Philippine
National Bank v. Court of Appeals,21 we held that:
xxx it is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of the
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For when the legislature intends to deny
the right of a creditor to sue for any deficiency resulting from foreclosure of security given to guarantee an

obligation it expressly provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages of a thing
sold on installment basis [Civil Code, Art. 1484(3)]. Act No. 3135, which governs the extrajudicial foreclosure of
mortgages, while silent as to the mortgagees right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial foreclosure is
allowed.22
Indeed, as we indicated in Prudential Bank v. Martinez,23 the fact that the mortgaged property was sold at an amount
less than its actual market value should not militate against the right to such recovery.24
There should be no question that PNB was legally entitled to recover the penalty charge of 3% per annum and
attorneys fees equivalent to 10% of the total amount due. The documents relating to the loan and the real estate
mortgage showed that the Spouses Rabat had expressly conformed to such additional liabilities; hence, they could
not now insist otherwise. To be sure, the law authorizes the contracting parties to make any stipulations in their
covenants provided the stipulations are not contrary to law, morals, good customs, public order or public policy.25
Equally axiomatic are that a contract is the law between the contracting parties, and that they have the autonomy to
include therein such stipulations, clauses, terms and conditions as they may want to include. 26 Inasmuch as the
Spouses Rabat did not challenge the legitimacy and efficacy of the additional liabilities being charged by PNB, they
could not now bar PNB from recovering the deficiency representing the additional pecuniary liabilities that the
proceeds of the forced sales did not cover.
Lastly, we uphold the CAs promulgation of the second amended decision.1wphi1 Verily, all courts of law have the
unquestioned power to alter, modify, or set aside their decisions before they become final and unalterable. 27 A
judgment that has attained finality becomes immutable and unalterable, and may thereafter no longer be modified in
any respect even if the modification is meant to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land.28 The reason for the rule of immutability is that
if, on the application of one party, the court could change its judgment to the prejudice of the other, the court could
thereafter, on application of the latter, again change the judgment and continue this practice indefinitely. 29 The
equity of a particular case must yield to the overmastering need of certainty and unalterability of judicial
pronouncements.30 The doctrine of immutability and inalterability of a final judgment has a two-fold purpose,
namely: (a) to avoid delay in the administration of justice and, thus, procedurally, to make orderly the discharge of
judicial business; and (b) to put an end to judicial controversies, at the risk of occasional errors, which is precisely
why courts exist. Indeed, controversies cannot drag on indefinitely; the rights and obligations of every litigant must
not hang in suspense for an indefinite period of time.31 As such, the doctrine of immutability is not a mere
technicality to be easily brushed aside, but a matter of public policy as well as a time-honored principle of
procedural law.
It is no different herein. The amended decision that favored the Spouses Rabat would have attained finality only
after the lapse of 15 days from notice thereof to the parties without a motion for reconsideration being timely filed or
an appeal being seasonably taken.32 Had that happened, the amended decision might have become final and
immutable. However, considering that PNB timely filed its motion for reconsideration vis--vis the amended
decision, the CAs reversal of the amended decision and its promulgation of the second amended decision were valid
and proper.
WHEREFORE, we AFFIRM the SECOND AMENDED DECISION promulgated on March 26, 2003 in CA-G.R.
CV No. 49800 entitled Philippine National Bank v. Spouses Francisco and Merced Rabat.
The petitioners shall pay the costs of suit.

SO ORDERED.
G.R. No. 169190

February 11, 2010

CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO, Petitioners,

vs.
HON. HILARIO L. LAQUI, Presiding Judge, Regional Trial Court, Branch 218, Quezon City and
PHILIPPINE BANK OF COMMUNICATION, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 of the 29 April 2005 and 4 August 2005 Resolutions2 of the Court of Appeals in CAG.R. SP No. 88963. In its 29 April 2005 Resolution, the Court of Appeals dismissed the petition for certiorari 3 of
petitioner spouses Claro G. Castro and Juanita Castro and petitioner Cua Lai Chu (petitioners). In its 4 August 2005
Resolution, the Court of Appeals denied petitioners motion for reconsideration.
The Facts
In November 1994, petitioners obtained a loan in the amount of P3,200,000 from private respondent Philippine
Bank of Communication. To secure the loan, petitioners executed in favor of private respondent a Deed of Real
Estate Mortgage4 over the property of petitioner spouses covered by Transfer Certificate of Title No. 22990. In
August 1997, petitioners executed an Amendment to the Deed of Real Estate Mortgage 5 increasing the amount of the
loan by P1,800,000, bringing the total loan amount to P5,000,000.
For failure of petitioners to pay the full amount of the outstanding loan upon demand, 6 private respondent applied
for the extrajudicial foreclosure of the real estate mortgage. 7 Upon receipt of a notice8 of the extrajudicial foreclosure
sale, petitioners filed a petition to annul the extrajudicial foreclosure sale with a prayer for temporary restraining
order (TRO). The petition for annulment was filed in the Regional Trial Court of Quezon City and docketed as Q02-46184.9
The extrajudicial foreclosure sale did not push through as originally scheduled because the trial court granted
petitioners prayer for TRO. The trial court subsequently lifted the TRO and reset the extrajudicial foreclosure sale
on 29 May 2002. At the foreclosure sale, private respondent emerged as the highest bidder. A certificate of sale 10 was
executed on 4 June 2002 in favor of private respondent. On 7 June 2002, the certificate of sale was annotated as
Entry No. 185511 on TCT No. 22990 covering the foreclosed property.
After the lapse of the one-year redemption period, private respondent filed in the Registry of Deeds of Quezon City
an affidavit of consolidation to consolidate its ownership and title to the foreclosed property. Forthwith, on 8 July
2003, the Register of Deeds cancelled TCT No. 22990 and issued in its stead TCT No. 25183512 in the name of
private respondent.
On 18 August 2004, private respondent applied for the issuance of a writ of possession of the foreclosed property.13
Petitioners filed an opposition.14 The trial court granted private respondents motion for a declaration of general

default and allowed private respondent to present evidence ex parte. The trial court denied petitioners notice of
appeal.
Undeterred, petitioners filed in the Court of Appeals a petition for certiorari. The appellate court dismissed the
petition. It also denied petitioners motion for reconsideration.
The Orders of the Trial Court
The 8 October 2004 Order15 granted private respondents motion for a declaration of general default and allowed
private respondent to present evidence ex parte. The 6 January 2005 Order16 denied petitioners motion for
reconsideration of the prior order. The 24 February 2005 Order17 denied petitioners notice of appeal.
The Ruling of the Court of Appeals
The Court of Appeals dismissed on both procedural and substantive grounds the petition for certiorari filed by
petitioners. The appellate court noted that the counsel for petitioners failed to indicate in the petition the updated
PTR Number, a ground for outright dismissal of the petition under Bar Matter No. 1132. Ruling on the merits, the
appellate court held that a proceeding for the issuance of a writ of possession is ex parte in nature. As such,
petitioners right to due process was not violated even if they were not given a chance to file their opposition. The
appellate court also ruled that there was no violation of the rule against forum shopping since the application for the
issuance of a writ of possession is not affected by a pending case questioning the validity of the extrajudicial
foreclosure sale.
The Issue
Petitioners raise the question of whether the writ of possession was properly issued despite the pendency of a case
questioning the validity of the extrajudicial foreclosure sale and despite the fact that petitioners were declared in
default in the proceeding for the issuance of a writ of possession.
The Courts Ruling
The petition has no merit.
Petitioners contend they were denied due process of law when they were declared in default despite the fact that they
had filed their opposition to private respondents application for the issuance of a writ of possession. Further,
petitioners point out that the issuance of a writ of possession will deprive them not only of the use and possession of
their property, but also of its ownership. Petitioners cite Bustos v. Court of Appeals18 and Vda. De Legaspi v.
Avendao19 in asserting that physical possession of the property should not be disturbed pending the final
determination of the more substantial issue of ownership. Petitioners also allege forum shopping on the ground that
the application for the issuance of a writ of possession was filed during the pendency of a case questioning the
validity of the extrajudicial foreclosure sale.
Private respondent, on the other hand, maintains that the application for the issuance of a writ of possession in a
foreclosure proceeding is ex parte in nature. Hence, petitioners right to due process was not violated even if they
were not given a chance to file their opposition. Private respondent argues that the issuance of a writ of possession
may not be stayed by a pending case questioning the validity of the extrajudicial foreclosure sale. It contends that
the former has no bearing on the latter; hence, there is no violation of the rule against forum shopping. Private

respondent asserts that there is no judicial determination involved in the issuance of a writ of possession; thus, the
same cannot be the subject of an appeal.
At the outset, we must point out that the authorities relied upon by petitioners are not in point and have no
application here. In Bustos v. Court of Appeals,20 the Court simply ruled that the issue of possession was intertwined
with the issue of ownership in the consolidated cases of unlawful detainer and accion reinvindicatoria. In Vda. De
Legaspi v. Avendao,21 the Court merely stated that in a case of unlawful detainer, physical possession should not be
disturbed pending the resolution of the issue of ownership. Neither case involved the right to possession of a
purchaser at an extrajudicial foreclosure of a mortgage.
Banco Filipino Savings and Mortgage Bank v. Pardo22 squarely ruled on the right to possession of a purchaser at an
extrajudicial foreclosure of a mortgage. This case involved a real estate mortgage as security for a loan obtained
from a bank. Upon the mortgagors default, the bank extrajudicially foreclosed the mortgage. At the auction sale, the
bank was the highest bidder. A certificate of sale was duly issued and registered. The bank then applied for the
issuance of a writ of possession, which the lower court dismissed. The Court reversed the lower court and held that
the purchaser at the auction sale was entitled to a writ of possession pending the lapse of the redemption period upon
a simple motion and upon the posting of a bond.1avvphi1
In Navarra v. Court of Appeals,23 the purchaser at an extrajudicial foreclosure sale applied for a writ of possession
after the lapse of the one-year redemption period. The Court ruled that the purchaser at an extrajudicial foreclosure
sale has a right to the possession of the property even during the one-year redemption period provided the purchaser
files an indemnity bond. After the lapse of the said period with no redemption having been made, that right becomes
absolute and may be demanded by the purchaser even without the posting of a bond. Possession may then be
obtained under a writ which may be applied for ex parte pursuant to Section 7 of Act No. 3135,24 as amended by Act
No. 4118,25 thus:
SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of
the province or place where the property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months,
to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte
motion x x x and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who shall execute said order immediately. (Emphasis
supplied)
In the present case, the certificate of sale of the foreclosed property was annotated on TCT No. 22990 on 7 June
2002. The redemption period thus lapsed on 7 June 2003, one year from the registration of the sale.26 When private
respondent applied for the issuance of a writ of possession on 18 August 2004, the redemption period had long
lapsed. Since the foreclosed property was not redeemed within one year from the registration of the extrajudicial
foreclosure sale, private respondent had acquired an absolute right, as purchaser, to the writ of possession. It had
become the ministerial duty of the lower court to issue the writ of possession upon mere motion pursuant to Section
7 of Act No. 3135, as amended.
Moreover, once ownership has been consolidated, the issuance of the writ of possession becomes a ministerial duty
of the court, upon proper application and proof of title.27 In the present case, when private respondent applied for the
issuance of a writ of possession, it presented a new transfer certificate of title issued in its name dated 8 July 2003.
The right of private respondent to the possession of the property was thus founded on its right of ownership. As the

purchaser of the property at the foreclosure sale, in whose name title over the property was already issued, the right
of private respondent over the property had become absolute, vesting in it the corollary right of possession.
Petitioners are wrong in insisting that they were denied due process of law when they were declared in default
despite the fact that they had filed their opposition to the issuance of a writ of possession. The application for the
issuance of a writ of possession is in the form of an ex parte motion. It issues as a matter of course once the
requirements are fulfilled. No discretion is left to the court. 28
Petitioners cannot oppose or appeal the courts order granting the writ of possession in an ex parte proceeding. The
remedy of petitioners is to have the sale set aside and the writ of possession cancelled in accordance with Section 8
of Act No. 3135, as amended, to wit:
SEC. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after
the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled,
specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in
accordance with the provisions hereof. x x x
Any question regarding the validity of the extrajudicial foreclosure sale and the resulting cancellation of the writ
may be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135, as amended. Such question
should not be raised as a justification for opposing the issuance of a writ of possession since under Act No. 3135, as
amended, the proceeding for this is ex parte.
Further, the right to possession of a purchaser at an extrajudicial foreclosure sale is not affected by a pending case
questioning the validity of the foreclosure proceeding. The latter is not a bar to the former. Even pending such latter
proceeding, the purchaser at a foreclosure sale is entitled to the possession of the foreclosed property.29
Lastly, we rule that petitioners claim of forum shopping has no basis. Under Act No. 3135, as amended, a writ of
possession is issued ex parte as a matter of course upon compliance with the requirements. It is not a judgment on
the merits that can amount to res judicata, one of the essential elements in forum shopping. 30
The Court of Appeals correctly dismissed the petition for certiorari filed by petitioners for lack of merit.
WHEREFORE, we DENY the petition for review. We AFFIRM the 29 April 2005 and 4 August 2005 Resolutions of
the Court of Appeals in CA-G.R. SP No. 88963.
SO ORDERED.
.R. No. 172302

February 18, 2014

PRYCE CORPORATION, Petitioner,

vs.
CHINA BANKING CORPORATION, Respondent.
RESOLUTION
LEONEN, J.:

This case resolves conflicting decisions between two divisions. Only one may serve as res judicata or a bar for the
other to proceed. This case also settles the doctrine as to whether a hearing is needed prior to the issuance of a stay
order in corporate rehabilitation proceedings.
The present case originated from a petition for corporate rehabilitation filed by petitioner Pryce Corporation on July
9, 2004 with the Regional Trial Court of Makati, Branch 138.1
The rehabilitation court found the petition sufficient in form and substance and issued a stay order on July 13, 2004
appointing Gener T. Mendoza as rehabilitation receiver.2
On September 13, 2004, the rehabilitation court gave due course to the petition and directed the rehabilitation
receiver to evaluate and give recommendations on petitioner Pryce Corporations proposed rehabilitation plan
attached to its petition.3
The rehabilitation receiver did not approve this plan and submitted instead an amended rehabilitation plan, which the
rehabilitation court approved by order dated January 17, 2005.4 In its disposition, the court found petitioner Pryce
Corporation "eligible to be placed in a state of corporate rehabilitation."5 The disposition likewise identified the
assets to be held and disposed of by petitioner Pryce Corporation and the manner by which its liabilities shall be
paid and liquidated.6
On February 23, 2005, respondent China Banking Corporation elevated the case to the Court of Appeals. Its petition
questioned the January 17, 2005 order that included the following terms:
1. The indebtedness to China Banking Corporation and Bank of the Philippine Islands as well as the long
term commercial papers will be paid through a dacion en pago of developed real estate assets of the
petitioner.
xxxx
4. All accrued penalties are waived[.]
5. Interests shall accrue only up to July 13, 2004, the date of issuance of the stay order[.]
6. No interest will accrue during the pendency of petitioners corporate rehabilitation[.]
7. Dollar-denominated loans will be converted to Philippine Pesos on the date of the issuance of this Order
using the reference rate of the Philippine Dealing System as of this date.7
Respondent China Banking Corporation contended that the rehabilitation plans approval impaired the obligations of
contracts. It argued that neither the provisions of Presidential Decree No. 902-A nor the Interim Rules of Procedure
on Corporate Rehabilitation (Interim Rules) empowered commercial courts "to render without force and effect valid
contractual stipulations."8 Moreover, the plans approval authorizing dacion en pago of petitioner Pryce
Corporations properties without respondent China Banking Corporations consent not only violated "mutuality of
contract and due process, but [was] also antithetical to the avowed policies of the state to maintain a competitive
financial system."9
The Bank of the Philippine Islands (BPI), another creditor of petitioner Pryce Corporation, filed a separate petition
with the Court of Appeals assailing the same order by the rehabilitation court. BPI called the attention of the court

"to the non-impairment clause and the mutuality of contracts purportedly ran roughshod by the [approved
rehabilitation plan]."10
On July 28, 2005, the Court of Appeals Seventh (7th) Division11 granted respondent China Banking Corporation's
petition, and reversed and set aside the rehabilitation courts: (1) July 13, 2004 stay order that also appointed Gener
T. Mendoza as rehabilitation receiver; (2) September 13, 2004 order giving due course to the petition and directing
the rehabilitation receiver to evaluate and give recommendations on petitioner Pryce Corporations proposed
rehabilitation plan; and (3) January 17, 2005 order finding petitioner Pryce Corporation eligible to be placed in a
state of corporate rehabilitation, identifying assets to be disposed of, and determining the manner of liquidation to
pay the liabilities.12
With respect to BPIs separate appeal, the Court of Appeals First (1st) Division13 granted its petition initially and set
aside the January 17, 2005 order of the rehabilitation court in its decision dated May 3, 2006.14 On reconsideration,
the court issued a resolution dated May 23, 2007 setting aside its original decision and dismissing the petition.15
BPI elevated the case to this court, docketed as G.R. No. 180316. By resolution dated January 30, 2008, the First
(1st) Division of this court denied the petition.16 By resolution dated April 28, 2008, this court denied
reconsideration with finality.17
Meanwhile, petitioner Pryce Corporation also appealed to this court assailing the July 28, 2005 decision of the Court
of Appeals Seventh (7th) Division granting respondent China Banking Corporations petition as well as the
resolution denying its motion for reconsideration.
In the decision dated February 4, 2008,18 the First (1st) Division of this court denied its petition with the dispositive
portion as follows:
WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 88479 is
AFFIRMED with the modification discussed above. Let the records of this case be REMANDED to the RTC,
Branch 138, Makati City, sitting as Commercial Court, for further proceedings with dispatch to determine the merits
of the petition for rehabilitation. No costs.19
Petitioner Pryce Corporation filed an omnibus motion for (1) reconsideration or (2) partial reconsideration and (3)
referral to the court En Banc dated February 29, 2008. Respondent China Banking Corporation also filed a motion
for reconsideration on even date, praying that the February 4, 2008 decision be set aside and reconsidered only
insofar as it ordered the remand of the case for further proceedings "to determine whether petitioner's financial
condition is serious and whether there is clear and imminent danger that it will lose its corporate assets."20
By resolution dated June 16, 2008, this court denied with finality the separate motions for reconsideration filed by
the parties.
On September 10, 2008, petitioner Pryce Corporation filed a second motion for reconsideration praying that the
Court of Appeals decision dated February 4, 2008 be set aside.
The First Division of this court referred this case to the En Banc en consulta by resolution dated June 22, 2009.21
The court En Banc, in its resolution dated April 13, 2010, resolved to accept this case.22
On July 30, 2013, petitioner Pryce Corporation and respondent China Banking Corporation, through their respective
counsel, filed a joint manifestation and motion to suspend proceedings. The parties requested this court to defer its

ruling on petitioner Pryce Corporations second motion for reconsideration "so as to enable the parties to work out a
mutually acceptable arrangement."23
By resolution dated August 6, 2013, this court granted the motion but only for two (2) months. The registry receipts
showed that counsel for respondent China Banking Corporation and counsel for petitioner Pryce Corporation
received their copies of this resolution on September 5, 2013.24
More than two months had lapsed since September 5, 2013, but no agreement was filed by the parties. Thus, we
proceed to rule on petitioner Pryce Corporations second motion for reconsideration.
This motion raises two grounds.
First, petitioner Pryce Corporation argues that the issue on the validity of the rehabilitation court orders is now res
judicata. Petitioner Pryce Corporation submits that the ruling in BPI v. Pryce Corporation docketed as G.R. No.
180316 contradicts the present case, and it has rendered the issue on the validity and regularity of the rehabilitation
court orders as res judicata.25
Second, petitioner Pryce Corporation contends that Rule 4, Section 6 of the Interim Rules of Procedure on Corporate
Rehabilitation26 does not require the rehabilitation court to hold a hearing before issuing a stay order. Considering
that the Interim Rules was promulgated later than Rizal Commercial Banking Corp. v. IAC27 that enunciated the
"serious situations" test,28 petitioner Pryce Corporation argues that the test has effectively been abandoned by the
"sufficiency in form and substance test" under the Interim Rules.29
The present second motion for reconsideration involves the following issues:
I. WHETHER THE ISSUE ON THE VALIDITY OF THE REHABILITATION ORDER DATED
JANUARY 17, 2005 IS NOW RES JUDICATA IN LIGHT OF BPI V. PRYCE CORPORATION
DOCKETED AS G.R. NO. 180316;
II. WHETHER THE REHABILITATION COURT IS REQUIRED TO HOLD A HEARING TO COMPLY
WITH THE "SERIOUS SITUATIONS" TEST LAID DOWN IN THE CASE OF RIZAL COMMERCIAL
BANKING CORP. V. IAC BEFORE ISSUING A STAY ORDER.
We proceed to discuss the first issue.
BPI v. Pryce Corporation docketed as G.R. No. 180316 rendered the issue on the validity of the rehabilitation courts
January 17, 2005 order approving the amended rehabilitation plan as res judicata.
In BPI v. Pryce Corporation, the Court of Appeals set aside initially the January 17, 2005 order of the rehabilitation
court.30 On reconsideration, the court set aside its original decision and dismissed the petition.31 On appeal, this
court denied the petition filed by BPI with finality. An entry of judgment was made for BPI v. Pryce Corporation on
June 2, 2008.32 In effect, this court upheld the January 17, 2005 order of the rehabilitation court.
According to the doctrine of res judicata, "a final judgment or decree on the merits by a court of competent
jurisdiction is conclusive of the rights of the parties or their privies in all later suits on all points and matters
determined in the former suit."33

The elements for res judicata to apply are as follows: (a) the former judgment was final; (b) the court that rendered it
had jurisdiction over the subject matter and the parties; (c) the judgment was based on the merits; and (d) between
the first and the second actions, there was an identity of parties, subject matters, and causes of action.34
Res judicata embraces two concepts: (1) bar by prior judgment35 and (2) conclusiveness of judgment.36
Bar by prior judgment exists "when, as between the first case where the judgment was rendered and the second case
that is sought to be barred, there is identity of parties, subject matter, and causes of action."37
On the other hand, the concept of conclusiveness of judgment finds application "when a fact or question has been
squarely put in issue, judicially passed upon, and adjudged in a former suit by a court of competent jurisdiction."38
This principle only needs identity of parties and issues to apply.39
The elements of res judicata through bar by prior judgment are present in this case.
On the element of identity of parties, res judicata does not require absolute identity of parties as substantial identity
is enough.40 Substantial identity of parties exists "when there is a community of interest between a party in the first
case and a party in the second case, even if the latter was not impleaded in the first case."41 Parties that represent the
same interests in two petitions are, thus, considered substantial identity of parties for purposes of res judicata.42
Definitely, one test to determine substantial identity of interest would be to see whether the success or failure of one
party materially affects the other.
In the present case, respondent China Banking Corporation and BPI are creditors of petitioner Pryce Corporation
and are both questioning the rehabilitation courts approval of the amended rehabilitation plan. Thus, there is
substantial identity of parties since they are litigating for the same matter and in the same capacity as creditors of
petitioner Pryce Corporation.
There is no question that both cases deal with the subject matter of petitioner Pryce Corporations rehabilitation. The
element of identity of causes of action also exists.
In separate appeals, respondent China Banking Corporation and BPI questioned the same January 17, 2005 order of
the rehabilitation court before the Court of Appeals.
Since the January 17, 2005 order approving the amended rehabilitation plan was affirmed and made final in G.R.
No. 180316, this plan binds all creditors, including respondent China Banking Corporation.
In any case, the Interim Rules or the rules in effect at the time the petition for corporate rehabilitation was filed in
2004 adopts the cram-down principle which "consists of two things: (i) approval despite opposition and (ii) binding
effect of the approved plan x x x."43
First, the Interim Rules allows the rehabilitation court44 to "approve a rehabilitation plan even over the opposition
of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor
is feasible and the opposition of the creditors is manifestly unreasonable."45
Second, it also provides that upon approval by the court, 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 plan or whether or not their claims have been scheduled."46

Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and executory resulting from
the resolution of BPI v. Pryce Corporation docketed as G.R. No. 180316, binds all creditors including respondent
China Banking Corporation.
This judgment in BPI v. Pryce Corporation covers necessarily the rehabilitation courts September 13, 2004 order
giving due course to the petition. The general rule precluding relitigation of issues extends to questions implied
necessarily in the final judgment, viz:
The general rule precluding the relitigation of material facts or questions which were in issue and adjudicated in
former action are commonly applied to all matters essentially connected with the subject matter of the litigation.
Thus, it extends to questions necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto and although such matters were directly referred to in the pleadings and were not actually
or formally presented. x x x.47
The dispositive portion of the Court of Appeals decision in BPI v. Pryce Corporation, reversed on reconsideration,
only mentioned the January 17, 2005 order of the rehabilitation court approving the amended rehabilitation plan.
Nevertheless, the affirmation of its validity necessarily included the September 13, 2004 order as this earlier order
gave due course to the petition and directed the rehabilitation receiver to evaluate and give recommendations on the
rehabilitation plan proposed by petitioner.48
In res judicata, the primacy given to the first case is related to the principle of immutability of final judgments
essential to an effective and efficient administration of justice, viz:
x x x [W]ell-settled is the principle that a decision that has acquired finality becomes immutable and unalterable and
may no longer be modified in any respect even if the modification is meant to correct erroneous conclusions of fact
or law and whether it will be made by the court that rendered it or by the highest court of the land.
The reason for this is that litigation must end and terminate sometime and somewhere, and it is essential to an
effective and efficient administration of justice that, once a judgment has become final, the winning party be not
deprived of the fruits of the verdict. Courts must guard against any scheme calculated to bring about that result and
must frown upon any attempt to prolong the controversies.
The only exceptions to the general rule are the correction of clerical errors, the so-called nunc pro tunc entries which
cause no prejudice to any party, void judgments, and whenever circumstances transpire after the finality of the
decision rendering its execution unjust and inequitable.49 (Emphasis provided)
Generally, the later case is the one abated applying the maxim qui prior est tempore, potior est jure (he who is before
in time is the better in right; priority in time gives preference in law).50 However, there are limitations to this rule as
discussed in Victronics Computers, Inc. v. Regional Trial Court, Branch 63, Makati:51
In our jurisdiction, the law itself does not specifically require that the pending action which would hold in abatement
the other must be a pending prior action. Thus, in Teodoro vs. Mirasol, this Court observed:
It is to be noted that the Rules do not require as a ground for dismissal of a complaint that there is a prior pending
action. They provide that there is a pending action, not a pending prior action. The fact that the unlawful detainer
suit was of a later date is no bar to the dismissal of the present action. We find, therefore, no error in the ruling of the
court a quo that plaintiff's action should be dismissed on the ground of the pendency of another more appropriate
action between the same parties and for the same cause.

In Roa-Magsaysay vs. Magsaysay, wherein it was the first case which was abated, this Court ruled:
In any event, since We are not really dealing with jurisdiction but mainly with venue, considering both courts
concerned do have jurisdiction over the causes of action of the parties herein against each other, the better rule in the
event of conflict between two courts of concurrent jurisdiction as in the present case, is to allow the litigation to be
tried and decided by the court which, under the circumstances obtaining in the controversy, would, in the mind of
this Court, be in a better position to serve the interests of justice, considering the nature of the controversy, the
comparative accessibility of the court to the parties, having in view their peculiar positions and capabilities, and
other similar factors. Without in any manner casting doubt as to the capacity of the Court of First Instance of
Zambales to adjudicate properly cases involving domestic relations, it is easy to see that the Juvenile and Domestic
Relations Court of Quezon City which was created in order to give specialized attention to family problems, armed
as it is with adequate and corresponding facilities not available to ordinary courts of first instance, would be able to
attend to the matters here in dispute with a little more degree of expertise and experience, resulting in better service
to the interests of justice. A reading of the causes of action alleged by the contending spouses and a consideration of
their nature, cannot but convince Us that, since anyway, there is an available Domestic Court that can legally take
cognizance of such family issues, it is better that said Domestic Court be the one chosen to settle the same as the
facts and the law may warrant.
We made the same pronouncement in Ramos vs. Peralta:
Finally, the rule on litis pendentia does not require that the later case should yield to the earlier case. What is
required merely is that there be another pending action, not a prior pending action. Considering the broader scope of
inquiry involved in Civil Case No. 4102 and the location of the property involved, no error was committed by the
lower court in deferring to the Bataan court's jurisdiction.
An analysis of these cases unravels the ratio for the rejection of the priority-in-time rule and establishes the criteria
to determine which action should be upheld and which is to be abated. In Teodoro, this Court used the criterion of
the more appropriate action. We ruled therein that the unlawful detainer case, which was filed later, was the more
appropriate action because the earlier case for specific performance or declaratory relief filed by the lessee
(Teodoro) in the Court of First Instance (CFI) to seek the extension of the lease for another two (2) years or the
fixing of a longer term for it, was "prompted by a desire on plaintiff's part to anticipate the action for unlawful
detainer, the probability of which was apparent from the letter of the defendant to the plaintiff advising the latter that
the contract of lease expired on October 1, 1954." The real issue between the parties therein was whether or not the
lessee should be allowed to continue occupying the leased premises under a contract the terms of which were also
the subject matter of the unlawful detainer case. Consonant with the doctrine laid down in Pue vs. Gonzales and Lim
Si vs. Lim, the right of the lessee to occupy the land leased against the lessor should be decided under Rule 70 of the
Rules of Court; the fact that the unlawful detainer case was filed later then of no moment. Thus, the latter was the
more appropriate action.
xxxx
In Roa-Magsaysay[,] the criterion used was the consideration of the interest of justice. In applying this standard,
what was asked was which court would be "in a better position to serve the interests of justice," taking into account
(a) the nature of the controversy, (b) the comparative accessibility of the court to the parties and (c) other similar
factors. While such a test was enunciated therein, this Court relied on its constitutional authority to change venue to
avoid a miscarriage of justice.

It is interesting to note that in common law, as earlier adverted to, and pursuant to the Teodoro vs. Mirasol case, the
bona fides or good faith of the parties is a crucial element. In the former, the second case shall not be abated if not
brought to harass or vex; in the latter, the first case shall be abated if it is merely an anticipatory action or, more
appropriately, an anticipatory defense against an expected suit a clever move to steal the march from the
aggrieved party.52 (Emphasis provided and citations omitted)
None of these situations are present in the facts of this instant suit. In any case, it is the better part of wisdom in
protecting the creditors if the corporation is rehabilitated.
We now proceed to the second issue on whether the rehabilitation court is required to hold a hearing to comply with
the "serious situations" test laid down in Rizal Commercial Banking Corp. v. IAC before issuing a stay order.
The rehabilitation court complied with the Interim Rules in its order dated July 13, 2004 on the issuance of a stay
order and appointment of Gener T. Mendoza as rehabilitation receiver.53
The 1999 Rizal Commercial Banking Corp. v. IAC54 case provides for the "serious situations" test in that the
suspension of claims is counted only upon the appointment of a rehabilitation receiver,55 and certain situations
serious in nature must be shown to exist before one is appointed, viz:
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation does not always result
in the appointment of a receiver or the creation of a management committee. The SEC has to initially determine
whether such appointment is appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of
Presidential Decree No. 902-A, certain situations must be shown to exist before a management committee may be
created or appointed, such as:
1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties;
or
2. when there is paralization of business operations of such corporations or entities which may be
prejudicial to the interest of minority stockholders, parties-litigants or to the general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 [c], P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a management committee or a receiver to
preserve the existing assets and property of the corporation in order to protect the interests of its investors and
creditors. Thus, in such situations, suspension of actions for claims against a corporation as provided in Paragraph
(c) of Section 6, of Presidential Decree No. 902-A is necessary, and here we borrow the words of the late Justice
Medialdea, "so as not to render the SEC management Committee irrelevant and inutile and to give it unhampered
rescue efforts over the distressed firm" (Rollo, p. 265)."
Otherwise, when such circumstances are not obtaining or when the SEC finds no such imminent danger of losing the
corporate assets, a management committee or rehabilitation receiver need not be appointed and suspension of
actions for claims may not be ordered by the SEC. When the SEC does not deem it necessary to appoint a receiver

or to create a management committee, it may be assumed, that there are sufficient assets to sustain the rehabilitation
plan, and that the creditors and investors are amply protected.56
However, this case had been promulgated prior to the effectivity of the Interim Rules that took effect on December
15, 2000.
Section 6 of the Interim Rules states explicitly that "[i]f the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition, issue an Order (a) appointing a
Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims x x x."57
Compliant with the rules, the July 13, 2004 stay order was issued not later than five (5) days from the filing of the
petition on July 9, 2004 after the rehabilitation court found the petition sufficient in form and substance.
We agree that when a petition filed by a debtor "alleges all the material facts and includes all the documents required
by Rule 4-2 [of the Interim Rules],"58 it is sufficient in form and substance.
Nowhere in the Interim Rules does it require a comprehensive discussion in the stay order on the courts findings of
sufficiency in form and substance.
The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an "extraordinary, preliminary, ex
parte remed[y]."59 The effectivity period of a stay order is only "from the date of its issuance until dismissal of the
petition or termination of the rehabilitation proceedings."60 It is not a final disposition of the case. It is an
interlocutory order defined as one that "does not finally dispose of the case, and does not end the Courts task of
adjudicating the parties contentions and determining their rights and liabilities as regards each other, but obviously
indicates that other things remain to be done by the Court."61
Thus, it is not covered by the requirement under the Constitution that a decision must include a discussion of the
facts and laws on which it is based.62
Neither does the Interim Rules require a hearing before the issuance of a stay order. What it requires is an initial
hearing before it can give due course to63 or dismiss64 a petition.
Nevertheless, while the Interim Rules does not require the holding of a hearing before the issuance of a stay order,
neither does it prohibit the holding of one. Thus, the trial court has ample discretion to call a hearing when it is not
confident that the allegations in the petition are sufficient in form and substance, for so long as this hearing is held
within the five (5)-day period from the filing of the petition the period within which a stay order may issue as
provided in the Interim Rules.
One of the important objectives of the Interim Rules is "to promote a speedy disposition of corporate rehabilitation
cases[,] x x x apparent from the strict time frames, the non-adversarial nature of the proceedings, and the prohibition
of certain kinds of pleadings."65 It is in light of this objective that a court with basis to issue a stay order must do so
not later than five (5) days from the date the petition was filed.66
Moreover, according to the November 17, 2000 memorandum submitted by the Supreme Court Committee on the
Interim Rules of Procedure on Corporate Rehabilitation:

The Proposed Rules remove the concept of the Interim Receiver and replace it with a rehabilitation receiver. This is
to justify the immediate issuance of the stay order because under Presidential Decree No. 902-A, as amended, the
suspension of actions takes effect only upon appointment of the rehabilitation receiver.67 (Emphasis provided)
Even without this court going into the procedural issues, addressing the substantive merits of the case will yield the
same result.
Respondent China Banking Corporation mainly argues the violation of the constitutional proscription against
impairment of contractual obligations68 in that neither the provisions of Pres. Dec. No. 902-A as amended nor the
Interim Rules empower commercial courts "to render without force and effect valid contractual stipulations."69
The non-impairment clause first appeared in the United States Constitution as a safeguard against the issuance of
worthless paper money that disturbed economic stability after the American Revolution.70 This constitutional
provision was designed to promote commercial stability.71 At its core is "a prohibition of state interference with
debtor-creditor relationships."72
This clause first became operative in the Philippines through the Philippine Bill of 1902, the fifth paragraph of
Section 5 which states "[t]hat no law impairing the obligation of contracts shall be enacted." It was consistently
adopted in subsequent Philippine fundamental laws, namely, the Jones Law of 1916,73 the 1935 Constitution,74 the
1973 Constitution,75 and the present Constitution.76
Nevertheless, this court has brushed aside invocations of the non-impairment clause to give way to a valid exercise
of police power77 and afford protection to labor.78
In Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc.79 which similarly involved
corporate rehabilitation, this court found no merit in Pacific Wides invocation of the non-impairment clause,
explaining as follows:
We also find no merit in PWRDCs contention that there is a violation of the impairment clause. Section 10, Article
III of the Constitution mandates that no law impairing the obligations of contract shall be passed. This case does not
involve a law or an executive issuance declaring the modification of the contract among debtor PALI, its creditors
and its accommodation mortgagors. Thus, the non-impairment clause may not be invoked. Furthermore, as held in
Oposa v. Factoran, Jr. even assuming that the same may be invoked, the non-impairment clause must yield to the
police power of the State. Property rights and contractual rights are not absolute. The constitutional guaranty of nonimpairment of obligations is limited by the exercise of the police power of the State for the common good of the
general public.
Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees, and the economy
in general. The court may approve a rehabilitation plan even over the opposition of creditors holding a majority of
the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable. The rehabilitation plan, once approved, is 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 have opposed the plan or whether or not their claims have been scheduled.80
Corporate rehabilitation is one of many statutorily provided remedies for businesses that experience a downturn.
Rather than leave the various creditors unprotected, legislation now provides for an orderly procedure of equitably
and fairly addressing their concerns. Corporate rehabilitation allows a court-supervised process to rejuvenate a
corporation. Its twin, insolvency, provides for a system of liquidation and a procedure of equitably settling various

debts owed by an individual or a business. It provides a corporations owners a sound chance to re-engage the
market, hopefully with more vigor and enlightened services, having learned from a painful experience.
Necessarily, a business in the red and about to incur tremendous losses may not be able to pay all its creditors.
Rather than leave it to the strongest or most resourceful amongst all of them, the state steps in to equitably distribute
the corporations limited resources.
The cram-down principle adopted by the Interim Rules does, in effect, dilute contracts. When it permits the approval
of a rehabilitation plan even over the opposition of creditors,81 or when it imposes a binding effect of the approved
plan on all parties including those who did not participate in the proceedings,82 the burden of loss is shifted to the
creditors to allow the corporation to rehabilitate itself from insolvency.
Rather than let struggling corporations slip and vanish, the better option is to allow commercial courts to come in
and apply the process for corporate rehabilitation.
This option is preferred so as to avoid what Garrett Hardin called the Tragedy of Commons. Here, Hardin submits
that "coercive government regulation is necessary to prevent the degradation of common-pool resources [since]
individual resource appropriators receive the full benefit of their use and bear only a share of their cost."83 By
analogy to the game theory, this is the prisoners dilemma: "Since no individual has the right to control or exclude
others, each appropriator has a very high discount rate [with] little incentive to efficiently manage the resource in
order to guarantee future use."84 Thus, the cure is an exogenous policy to equitably distribute scarce resources. This
will incentivize future creditors to continue lending, resulting in something productive rather than resulting in
nothing.
In fact, these corporations exist within a market. The General Theory of Second Best holds that "correction for one
market imperfection will not necessarily be efficiency-enhancing unless [there is also] simultaneous [correction] for
all other market imperfections."85 The correction of one market imperfection may adversely affect market
efficiency elsewhere, for instance, "a contract rule that corrects for an imperfection in the market for consensual
agreements may [at the same time] induce welfare losses elsewhere."86 This theory is one justification for the
passing of corporate rehabilitation laws allowing the suspension of payments so that corporations can get back on
their feet.
As in all markets, the environment is never guaranteed. There are always risks.1avvphi1 Contracts are indeed sacred
as the law between the parties. However, these contracts exist within a society where nothing is risk-free, and the
government is constantly being called to attend to the realities of the times.
Corporate rehabilitation is preferred for addressing social costs.1wphi1 Allowing the corporation room to get back
on its feet will retain if not increase employment opportunities for the market as a whole. Indirectly, the services
offered by the corporation will also benefit the market as "[t]he fundamental impulse that sets and keeps the
capitalist engine in motion comes from [the constant entry of] new consumers goods, the new methods of
production or transportation, the new markets, [and] the new forms of industrial organization that capitalist
enterprise creates."87
As a final note, this is not the first time this court was made to review two separate petitions appealed from two
conflicting decisions, rendered by two divisions of the Court of Appeals, and originating from the same case. In
Serrano v. Ambassador Hotel, Inc.,88 we ordered the Court of Appeals to adopt immediately a more efficient system
in its Internal Rules to avoid situations as this.

In this instance, it is fortunate that this court had the opportunity to correct the situation and prevent conflicting
judgments from reaching impending finality with the referral to the En Banc.
We reiterate the need for our courts to be "constantly vigilant in extending their judicial gaze to cases related to the
matters submitted for their resolution"89 as to "ensure against judicial confusion and [any] seeming conflict in the
judiciarys decisions."90
WHEREFORE, petitioner Pryce Corporation's motion is GRANTED. This court's February 4, 2008 decision is
RECONSIDERED and SET ASIDE.
SO ORDERED.
G.R. No. 171132

August 15, 2012

MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM & COMPANY, INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
VILLARAMA, JR., J.:
On appeal are the Resolutions dated April 14, 20051 and January 24, 20062 of the Court of Appeals (CA) in CA-G.R.
SP No. 88735. The CA dismissed petitioner's petition for review of the January 4, 2005 Resolution3 and February 9,
2000 Order4 of the Securities and Exchange Commission (SEC) for failure of petitioner to attach to the petition
copies of material portions of the records and other relevant or pertinent documents.
The facts follow:
ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in Pampanga. 5 Between 1991 and
1993, ARCAM applied for and was granted a loan by respondent Philippine National Bank (PNB). 6 To secure the
loan, ARCAM executed a Real Estate Mortgage over a 350,004-square meter parcel of land covered by TCT No.
340592-R and a Chattel Mortgage over various personal properties consisting of machinery, generators, field
transportation and heavy equipment.
ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to the provisions of
the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings in the Office of
the Clerk of Court/Ex Officio Sheriff of the Regional Trial
Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for the mortgaged
real properties and December 8, 1993 for the mortgaged personal properties.
On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments, Appointment of a
Management or Rehabilitation Committee, and Approval of Rehabilitation Plan, with application for issuance of a
temporary restraining order (TRO) and writ of preliminary injunction. The SEC issued a TRO and subsequently a
writ of preliminary injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga from proceeding
with the foreclosure sale of the mortgaged properties.8 An interim management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the petition for
suspension of payment was filed in December 1993 and six years had passed but the potential white knight" investor
had not infused the much needed capital to bail out ARCAM from its financial difficulties. 9 Thus, the SEC decreed
that ARCAM be dissolved and placed under liquidation.10 The SEC Hearing Panel also granted PNBs motion to
dissolve the preliminary injunction and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for
ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of Court to reschedule the sale at public auction of the mortgaged properties.
Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion for the Issuance
of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the foreclosure sale of ARCAMs
assets. The SEC en banc issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without any writ of
preliminary injunction being issued by the SEC. Consequently, on July 28, 2000, PNB resumed the proceedings for
the extrajudicial foreclosure sale of the mortgaged properties. 12 PNB emerged as the highest winning bidder in the
auction sale, and certificates of sale were issued in its favor.
On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale. 13 Petitioner posited that all
actions against companies which are under liquidation, like ARCAM, are suspended because liquidation is a
continuation of the petition for suspension proceedings. Petitioner argued that the prohibition against foreclosure
subsisted during liquidation because payment of all of ARCAMs obligations was proscribed except those
authorized by the Commission. Moreover, petitioner asserted that the mortgaged assets should be included in the
liquidation and the proceeds shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules prohibits
secured creditors from foreclosing on their mortgages to satisfy the mortgagors debt after the termination of the
rehabilitation proceedings and during liquidation proceedings. 14
On January 4, 2005, the SEC issued a Resolution15 denying petitioners motion to nullify the auction sale. It held
that PNB was not legally barred from foreclosing on the mortgages. Aggrieved, petitioner filed on February 28,
2005, a petition for review in the CA questioning the January 4, 2005 Resolution of the SEC.16
By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner failed to attach
material portions of the record and other documents relevant to the petition as required in Rule 46, Section 3 of the
1997 Rules of Civil Procedure, as amended. The CA likewise denied ARCAMs motion for reconsideration in its
Resolution dated January 24, 2006.
Hence this petition under Rule 45 arguing that:
4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND PREFERENCE OF
CREDITS UNDER THE CIVIL CODE AND JURISPRUDENCE WHEN PD 902-A PROVIDES THAT THE
SAME BE APPLIED IN INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND PLACED
UNDER LIQUIDATION ON ACCOUNT OF FAILURE TO REHABILITATE DUE TO INSOLVENCY.17
4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO FORECLOSE THE
MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM LIQUIDATOR TO
MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES, SINCE THE
LIQUIDATOR HAD INITIALLY DETERMINED THAT ASIDE FROM PNB, SOME ARCAM WORKERS MAY

ALSO HAVE A LEGAL LIEN OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID
WAGES. THESE LIENS OVER THE SAME MOVABLE OR REAL PROPERTY ARE TO BE SATISFIED PRORATA WITH THE CONTRACTUAL LIENS PURSUANT TO 2247 AND 2249 OF THE CIVIL CODE, IN
RELATION TO 2241 TO 2242 RESPECTIVELY. ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT
THE LIQUIDATOR DOES NOT KNOW ABOUT, AND IF THERE WERE, THESE COULD COMPRISE TAX
LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL CODE ARE CLEARLY GIVEN PRIORITY OVER
OTHER PREFERRED CLAIMS SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS
PROVIDED UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS MORTGAGE LIENS.18
4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN ENTITY IS DISSOLVED
AND PLACED UNDER LIQUIDATION DUE TO INSOLVENCY, SECURED CREDITORS ARE
AUTOMATICALLY ALLOWED TO FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR
CREDITS AGAINST THE DEBTOR.19
4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SECS HOLDING THAT THE
FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT PNB IS
THE SOLE AND ONLY LIEN HOLDER, IT STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR
AGREES TO SUCH OR THAT THE SEC GAVE PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE
FORECLOSURE PROCEEDINGS.20
4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON THAT THE
FORECLOSURE PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21
The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to attach material
documents referred to in the petition; and (2) whether PNB, as a secured creditor, can foreclose on the mortgaged
properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC.
On the procedural issue, the Court finds that the CA erred in dismissing the petition for review before it on the
ground of failure to attach material portions of the record and other documents relevant to the petition. A perusal of
the petition for review filed with the CA, and as admitted by PNB,22 reveals that certified true copies of the assailed
January 4, 2005 SEC Resolution and the February 9, 2000 SEC Order appointing petitioner Atty. Manuel D.
Yngson, Jr. as liquidator were annexed therein.
We find the foregoing attached documents sufficient for the appellate court to decide the case at bar considering that
the SEC resolution contains statements of the factual antecedents material to the case. The Resolution also contains
the SECs findings on the legality of PNBs foreclosure of the mortgages. The SEC held that when the rehabilitation
proceeding was terminated and the suspensive effect of the order staying the enforcement of claims was lifted, PNB
could already assert its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors.23 Before the CA, petitioner raised only the same
legal questions as there was no controversy involving factual matters. Petitioner claimed that the SEC erred in not
applying the rules on concurrence and preference of credits, and in denying its motion to nullify the auction sale of
the secured properties.24 Therefore, the assailed SEC Resolution is the only material portion of the record that should
be annexed with the petition for the CA to decide on the correctness of the SECs interpretation of the law and
jurisprudence on the matter before it.
Having so ruled, this Court would normally order the remand of the case to the CA for resolution of the substantive
issues. However, we find it more appropriate to decide the merits of the case in the interest of speedy justice
considering that the parties have adequately argued all points and issues raised. It is the policy of the Court to strive

to settle an entire controversy in a single proceeding, and to leave no root or branch to bear the seeds of future
litigation.25 The ends of speedy justice would not be served by a remand of this case to the CA especially since any
ruling of the CA on the matter could end up being appealed to this Court.
Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We answer in the
negative.
In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual antecedents
similar to the present case, the court has already settled the above question and upheld the right of the secured
creditor to foreclose the mortgages in its favor during the liquidation of a debtor corporation. In that case, Consuelo
Metal Corporation (CMC) filed with the SEC a petition to be declared in a state of suspension of payment, for
rehabilitation, and for the appointment of a rehabilitation receiver or management committee under Section 5(d) of
P.D. No. 902-A. On April 2, 1996, the SEC, finding the petition sufficient in form and substance, declared that "all
actions for claims against CMC pending before any court, tribunal, office, board, body and/or commission are
deemed suspended immediately until further orders" from the SEC. Then on November 29, 2000, upon the
management committees recommendation, the SEC issued an Omnibus Order directing the dissolution and
liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters Bank), one of CMCs creditors,
commenced the extrajudicial foreclosure of CMCs real estate mortgage. Planters Bank extrajudicially foreclosed on
the real estate mortgage as CMC failed to secure a TRO. CMC questioned the validity of the foreclosure because it
was done without the knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as
follows:
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no
longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over
unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits.
Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the
preference and prove their credits as ordinary claims.
Moreover, Section 2248 of the Civil Code provides:
"Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the
extent of the value of the immovable or real right to which the preference refers."
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a
right to foreclose the mortgage under Section 2248 of the Civil Code. The creditor-mortgagee has the right to
foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or
liquidation proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a
management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However,
the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order.27 (Emphasis supplied)
It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial Rehabilitation and
Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien during liquidation proceedings is
retained. Section 114 of said law thus provides:
SEC. 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 rights 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 his 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.1wphi1 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 debtors right of
redemption upon receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditors entire claim from the proceeds of the sale;
or
(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws. (Emphasis
supplied)
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged
properties should be respected, in line with our pronouncement in Consuelo Metal Corporation.
As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has elucidated in the
case of Development Bank of the Philippines v. NLRC28 that a distinction should be made between a preference of
credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a
charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 of
the Labor Code, does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a
preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the
order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to
a first preference in the discharge of the funds of the judgment debtor. Consequently, the right of first preference for
unpaid wages may not be invoked in this case to nullify the foreclosure sales conducted pursuant to PNB 's right as a
secured creditor to enforce its lien on specific properties of its debtor, ARCAM.
WHEREFORE, the petition for review on certiorari is DENIED.
With costs against the petitioner.
SO ORDERED.