or notes and/or accommodations were existing on the date thereof.
This
FIRST DIVISION
[G.R. No. 103576. August 22, 1996]
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA
PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
DECISION
VITUG, J.:
Would it be valid and effective to have a clause in a chattel mortgage
that purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant petition
for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-
petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June
1978, for and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way
of security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect -
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well
and truly perform the full obligation or obligations above-stated according to
the terms thereof, then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or notes
either as a renewal of the former note, as an extension thereof, or as a new
loan, or is given any other kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this
mortgage shall have the same force and effect as if the said promissory note
mortgage shall also stand as security for said obligations and any and all
other obligations of the MORTGAGOR to the MORTGAGEE of whatever
kind and nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage."[1]
In due time, the loan of P3,000,000.00 was paid by petitioner
corporation. Subsequently, in 1981, it obtained from respondent bank
additional financial accommodations totalling P2,700,000.00. [2] These
borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner
corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the
loan was not settled at maturity.[3] Respondent bank thereupon applied for
an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with
the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file
an action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City (Civil Case No.
C-12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by
the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals[4] which, on 14
August 1991, affirmed, "in all respects," the decision of the court a quo. The
motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially
denied on 04 March 1992 by this Court for having been insufficient in form
and substance. Private respondent filed a motion to dismiss the petition
while petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment
thereon.[5]
Except in criminal cases where the penalty of reclusion perpetua or
death is imposed[6] which the Court so reviews as a matter of course, an
appeal from judgments of lower courts is not a matter of right but of sound
judicial discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that
can unnecessarily clog the docket and needlessly consume the time of the
1
Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective
for, after all, the dispensation of justice is the core reason for the existence of
courts. In this instance, once again, the Court is constrained to relax the
rules in order to give way to and uphold the paramount and overriding
interest of justice.
Contracts of security are either personal or real. In contracts of
personal security, such as a guaranty or a suretyship, the faithful
performance of the obligation by the principal debtor is secured by
the personalcommitment of another (the guarantor or surety). In contracts of
real security, such as a pledge, a mortgage or an antichresis, that fulfillment
is secured by an encumbrance of property - in pledge, the placing of
movable property in the possession of the creditor; in chattel mortgage, by
the execution of the corresponding deed substantially in the form prescribed
by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a
written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his credit - upon the
essential condition that if the principal obligation becomes due and the
debtor defaults, then the property encumbered can be alienated for the
payment of the obligation,[7] but that should the obligation be duly paid, then
the contract is automatically extinguished proceeding from the accessory
character[8] of the agreement. As the law so puts it, once the obligation is
complied with, then the contract of security becomes, ipso facto, null and
void.[9]
While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are accurately
described,[10] a chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be
contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed
either by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel Mortgage
Law.[11] Refusal on the part of the borrower to execute the agreement so as
to cover the after-incurred obligation can constitute an act of default on the
part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts
extant at the time of constitution and during the life of the chattel mortgage
sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of good
faith. While it is not doubted that if such an affidavit is not appended to the
agreement, the chattel mortgage would still be valid between the parties (not
against third persons acting in good faith[12]), the fact, however, that the
statute has provided that the parties to the contract must execute an oath
that -
"x x x (the) mortgage is made for the purpose of securing the obligation
specified in the conditions thereof, and for no other purpose, and that the
same is a just and valid obligation, and one not entered into for the purpose
of fraud."[13]
makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated.In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract was
the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue
of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian
Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., [14] the Court
said -
"x x x A mortgage that contains a stipulation in regard to future advances in
the credit will take effect only from the date the same are made and not from
the date of the mortgage."[15]
The significance of the ruling to the instant problem would be that since the
1978 chattel mortgage had ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan,[16] there no longer was any chattel
mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case
should be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by
respondent bank against it."[17] This prayer is not reflected in its complaint
2
which has merely asked for the amount of P3,000,000.00 by way of moral
damages.[18] In LBC Express, Inc. vs. Court of Appeals,[19] we have said:
"Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. A corporation, being an
artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows, and griefs
of life - all of which cannot be suffered by respondent bank as an artificial
person."[20]
While Chua Pac is included in the case, the complaint, however, clearly
states that he has merely been so named as a party in representation of
petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in
pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:
`through a scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts and judicial
officers x x x.'"[23]
The virtues of humility and of respect and concern for others must still live on
even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal recourse
by private respondent as may still be warranted as an unsecured
creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.
Kapunan and Hermosisima, Jr., JJ., concur.
Padilla, J., took no part in view of lessor-lessee relationship with
respondent bank.
Bellosillo, J., on leave.

"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well
as the clear provisions of the Chattel Mortgage Law and well-settled
jurisprudence of this Honorable Court; that in the event that its explanation is
wholly unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in ridding our courts
of law of incompetent and dishonest magistrates especially members of a
superior court of appellate jurisdiction."[21] (Italics supplied.) Republic of the Philippines
SUPREME COURT
Manila
The statement is not called for. The Court invites counsel's attention to the
admonition in Guerrero vs. Villamor;[22]thus:
FIRST DIVISION
"(L)awyers x x x should bear in mind their basic duty `to observe and
maintain the respect due to the courts of justice and judicial officers and x x x G.R. No. 59255 December 29, 1995
(to) insist on similar conduct by others.' This respectful attitude towards the
court is to be observed, `not for the sake of the temporary incumbent of the OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,
judicial office, but for the maintenance of its supreme importance.' And it is vs.

3
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO
DOMDOMA, respondents.
BELLOSILLO, J.:
Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision
of the Court of Appeals1 which "modified" the order of the trial court
dismissing the complaint for lack of cause of action. The appellate court
remanded the case to the court a quo for private respondents to file their
responsive pleading and for trial on the merits.
On 17 December 1977 private respondents filed with the Regional Trial
Court of Manila an action against petitioners for collection of various sums of
money based on loans obtained by the latter. On 3 January 1978 petitioners
filed a motion to dismiss the complaint on the ground that the complaint
stated no cause of action and that plaintiffs had no capacity to sue.
After private respondents submitted their opposition to the motion to dismiss
on 9 January 1978 the trial court dismissed the case. A motion to reconsider
the dismissal was denied.
On 27 March 1978 private respondents appealed to the Court of Appeals
which on 11 December 1980 modified the order of dismissal "by returning
the records of this case for trial on the merits, upon filing of an answer
subject to the provisions of Articles 1182 and 1197 of the Civil Code for the
first cause of action. The other causes of action should be tried on the merits
subject to the defenses the defendants may allege in their answer."
The instant petition alleges that respondent court erred: (a) in not dismissing
the appeal for lack of appellate jurisdiction over the case which involves
merely a question of law; (b) in not affirming the order of dismissal for lack of
cause of action; and, (c) in holding that private respondents have a cause of
action under the second to the sixth causes of action of the complaint. 2
We cannot sustain the petition. Petitioners are now estopped from assailing
the appellate jurisdiction of the Court of Appeals after receiving an adverse
judgment therefrom.3 Having participated actively in the proceedings before
the appellate court, petitioners can no longer question its authority.
Petitioners submit that private respondents failed to specify in their complaint
a fixed period within which petitioners should pay their obligations; that
instead of stating that petitioners failed to discharge their obligations upon
maturity private respondents sought to collect on the checks which were
issued to them merely as security for the loans; and, that private
respondents failed to make a formal demand on petitioners to satisfy their
obligations before filing the action.
For a proper determination of whether the complaint filed by private
respondents sufficiently stated a cause of action, we shall examine the
relevant allegations in the complaint, to wit:
Allegations Common To All Causes of Actions
xxx xxx xxx
3. That sometime in . . . February, 1977, when the
Reycard Duet was in Manila, plaintiff Teresita got
acquainted with defendant Olivia in the jewelry business,
the former selling the jewelries of the latter; that to the
Reycard Duet alone, plaintiff Teresita sold jewelries worth
no less than ONE HUNDRED TWENTY THOUSAND
(P120,000.00) PESOS in no less than twenty (20)
transactions; that even when the Reycards have already
left, their association continued, and up to the month of
August, 1977, plaintiff Teresita sold for defendant Olivia
jewelries worth no less than TWENTY THOUSAND
(P20,000.00) PESOS, in ten (10) transactions more or
less;
xxx xxx xxx
5. That sometime in the month of June and July of 1977,
defendant Olivia, on two occasions, asked for a loan from
plaintiff Teresita, for the purpose of investing the same in
the purchase of jewelries, which loan were secured by
4
personal checks of the former; that in connection with
these loans, defendant promised plaintiff a participation in
an amount equivalent to one half (1/2) of the profit to be
realized; that on these loans, plaintiff was given a share in
the amount of P1,200.00 in the first transaction, and in the
second transaction, the sum of P950.00;
First Cause of Action
6. That on August 15, 1977, defendant Olivia got from
plaintiff Teresita, one diamond ring, one and one half (1-
1/2) karats, heart shape, valued in the amount of Fifteen
thousand (P15,000.00) Pesos; that as a security for the
said ring, Olivia issued a Philippine Commercial and
Industrial Bank Check, San Sebastian Branch, dated
August 15, 1977, No. 13894, copy of which is hereto
attached and made a part hereof as Annex "A";
7. That the condition of the issuance of the check was — if
the ring is not returned within fifteen (15) days from August
15, 1977, the ring is considered sold; that after fifteen
days, plaintiff Teresita asked defendant Olivia if she could
deposit the check, and the answer of defendant Olivia was
— hold it for sometime, until I tell you to deposit the same;
that the check was held until the month of November,
1977, and when deposited, it was dishonored for lack of
sufficient funds; that for the reason that the
aforementioned check was not honored when deposited,
defendant Olivia should be held liable for interest at the
rate of one percent a month, from date of issue, until the
same is fully paid;
Second Cause of Action
8. That on August 25, 1977, plaintiff Teresita extended a
loan to the herein defendant Olivia in the amount of TEN
THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial and Industrial Bank Check,
PCIBANK Singalong Branch, No. 14307, dated Sept. 25,
1977, photo copy of which is hereto attached and made a
part hereof as Annex "B";
9. That this loan was extended upon representation of
defendant Olivia that she needed money to pay for
jewelries which she can resell for a big profit; that having
established her goodwill, by reason of the transaction
mentioned in par. "5" hereof, the loan was extended by
plaintiff;
10. That this check, Annex "B", when deposited was
dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be
held liable for interest at the rate of one percent (1%) per
month, from the date of issue until fully paid;
Third Cause of Action
11. That on August 27, 1977, plaintiff extended to
defendant Olivia a loan in the amount of FIVE
THOUSAND PESOS (P5,000.00), secured by a Philippine
Commercial & Industrial Bank check, PCIBANK Singalong
Branch, No. 14308, dated Sept. 27, 1977, photo copy of
which is hereto attached and made a part hereof as Annex
"C";
12. That this loan was extended on the same
representation made by defendant Olivia, stated in par.
"9", under the terms and conditions stated in par. "5"
hereof;
13. That the check Annex "C", has not as yet been paid up
to now, hence, defendant Olivia should be held liable for
interest at the rate of one percent (1%) monthly, from date
of issue, until fully paid;
Fourth Cause of Action
5
14. That on August 30, 1977, plaintiff Teresita, extended a
loan in favor of defendant Olivia, in the amount of Five
Thousand (P5,000.00) Pesos, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK
Singalong Branch, No. 14311, dated Sept. 30, 1977, photo
copy of which is hereto attached and made a part hereof
as Annex "D";
15. That this loan was extended on the same
representation made by defendant Olivia, as stated in par.
"9" hereof, under the terms and conditions stated in par.
"5" hereof;
16. That this check, Annex "D" has not as yet been paid
up to now, hence, she should be held liable for interest
thereon at the rate of one percent (1%) per month, from
date of issue, until fully paid;
Fifth Cause of Action
17. That on Sept. 15, 1977, plaintiff Teresita extended a
loan in favor of defendant Olivia, in the amount of TEN
THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial & Industrial Bank check, PCIBANK
Singalong Branch, No. 14320, dated October 15, 1977,
photo copy of which is hereto attached and made a part
hereof as Annex "E";
18. That this loan was given on the same representation
made by defendant Olivia, stated on par. "9" hereof, and
under the terms and conditions stated in par. "5" hereof;
19. That this check Annex "E" when deposited was
dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be
held liable for interest at the rate of one percent (1%)
monthly, from date of issue, until fully paid;
Sixth Cause of Action
20. That on Sept. 27, 1977, plaintiff Teresita extended a
loan to defendant Olivia, in the amount of TEN
THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial & Industrial Bank check, No.
14325, dated October 27, 1977, photo copy of which is
hereto attached and made a part hereof as Annex "F";
21. That this loan was given on the same representation
made by defendant Olivia, stated in par. "9" hereof, and
under the terms and conditions stated in par. "5" hereof;
22. That this check, Annex F, when deposited was
dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be
held liable for interest thereon, at the rate of one percent
(1%) monthly, from date of issue, until fully paid;
Seventh Cause of Action
23. That plaintiff, by reason of the two transactions in par.
"5" hereof, reposed trust and confidence on defendant
Olivia, however, by virtue of these trust and confidence,
she availed of the same in securing the loans
aforementioned by misrepresentations, and as a direct
consequence thereof, the loans have not as yet been
settled up to now, for which plaintiff Teresita suffered
sleepless nights, mental torture and wounded feelings, for
the reason that the money used in said transactions do all
belong to her; that this situation is further aggravated by
the malicious act of defendant Olivia, by having filed a
complaint with the Manila Police, to the effect that she
(Teresita) stole the checks involved in this case; that as a
consequence thereof, she was investigated and she
suffered besmirched reputation, social humiliation,
wounded feelings, moral shock and similar injuries, for
which defendant Olivia should be held liable, as and by
way of moral damages in the amount of EIGHTY
THOUSAND (P80,000.00) PESOS;
6
 Eight Cause of Action
24. That as and by way of exemplary or corrective
damages, to serve as an example or correction for the
public good, defendant Olivia should be held liable to pay
to the herein plaintiff Teresita, the amount of Ten
Thousand Pesos, as exemplary damages;
Ninth Cause of Action
25. That plaintiff, in order to protect her rights and
interests, engaged the services of the undersigned, and
she committed herself to pay the following:
a. The amount of P200.00 for every appearance in the trial
of this case.
b. The amount of P2,000.00 as retainers fees.
c. An amount equivalent to ten percent of any recover from
defendant.
On the basis of the allegations under the heading Allegations Common to all
Causes of Action above stated as well as those found under the First Cause
of Action to the Ninth Cause of Action, should the complaint be dismissed for
want of cause of action?
A cause of action is the fact or combination of facts which affords a party a
right to judicial interference in his behalf. The requisites for a cause of action
are: (a) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created, (b) an obligation on the part of the
defendant to respect and not to violate such right; and, (c) an act or omission
on the part of the defendant constituting a violation of the plaintiff's right or
breach of the obligation of the defendant to the plaintiff.4 Briefly stated, it is
the reason why the litigation has come about; it is the act or omission of
defendant resulting in the violation of someone's right. 5
In determining the existence of a cause of action, only the statements in the
complaint may properly be considered. Lack of cause of action must appear
on the face of the complaint and its existence may be determined only by the
allegations of the complaint, consideration of other facts being proscribed
and any attempt to prove extraneous circumstances not being allowed.
If a defendant moves to dismiss the complaint on the ground of lack of cause
of action, such as what petitioners did in the case at bar, he is regarded as
having hypothetically admitted all the averments thereof. The test of
sufficiency of the facts found in a complaint as constituting a cause of action
is whether or not admitting the facts alleged the court can render a valid
judgment upon the same in accordance with the prayer thereof. The
hypothetical admission extends to the relevant and material facts well
pleaded in the complaint and inferences fairly deducible therefrom. Hence, if
the allegations in a complaint furnish sufficient basis by which the complaint
can be maintained, the same should not be dismissed regardless of the
defense that may be assessed by the defendants.6
In their first cause of action private respondents Eduardo and Teresita
Domdoma alleged that petitioner Olivia Navoa obtained from the latter a ring
valued at P15,000.00 and issued as security therefor a check for the same
amount dated 15 August 1977 with the condition that if the ring was not
returned within fifteen (15) days the ring would be considered sold; and, after
the lapse of the period, private respondent Teresita Domdoma asked to
deposit the check but petitioner Olivia Navoa requested the former not to
deposit it in the meantime; that when Teresita Domdoma deposited the
check after holding it for sometime the same was dishonored for lack of
funds. Private respondent Teresita Domdoma sought to collect the amount
of P15,000.00 plus interest from 15 August 1977 until fully paid.
From these facts the ring was considered sold to petitioner Olivia Navoa 15
days from 15 August 1977 and despite the sale the latter failed to pay the
price therefor even as the former was given ample time to pay the agreed
amount covered by a check. Clearly, respondent Teresita Domdoma's right
under the agreement with petitioner Olivia Navoa was violated by the latter.
In the second to the sixth causes of action it was alleged that private
respondents granted loans to petitioners in different amounts on different
dates. All these loans were secured by separate checks intended for each
amount of loan obtained and dated one month after the contracts of loan
7
were executed. That when these checks were deposited on their due dates WHEREFORE, the petition is DENIED. The judgment of the Court of
they were all dishonored by the bank. As a consequence, private Appeals dated 11 December 1980 remanding the case to the trial court for
respondents prayed that petitioners be ordered to pay the amounts of the the filing of petitioners' answer and thereafter for trial on the merits is
loans granted to them plus one percent interest monthly from the dates the AFFIRMED. Costs against petitioners.
checks were dishonored until fully paid.
SO ORDERED.
Culled from the above, the right of private respondents to recover the
amounts loaned to petitioners is clear. Moreover, the corresponding duty of Padilla, Davide, Jr., Kapunan and Hermosisima, Jr., JJ., concur.
petitioners to pay private respondents is undisputed. The question now is
whether Petitioners committed an act or omission constituting a violation of
the right of private respondents.

All the loans granted to petitioners are secured by corresponding checks

dated a month after each loan was obtained. In this regard, the term security
is defined as a means of ensuring the enforcement of an obligation or of Republic of the Philippines
protecting some interest in property. It may be personal, as when an SUPREME COURT
individual becomes a surety or a guarantor; or a property security, as when a Manila
mortgage, pledge, charge, lien, or other device is used to have property
held, out of which the person to be made secure can be compensated for EN BANC
loss.7 Security is something to answer for as a promissory note.8 That is why
a secured creditor is one who holds a security from his debtor for payment of
a debt.9From the allegations in the complaint there is no other fair inference G.R. No. L-18535 August 15, 1922
than that the loans were payable one month after they were contracted and
the checks issued by petitioners were drawn to answer for their debts to THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
private respondents. vs.
VENANCIO CONCEPCION, defendant-appellant.
Petitioners failed to make good the checks on their due dates for the
payment of their obligations. Hence, private respondents filed the action with Hartigan and Welch, and Recaredo M.a Calvo for appellant.
the trial court precisely to compel petitioners to pay their due and Attorney-General Villa-Real for appellee.
demandable obligations. Art. 1169 of the Civil Code is explicit — those
obliged to deliver or to do something incur in delay from the time the obligee
STATEMENT
judicially or extrajudicially demands from them the fulfillment of their
obligation. The continuing refusal of petitioners to heed the demand of
private respondents stated in their complaint unmistakably shows the February 4, 1916, the Legislature of the Philippine Islands passed Act No.
existence of a cause of action on the part of the latter against the former. 2612, known as the charter of the Philippine National Bank, under which it
was organized with plenary powers and a capital stock of P20,000,000
divided into 200,000 shares of the par value of P100 each, 101,000 of which
Quite obviously, the trial court erred in dismissing the case on the ground of
to be subscribed, owned and held by the Government, and the remainder by
lack of cause of action. Respondent Court of Appeals therefore is correct in
private persons.
remanding the case to the trial court for the filing of an answer by petitioners
and to try the case on the merits.

8
Section 37 provides:
The National Bank shall never at any time, under any
circumstances, directly or indirectly grant to any individual,
company of individuals, firm, corporation, Insular, provincial or
municipal government any real estate mortgage loan exceeding the
sum of fifty thousand pesos, or any other loan exceeding the sum of
three hundred thousand pesos.
Section 38 provides:
The National Bank shall not directly or indirectly grant loans to any
of the members of the board of directors of the bank nor to agents
of the branch banks. Said National Bank is hereby prohibited from
making any loan directly or indirectly in excess of one thousand
pesos to any member of the Philippine Legislature or to any official
or employee of the Insular, provincial, or municipal governments
except upon satisfactory real estate security.
Section 53:
Any person who shall violate any of the provisions of this Act shall
be punished by a fine not to exceed ten thousand pesos, or by
imprisonment not to exceed five years, or by both such fine and
imprisonment.
February 20, 1918, the Legislature passed Act No. 2747, entitled "An Act to
amend in certain particulars Act Numbered Twenty-six hundred and twelve,
entitled 'An Act creating the Philippine National Bank,' which provides:"
In order to explain certain provisions, increase the stability of the
institution, and extend its powers, Act Numbered Twenty-six
hundred and twelve, entitled "An Act creating the Philippine
National Bank," is hereby amended in certain particulars, so that
hereafter the said Act shall read as follows:
Section 35 of which provides:
The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of directors of the bank nor to agents
of the branch banks.
Section 49:
Any person who shall violate any of the provisions of this Act shall
be punished by a fine not to exceed ten thousand pesos, or by
imprisonment not to exceed five years, or by both such fine and
imprisonment.
January 30, 1921, the Legislature passed Act No. 2938 entitled "An Act to
amend Act Numbered Twenty-six hundred and twelve, entitled 'An Act
creating the Philippine National Bank,' as amended by Act Numbered
Twenty-seven hundred and forty-seven."
It also provides:
Act Numbered Twenty-six hundred and twelve, entitled "An Act
creating the Philippine National Bank, as amended by Act
Numbered Twenty-seven hundred and forty-seven, is hereby
amended in certain particulars, so that hereafter the said Act shall
read as follows:
The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of directors, the general manager,
assistant general manager, and employees of the bank, nor to
agents or employees of the branch banks, and no loan shall be
granted to a corporation, partnership or company wherein any
member of the board of directors is a shareholder, agent or
employee in any manner, except by the unanimous vote of the
members of the board, excluding the member interested: Provided,
That the total liabilities to the Bank of any corporation wherein any
of the members of the board of directors is a shareholder, agent or
employee in any manner, shall at no time exceed ten per centum of
the surplus and paid-up capital of the Bank.
All Acts or parts of Acts inconsistent or incompatible with the
provisions of this Act are hereby repealed.
9
Section 43:
Any member of the board of directors of the National Bank who
knowingly violates or knowingly permits any of the officers, agents,
or servants of the Bank to violate any of the provisions of this Act,
and any officer, employee, agent, or servant of the Bank who
violates any of the provisions of this Act and any person aiding and
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by
imprisonment not to exceed five years or by both such fine and
imprisonment.
At all of the material times hereinafter stated, the defendant, Venancio
Concepcion, was the duly elected, qualified and acting President of the
Philippine National Bank, which was organized and continued to exist under
the respective legislative acts.
June, 1918, what is known in the record as the Binalbagan Estate, Inc., was
organized by the agriculturists in the provinces of Occidental Negros and
Iloilo, with a capital stock of P10,000. Its primary purpose was to foster the
manufacture and refinement of centrifugal sugar and its by-products. Only
P2,500 of the capital stock was paid, and, for a long time, little, if anything,
was done. In 1920 its corporate interests were acquired by Phil. C. Whitaker
and the defendant, who reorganized the company with a capital stock of
P500,000 divided into 5,000 shares of the par value of P100 each, out of
which Whitaker was issued a certificate for 1,865 shares and the defendant
1,615 shares, and the firm of Puno, Concepcion and Co. a certificate for 250
shares, and the remainder to other and different persons. In the month of
November, 1910, the capital stock was increased to P1,500,000, and 6,053
shares of stock were issued to the defendant, portions of which he
transferred to other persons, among whom were his immediate relatives.
Notwithstanding the fact that the original capital stock was for P10,000, and
that it was increased to P500,000 and again to P1,500,000, there is no
registered document in the Bureau of Commerce and Industry in either case
showing the increase of the capital stock of the estate.
January 30, 1920, Whitaker, Luzuriaga, and the defendant entered into an
agreement as partners to acquire and operate what is known as the "Palma"
sugar central and hacienda in the municipality of Ilog, Occidental Negros, a
short distance from the property of the Binalbagan Estate. Under this
agreement, Whitaker and the defendant were to each have 40 per cent and
Luzuriaga 20 per cent. Concurrent therewith, the three entered into another
agreement with Salvador Serra for the sale and purchase of his business
known as central and hacienda "Palma" at an agreed price of P1,500,000,
P150,000 of which was to be paid on or before June 30, 1920, when the
property was to be actually conveyed, and to assume a mortgage on the
property for P600,000, the remainder to be paid in three installments of
P250,000 each, respectively, on or before June 30, 1921, 1922, and 1923.
January 29, 1920, this contract was duly signed by all of the respective
parties, and was duly witnessed and acknowledged before a notary public.
On January 10, 1919, Salvador Serra executed a mortgage upon all of this
property in favor of the Philippine National Bank for P600,000, which was
then owned and held by the bank, and in full force and effect.
On July 17, 1920, in the office of the Philippine National Bank and in the
presence of the defendant and Whitaker, and in accord with the terms and
provisions of the instrument of January 29, 1920, Salvador Serra made,
executed and delivered a deed of conveyance of the property described in
the contract of January 29, 1920, and at the same time and place, and as a
part of the transaction, Whitaker delivered to Salvador Serra the check of the
Binalbagan Estate drawn upon the Philippine National Bank for P750,000,
which was honored and paid by the bank, and out of which it satisfied the
mortgage, which it then held on the "Palma" hacienda, for P600,000 with
accrued interest amounting to P26,218.66, and gave Salvador Serra credit in
his current account in its branch at Iloilo for P123,781.34, making a total of
P750,000, which the defendant and his associates had agreed to pay under
the contract of January 29, 1920, thus consummating the deal.
On July 17, 1920, the Binalbagan Estate was indebted to the Philippine
National Bank more than P3,000,000, and did not have the money with
which to pay the check of P750,000. To provide the necessary funds, it
executed its promissory note payable on sight for that amount to the
Philippine National Bank, which was presented to Vicente Gaskell, then in
charge of loans and discounts, who in turn presented the note to the
defendant for his approval, and the defendant then and there approved the
loan to the estate, and initialed the note "V. C." which was his customary and
usual method of approving loans, and after the defendant approved the loan,
the check of the Binalbagan Estate for P750,000 was honored by the bank,
10
and the account of the Binalbagan Estate was then credited with the amount
of P750,000.
In his weekly report of July 22, it appears that Gaskell made a report of the
P750,000 loan to the Binalbagan Estate, but that no specific mention was
made of the loan by the defendant in his report, and that no record of the
loan was made in the corporate minutes of the Board of Directors as of July
23, 1920.
By the provisions of Act No. 2938, the capital stock of the bank was
increased from P20,000,000 to P50,000,000.
Following an investigation, an information was filed in the Court of First
Instance against the defendant, which was later amended, charging him, as
President of the Bank, with a violation of the provisions of section 35 as it
relates to section 49 of Act No. 2747 of the Philippine Legislature above
quoted. In substance, and to the effect that, through the commission of such
acts and in the making of the loan of P750,000 to the Binalbagan Estate, the
defendant was guilty of a violation of section 35, and should be punished
under section 49 of Act No. 2747. Upon this charge, he was arraigned, tried,
convicted and sentenced to two years of imprisonment and to pay a fine of
P5,000 and costs, from which the defendant appeals and assigns the
following errors:
I. The trial court erred in overruling the demurrer interposed by the defense
on the ground that the facts alleged in the complaint do not constitute a
violation of Act No. 2747.
II. The trial court likewise erred in overruling the motion for dismissal,
interposed by the defense, on the ground that the prosecution has not
proved the essential facts alleged in the complaint.
III. The trial court likewise erred in not ordering the striking out of the hearsay
testimony of the witnesses for the prosecution, notwithstanding the petition
of the defense, as well as in permitting the fiscal to ask leading questions on
incompetent, immaterial and irrelevant facts, to the witnesses for the
prosecution, and the latter to answer said questions which were objected to
by the defense.
IV. The court likewise erred in admitting as proof Exhibits B, C, D, E, F, F-1,
G, H, K, L, P, V-15, X, Y, Y-1, AA, BB, CC, DD, FF, GG, GG-1, HH, HH-1 to
HH-12, JJ, JJ-1, and JJ-2 of the prosecution, notwithstanding that they were
objected to by the defense as being incompetent, irrelevant, and immaterial,
for they are not the best proof and not having been duly authenticated.
V. The trial court likewise erred in declaring that about the first months of the
year, 1920, a great portion of the interests of the Binalbagan Estate, Inc.,
was acquired by Phil. C. Whitaker and the accused, V. Concepcion.
VI. The lower court likewise erred in declaring that the firm of Puno,
Concepcion and Co., Ltd., is exclusively composed of the accused and the
members of his family.
VII. The lower court also erred in declaring that the writing executed on
January 29, 1920, by Salvador Serran, the owner of the hacienda and the
central "Palma" in favor of Whitaker, Concepcion, and Luzuriaga was an
option and not a purchase and sale.
VII. The lower court likewise erred in declaring that at the time in which the
Binalbagan Estate, Inc., drew the check for P750,000 in favor of Salvador
Serran, the same had obtained from the National Bank, under the signature
and authorization of its president, the accused herein, several credits,
overdrafts and loans, which amounted to several millions of pesos.
IX. The lower court likewise erred in declaring that the limit of the credit
allowed by the National Bank to the Binalbagan Estates, Inc., in the week
which terminated on the 22d of July, 1920, was P3,660,000.
X. The lower court likewise erred in declaring that the Binalbagan Estate,
Inc., had been obtaining credits from the Philippine National Bank for various
amounts, against which it was obtaining loans for amounts which at times
were included in the total sum of the credit allowed, and at times exceeded
the limit of said credit.
XI. The lower court likewise erred in not declaring that the concession by the
Philippine National Bank to the Binalbagan Estate, Inc., of P750,000 on July
17, 1920, has been made with the unanimous consent of the members of the
Board of Directors of the bank.
11
XII. The lower court likewise erred in declaring contrary to section 10 of Act
No. 2612, as amended by Act No. 2938, that the obligations contracted with
the National Bank by virtue of the discount of negotiable papers, bills of
exchange, and promissory notes, are loans.
XIII. The lower court also erred in declaring that the opinion of the Insular
Auditor, the ex-officio Auditor of the Bank, cannot in any manner serve as a
standard of conduct for the officers of the bank.
XIV. The lower court likewise erred in declaring that the sum of P750,000
given to the Binalbagan Estate, Inc., by the National Bank on July 17, 1920,
was a loan granted on said date and not on the date on which the credit
contract was perfected.
XV. The lower court lastly erred in finding the accused guilty of the violation
with which he is charged in the complaint, sentencing him to two years of
imprisonment, and to pay a fine of P5,000 and costs of the action.
JOHNS, J.:
There is a clear and correct analysis of the facts in the exhaustive opinion of
the trial court, and there is but little, if any, dispute about any of the material
facts. The testimony is conclusive that the defendant either owned or
controlled about 40 per cent of the capital stock of the Binalbagan Estate,
which, at the time of the above transaction, was indebted to the Philippine
National Bank more than P3,000,000. That the bank then owned and held a
first mortgage lien upon the "Palma" property for P600,000, which it satisfied
and discharged out of the proceeds of the check of Binalbagan Estate for
P750,00. That is to say, as a result of the transaction, the bank satisfied its
mortgage lien for P600,000 with accrued interest, and in lieu thereof took
and accepted the unsecured promissory note of Binalbagan Estate for
P750,000, and, including the amount of that note, the total indebtedness to
the bank then amounted to P3,952,672.77.
The testimony is also conclusive that the P750,00 loan was personally
approved by the defendant, and was made upon his personal responsibility,
and that, so far as it appears in the record, no other officer or director was
ever consulted about the transaction or the making of the loan at any time
prior to its consummation.
The testimony is also conclusive that on the very day that the note was
presented to the bank by the Binalbagan Estate, the loan was
consummated, and the amount of it was placed to the credit of the
Binalbagan Estate, which in turn drew its check for the full amount of the
loan, which was honored by the bank when presented.
In this connection, it will be noted that the capital stock of the bank was then
P20,000,00, and the total amount of the indebtedness of Binalbagan Estate
to the bank was P3,952,672.77.
Section 35 of Act No. 2747 provides:
The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of directors of the bank nor to agents
of the branch banks.
Section 37 of Act No. 2612, above quoted, limits the amount of any real
estate mortgage loan to P50,000 or any other loan to P300,000. There is no
such limitation in Act No. 2747, and in so far as it is material to this opinion,
section 38 of Act No. 2612 is identical with section 35 of Act No. 2747.
Defendant's counsel ably and adroitly contend that the limitation provided for
in the act is upon the bank itself, and that it does not apply to the defendant,
as President of the Bank.
The bank is a corporation organized by special act of the Legislature, and it
could only act or operate through its officers and board of directors. While
the corporation itself might be made subject to a fine for a criminal offense, it
could not be imprisoned, and it will be noted that section 53 of the original
Act, which is identical with the other two Acts, says:
Any person who shall violate any of the provisions of this Act shall
be punished by a fine not to exceed ten thousand pesos, or by
12
 imprisonment not to exceed five years, or by both such fine and
imprisonment.
The limitation in Section 35 of Act No. 2747 says:
The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of directors of the bank not to agents
of the branch banks.
And section 53 of Act No. 2612 says:
Any person who shall violate any of the provisions of this Act, etc.,"
and provides for a fine or imprisonment or both, and it must be
conceded that the bank itself could not be imprisoned for a violation
of section 35.
It is very apparent that section 35 was intended to prohibit the making of any
loan by the bank to an officer or director of the bank.
It is also claimed that the loan to the defendant within the meaning of section
35. He was the President and active Manager of the Bank, and was the
owner and had under his control about 40 per cent of the capital stock of the
Binalbagan Estate, which was also a corporation, which was then indebted
to the bank more than 15 per cent of the capital stock of the bank. With
P750,000 loan, its idebtedness to the bank amounted to very little less than
20 per cent of the capital stock of the bank.
Upon that question, the case of People vs. Knapp (132 N.Y. Supp., 747), is
square in point. There, third count of the indictment charged the defendant
with violating subdivision 11 of section 186 of the banking law in the making
of a loan to him as director by a loaning of the money to the copartnership of
which he was a member, and that it was done through the direction,
permission, advice, and procurement of the defendant.
The court said:
We are of opinion the statute forbade the loan to his copartnership
firm as well as to himself directly. The loan was made indirectly to
him through his firm. . . .
An appeal was taken, and the lower court was affirmed in (206 N. Y. 373),
and the case is reported in 11 Am. Ann. Cases, p. 243, in which the syllabus
says:
The prohibition in a statute forbidding a corporation to do an act
extends to the board of directors and to each director separately
and individually.
And the opinion says:
As to the remaining counts the defendant insists that the command
that a corporation shall not do a certain act is not a command that
he directors shall not do the act. A corporation, however, is a mere
conception of the legislative mind. It exists only on paper through
the command of the legislature that its mental conception shall be
clothed with power. All its power resides in the directors. Inanimate
and incapable of thought, action or neglect, it cannot hear or obey
the voice of the legislature except through its directors. It can
neither act nor omit to act except through them. Hence a command
addressed to a corporation would be idle and vain unless the
legislature in directing the corporate body, acting wholly by its
directors, to do a thing required or not to do a thing prohibited,
meant that the directors should not make or cause the corporation
to do what was forbidden, or omit to do what was directed. We
think, as the appellate division held, that when the corporation itself
is forbidden to do an act, the prohibitions extends to the board of
directors and to each director, separately and individually.
. . . The Banking Law should be construed in accordance with the
obvious intention of the legislature so as to permit flexibility and to
prevent looseness in doing business. The prime object is to protect
the public, including depositors, and after that to enable the
stockholders to secure a fair return from their investment. Banking
institutions are not created for the benefit of the directors. While
directors have great powers as directors, they have no special
13
 privileges as individuals. They cannot use the assets of the bank for
their own benefit except as permitted by law. Stringent restrictions
are placed about them so that when acting both for the bank and for
one of themselves at the same time, they must keep within certain
prescribed lines regarded by the legislature as essential to safety in
the banking business.
The only difference as to the facts is that, there, the money was loaned to a
copartnership of which the defendant was a member, and, here it is loaned
to a corporation of which the defendant was one of the heaviest
stockholders. Here, good faith on the part of the defendant and sound
banking would not permit the personal satisfaction by him, as President of
the Bank, of a first mortgage loan of P600,000, and the taking in lieu thereof,
and as a substitute therefor, of the unsecured promissory note of the
Binalbagan Estate in which he owned and controlled at least 40 per cent of
its capital stock and it is very apparent that the defendant would never have
authorized the loan of P750,000, or satisfied the mortgage of P600,000, if he
had not been a heavy stockholder in the Binalbagan Estate. The fact that he
was such a stockholder was one of the main inducements and the primary
consideration for his approval of the transaction.
It will be noted that section 35 of Act No. 2747 does not contain any
exception or proviso, and that section 29 of Act No. 2938, which was
enacted in 1921, says:
The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of directors, the general manager,
assistant general manager, and employees of the Bank, nor to
agents or employees of the branch banks, and no loan shall be
granted to a corporation, partnership or company wherein any
member of the board of directors is a shareholder, agent or
employee in any manner, except by the unanimous vote of the
members of the board, excluding the member interested: Provided,
That the total liabilities to the Bank of any corporation wherein any
of the members of other board of directors is a shareholder, agent
or employee in any manner, shall at no time exceed ten per centum
of the surplus and paid-up capital of the bank.
This section was enacted in 1921, and section 35 above quoted was
enacted in 1918, and section 42 of Act No. 2938 expressly provides that:
All Acts or parts of Acts inconsistent or incompatible with the
provisions of this Act are hereby repealed.
Defendant's counsel vigorously contend that the P750,000 loan to
Banalbagan Estate was reported to, and approved by, the Board of
Directors; that section 35 of Act No. 2747 was repealed, and that section 29
of Act No. 2939 is the law under which the defendant should be prosecuted.
Construing section 29, the record here is conclusive that the defendant,
acting and representing the bank, personally made and consummated the
loan, and that upon his personal advice and instructions, the check was paid,
and that personally, as President, he satisfied the mortgage for P600,000.
He not only authorized the making of the loan, but made the loan himself
without the consent or the authority of the Board of Directors, and the loan
was consummated, and the bank parted with the money without the
knowledge of the Board of Directors. It was a completed transaction. There
is a marked difference between the authority of the president of the bank to
promise or negotiate a loan and the making of the loan itself.
Section 29 of Act No. 2938 contemplates that no loan shall ever be made to
any officer o the bank until such time as it is submitted to, and approved by,
the unanimous vote of the Board of Directors, excluding the applicant for the
loan. But, here, the loan was consummated and the transaction was
completed several days before it was ever brought to the knowledge or
attention of the directors, and, even assuming that they did ratify a loan of
that character, it would not constitute a defense. The law was violated in the
making and consummation of the loan without the knowledge or consent of
the Board of Directors. If the Binalbagan Estate had applied to the
defendant, as President of the Bank, for the loan in question, and if, upon its
receipt, he had submitted the application to the Board of Directors
recommending the loan, and acting upon his advice the Board had approved
the loan, and the loan had been made after such approval by the board,
another and different question would have been presented, and there would
have been merit in such a defense, but that is not this case.
Even under section 29, the consent and approval of the Board of Directors
was a condition precedent to the making of the loan in question, and the fact
that the Board of Directors a few days after the offense was committed may
have approved it would not be a defense to the commission of the crime. In
other words, assuming that the Board of Directors did approve of a violation
14
of the law, it would not aid the defendant. He was occupying a position of
special trust and confidence, and was the president and head of the most
important financial institution in the whole Philippine Islands. His powers and
duties were defined and described in the corporate charter of the bank. It
was organized under a special act, and the Government itself subscribed for,
and was the owner of, the majority of its capital stock. It was the purpose
and intent to make it a conservative, strong and safe bank, and numerous
provisions were made in the Act for its safety an stability, among which was
section 35 of Act No. 2747.
Here, you have the President of the Bank upon his own initiative and his sole
approval authorizing, making and perfecting a loan of P750,000 to a
corporation in which he owned and controlled 40 per cent of its capital stock.
It was never the purpose or intent of the corporate charter that any officer of
the bank should have, assume or exercise any such arbitrary or autocratic
power.
It is worthy of note that the material provisions of the law prohibiting a loan to
an officer of the bank are almost identical in each legislative act. Also, that
the punishment for a violation is the same in each Act.
Hence, we must assume that at all times, it was the purpose and intent of
the Legislature that no loan should ever be made by the bank to any officer
or director, except under the express provisions of the law.
The loan was maid while Act No. 2747 was in force and effect and before the
passage of Act No. 2938, and appellant's counsel vigorously contend that
Act No. 2747 was repealed by Act No. 2938, and appellant's counsel
vigorously contend that Act No. 2747 was repealed by Act No. 2938, and
that the repeal of the one and the enactment of the other operated as a
release and discharge of all crime which were committed prior to the
passage of Act No. 2938. In other words, that the Act of the Legislature
released the defendant of any crime which he may have committed prior to
January, 1921.
We do not believe that it was ever the purpose or intention of the Legislature
to release anyone from a crime committed under either one of the Acts, and,
in particular, as to the offense described in the information. As stated upon
the question here involved, each one of the legislative acts expressly
prohibits the bank from loaning any of its money to an officer or director, and
the only difference is found in the latter portion of section 29 of Act No. 2938,
which, upon the undisputed facts, is not material to the question involved
here.
Section 42 of Act No. 2938 says:
All Acts or parts of Acts inconsistent or incompatible with the 
provisions of this Act are hereby repealed.
Upon the disputed facts, there is nothing inconsistent or incompatible with
either section 37 of Act No. 2612, or section 35 of Act No. 2747, as
construed with section 29 of Act No. 2938. Each section expressly prohibits
the making of a loan by the Bank to an officer, and the only difference is the
proviso in section 29, which does not apply to the facts here. There is
nothing in section 37 or in section 35 which is inconsistent or incompatible
with section 29. Each of them was intended to prohibit the Bank from loaning
money to an officer of the bank.
Much stress is laid upon article 22 of the Penal Code, which says:
Penal laws shall have a retroactive effect in so far as they favor the
person guilty of a felony or misdemeanor, although at the time of
the publication of such laws a final sentence has been pronounced
and the convict is serving same.
For the reason that the bank here was incorporated under a special Act, that
article should be construed as it relates to article 7, which says:
Offenses punishable under special laws are not subject to the
provisions of this code.
This was construed in United States vs. Cuna (12 Phil., 241), in which this
court held:
Where an Act of the Commission or of the Philippine Legislature
which penalizes an offense repeals a former Act which penalizes
the same offense, such repeal does not have the effect of thereafter
15
 depriving the courts of jurisdiction to try, convict, and sentence
offenders charged with violations of the old law prior to its repeal.
Article 22 was further construed and applied in United States vs. Parrone (24
Phil., 29).
But, in the instant case, there is no change in the law for the punishment of
the crime, and section 42 of Act No. 2938 limits the repeal to such portions
only of the previous law as are inconsistent or incompatible with Act No.
2938.
Section 35 says:
The National Bank shall not, directly or indirectly, grant loans to any
of the members, etc.
Appellant contends that the transaction involved here was a discount of the
note of the estate as distinguished from a loan, and, hence, that it was not a
violation of the law. Suffice it to say that, in enacting the law, the Legislature
was not dealing with, and knew but very little, if anything, of, the subtle
distinction between loans and discounts. Section 35 was intended to prohibit
any officer of the bank from borrowing or using any money of the bank for
any purpose. Again, an analysis of the facts clearly shows that the
transaction was a loan, and that it did not have any of the elements of a
discount.
The face value of the original mortgage, which the bank held on the
"Palma" hacienda, was P600,000, and the accrued interest was P26,218.66,
and the amount of the check, which the bank gave to Salvador Serra was
P123,781.34, the amount of the check, which the bank gave to Salvador
Serra was P123,781.34, the total amount of which was P750,000, which is
the identical amount of the note which was executed by the Binalbagan
Estate to the bank at the time the deal was closed, hence, the evidence is
conclusive that it was a loan as distinguished from a discount.
In August, 1916, a question arose as to the construction which should be
placed upon sections 37 and 38 of Act No. 2612, and an opinion of the then
Insular Auditor was rendered, which apparently gave color to the legal right
of the Bank to defeat • the purpose and intent of those sections, and the
defendant claims that he was justified in his conduct through the previous
acts and the established custom of the bank, and it is true that, in the
ordinary course of business, but little attention was paid to the provisions of
those sections. The Auditor was not the legal adviser of the Bank.
Section 25 of the original act expressly provides that:
The Attorney-General of the Philippine Islands shall be attorney for
said National Bank: Provided, however, That the Board of Directors
of said bank shall have power to employ other attorneys in special
cases.
Hence, it must follow that the Attorney-General was the legal adviser of the
bank, and there is nothing to show that he was ever requested to, or that he
ever did, render a legal opinion upon the construction which should be
placed upon sections 37 and 38 of Act No. 2612. But giving the Auditor's
opinion its broadest construction, it would not justify the commission by the
defendant of the acts shown in the record. It might tend to mitigate, but it
would not legalize the offense.
The record further shows that on September 15, 1916, Mr. Ferguson, as
Acting President of the Bank, addressed a letter to Mr. Dexter, as Acting
Insular Auditor, in which he says:
We can readily see where loans directly made to Directors would
be very harmful, and it is a wise provision in the Act which makes
this impossible, but there is a wide difference between loaning
money to a Director, and discounting the single name paper or Bills
receivable of a business house, with whom such a Director might
be interested.
As we have pointed out, the transaction here was a loan and not a discount.
Again, any mitigation of the offense is more than offset by the subsequent
conduct of the defendant.
16
August 3, 1920, the defendant wrote a letter to the Governor-General in
which he complains of official treatment, and clearly points out the serious
financial condition of the Bank, in which, among other things, he says:
If this Bank is compelled to adopt drastic measures as to the
liquidation of its loans we would be placed in the position of having
to shirk the responsibility for any serious consequences that may
arise, and to point to the Department of Finance for insisting on
such a policy.
The policy of contraction which is now in force in the operations •
of the Bank and with the party payments on our loans to sugar
central, our cash reserve will be up to the requirements next year
aside from our ability to replenish our cash reserve in substantial
amounts.
The whole tenor of the letter clearly reveals that the defendant realized and
was very uneasy about the condition of the bank, and yet seventeen days
before that letter was written, he personally made an unsecured loan to the
Binalbagan Estate for P750,000, because of the very apparent reason that
he was one of its heaviest stockholders.
We have given this case the careful consideration which its importance
demands, and have examined each of the numerous assignments of error.
Defendant's case was skillfully presented in an exhaustive brief by able
counsel, but in the final analysis, the stubborn, undisputed fact remains that
the defendant did personally make a large unsecured loan to a corporation in
which he was one of its heaviest stockholders, and that the loan was
consummated and the money paid over without the knowledge of the Board
of Directors, and that it was made to the prejudice and injury of the bank,
and to further and promote his own personal interests, and that, as President
of the Bank, he personally released the mortgage of the bank upon the
property which his corporation acquired through the deal, and that upon the
undisputed facts, it was done in violation not only of section 35 of Act No.
2747, but also of section 38 of Act No. 2612, and of section 29 of Act No.
2938.
Criticism is made of the penal clause, and its validity is attacked. It will be
noted that it is the same in each act, and that a large discretion is given to
the trial court, varying from a minimum fine to P10,000, or imprisonment not
to exceed five years, or both fine and imprisonment. Its purpose was to
prohibit a violation of any provision of the bank's charter, and to make the
penalty correspond to the gravity of the offense, and that question was left to
the discretion of the court.
The judgement of the lower court is affirmed, with costs. So ordered.
Araullo, C.J., Johnsons, Street, Malcolm, Avanceña, Villamor, Ostrand and
Romualdez, JJ., concur.
[ GR No. L-16106, Dec 30, 1961 ]
REPUBLIC v. PHILIPPINE NATIONAL BANK +
DECISION
113 Phil. 828
BAUTISTA ANGELO, J.:
The Republic of the Philippines filed on September 25, 1957 before the
Court of First Instance of Manila a complaint for escheat of certain unclaimed
bank deposits balances under the provisions of Act No. 3936 against several
banks, among them the First National City Bank of New York. It Is alleged
that pursuant to Section 2 of said Act defendant banks forwarded to the
Treasurer of the Philippines a statement under oath of their respective
managing officials of all the credits and deposits held by them in favor of
persons known to be dead or who have not made further deposits or
withdrawals during the period of 10 years or more. Wherefore, it is prayed
that said credits and deposits be escheated to the Republic of the
Philippines by ordering defendant banks to deposit them to its credit with the
Treasurer of the Philippines.
In its answer-the-First National City Bank of New York claims that, while it
admits that various savings deposits, pre-war inactive accounts, and sundry
17
accounts contained in its report submitted to the Treasurer of the Philippines
pursuant to Act No. 3936, totalling more than P100,000.00, which remained
dormant for totalling more than 10 years or more, are subject to escheat,
however, it has inadvertently included in said report, certain items an which,
properly speaking, are not credits or deposits within the contemplation of Act
No. 3936. Hence, it prayed that said items be not included In the claim of
plaintiff.
After hearing the court a quo rendered judgment holding that cashier's or
manager's checks and demand drafts as those which defendant wants
excluded from the complaint come within the purview of Act No. 3936, but
not the telegraphic transfer payment orders which are of different category.
Consequently, the complaint was dismissed with regard to the latter. But,
after a motion to reconsider was filed by defendant, the court a quo changed
its view and held that even said demand drafts do not come within the
purview of said Act and so amended its decision accordingly. Plaintiff has
appealed.
Section 1. Act No. 3936, provides:
"SECTION 1. 'Unclaimed balances' within the meaning of this Act shall
include credits or deposits of moneys' bullion s security or other evidence of
indebtedness of, any kind, and interest thereon with banks, as hereinafter
defined, in favor or any person unheard from for a period of ten years or
more. Such unclaimed balances, together with the increase and proceeds
thereof, shall be deposited with the Insular Treasurer , to the credit of the
Government of the Philippine Islands to be used as the Philippine
Legislature may direct."
It would appear that the terms "unclaimed balances" that are subject to
escheat include credits or deposits of money, or other evidence of
indebtedness of any kind, with banks, in favor of any person unheard from
for a period of 10 years or more. And as correctly stated by the trial court,
the term "credit" in its usual meaning is a sum credited on the books of a
company to a person who appears, to be entitled to. it. It jpresupposes a
creditor-debtor, relationship, and may be said to imply ability, by reason of
property or estates, to make a promised payment (In Re Ford, 14 F. 2d 848,
849) . It is the correlative to debt or indebtedness, and that which is due to
any person as distinguished from that which he owes (Mountain Motor Car
Co. vs. Solof, 124 S .E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See
also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of
America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271,
274). The same is true with the term "deposits" in banks where the
relationship created between the depositor and the bank is that of creditor
and debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil., 519;
Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., e.t al., 65 Phil., 443).
The questions that now arise are: Do demand drafts and telegraphic orders
come within the meaning of the term "credits" or "deposits" employed in the
law? Can their import be considered as a sum credited on the books of the
bank to a person who appears to be entitled to it? Do they create a creditor-
debtor relationship between the drawee and the payee?
The answer to these questions require a digression oil the legal meaning of
said banking terminologies.
To begin with, we may say that a demand draft is a bill of exchange payable
on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City.Trust
Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42
S.W. 2d, 27). Considered as a bill of exchange, a draft is said to bes like the
former, an open letter of request from, and an order by, one person on
another to pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified (13 Words and Phrases, 371) .
As a matter of fact, the term "draft" is often used and is the common term, for
all bills of exchange. And the words "draft" and "bill of exchange" are used
indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811;
Hinnemann. vs.Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Buchenau, 43
Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our Negotiable
Instrument Law (Act No. 2031) does not operate as an assignment of funds
in the hands of the drawee who is not liable on the instrument until he
accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself, does not operate as an assignment of the funds in the hands of the
drawee available for the payment thereon and the drawee is not liable, on
the bill unless and until he accepts the same." In other words, in order that a
drawee may be liable op the draft and then become obligated to the payee it
is necessary that he first accepts the same. In fact, our law requires that with
regard to drafts or bills of exchange there is need that they be presented
either for acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereof as the case maybe (Section
71, Act 2031). Failure to make such presentment will discharge the drawer
from liability or to the extant of the loss caused by the delay (Section
186, Ibid.).
18
Since it is admitted that the demand drafts herein in- volved have not been
presented either for acceptance or for payment, the inevitable consequence
is that the appellee bank never had any chance of accepting :or rejecting
them. Verily, appellee bank never became a debtor of the payee concerned
and as such the aforesaid drafts cannot be considered as credits subject to
escheat within the meaning of the law.
But a demand draft Is very different from a cashier's or manager's check,
contrary to appellant's pretense for it has been held that the latter is a
primary obligation of the bank which issues It and constitutes its written
promise to pay upon demand. Thus, a cashier's check has been clearly
characterized In Re Bank of the United States, 277 N.Y.S. 96, 100, as
follows:
"A cashier's check issued by a bank, however, is not an ordinary draft.The
latter is a bill of exchange payable on demaid. It is an order upon a third
party purporting to be drawn upon a deposit of funds. Drinkall vs. Movious
State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693;
State vs. Tyler County State Bank (Tex. Com. App.) 277 S.W 625, 42 A.L.R.
1347. A cashier's check is of a very different character. It is the primary
obligation of the bank which assues it (Nissenbaum vs. State, 38 Ga. App.
253, 143 S.E. 776) and constitutes its written promise to pay upon demand
(Steinmetz vs. Schultz, 59 S.D. 603, 241 N.W. 734). * * *"
The following definitions cited by appellant also confirm this view:
"A cashier's check is a check of the bank's cashier on his or another bank. It
is in effect a bill of exchange drawn by a bank on itself and accepted in
advance by the act of its issuance" (10 C. J. S. 409).
"A cashier's check issued a depositor is fche substantial on request of
equivalent of a certified check and the deposit represented by the check
passes to the credit of the checkholder, who is thereafter a depositor to that
amount" (Lummus Cotton Gin Co. vs. Walker 70 So. 715, 201Ala. 189).
The case, however, is different with regard to a telegraphic payment order. It
is said that as the transaction is for the establishment of a telegraphic or
cable transfer, the agreement to remit creates a contractual obligation and
has been termed a purchase and sale transaction (9 C. J. S. 368). The
purchaser of a telegraphic transfer upon making payment completes the
transaction insofar as he is concerned, though insofar as the remitting bank
is concerned the contract is executory until the credit is established (Ibid).
We agree with the following comment of the Solicitor General: "This Is so
because the drawer bank was already paid the value of the telegraphic
transfer payment order1. In the particular cases under consideration it
appears that the books of the defendant bank that the amounts represented
by the telegraphic payment orders appear in the names of the respective
payees. If the latter choose to demand payment ok their telegraphic transfers
at the time the same was (were) received by the defendant bank, there could
be no question that this bank would have to pay them. Now, the question is,
if the payees decide to have their money remain for; sometime in the
defendant bank, can the latter maintain'that the ownership of said
telegraphic payment orders is now with the drawer bank? The latter, was
already paid the value of the telegraphic payment orders otherwise it would
not have transmitted the same to the defendant bank. Hence, it is absurd to
say that the drawer banks are still the owners of said telegraphic payment
orders."
Wherefore, the decision of the trial court is hereby modified in the sense that
the items specifically referred to and listed under paragraph 3 of appellee
bank's answer representing telegraphic transfer payment orders should be
escheated in favor of the Republic of the Philippines. No costs.
Reyes, J.B.L., Barrera, Paredes, Dizon, and De Leon, JJ., concur.

"A cashier's check, being merely a bill of exchange drawn by a bank on

itself, and accepted in advance by the jact of its issuance, is not subject to
countermanaby the payee after indorsement, and has thessame legal effects
as a certificate of deposit or a certified check" (Walker vs. Sellers, 77 So.
715, 201 Ala. 189).
A demand draft is not therefore of the same category as a cashier's check
which should come within the purview of the law.

19
 CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the

then Court of First Instance of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties
having agreed during the pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and

ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation)
entered into a "Lease Agreement" whereby the former leased to the latter a
portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40

sqm. per month on 400 sqm. and are to be expropriated later on
(sic) or P560 per month and Fl.40 per sqm. per month on 1,693
sqm. or P2,370.21 per month or a total of P2,930.20 per month
2,093 sqm. more or less, payable yearly in advance within the 1st
twenty days of each year; provided, a financial aid in the sum of
P15,000 to clear the leased premises of existing improvements
thereon is paid in this manner; P10,000 upon execution of this
Republic of the Philippines lease and P5,000 upon delivery of leased premises free and clear
SUPREME COURT of improvements thereon within 30 days from the date of execution
Manila of this agreement. The portion on the side of the leased premises
with an area of 365 sqrm. more or less, will be occupied by
LESSEE without rental during the lifetime of this lease. PROVIDED
FIRST DIVISION
FINALLY, that the Lessor is paid 8 years advance rental based on
P2,930.70 per month discounted at 12% interest per annum or a
G.R. No. L-48349 December 29, 1986 total net amount of P130,288.47 before registration of lease.
Leased premises shall be delivered within 30 days after 1st partial
FRANCISCO HERRERA, plaintiff-appellant, payment of financial aid. 2
vs.
PETROPHIL CORPORATION, defendant-appellee. On December 31, 1969, pursuant to the said contract, the defendant-
appellee paid to the plaintfff-appellant advance rentals for the first eight
Paterno R. Canlas Law Offices for plaintiff-appellant. years, subtracting therefrom the amount of P101,010.73, the amount it
computed as constituting the interest or discount for the first eight years, in
the total sum P180,288.47. On August 20, 1970, the defendant-appellee,
explaining that there had been a mistake in computation, paid to the

20
appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for
the sum of P98,828.03, with interest, claiming this had been illegally
deducted from him in violation of the Usury Law. 4 He also prayed for moral
damages and attorney's fees. In its answer, the defendant-appellee admitted
the factual allegations of the complaint but argued that the amount deducted
was not usurious interest but a given to it for paying the rentals in advance
for eight years. 5 Judgment on the pleadings was rendered for the
defendant. 6
Plaintiff-appellant now prays for a reversal of that judgment, insisting that the
lower court erred in the computation of the interest collected out of the
rentals paid for the first eight years; that such interest was excessive and
violative of the Usury Law; and that he had neither agreed to nor accepted
the defendant-appellant's computation of the total amount to be deducted for
the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his
complaint, which read:
6. The interest collected by defendant out of the rentals for the first
eight years was excessive and beyond that allowable by law,
because the total interest on the said amount is only P33,755.90 at
P4,219.4880 per yearly rental; and considering that the interest
should be computed excluding the first year rental because at the
time the amount of P281, 199.20 was paid it was already due under
the lease contract hence no interest should be collected from the
rental for the first year, the amount of P29,536.42 only as the total
interest should have been deducted by defendant from the sum of
P281,299.20.
The defendant maintains that the correct amount of the discount is
P98,828.03 and that the same is not excessive and above that allowed by
law.
As its title plainly indicates, the contract between the parties is one of lease
and not of loan. It is clearly denominated a "LEASE AGREEMENT."
Nowhere in the contract is there any showing that the parties intended a loan
rather than a lease. The provision for the payment of rentals in advance
cannot be construed as a repayment of a loan because there was no grant
or forbearance of money as to constitute an indebtedness on the part of the
lessor. On the contrary, the defendant-appellee was discharging its
obligation in advance by paying the eight years rentals, and it was for this
advance payment that it was getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its
validity, it is settled that the parties may establish such stipulations, clauses,
terms and condition as they may want to include; and as long as such
agreements are not contrary to law, morals, good customs, public policy or
public order, they shall have the force of law between them. 8
There is no usury in this case because no money was given by the
defendant-appellee to the plaintiff-appellant, nor did it allow him to use its
money already in his possession. 9 There was neither loan nor forbearance
but a mere discount which the plaintiff-appellant allowed the defendant-
appellee to deduct from the total payments because they were being made
in advance for eight years. The discount was in effect a reduction of the
rentals which the lessor had the right to determine, and any reduction
thereof, by any amount, would not contravene the Usury Law.
The difference between a discount and a loan or forbearance is that the
former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be of
money or something circulating as money; it must be repayable absolutely
and in all events; and something must be exacted for the use of the money
in excess of and in addition to interest allowed by law." 11
It has been held that the elements of usury are (1) a loan, express or
implied; (2) an understanding between the parties that the money lent shall
or may be returned; that for such loan a greater rate or interest that is
allowed by law shall be paid, or agreed to be paid, as the case may be; and
(4) a corrupt intent to take more than the legal rate for the use of money
loaned. Unless these four things concur in every transaction, it is safe to
affirm that no case of usury can be declared. 12
21
Concerning the computation of the deductible discount, the trial court
declared:
As above-quoted, the 'Lease Agreement' expressly provides that
the lessee (defendant) shag pay the lessor (plaintiff) eight (8) years
in advance rentals based on P2,930.20 per month discounted at
12% interest per annum. Thus, the total rental for one-year period is
P35,162.40 (P2,930.20 multiplied by 12 months) and that the
interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%).
So, therefore, the total interest for the first eight (8) years should be
only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not
P98,828.03 as the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is
patently erroneous. It is most seriously misleading. He just
computed the annual discount to be at P4,129.4880 and then
simply multiplied it by eight (8) years. He did not take into
consideration the naked fact that the rentals due on the eight year
were paid in advance by seven (7) years, the rentals due on the
seventh year were paid in advance by six (6) years, those due on
the sixth year by five (5) years, those due on the fifth year by four
(4) years, those due on the fourth year by three (3) years, those
due on the third year by two (2) years, and those due on the second
year by one (1) year, so much so that the total number of years by
which the annual rental of P4,129.4880 was paid in advance is
twenty-eight (28), resulting in a total amount of P118,145.44
(P4,129.48 multiplied by 28 years) as the discount. However,
defendant was most fair to plaintiff. It did not simply multiply the
annual rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by Annex
'A' of its memorandum. This is why the total discount amount to
only P 8,828.03.
The allegation of plaintiff that defendant made the computation in a
compounded manner is erroneous. Also after making its own
computations and after examining closely defendant's Annex 'A' of
its memorandum, the court finds that defendant did not charge 12%
discount on the rentals due for the first year so much so that the
computation conforms with the provision of the Lease Agreement to
the effect that the rentals shall be 'payable yearly in advance within
the 1st 20 days of each year. '
We do not agree. The above computation appears to be too much technical
mumbo-jumbo and could not have been the intention of the parties to the
transaction. Had it been so, then it should have been clearly stipulated in the
contract. Contracts should be interpreted according to their literal meaning
and should not be interpreted beyond their obvious intendment. 13
The plaintfff-appellant simply understood that for every year of advance
payment there would be a deduction of 12% and this amount would be the
same for each of the eight years. There is no showing that the intricate
computation applied by the trial court was explained to him by the defendant-
appellee or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that
the plaintiff-appellant had actually agreed to a 12% reduction for advance
rentals for all of twenty eight years. That is absurd. It is not normal for a
person to agree to a reduction corresponding to twenty eight years advance
rentals when all he is receiving in advance rentals is for only eight years.
The deduction shall be for only eight years because that was plainly what the
parties intended at the time they signed the lease agreement. "Simplistic" it
may be, as the Solicitor General describes it, but that is how the lessor
understood the arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven years because
the first year rental was not being paid in advance. The agreement was for
a uniform deduction for the advance rentals for each of the eight years, and
neither of the parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12% discount was
P4,220.21; and for eight years, the total rental was P281,347.20 from which
was deducted the total discount of P33,761.68, leaving a difference of
P247,585.52. Subtracting from this amount, the sum of P182,471.17 already
paid will leave a balance of P65,114.35 still due the plaintiff-appellant.
The above computation is based on the more reasonable interpretation of
the contract as a whole rather on the single stipulation invoked by the
respondent for the flat reduction of P130,288.47.
22
WHEREFORE, the decision of the trial court is hereby modified, and the
defendant-appellee Petrophil Corporation is ordered to pay plaintiff-appellant
the amount of Sixty Five Thousand One Hundred Fourteen pesos and Thirty-
Five Centavos (P65,114.35), with interest at the legal rate until fully paid,
plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against
the defendant-appellee.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for
plaintiff-appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment
was rendered on June 28, 1965 sentencing defendant Development Bank of
the Philippines (DBP) to pay actual and consequential damages to plaintiff
Saura Import and Export Co., Inc. in the amount of P383,343.68, plus
interest at the legal rate from the date the complaint was filed and attorney's
fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP,
for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for
the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill
machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already
been purchased by Saura on the strength of a letter of credit extended by
the Prudential Bank and Trust Co., and arrived in Davao City in July 1953;
and that to secure its release without first paying the draft, Saura, Inc.
executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan
application for P500,000.00, to be secured by a first mortgage on the factory
building to be constructed, the land site thereof, and the machinery and
equipment to be installed. Among the other terms spelled out in the
resolution were the following:
1. That the proceeds of the loan shall be utilized
exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
23
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy
and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory
notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance
Corporation, subject to availability of funds, and as the construction of the
factory buildings progresses, to be certified to by an appraiser of this
Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The
day before, however, evidently having otherwise been informed of its
approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the
terms laid down by it, namely: that in lieu of having China Engineers, Ltd.
(which was willing to assume liability only to the extent of its stock
subscription with Saura, Inc.) sign as co-maker on the corresponding
promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be
substituted for Inocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4,
1954, designating of the members of its Board of Governors, for certain
reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of
jute mills, and to submit his findings thereon at the next meeting of the
Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had
again agreed to act as co-signer for the loan, and asked that the necessary
documents be prepared in accordance with the terms and conditions
specified in Resolution No. 145. In connection with the reexamination of the
project to be financed with the loan applied for, as stated in Resolution No.
736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies,
although in appointing its own committee Saura, Inc. made the observation
that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already) entered into,"
referring to its acceptance of the terms and conditions mentioned in
Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note,
with F.R. Halling, representing China Engineers, Ltd., as one of the co-
signers; and the corresponding deed of mortgage, which was duly registered
on the following April 17.
It appears, however, that despite the formal execution of the loan agreement
the reexamination contemplated in Resolution No. 736 proceeded. In a
meeting of the RFC Board of Governors on June 10, 1954, at which Ramon
Saura, President of Saura, Inc., was present, it was decided to reduce the
loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved
as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export
Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00.
Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the
various aspects of the loan granted the Saura Import & Export Co. under
Resolution No. 145, c.s., for the purpose of financing the manufacture of jute
sacks in Davao, with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operation of
jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura Import & Export Co. be
REDUCED from P500,000 to P300,000 and that releases up to P100,000
may be authorized as may be necessary from time to time to place the
factory in actual operation: PROVIDED that all terms and conditions of
Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force
and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other
RFC that his company no longer to of the loan and therefore considered the
same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of
P500,000.00 be granted. The request was denied by RFC, which added in
its letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."
24
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan
and informed RFC that China Engineers, Ltd. "will at any time reinstate their
signature as co-signer of the note if RFC releases to us the P500,000.00
originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan
to the original amount of P500,000.00, "it appearing that China Engineers,
Ltd. is now willing to sign the promissory notes jointly with the borrower-
corporation," but with the following proviso:
That in view of observations made of the shortage and
high cost of imported raw materials, the Department of
Agriculture and Natural Resources shall certify to the
following:
This fact, according to defendant DBP, is what moved RFC to approve the
loan application in the first place, and to require, in its Resolution No. 9083, a
certification from the Department of Agriculture and Natural Resources as to
the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant's
stand impliedly in its letter of January 21, 1955: (1) stating that according to
a special study made by the Bureau of Forestry "kenaf will not be available
in sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to
bring in sufficient jute materials as may be necessary for the full operation of
the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &

1. That the raw materials needed by the borrower- Trust Company P250,000.00
corporation to carry out its operation are available in the
immediate vicinity; and (For immediate release)

2. That there is prospect of increased production thereof to b) For the purchase of materials and equip-
provide adequately for the requirements of the factory." ment per attached list to enable the jute
mill to operate 182,413.91
The action thus taken was communicated to Saura, Inc. in a letter of RFC
dated December 22, 1954, wherein it was explained that the certification by c) For raw materials and labor 67,586.09
the Department of Agriculture and Natural Resources was required "as the
intention of the original approval (of the loan) is to develop the manufacture 1) P25,000.00 to be released on the
of sacks on the basis of locally available raw materials." This point is open-
important, and sheds light on the subsequent actuations of the parties. ing of the letter of credit for raw jute
Saura, Inc. does not deny that the factory he was building in Davao was for for $25,000.00.
the manufacture of bags from local raw materials. The cover page of its
brochure (Exh. M) describes the project as a "Joint venture by and between
the Mindanao Industry Corporation and the Saura Import and Export Co., 2) P25,000.00 to be released upon
Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra arrival
and corn bags, runners, floor mattings, carpets, draperies; out of 100% local of raw jute.
raw materials, principal kenaf." The explanatory note on page 1 of the same
brochure states that, the venture "is the first serious attempt in this country to 3) P17,586.09 to be released as soon as
use 100% locally grown raw materials notably kenaf which is presently the
grown commercially in theIsland of Mindanao where the proposed jutemill is mill is ready to operate.
located ..."

25
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of
January 21, 1955, regarding the release
of your loan under consideration of
P500,000. As stated in our letter of
December 22, 1954, the releases of the
loan, if revived, are proposed to be
made from time to time, subject to
availability of funds towards the end that
the sack factory shall be placed in actual
operating status. We shall be able to act
on your request for revised purpose and
manner of releases upon re-appraisal of
the securities offered for the loan.
With respect to our requirement that the
Department of Agriculture and Natural
Resources certify that the raw materials
needed are available in the immediate
vicinity and that there is prospect of
increased production thereof to provide
adequately the requirements of the
factory, we wish to reiterate that the
basis of the original approval is to
develop the manufacture of sacks on the
basis of the locally available raw
materials. Your statement that you will
have to rely on the importation of jute
and your request that we give you
assurance that your company will be
able to bring in sufficient jute materials
as may be necessary for the operation
of your factory, would not be in line with
our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did
not pursue the matter further. Instead, it requested RFC to cancel the
mortgage, and so, on June 17, 1955 RFC executed the corresponding deed
of cancellation and delivered it to Ramon F. Saura himself as president of
Saura, Inc.
It appears that the cancellation was requested to make way for the
registration of a mortgage contract, executed on August 6, 1954, over the
same property in favor of the Prudential Bank and Trust Co., under which
contract Saura, Inc. had up to December 31 of the same year within which to
pay its obligation on the trust receipt heretofore mentioned. It appears further
that for failure to pay the said obligation the Prudential Bank and Trust Co.
sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was
cancelled at the request of Saura, Inc., the latter commenced the present
suit for damages, alleging failure of RFC (as predecessor of the defendant
DBP) to comply with its obligation to release the proceeds of the loan applied
for and approved, thereby preventing the plaintiff from completing or paying
contractual commitments it had entered into, in connection with its jute mill
project.
The trial court rendered judgment for the plaintiff, ruling that there was a
perfected contract between the parties and that the defendant was guilty of
breach thereof. The defendant pleaded below, and reiterates in this appeal:
(1) that the plaintiff's cause of action had prescribed, or that its claim had
been waived or abandoned; (2) that there was no perfected contract; and (3)
that assuming there was, the plaintiff itself did not comply with the terms
thereof.
We hold that there was indeed a perfected consensual contract, as
recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by
way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not
be perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of
Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered.
26
But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover
damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on
the assumption that the factory to be constructed would utilize locally grown
raw materials, principally kenaf. There is no serious dispute about this. It was
in line with such assumption that when RFC, by Resolution No. 9083
approved on December 17, 1954, restored the loan to the original amount of
P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials
needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and (2) that there is prospect of increased production
thereof to provide adequately for the requirements of the factory." The
imposition of those conditions was by no means a deviation from the terms
of the agreement, but rather a step in its implementation. There was nothing
in said conditions that contradicted the terms laid down in RFC Resolution
No. 145, passed on January 7, 1954, namely — "that the proceeds of the
loan shall be utilized exclusively for the following purposes: for construction
of factory building — P250,000.00; for payment of the balance of purchase
price of machinery and equipment — P240,900.00; for working capital —
P9,100.00." Evidently Saura, Inc. realized that it could not meet the
conditions required by RFC, and so wrote its letter of January 21, 1955,
stating that local jute "will not be able in sufficient quantity this year or
probably next year," and asking that out of the loan agreed upon the sum of
P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the
mortgage contract, implying as it did a diversion of part of the proceeds of
the loan to purposes other than those agreed upon.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not
protest against any alleged breach of contract by RFC, or even point out that
the latter's stand was legally unjustified. Its request for cancellation of the
mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance. In 1962 it even applied with
DBP for another loan to finance a rice and corn project, which application
was disapproved. It was only in 1964, nine years after the loan agreement
had been cancelled at its own request, that Saura, Inc. brought this action for
damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance — and that on the
initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and
resolve the other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint
dismissed, with costs against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo
and Antonio, JJ., concur.
Makasiar, J., took no part.

When RFC turned down the request in its letter of January 25, 1955 the
negotiations which had been going on for the implementation of the
agreement reached an impasse. Saura, Inc. obviously was in no position to
comply with RFC's conditions. So instead of doing so and insisting that the
loan be released as agreed upon, Saura, Inc. asked that the mortgage be
cancelled, which was done on June 15, 1955. The action thus taken by both
parties was in the nature cf mutual desistance — what Manresa terms
"mutuo disenso"1 — which is a mode of extinguishing obligations. It is a
concept that derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its
extinguishment.2

27
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49101 October 24, 1983
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK
OF COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Siguion Reyna, Montecillo & Associates for private respondent.
GUERRERO, J:
Petition for review on certiorari seeking the reversal of the decision of the
defunct Court of Appeals, now Intermediate Appellate Court, in CA-G.R. No.
61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of Commerce, et
al.," promulgated August 11, 1978 1 as well as the Resolution denying the
motion for reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with
the Court of First Instance of Rizal against respondent Philippine Bank of
Commerce sought the annulment of the Deed of Mortgage dated December
6, 1966 executed in favor of the Philippine Bank of Commerce by the
spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial
foreclosure made on September 4, 1968. It alleged among others that (a) the
Deed of Mortgage lacks consideration and (b) the mortgage was executed
by one who was not the owner of the mortgaged property. It further alleged
that the property in question was foreclosed pursuant to Act No. 3135 as
amended, without, however, complying with the condition imposed for a valid
foreclosure. Granting the validity of the mortgage and the extrajudicial
foreclosure, it finally alleged that respondent Bank should have accepted
petitioner's offer to redeem the property under the principle of equity said
justice.
On the other hand, the answer of defendant Bank, now private respondent
herein, specifically denied most of the allegations in the complaint and raised
the following affirmative defenses: (a) that the defendant has not given its
consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan
secured thereby; (b) that the demand letters and notice of foreclosure were
sent to Jose Lozano at his address; (c) that it was notified for the first time
about the alleged sale after it had foreclosed the Lozano mortgage; (d) that
the law on contracts requires defendant's consent before Jose Lozano can
be released from his bilateral agreement with the former and doubly so,
before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that
the loan of P75,000.00 which was secured by mortgage, after two renewals
remain unpaid despite countless reminders and demands; of that the
property in question remained registered in the name of Jose M. Lozano in
the land records of Rizal and there was no entry, notation or indication of the
alleged sale to plaintiff; (g) that it is an established banking practice that
payments against accounts need not be personally made by the debtor
himself; and (h) that it is not true that the mortgage, at the time of its
execution and registration, was without consideration as alleged because the
execution and registration of the securing mortgage, the signing and delivery
of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul
SV Bonnevie filed a motion for intervention. The intervention was premised
on the Deed of Assignment executed by petitioner Honesto Bonnevie in
favor of petitioner Raoul SV Bonnevie covering the rights and interests of
petitioner Honesto Bonnevie over the subject property. The intervention was
ultimately granted in order that all issues be resolved in one proceeding to
avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive
portion of which reads as follows:
28
 WHEREFORE, all the foregoing premises considered,
judgment is hereby rendered dismissing the complaint with
costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied,
petitioners appealed to respondent Court of Appeals assigning the following
errors:
1. The lower court erred in not finding that the real estate
mortgage executed by Jose Lozano was null and void;
2. The lower court erred in not finding that the auction sale
decide on August 19, 1968 was null and void;
3. The lower court erred in not allowing the plaintiff and the
intervenor to redeem the property;
4. The lower court erred in not finding that the defendant
acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming
the decision of the lower court, and on October 3. 1978 denied the motion for
reconsideration. Hence, the present petition for review.
The factual findings of respondent Court of Appeals being conclusive upon
this Court, We hereby adopt the facts found the trial court and found by the
Court of Appeals to be consistent with the evidence adduced during trial, to
wit:
It is not disputed that spouses Jose M. Lozano and Josefa
P. Lozano were the owners of the property which they
mortgaged on December 6, 1966, to secure the payment
of the loan in the principal amount of P75,000.00 they
were about to obtain from defendant-appellee Philippine
Bank of Commerce; that on December 8, 1966, executed
in favor of plaintiff-appellant the Deed of Sale with
Mortgage ,, for and in consideration of the sum of
P100,000.00, P25,000.00 of which amount being payable
to the Lozano spouses upon the execution of the
document, and the balance of P75,000.00 being payable
to defendant- appellee; that on December 6, 1966, when
the mortgage was executed by the Lozano spouses in
favor of defendant-appellee, the loan of P75,000.00 was
not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the
promissory note for that amount; that from April 28, 1967
to July 12, 1968, plaintiff-appellant made payments to
defendant-appellee on the mortgage in the total amount of
P18,944.22; that on May 4, 1968, plaintiff-appellant
assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul
Bonnevie; that on June 10, 1968, defendant-appellee
applied for the foreclosure of the mortgage, and notice of
sale was published in the Luzon Weekly Courier on June
30, July 7, and July 14, 1968; that auction sale was
conducted on August 19, 1968, and the property was sold
to defendant-appellee for P84,387.00; and that offers from
plaintiff-appellant to repurchase the property failed, and on
October 9, 1969, he caused an adverse claim to be
annotated on the title of the property. (Decision of the
Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the
spouses Lozano in favor of respondent bank was validly
and legally executed.
II
Whether the extrajudicial foreclosure of the said mortgage
was validly and legally effected.
29
 III
Whether petitioners had a right to redeem the foreclosed
property.
IV
Granting that petitioners had such a right, whether
respondent was justified in refusing their offers to
repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action
is three-fold. They primarily attack the validity of the mortgage executed by
the Lozano spouses in favor of respondent Bank. Next, they attack the
validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that
when it was executed on December 6, 1966, there was yet no principal
obligation to secure as the loan of P75,000.00 was not received by the
Lozano spouses "So much so that in the absence of a principal obligation,
there is want of consideration in the accessory contract, which consequently
impairs its validity and fatally affects its very existence." (Petitioners' Brief,
par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the mortgage
deed itself, it is clearly seen that the mortgage deed was executed for and on
condition of the loan granted to the Lozano spouses. The fact that the latter
did not collect from the respondent Bank the consideration of the mortgage
on the date it was executed is immaterial. A contract of loan being a
consensual contract, the herein contract of loan was perfected at the same
time the contract of mortgage was executed. The promissory note executed
on December 12, 1966 is only an evidence of indebtedness and does not
indicate lack of consideration of the mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the
subsequent renewals of the original loan, using as security the same
property which the Lozano spouses had already sold to petitioners, rendered
the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage
which prohibits the sale, disposition of, mortgage and encumbrance of the
mortgaged properties, without the written consent of the mortgagee, as well
as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and
conditions under which it is constituted. These provisions are expressly
made part and parcel of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to
the sale with assumption of mortgage. Coupled with the fact that the
sale/assignment was not registered so that the title remained in the name of
the Lozano spouses, insofar as respondent Bank was concerned, the
Lozano spouses could rightfully and validly mortgage the property.
Respondent Bank had every right to rely on the certificate of title. It was not
bound to go behind the same to look for flaws in the mortgagor's title, the
doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De
Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that a
mortgage follows the property whoever the possessor may be and subjects
the fulfillment of the obligation for whose security it was constituted. Finally, it
can also be said that petitioners voluntarily assumed the mortgage when
they entered into the Deed of Sale with Assumption of Mortgage. They are,
therefore, estopped from impugning its validity whether on the original loan
or renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial foreclosure
on the following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period
required by law.
c) publication of the notice of auction sale in the Luzon
Weekly Courier was not in accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground.
Respondent Bank not being a party to the Deed of Sale with Assumption of
Mortgage, it can validly claim that it was not aware of the same and hence, it
30
may not be obliged to notify petitioners. Secondly, petitioner Honesto
Bonnevie was not entitled to any notice because as of May 14, 1968, he had
transferred and assigned all his rights and interests over the property in favor
of intervenor Raoul Bonnevie and respondent Bank not likewise informed of
the same. For the same reason, Raoul Bonnevie is not entitled to notice.
Most importantly, Act No. 3135 does not require personal notice on the
mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the
sale for not less than twenty days in at least three public
places of the municipality or city where the property is
situated, and if such property is worth more than four
hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper
of general circulation in the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on
June 30, July 7 and July 14, 1968 and notices of the sale were posted for not
less than twenty days in at least three (3) public places in the Municipality
where the property is located. Petitioners were thus placed on constructive
notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is
inapplicable because said case involved a judicial foreclosure and the sale to
the vendee of the mortgaged property was duly registered making the
mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction
sale was not in accordance with law, namely: once a week for at least three
consecutive weeks, the Court of Appeals ruled that the publication of notice
on June 30, July 7 and July 14, 1968 satisfies the publication requirement
under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only
14 days. We agree. Act No. 3135 merely requires that such notice shall be
published once a week for at least three consecutive weeks." Such phrase,
as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not
mean that notice should be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly
Courier" was not in accordance with law as said newspaper is not of general
circulation must likewise be disregarded. The affidavit of publication,
executed by the Publisher, business/advertising manager of the Luzon
Weekly Courier, stares that it is "a newspaper of general circulation in ...
Rizal, and that the Notice of Sheriff's sale was published in said paper on
June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of
compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for
the dissemination of local news and general information; that it has a bona
fide subscription list of paying subscribers; that it is published at regular
intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have
the largest circulation so long as it is of general circulation. Banta vs.
Pacheco, 74 Phil. 67). The testimony of three witnesses that they do read
the Luzon Weekly Courier is no proof that said newspaper is not a
newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required
by law is a question of fact. It can no longer be entertained by this Court.
(see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the records
show that copies of said notice were posted in three conspicuous places in
the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig
Municipal Market and Pasig Municipal Hall. In the same manner, copies of
said notice were also posted in the place where the property was located,
namely: the Municipal Building of San Juan, Rizal; the Municipal Market and
on Benitez Street. The following statement of Atty. Santiago Pastor, head of
the legal department of respondent bank, namely:
Q How many days were the notices
posted in these two places, if you know?
A We posted them only once in one day.
(TSN, p. 45, July 25, 1973)
is not a sufficient countervailing evidence to prove that there was no
compliance with the posting requirement in the absence of proof or even of
allegation that the notices were removed before the expiration of the twenty-
day period. A single act of posting (which may even extend beyond the
period required by law) satisfies the requirement of law. The burden of
31
proving that the posting requirement was not complied with is now shifted to
the one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the
property, We hold that the Court of Appeals did not err in ruling that they had
no right to redeem. No consent having been secured from respondent Bank
to the sale with assumption of mortgage by petitioners, the latter were not
validly substituted as debtors. In fact, their rights were never recorded and
hence, respondent Bank is charged with the obligation to recognize the right
of redemption only of the Lozano spouses. But even granting that as
purchaser or assignee of the property, as the case may be, the petitioners
had acquired a right to redeem the property, petitioners failed to exercise
said right within the period granted by law. Thru certificate of sale in favor of
appellee was registered on September 2, 1968 and the one year redemption
period expired on September 3, 1969. It was not until September 29, 1969
that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at
that time already transferred his rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in
holding that respondent Bank did not act in bad faith, petitioners rely on
Exhibit "B" which is the letter of lose Lozano to respondent Bank dated
December 8, 1966 advising the latter that Honesto Bonnevie was authorized
to make payments for the amount secured by the mortgage on the subject
property, to receive acknowledgment of payments, obtain the Release of the
Mortgage after full payment of the obligation and to take delivery of the title
of said property. On the assumption that the letter was received by
respondent Bank, a careful reading of the same shows that the plaintiff was
merely authorized to do acts mentioned therein and does not mention that
petitioner is the new owner of the property nor request that all
correspondence and notice should be sent to him.
The claim of appellants that the collection of interests on the loan up to July
12, 1968 extends the maturity of said loan up to said date and accordingly
on June 10, 1968 when defendant applied for the foreclosure of the
mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26,
1967. On June 10, 1968, when respondent Bank applied for foreclosure, the
loan was already six months overdue. Petitioners' payment of interest on
July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order
that a renewal of a loan may be effected, not only the payment of the
accrued interest is necessary but also the payment of interest for the
proposed period of renewal as well. Besides, whether or not a loan may be
renewed does not solely depend on the debtor but more so on the discretion
of the bank. Respondent Bank may not be, therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of
Appeals is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Aquino, J., concur.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.
Concepcion J J., took no part.
De Castro, J., is on leave.
Footnotes
1 Third Division, Reyes, L.B., J., ponente; Busran and
Nocon, JJ., concurring.
2 4. The MORTGAGOR shall not sell, dispose of,
mortgage, nor in any manner encumber the mortgaged
properties without the written consent of MORTGAGEE. If
in spite of this stipulation, a mortgaged property is sold,
the Vendee shall assume the mortgaged in the terms and
conditions under which it is constituted, it being
understood that the assumption of the Vendee (does) not
release the Vendor of his obligation to the MORTGAGEE;
on the contrary, both the Vendor and the Vendee shall be
jointly and severally liable for said mortgage obligation. ...
32
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR

ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL
AND SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners,

33
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the
decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February
11, 1977, modifying the decision dated February 15, 1972 of the Court of
First Instance of Agusan, which dismissed the petition of respondent Sulpicio
M. Tolentino for injunction, specific performance or rescission, and damages
with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of
its legal department, approved the loan application for P80,000.00 of
Sulpicio M. Tolentino, who, as a security for the loan, executed on the same
day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was
annotated on the said title the next day. The approved loan application called
for a lump sum P80,000.00 loan, repayable in semi-annual installments for a
period of 3 years, with 12% annual interest. It was required that Sulpicio M.
Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan
was made by the Bank; and Sulpicio M. Tolentino and his wife Edita
Tolentino signed a promissory note for P17,000.00 at 12% annual interest,
payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was
deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of
the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the P63,000.00 balance (p.
113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding
Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides:
In view of the chronic reserve deficiencies of the Island
Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and
investments [except investments in government securities]
excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be
subject to review by the Superintendent of Banks, who
may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as
possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings
Bank failed to put up the required capital to restore its solvency, issued
Resolution No. 967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting Superintendent of
Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the
P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the 100-
hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction
for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of
First Instance of Agusan for injunction, specific performance or rescission
34
and damages with preliminary injunction, alleging that since Island Savings
Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver
the P63,000.00 with interest of 12% per annum from April 28, 1965, and if
said balance cannot be delivered, to rescind the real estate mortgage (pp.
32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety
bond, issued a temporary restraining order enjoining the Island Savings
Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention
praying for the dismissal of the petition of Sulpicio M. Tolentino and the
setting aside of the restraining order, filed by the Central Bank and by the
Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its
decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering
him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest
and legal charges due thereon, and lifting the restraining order so that the
sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M.
Tolentino, modified the Court of First Instance decision by affirming the
dismissal of Sulpicio M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose the real estate
mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific
performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00
debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00
subsists, can his real estate mortgage be foreclosed to
satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an
P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal
obligations. In reciprocal obligations, the obligation or promise of each party
is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party
has performed or is ready and willing to perform his part of the contract, the
other party who has not performed or is not ready and willing to perform
incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings
Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a
real estate mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings Bank to
furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing
the entire loan started on April 28, 1965, and lasted for a period of 3 years or
when the Monetary Board of the Central Bank issued Resolution No. 967 on
June 14, 1968, which prohibited Island Savings Bank from doing further
business. Such prohibition made it legally impossible for Island Savings
Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power
of the Monetary Board to take over insolvent banks for the protection of the
public is recognized by Section 29 of R.A. No. 265, which took effect on
June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt
the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited
the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements
previously contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-fulfillment of an
obligation but 'instead it is taken as a breach of the contract by him (vol. 17A,
1974 ed., CJS p. 650)
35
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the
pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a waiver of his right to
collect the P63,000.00 balance. The act of Island Savings Bank, in asking
the advance interest for 6 months on the supposed P80,000.00 loan, was
improper considering that only P17,000.00 out of the P80,000.00 loan was
released. A person cannot be legally charged interest for a non-existing
debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest
was an exercise of his right to it, which right exist independently of his right
to demand the completion of the P80,000.00 loan. The exercise of one right
does not affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the
loan collateral cannot exempt it from complying with its reciprocal obligation
to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank
officials and employees are expected to exercise caution and prudence in
the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104
SCRA 151 [1981]). It is the obligation of the bank's officials and employees
that before they approve the loan application of their customers, they must
investigate the existence and evaluation of the properties being offered as a
loan security. The recent rush of events where collaterals for bank loans turn
out to be non-existent or grossly over-valued underscore the importance of
this responsibility. The mere reliance by bank officials and employees on
their customer's representation regarding the loan collateral being offered as
loan security is a patent non-performance of this responsibility. If ever bank
officials and employees totally reIy on the representation of their customers
as to the valuation of the loan collateral, the bank shall bear the risk in case
the collateral turn out to be over-valued. The representation made by the
customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M.
Tolentino, had enjoined petitioners from presenting proof on the alleged
over-valuation because of their failure to raise the same in their pleadings
(pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and
objections not pleaded either in a motion to dismiss or in the answer are
deemed waived." Petitioners, thus, cannot raise the same issue before the
Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation
under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the
Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited
from doing further business by Monetary Board Resolution No. 967, WE
cannot grant specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that
rescission is only for the P63,000.00 balance of the P80,000.00 loan,
because the bank is in default only insofar as such amount is concerned, as
there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and
executed a promissory note to cover it, the bank was deemed to have
complied with its reciprocal obligation to furnish a P17,000.00 loan. The
promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue
amortizations under the promissory note made him a party in default, hence
not entitled to rescission (Article 1191 of the Civil Code). If there is a right to
rescind the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note setting
the date for payment of P17,000.00 within 3 years, he would be entitled to
ask for rescission of the entire loan because he cannot possibly be in default
as there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the liability
of Island Savings Bank for damages in not furnishing the entire loan is offset
by the liability of Sulpicio M. Tolentino for damages, in the form of penalties
and surcharges, for not paying his overdue P17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be
included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he
should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino
cannot be entirely foreclosed to satisfy his P 17,000.00 debt.
36
The consideration of the accessory contract of real estate mortgage is the
same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA
443 [1979]). For the debtor, the consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage,
the consideration of the debtor in furnishing the mortgage is the existence of
a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of
the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage,
no consideration was then in existence, as there was no debt yet because
Island Savings Bank had not made any release on the loan, does not make
the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may
either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the
debt secured by it is created as a binding contract to pay (Parks vs,
Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol.
2, pp. 5-6). And, when there is partial failure of consideration, the mortgage
becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore,
Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the
indebtedness actually owing to the holder of the mortgage is less than the
sum named in the mortgage, the mortgage cannot be enforced for more than
the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p.
88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence
the real estate mortgage covering 100 hectares is unenforceable to the
extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is
more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089
of the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt
may be divided among the successors in interest of the
debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the
debt can not ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who have received his share
of the debt return the pledge or cancel the mortgage, to
the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-
quoted presupposes several heirs of the debtor or creditor which does not
obtain in this case. Hence, the rule of indivisibility of a mortgage cannot
apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED
FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR
OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00
REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD
FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON
THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE
MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS
HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED
RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
37
Aquino (Chairman) and Abad Santos, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by
the late Jose V. Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions
of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the

Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi
with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for
breeding purposes subject to a government charge of breeding fee of 10% of

38
the book value of the bulls. Upon the expiration on 7 May 1949 of the
contract, the borrower asked for a renewal for another period of one year.
However, the Secretary of Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year from 8 May 1949 to 7 May
1950 and requested the return of the other two. On 25 March 1950 Jose V.
Bagtas wrote to the Director of Animal Industry that he would pay the value
of the three bulls. On 17 October 1950 he reiterated his desire to buy them
at a value with a deduction of yearly depreciation to be approved by the
Auditor General. On 19 October 1950 the Director of Animal Industry
advised him that the book value of the three bulls could not be reduced and
that they either be returned or their book value paid not later than 31 October
1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of
Manila the Republic of the Philippines commenced an action against him
praying that he be ordered to return the three bulls loaned to him or to pay
their book value in the total sum of P3,241.45 and the unpaid breeding fee in
the sum of P199.62, both with interests, and costs; and that other just and
equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and
Manalo, answered that because of the bad peace and order situation in
Cagayan Valley, particularly in the barrio of Baggao, and of the pending
appeal he had taken to the Secretary of Agriculture and Natural Resources
and the President of the Philippines from the refusal by the Director of
Animal Industry to deduct from the book value of the bulls corresponding
yearly depreciation of 8% from the date of acquisition, to which depreciation
the Auditor General did not object, he could not return the animals nor pay
their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment —
. . . sentencing the latter (defendant) to pay the sum of P3,625.09
the total value of the three bulls plus the breeding fees in the
amount of P626.17 with interest on both sums of (at) the legal rate
from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which
the court granted on 18 October and issued on 11 November 1958. On 2
December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ
outside Manila. Of this order appointing a special sheriff, on 6 December
1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose
Bagtas who died on 23 October 1951 and as administratrix of his estate, was
notified. On 7 January 1959 she file a motion alleging that on 26 June 1952
the two bull Sindhi and Bhagnari were returned to the Bureau Animal of
Industry and that sometime in November 1958 the third bull, the Sahiniwal,
died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad
Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to
her motion. On 6 February 1959 she filed a reply thereto. On the same day,
6 February, the Court denied her motion. Hence, this appeal certified by the
Court of Appeals to this Court as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by
the late defendant, returned the Sindhi and Bhagnari bulls to Roman
Remorin, Superintendent of the NVB Station, Bureau of Animal Industry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January
1959 to the appellant's motion to quash the writ of execution the appellee
prays "that another writ of execution in the sum of P859.53 be issued against
the estate of defendant deceased Jose V. Bagtas." She cannot be held liable
for the two bulls which already had been returned to and received by the
appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during
a raid by the Huk in November 1953 upon the surrounding barrios of
Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and
that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is
without merit. The loan by the appellee to the late defendant Jose V. Bagtas
of the three bulls for breeding purposes for a period of one year from 8 May
1948 to 7 May 1949, later on renewed for another year as regards one bull,
was subject to the payment by the borrower of breeding fee of 10% of the
book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A
contract of commodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the
39
contract be commodatum, still the appellant is liable, because article 1942 of
the Civil Code provides that a bailee in a contract of commodatum —
. . . is liable for loss of the things, even if it should be through a
fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility
in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The
loan of one bull was renewed for another period of one year to end on 8 May
1950. But the appellant kept and used the bull until November 1953 when
during a Huk raid it was killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of
loss of the bull due to fortuitous event the late husband of the appellant
would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the
return of the bull or the payment of its value being a money claim should be
presented or filed in the intestate proceedings of the defendant who died on
23 October 1951, is not altogether without merit. However, the claim that his
civil personality having ceased to exist the trial court lost jurisdiction over the
case against him, is untenable, because section 17 of Rule 3 of the Rules of
Court provides that —
After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of the
deceased to appear and to be substituted for the deceased, within
a period of thirty (30) days, or within such time as may be granted. .
..
and after the defendant's death on 23 October 1951 his counsel failed to
comply with section 16 of Rule 3 which provides that —
Whenever a party to a pending case dies . . . it shall be the duty of
his attorney to inform the court promptly of such death . . . and to
give the name and residence of the executory administrator,
guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issue letters of administration of the estate of
the late Jose Bagtas and that "all persons having claims for monopoly
against the deceased Jose V. Bagtas, arising from contract express or
implied, whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said decedent, and
judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months
from the date of the first publication of this order, serving a copy thereof
upon the aforementioned Felicidad M. Bagtas, the appointed administratrix
of the estate of the said deceased," is not a notice to the court and the
appellee who were to be notified of the defendant's death in accordance with
the above-quoted rule, and there was no reason for such failure to notify,
because the attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant
or of the administration proceedings of his estate instituted in another court
that if the attorney for the deceased defendant did not notify the plaintiff or its
attorney of such death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the
estate of the late defendant is only liable for the sum of P859.63, the value of
the bull which has not been returned to the appellee, because it was killed
while in the custody of the administratrix of his estate. This is the amount
prayed for by the appellee in its objection on 31 January 1959 to the motion
filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the
deceased Jose V. Bagtas having been instituted in the Court of First
Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
40
ACCORDINGLY, the writ of execution appealed from is set aside, without Republic of the Philippines
pronouncement as to costs. SUPREME COURT
Manila
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Paredes, Dizon, Regala and Makalintal, JJ., concur. EN BANC
Barrera, J., concurs in the result.
G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,

vs.
Footnotes RUPERTA PASCUAL, ET AL., defendants-appellees.

1 Article 1933 of the Civil Code. N. Segundo for appellants.

Iñigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco

Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the center
of the town of Laoag, the capital of the Province of Ilocos Norte, the property
having been awarded to him through its purchase at a public auction held by
the alcalde mayor of that province. The lot has a frontage of 120 meters and
a depth of 15.

Andres Fontanilla, with the consent of his brother Francisco, erected a

warehouse on a part of the said lot, embracing 14 meters of its frontage by
11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein
plaintiffs, Alejandro Mina, et al., were recognized without discussion as his
heirs.

Andres Fontanilla, the former owner of the warehouse, also having died, the
children of Ruperta Pascual were recognized likes without discussion,
though it is not said how, and consequently are entitled to the said building,

41
or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-
half of it, the other half belonging, as it appears, to the plaintiffs themselves,
and the remaining one-seventh of the first one-half to the children of one of
the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the
defendants are virtually, to all appearance, the owners of the warehouse;
while the plaintiffs are undoubtedly, the owners of the part of the lot occupied
by that building, as well as of the remainder thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the
guardian of her minor children, the herein defendants, petitioned the Curt of
First Instance of Ilocos Norte for authorization to sell "the six-sevenths of
the one-half of the warehouse, of 14 by 11 meters, together with its lot." The
plaintiffs — that is Alejandra Mina, et al. — opposed the petition of Ruperta
Pascual for the reason that the latter had included therein the lot occupied by
the warehouse, which they claimed was their exclusive property. All this
action was taken in a special proceeding in reguardianship.
The plaintiffs did more than oppose Pascual's petition; they requested the
court, through motion, to decide the question of the ownership of the lot
before it pass upon the petition for the sale of the warehouse. But the court
before determining the matter of the ownership of the lot occupied by the
warehouse, ordered the sale of this building, saying:
While the trial continues with respect to the ownership of the lot, the
court orders the sale at public auction of the said warehouse and of
the lot on which it is built, with the present boundaries of the land
and condition of the building, at a price of not less than P2,890
Philippine currency . . . .
So, the warehouse, together with the lot on which it stands, was sold to Cu
Joco, the other defendant in this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the
lot, and the court decided it by holding that this land belonged to the owner
of the warehouse which had been built thereon thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower
court and held that the appellants were the owners of the lot in question. 1
When the judgment became final and executory, a writ of execution issued
and the plaintiffs were given possession of the lot; but soon thereafter the
trial court annulled this possession for the reason that it affected Cu Joco,
who had not been a party to the suit in which that writ was served.
It was then that the plaintiffs commenced the present action for the purpose
of having the sale of the said lot declared null and void and of no force and
effect.
An agreement was had ad to the facts, the ninth paragraph of which is as
follows:
9. That the herein plaintiffs excepted to the judgment and appealed
therefrom to the Supreme Court which found for them by holding
that they are the owners of the lot in question, although there
existed and still exists a commodatum by virtue of which the
guardianship (meaning the defendants) had and has the use, and
the plaintiffs the ownership, of the property, with no finding
concerning the decree of the lower court that ordered the sale.
The obvious purport of the cause "although there existed and still exists a
commodatum," etc., appears to be that it is a part of the decision of the
Supreme Court and that, while finding the plaintiffs to be the owners of the
lot, we recognized in principle the existence of a commodatum under which
the defendants held the lot. Nothing could be more inexact. Possibly, also,
the meaning of that clause is that, notwithstanding the finding made by the
Supreme Court that the plaintiffs were the owners, these former and the
defendants agree that there existed, and still exists, a commodatum, etc. But
such an agreement would not affect the truth of the contents of the decision
of this court, and the opinions held by the litigants in regard to this point
could have no bearing whatever on the present decision.
Nor did the decree of the lower court that ordered the sale have the least
influence in our previous decision to require our making any finding in regard
thereto, for, with or without that decree, the Supreme Court had to decide the
ownership of the lot consistently with its titles and not in accordance with the
judicial acts or proceedings had prior to the setting up of the issue in respect
to the ownership of the property that was the subject of the judicial decree.
42
What is essentially pertinent to the case is the fact that the defendant agree
that the plaintiffs have the ownership, and they themselves only the use, of
the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite
evident, whatsoever be the manner in which the sale was effected, whether
judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The
effect of the sale being a transfer of the ownership of the thing, it is evident
that he who has only the mere use of the thing cannot transfer its ownership.
The sale of a thing effected by one who is not its owner is null and void. The
defendants never were the owners of the lot sold. The sale of it by them is
necessarily null and void. On cannot convey to another what he has never
had himself.
The returns of the auction contain the following statements:
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the
authorization conferred upon me on the 31st of July, 1909, by the
Court of First Instance of Ilocos Norte, proceeded with the sale at
public auction of the six-sevenths part of the one-half of the
warehouse constructed of rubble stone, etc.
Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold
at public auction all the land and all the rights title, interest, and
ownership in the said property to Cu Joco, who was the highest
bidder, etc.
Therefore, . . . I cede and deliver forever to the said purchaser, Cu
Joco, his heirs and assigns, all the interest, ownership and
inheritance rights and others that, as the guardian of the said
minors, I have and may have in the said property, etc.
The purchaser could not acquire anything more than the interest that might
be held by a person to whom realty in possession of the vendor might be
sold, for at a judicial auction nothing else is disposed of. What the minor
children of Ruperta Pascual had in their possession was the ownership of
the six-sevenths part of one-half of the warehouse and the use of the lot
occupied by his building. This, and nothing more, could the Chinaman Cu
Joco acquire at that sale: not the ownership of the lot; neither the other half,
nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of one-half and the
entire other half of the building was null and void, and likewise with still more
reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for
sale and what it was that he purchased. There is nothing that can justify the
acquisition by the purchaser of the warehouse of the ownership of the lot
that this building occupies, since the minors represented by Ruperta Pascual
never were the owners of the said lot, nor were they ever considered to be
such.
The trial court, in the judgment rendered, held that there were no grounds for
the requested annulment of the sale, and that the plaintiffs were entitled to
the P600 deposited with the clerk of the court as the value of the lot in
question. The defendants, Ruperta Pascual and the Chinaman Cu Joco,
were absolved from the complaint, without express finding as to costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and
be compelled to accept the price set on the lot by expert appraisers, not
even though the plaintiffs be considered as coowner of the warehouse. It
would be much indeed that, on the ground of coownership, they should have
to abide by and tolerate the sale of the said building, which point this court
does not decide as it is not a question submitted to us for decision, but, as
regards the sale of the lot, it is in all respects impossible to hold that the
plaintiffs must abide by it and tolerate, it, and this conclusion is based on the
fact that they did not give their consent (art. 1261, Civil Code), and only the
contracting parties who have given it are obliged to comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment
of the sale of the lot; but subsequently the plaintiffs, through motion, asked
for an amendment by their complaint in the sense that the action should be
deemed to be one for the recovery of possession of a lot and for the
annulment of its sale. The plaintiff's petition was opposed by the defendant's
attorney, but was allowed by the court; therefore the complaint seeks, after
the judicial annulment of the sale of the lot, to have the defendants
sentenced immediately to deliver the same to the plaintiffs.
43
Such a finding appears to be in harmony with the decision rendered by the
Supreme Court in previous suit, wherein it was held that the ownership of the
lot lay in the plaintiffs, and for this reason steps were taken to give
possession thereof to the defendants; but, as the purchaser Cu Joco was not
a party to that suit, the present action is strictly one for recover against Cu
Joco to compel him, once the sale has been annulled, to deliver the lot to its
lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and
in the previous suit, that Andres Fontanilla, the defendants'
predecessor in interest, erected the warehouse on the lot, some
thirty years ago, with the explicit consent of his brother Francisco
Fontanilla, the plaintiff's predecessor in interest.
2. That it also appears to be an admitted fact that the plaintiffs and
the defendants are the coowners of the warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither
Andres Fontanilla nor his successors paid any consideration or
price whatever for the use of the lot occupied by the said building;
whence it is, perhaps, that both parties have denominated that use
a commodatum.
Upon the premise of these facts, or even merely upon that of the first of
them, the sentencing of the defendants to deliver the lot to the plaintiffs does
not follow as a necessary corollary of the judicial declaration of ownership
made in the previous suit, nor of that of the nullity of the sale of the lot, made
in the present case.
The defendants do not hold lawful possession of the lot in
question.1awphil.net
But, although both litigating parties may have agreed in their idea of the
commodatum, on account of its not being, as indeed it is not, a question of
fact but of law, yet that denomination given by them to the use of the lot
granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not
acceptable. Contracts are not to be interpreted in conformity with the name
that the parties thereto agree to give them, but must be construed, duly
considering their constitutive elements, as they are defined and denominated
by law.
By the contract of loan, one of the parties delivers to the other,
either anything not perishable, in order that the latter may use it
during the certain period and return it to the former, in which case it
is called commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the
thing belonging to another shall for a certain period. Francisco Fontanilla did
not fix any definite period or time during which Andres Fontanilla could have
the use of the lot whereon the latter was to erect a stone warehouse of
considerable value, and so it is that for the past thirty years of the lot has
been used by both Andres and his successors in interest. The present
contention of the plaintiffs that Cu Joco, now in possession of the lot, should
pay rent for it at the rate of P5 a month, would destroy the theory of the
commodatum sustained by them, since, according to the second paragraph
of the aforecited article 1740, "commodatum is essentially gratuitous," and, if
what the plaintiffs themselves aver on page 7 of their brief is to be believed,
it never entered Francisco's mind to limit the period during which his brother
Andres was to have the use of the lot, because he expected that the
warehouse would eventually fall into the hands of his son, Fructuoso
Fontanilla, called the adopted son of Andres, which did not come to pass for
the reason that Fructuoso died before his uncle Andres. With that
expectation in view, it appears more likely that Francisco intended to allow
his brother Andres a surface right; but this right supposes the payment of an
annual rent, and Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on
another's ground, the question should be decided in accordance with the
statutes that, thirty years ago, governed accessions to real estate, and which
were Laws 41 and 42, title 28, of the third Partida, nearly identical with the
provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to
article 361, the owner of the land on which a building is erected in good faith
has a right to appropriate such edifice to himself, after payment of the
indemnity prescribed in articles 453 and 454, or to oblige the builder to pay
him the value of the land. Such, and no other, is the right to which the
plaintiff are entitled.
44
For the foregoing reasons, it is only necessary to annul the sale of the said
lot which was made by Ruperta Pascual, in representation of her minor
children, to Cu Joco, and to maintain the latter in the use of the lot until the
plaintiffs shall choose one or the other of the two rights granted them by
article 361 of the Civil Code.1awphil.net
The judgment appealed from is reversed and the sale of the lot in question is
held to be null and void and of no force or effect. No special finding is made
as to the costs of both instances.
Torres, Johnson, Carson, Moreland and Trent, JJ., concur.
SECOND DIVISION
[ G.R. No. 195166, July 08, 2015 ]
SPOUSES SALVADOR ABELLA AND ALMA ABELLA, PETITIONERS, VS.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, RESPONDENTS.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule 45 of the Rules
of Court praying that judgment be rendered reversing and setting aside the
September 30, 2010 Decision[1] and the January 4, 2011 Resolution[2] of the
Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition
also prays that respondents Spouses Romeo and Annie Abella be ordered to
pay petitioners Spouses Salvador and Alma Abella 2.5% monthly interest
plus the remaining balance of the amount loaned.
The assailed September 30, 2010 Decision of the Court of Appeals reversed
and set aside the December 28, 2005 Decision[3] of the Regional Trial Court,
Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed petitioners to pay
respondents P148,500.00 (plus interest), which was the amount respondents
supposedly overpaid. The assailed January 4, 2011 Resolution of the Court
of Appeals denied petitioners' Motion for Reconsideration.
The Regional Trial Court's December 28, 2005 Decision ordered
respondents to pay petitioners the supposedly unpaid loan balance of
P300,000.00 plus the allegedly stipulated interest rate of 30% per annum, as
well as litigation expenses and attorney's fees.[4]
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a
Complaint[5]for sum of money and damages with prayer for preliminary
attachment against respondents Spouses Romeo and Annie Abella before
the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as
Civil Case No. 6627.[6]
In their Complaint, petitioners alleged that respondents obtained a loan from
them in the amount of P500,000.00. The loan was evidenced by an
acknowledgment receipt dated March 22, 1999 and was payable within one
(1) year. Petitioners added that respondents were able to pay a total of
P200,000.00—P100,000.00 paid on two separate occasions—leaving an
unpaid balance of P300,000.00.[7]
In their Answer[8] (with counterclaim and motion to dismiss), respondents
alleged that the amount involved did not pertain to a loan they obtained from
petitioners but was part of the capital for a joint venture involving the lending
of money.[9]
Specifically, respondents claimed that they were approached by petitioners,
who proposed that if respondents were to "undertake the management of
whatever money [petitioners] would give them, [petitioners] would get 2.5% a
45
month with a 2.5% service fee to [respondents]."[10] The 2.5% that each party
would be receiving represented their sharing of the 5% interest that the joint
venture was supposedly going to charge against its debtors. Respondents
further alleged that the one year averred by petitioners was not a deadline
for payment but the term within which they were to return the money placed
by petitioners should the joint venture prove to be not lucrative. Moreover,
they claimed that the entire amount of P500,000.00 was disposed of in
accordance with their agreed terms and conditions and that petitioners
terminated the joint venture, prompting them to collect from the joint
venture's borrowers. They were, however, able to collect only to the extent of
P200,000.00; hence, the P300,000.00 balance remained unpaid.[11]
In the Decision[12] dated December 28, 2005, the Regional Trial Court ruled
in favor of petitioners. It noted that the terms of the acknowledgment receipt
executed by respondents clearly showed that: (a) respondents were
indebted to the extent of P500,000.00; (b) this indebtedness was to be paid
within one (1) year; and (c) the indebtedness was subject to interest. Thus,
the trial court concluded that respondents obtained a simple loan, although
they later invested its proceeds in a lending enterprise.[13] The Regional Trial
Court adjudged respondents solidarity liable to petitioners. The dispositive
portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendants jointly and severally to pay the plaintiffs
the sum of P300,000.00 with interest at the rate of 30% per annum
from the time the complaint was filed on July 31, 2002 until fully
paid;
2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50
as reimbursement for litigation expenses, and another sum of
P5,000.00 as attorney's fees.
For lack of legal basis, plaintiffs' claim for moral and exemplary damages
has to be denied, and for lack of merit the counter-claim is ordered
dismissed.[14]
In the Order dated March 13, 2006,[15] the Regional Trial Court denied
respondents' Motion for Reconsideration.
On respondents' appeal, the Court of Appeals ruled that while respondents
had indeed entered into a simple loan with petitioners, respondents were no
longer liable to pay the outstanding amount of P300,000.00.[16]
The Court of Appeals reasoned that the loan could not have earned interest,
whether as contractually stipulated interest or as interest in the concept of
actual or compensatory damages. As to the loan's not having earned
stipulated interest, the Court of Appeals anchored its ruling on Article 1956 of
the Civil Code, which requires interest to be stipulated in writing for it to be
due.[17] The Court of Appeals noted that while the acknowledgement receipt
showed that interest was to be charged, no particular interest rate was
specified.[18] Thus, at the time respondents were making interest payments
of 2.5% per month, these interest payments were invalid for not being
properly stipulated by the parties. As to the loan's not having earned interest
in the concept of actual or compensatory damages, the Court of Appeals,
citing Eusebio-Calderon v. People,[19] noted that interest in the concept of
actual or compensatory damages accrues only from the time that demand
(whether judicial or extrajudicial) is made. It reasoned that since respondents
received petitioners' demand letter only on July 12, 2002, any interest in the
concept of actual or compensatory damages due should be reckoned only
from then. Thus, the payments for the 2.5% monthly interest made after the
perfection of the loan in 1999 but before the demand was made in 2002
were invalid.[20]
Since petitioners' charging of interest was invalid, the Court of Appeals
reasoned that all payments respondents made by way of interest should be
deemed payments for the principal amount of P500,000.00. [21]
The Court of Appeals further noted that respondents made a total payment
of P648,500.00, which, as against the principal amount of P500,000.00,
entailed an overpayment of P148,500.00. Applying the principle of solutio
indebiti, the Court of Appeals concluded that petitioners were liable to
reimburse respondents for the overpaid amount of P148,500.00. [22] The
dispositive portion of the assailed Court of Appeals Decision reads:
WHEREFORE, the Decision of the Regional Trial Court is
hereby REVERSED and SET ASIDE, and a new one issued, finding that the
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally
pay Spouses Romeo and Annie Abella the amount of P148,500.00, with
interest of 6% interest (sic) per annum to be computed upon receipt of this
decision, until full satisfaction thereof. Upon finality of this judgment, an
46
interest as the rate of 12% per annum, instead of 6%, shall be imposed on
the amount due, until full payment thereof.[23]
In the Resolution[24] dated January 4, 2011, the Court of Appeals denied
petitioners' Motion for Reconsideration.
Aggrieved, petitioners filed the present appeal [25] where they claim that the
Court of Appeals erred in completely striking off interest despite the parties'
written agreement stipulating it, as well as in ordering them to reimburse and
pay interest to respondents.
In support of their contentions, petitioners cite Article 1371 of the Civil
Code,[26]which calls for the consideration of the contracting parties'
contemporaneous and subsequent acts in determining their true intention.
Petitioners insist that respondents' consistent payment of interest in the year
following the perfection of the loan showed that interest at 2.5% per month
was properly agreed upon despite its not having been expressly stated in the
acknowledgment receipt. They add that during the proceedings before the
Regional Trial Court, respondents admitted that interest was due on the
loan.[27]
In their Comment,[28] respondents reiterate the Court of Appeals' findings
that no interest rate was ever stipulated by the parties and that interest was
not due and demandable at the time they were making interest payments. [29]
In their Reply,[30] petitioners argue that even though no interest rate was
stipulated in the acknowledgment receipt, the case fell under the exception
to the Parol Evidence Rule. They also argue that there exists convincing and
sufficiently credible evidence to supplement the imperfection of the
acknowledgment receipt.[31]
For resolution are the following issues:
First, whether interest accrued on respondents' loan from petitioners, If so, at
what rate?
Second, whether petitioners are liable to reimburse respondents for the
Litter's supposed excess payments and for interest.
I This is to acknowledge receipt of the Amount of Five Hundred Thousand
As noted by the Court of Appeals and the Regional Trial Court, respondents
entered into a simple loan or mutuum, rather than a joint venture, with
petitioners.
Respondents' claims, as articulated in their testimonies before the trial court,
cannot prevail over the clear terms of the document attesting to the relation
of the parties. "If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations
shall control."[32]
Articles 1933 and 1953 of the Civil Code provide the guideposts that
determine if a contractual relation is one of simple loan or mutuum:
Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
....
Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to
petitioners, which states:
Batan, Aklan
March 22, 1999
(P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year
47
from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)[33]
(Emphasis supplied)
The text of the acknowledgment receipt is uncomplicated and
straightforward. It attests to: first, respondents' receipt of the sum of
P500,000.00 from petitioner Alma Abella; second, respondents' duty to pay
tack this amount within one (1) year from March 22, 1999; and third,
respondents' duty to pay interest. Consistent with what typifies a simple loan,
petitioners delivered to respondents with the corresponding condition lat
respondents shall pay the same amount to petitioners within one (1) year.
II
Although we have settled the nature of the contractual relation between
petitioners and respondents, controversy persists over respondents' duty to
pay conventional interest, i.e., interest as the cost of borrowing money. [34]
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall
be due unless it has been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple,
plain, and unequivocal. It attests to the contracting parties' intent to subject
to interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt's failure to state the exact
rate of interest.
Jurisprudence is clear about the applicable interest rate if a written
instrument fails to specify a rate. In Spouses Toring v. Spouses Olan,[35] this
court clarified the effect of Article 1956 of the Civil Code and noted that the
legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of
money, according to the Civil Code, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum."[36]
Spouses Toring cites and restates (practically verbatim) what this court
settled in Security Bank and Trust Company v. Regional Trial Court of
Makati, Branch 61: "In a loan or forbearance of money, the interest due
should be that stipulated in writing, and in the absence thereof the
rate shall be 12% per annum."[37]
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals,
which, in turn, stated:[38]
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.[39] (Emphasis
supplied)
The rule is not only definite; it is cast in mandatory language. From Eastern
Shippingto Security Bank to Spouses Toring, jurisprudence has repeatedly
used the word "shall," a term that has long been settled to denote something
imperative or operating to impose a duty.[40] Thus, the rule leaves no room
for alternatives or otherwise does not allow for discretion. It requires the
application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames[41] recognized that the
legal rate of interest has been reduced to 6% per annum:
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-
MB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013,
the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the absence
of stipulation in loan contracts, thereby amending Section 2 of Circular No.
905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the
48
Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for
loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum — as
reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the
Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions,
before its amendment by BSP-MB Circular No. 799 — but will now be six
percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the prevailing rate of interest when
applicable.[42] (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of
2013 and Nacar retain the definite and mandatory framing of the rule
articulated in Eastern Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
....
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a Joan 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 6% 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.[43](Emphasis supplied,
citations omitted)
Thus, it remains that where interest was stipulated in writing by the debtor
and creditor in a simple loan or mutuum, but no exact interest rate was
mentioned, the legal rate of interest shall apply. At present, this is 6% per
annum, subject to Nacar's qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed
subjected to conventional interest at the rate of 12% per annum, the legal
rate of interest at the time the parties executed their agreement.
Moreover, should conventional interest still be due as of July 1, 2013, the
rate of 12% per annum shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the
parties' intent, as expressed as of the time of the execution of their contract.
In this sense, the legal rate of interest is an affirmation of the contracting
parties' intent; that is, by their contract's silence on a specific rate, the then
prevailing legal rate of interest shall be the cost of borrowing money. This
rate, which by their contract the parties have settled on, is deemed to persist
regardless of shifts in the legal rate of interest. Stated otherwise, the legal
rate of interest, when applied as conventional interest, shall always be the
legal rate at the time the agreement was executed and shall not be
susceptible to shifts in rate.
Petitioners, however, insist on conventional interest at the rate of 2.5% per
month or 30% per annum. They argue that the acknowledgment receipt fails
to show the complete and accurate intention of the contracting parties. They
rely on Article 1371 of the Civil Code, which provides that the
contemporaneous and subsequent acts of the contracting parties shall be
considered should there be a need to ascertain their intent. [44] In addition,
they claim that this case falls under the exceptions to the Parol Evidence
Rule, as spelled out in Rule 130, Section 9 of the Revised Rules on
Evidence.[45]
It is a basic precept in legal interpretation and construction that a rule or
provision that treats a subject with specificity prevails over a rule or provision
that treats a subject in general terms.[46]
The rule spelled out in Security Bank and Spouses Toring is anchored on
Article 1956 of the Civil Code and specifically governs simple loans
or mutuum. Mutuum is a type of nominate contract that is specifically
recognized by the Civil Code and for which the Civil Code provides a specific
set of governing rules: Articles 1953 to 1961. In contrast, Article 11371 is
among the Civil Code provisions generally dealing with contracts. As this
case particularly involves a simple loan, the specific rule spelled out
49
in Security Bank and Spouses Toring finds preferential application as against
Article 1371.
Contrary to petitioners' assertions, there is no room for entertaining
extraneous (or parol) evidence. In Spouses Bonifacio and Lucia Paras v.
Kimwa Construction and Development Corporation,[47] we spelled out the
requisites for the admission of parol evidence:
In sum, two (2) things must be established for parol evidence to be admitted:
first, that the existence of any of the four (4) exceptions has been put in
issue in a party's pleading or has not been objected to by the adverse party;
and second, that the parol evidence sought to be presented serves to form
the basis of the conclusion proposed by the presenting party. [48]
The issue of admitting parol evidence is a matter that is proper to the trial,
not the appellate, stage of a case. Petitioners raised the issue of applying
the exceptions to the Parol Evidence Rule only in the Reply they filed before
this court. This is the last pleading that either of the parties has filed in the
entire string of proceedings culminating in this Decision. It is, therefore, too
late for petitioners to harp on this rule. In any case, what is at issue is not
admission of evidence per se, but the appreciation given to the evidence
adduced by the parties. In the Petition they filed before this court, petitioners
themselves acknowledged that checks supposedly attesting to payment of
monthly interest at the rate of 2.5% were admitted by the trial court (and
marked as Exhibits "2," "3," "4," "5," "6," "7," and "8"). [49] What petitioners
have an issue with is not the admission of these pieces of evidence but how
these have not been appreciated in a manner consistent with the
conclusions they advance.
Even if it can be shown that the parties have agreed to monthly interest at
the rate of 2.5%, this is unconscionable. As emphasized in Castro v.
Tan,[50] the willingness of the parties to enter into a relation involving an
unconscionable interest rate is inconsequential to the validity of the
stipulated rate:
The imposition of an unconscionable rate of interest on a money debt, even
if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount
to a repugnant spoliation and an iniquitous deprivation of property, repulsive
to the common sense of man. It has no support in law, in principles of
justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be
sustained within the sphere of public or private morals. [51]
The imposition of an unconscionable interest rate is void ab initio for being
"contrary to morals, and the law."[52]
In determining whether the rate of interest is unconscionable, the mechanical
application of pre-established floors would be wanting. The lowest rates that
have previously been considered unconscionable need not be an
impenetrable minimum. What is more crucial is a consideration of the
parties' contexts. Moreover, interest rates must be appreciated in light of the
fundamental nature of interest as compensation to the creditor for money
lent to another, which he or she could otherwise have used for his or her
own purposes at the time it was lent. It is not the default vehicle for predatory
gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor's unjust enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30% annual
interest. Compounded at this rate, respondents' obligation would have more
than doubled—increased to 219.7% of the principal—by the end of the third
year after which the loan was contracted if the entire principal remained
unpaid. By the end of the ninth year, it would have multiplied more than
tenfold (or increased to 1,060.45%). In 2015, this would have multiplied by
more than 66 times (or increased to 6,654.17%). Thus, from an initial loan of
only P500,000.00, respondents would be obliged to pay more than P33
million. This is grossly unfair, especially since up to the fourth year from
when the loan was obtained, respondents had been assiduously delivering
payment. This reduces their best efforts to satisfy their obligation into a
protracted servicing of a rapacious loan.
The legal rate of interest is the presumptive reasonable compensation for
borrowed money. While parties are free to deviate from this, any deviation
must be reasonable and fair. Any deviation that is far-removed is suspect.
Thus, in cases where stipulated interest is more than twice the prevailing
legal rate of interest, it is for the creditor to prove that this rate is required by
prevailing market conditions. Here, petitioners have articulated no such
justification.
In sum, Article 1956 of the Civil Code, read in light of established
jurisprudence, prevents the application of any interest rate other than that
specifically provided for by the parties in their loan document or, in lieu of it,
the legal rate. Here, as the contracting parties failed to make a specific
stipulation, the legal rate must apply. Moreover, the rate that petitioners
adverted to is unconscionable. The conventional interest due on the principal
50
amount loaned by respondents from petitioners is held to be 12% per
annum.
III
Apart from respondents' liability for conventional interest at the rate of 12%
per annum, outstanding conventional interest—if any is due from
respondents—shall itself earn legal interest from the time judicial demand
was made by petitioners, i.e., on July 31, 2002, when they filed their
Complaint. This is consistent with Article 2212 of the Civil Code, which
provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall itself earn legal interest from
the time it is judicially demanded."[53]
Consistent with Nacar, as well as with our ruling in Rivera v. Spouses
Chua,[54] the interest due on conventional interest shall be at the rate of 12%
per annum from July 31, 2002 to June 30, 2013. Thereafter, or starting July
1, 2013, this shall be at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents made an
overpayment in the amount of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of
P200,000.00, which was charged against the principal amount of
P500,000.00. The first payment of P100,000.00 was made on June 30,
2001,[55] while the second payment of P100,000.00 was made on December
30, 2001.[56]
The Court of Appeals' September 30, 2010 Decision stated that respondents
paid P6,000.00 in March 1999.[57]
The Pre-Trial Order dated December 2, 2002,[58] stated that the parties
admitted that "from the time the principal sum of P500,000.00 was borrowed
from [petitioners], [respondents] ha[d] been religiously paying" [59] what was
supposedly interest "at the rate of 2.5% per month." [60]
From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before
respondents' payment of P100,000.00 on June 30, 2001, which was
deducted from the principal amount of P500,000.00), the 2.5% monthly
"interest" was pegged to the principal amount of P500,000.00. These
monthly interests, thus, amounted to P12,500.00 per month. Considering
that the period from March 1999 to June 2001 spanned twenty-seven (27)
months, respondents paid a total of P337,500.00.[61]
From June 22, 2001 up to December 22, 2001 (before respondents'
payment of another P100,000.00 on December 30, 2001, which was
deducted from the remaining principal amount of P400,000.00), the 2.5%
monthly "interest" was pegged to the remaining principal amount of
P400,000.00. These monthly interests, thus, amounted to P10,000.00 per
month. Considering that this period spanned six (6) months, respondents
paid a total of P60,000.00.[62]
From after December 22, 2001 up to June 2002 (when petitioners filed their
Complaint), the 2.5% monthly "interest" was pegged to the remaining
principal amount of P300,000.00. These monthly interests, thus, amounted
to P7,500.00 per month. Considering that this period spanned six (6)
months, respondents paid a total of P45,000.00.[63]
Applying these facts and the properly applicable interest rate (for
conventional interest, 12% per annum; for interest on conventional interest,
12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum
henceforth), the following conclusions may be drawn:
By the end of the first year following the perfection of the loan, or as of
March 21, 2000, P560,000.00 was due from respondents. This consisted cf
the principal of P500,000.00 and conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments
totalling P150,000.00 (P12,500.00 each from April 1999 to March 2000).
This was in addition to their initial payment of P6,000.00 in March 999.
Application of payments must be in accordance with Article 1253 of the Civil
Code, which reads:
51
Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest
payments. Thereafter, any excess payments shall be charged against the
principal. As respondents paid a total of P156,000.00 within the first year, the
conventional interest of P60,000.00 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P96,000.00) is to be charged
against the principal. This yields a balance of P404,000.00.
By the end of the second year following the perfection of the loan, or as of
March 21, 2001, P452,480.00 was due from respondents. This consisted of
the outstanding principal of P404,000.00 and conventional interest of
P48,480.00.
Within this second year, respondents completed another round of twelve
(12) monthly payments totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P156,000.00 within the second year, the conventional interest of P48,480.00
must be deemed fully paid and the remaining amount that respondents paid
(i.e., P101,520.00) is to be charged against the principal. This yields a
balance of P302,480.00.
By the end of the third year following the perfection of the loan, or as of
March 21, 2002, P338,777.60 was due from respondents. This consists of
he outstanding principal of P302,480.00 and conventional interest of
P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as follows:
Between March 22, 2001 and June 30, 2001, respondents completed
(a)
three (3) monthly payments of P12,500.00 each, totaling P37,500.00.
On June 30, 2001, respondents paid P100,000.00, which was charged
(b)
as principal payment.
Between June 30, 2001 and December 30, 2001, respondents delivered
monthly payments of P10,000.00 each. At this point, the monthly
payments no longer amounted to P12,500.00 each because the
(c)
supposed monthly interest payments were pegged to the supposedly
remaining principal of P400,000.00. Thus, during this period, they paid a
total of six (6) monthly payments totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the
June 30, 2001 payment, was charged against the principal.
From the end of December 2002 to the end of February 2002,
respondents delivered monthly payments of P7,500.00 each. At this
(e) point, the supposed monthly interest payments were now pegged to the
supposedly remaining principal of P300,000.00. Thus, during this period,
they delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of
P320,000.00 within the third year, the conventional interest of P36,927.50
must be deemed fully paid and the remaining amount that respondents paid
(i.e., P283,702.40) is to be charged against the principal. This yields a
balance of P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of
March 21, 2003, P21,203.51 would have been due from respondents. This
consists of: (a) the outstanding principal of P18,777.60, (b) conventional
interest of P2,253.31, and (c) interest due on conventional interest starting
from July 31, 2002, the date of judicial demand, in the amount of P172.60.
The last (i.e., interest on interest) must be pro-rated. There were only 233
days from July 31, 2002 (the date of judicial demand) to March 21, 2003 (the
end of the fourth year); this left 63.83% of the fourth year, within which
interest on interest might have accrued. Thus, the full annual interest on
interest of 12% per annum could not have been completed, and only the
proportional amount of 7.66% per annum may be properly imposed for the
remainder of the fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3)
more monthly payments of P7,500.00 each. Thus, during this period, they
delivered three (3) monthly payments totalling P22,500.00.
At this rate, however, payment would have been completed by respondents
even before the end of the fourth year. Thus, for precision, it is more
appropriate to reckon the amounts due as against payments made on
monthly, rather than an annual, basis.
By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus
pro-rated monthly conventional interest at 1%, amounting to P187.78) would
have been due from respondents. Deducting the monthly payment of
P7,500.00 for the preceding month in a manner consistent with Article 1253
of the Civil Code would yield a balance of P11,465.38.
52
By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus
pro-rated monthly conventional interest at 1%, amounting to P114.65) would
have been due from respondents. Deducting the monthly payment of
P7,500.00 for the preceding month in a manner consistent with Article 1253
of the Civil Code would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-
rated monthly conventional interest at 1%, amounting to P40.80) would have
been due from respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article 1253 of the Civil
Code would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal
and all the conventional interest that had accrued on their loan. By this date,
they also overpaid P3,379.17. Moreover, while hypothetically, interest on
conventional interest would not have run from July 31, 2002, no such interest
accrued since there was no longer any conventional interest due from
respondents by then.
V arising from their quasi-contractual obligation.
As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code[64] applies. Article 2154 reads:
Article 2154. If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it arises.
In Moreno-Lentfer v. Wolff,[65] this court explained the application of solutio
indebiti:
The quasi-contract of solutio indebiti harks back to the ancient principle that
no one shall enrich himself unjustly at the expense of another. It applies
where (1) a payment is made when there exists no binding relation between
the payor, who has no duty to pay, and the person who received the
payment, and (2) the payment is made through mistake, and not through
liberality or some other cause.[66]
As respondents had already fully paid the principal and all conventional
interest that had accrued, they were no longer obliged to make further
payments. Any further payment they made was only because of a mistaken
impression that they were still due. Accordingly, petitioners are now bound
by a quasi-contractual obligation to return any and all excess payments
delivered by respondents.
Nacar provides that "[w]hen 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."[67] This applies to obligations arising from quasi-contracts such
as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal
interest if a sum of money is involved, or shall be liable for fruits received or
which should have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing
from any cause, and for damages to the person who delivered the thing, until
it is recovered.
Consistent however, with our finding that the excess payment made by
respondents were borne out of a mere mistake that it was due, we find it in
the better interest of equity to no longer hold petitioners liable for interest
Nevertheless, Nacar also provides:
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 6% per annum
from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. [68]
Thus, interest at the rate of 6% per annum may be properly imposed on the
total judgment award. This shall be reckoned from the finality of this Decision
until its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the January
4, 2011 Resolution of the Court of Appeals Nineteenth Division in CA-G.R.
CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and Alma
Abella are DIRECTED to jointly and severally reimburse respondents
Spouses Romeo and Annie Abella the amount of P3,379.17, which
respondents have overpaid.
53
A legal interest of 6% per annum shall likewise be imposed on the total
judgment award from the finality of this Decision until its full satisfaction.

SO ORDERED.

Peralta,* Bersamin,** Del Castillo*** (Acting Chairperson), and Mendoza, JJ.,

concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

54
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.
GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of
Appeals promulgated a long time ago can properly be considered res
judicata by respondent Court of Appeals in the present two cases between
petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31,
1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No.
05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No.
3655 (429)], both for Recovery of Possession, which affirmed the Decision of
the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of
Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655
(429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the
defendant, Catholic Vicar Apostolic of the Mountain
Province to return and surrender Lot 2 of Plan Psu-194357
to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the
same Plan to the other set of plaintiffs, the Heirs of
Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages
is hereby denied. Said defendant is ordered to pay costs.
(p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision,
sustained the trial court's conclusions that the Decision of the Court of
Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in
question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to
1951; that petitioner had been in possession of the same lots as bailee in
commodatum up to 1951, when petitioner repudiated the trust and when it
applied for registration in 1962; that petitioner had just been in possession as
owner for eleven years, hence there is no possibility of acquisitive
prescription which requires 10 years possession with just title and 30 years
of possession without; that the principle of res judicata on these findings by
the Court of Appeals will bar a reopening of these questions of facts; and
that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's
Decision in the two aforementioned cases (CA G.R. No. CV-05418 and
05419) was denied.
The facts and background of these cases as narrated by the trail court are
as follows —
... The documents and records
presented reveal that the whole
controversy started when the defendant
Catholic Vicar Apostolic of the Mountain
Province (VICAR for brevity) filed with
the Court of First Instance of Baguio
Benguet on September 5, 1962 an
application for registration of title over
Lots 1, 2, 3, and 4 in Psu-194357,
situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-
91, said Lots being the sites of the
Catholic Church building, convents, high
55
school building, school gymnasium,
school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the
Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and
3, respectively, asserting ownership and
title thereto. After trial on the merits, the
land registration court promulgated its
Decision, dated November 17, 1965,
confirming the registrable title of VICAR
to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in
the herein Civil Case No. 3655) and the
Heirs of Egmidio Octaviano (plaintiffs in
the herein Civil Case No. 3607)
appealed the decision of the land
registration court to the then Court of
Appeals, docketed as CA-G.R. No.
38830-R. The Court of Appeals
rendered its decision, dated May 9,
1977, reversing the decision of the land
registration court and dismissing the
VICAR's application as to Lots 2 and 3,
the lots claimed by the two sets of
oppositors in the land registration case
(and two sets of plaintiffs in the two
cases now at bar), the first lot being
presently occupied by the convent and
the second by the women's dormitory
and the sister's convent.
On May 9, 1977, the Heirs of Octaviano
filed a motion for reconsideration
praying the Court of Appeals to order
the registration of Lot 3 in the names of
the Heirs of Egmidio Octaviano, and on
May 17, 1977, the Heirs of Juan Valdez
and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2
and 3 be ordered registered in the
names of the Heirs of Juan Valdez and
Pacita Valdez. On August 12,1977, the
Court of Appeals denied the motion for
reconsideration filed by the Heirs of
Juan Valdez on the ground that there
was "no sufficient merit to justify
reconsideration one way or the other ...,"
and likewise denied that of the Heirs of
Egmidio Octaviano.
Thereupon, the VICAR filed with the
Supreme Court a petition for review on
certiorari of the decision of the Court of
Appeals dismissing his (its) application
for registration of Lots 2 and 3, docketed
as G.R. No. L-46832, entitled 'Catholic
Vicar Apostolic of the Mountain Province
vs. Court of Appeals and Heirs of
Egmidio Octaviano.'
From the denial by the Court of Appeals
of their motion for reconsideration the
Heirs of Juan Valdez and Pacita Valdez,
on September 8, 1977, filed with the
Supreme Court a petition for review,
docketed as G.R. No. L-46872,
entitled, Heirs of Juan Valdez and Pacita
Valdez vs. Court of Appeals, Vicar,
Heirs of Egmidio Octaviano and Annable
O. Valdez.
On January 13, 1978, the Supreme
Court denied in a minute resolution both
petitions (of VICAR on the one hand and
the Heirs of Juan Valdez and Pacita
Valdez on the other) for lack of merit.
Upon the finality of both Supreme Court
resolutions in G.R. No. L-46832 and
G.R. No. L- 46872, the Heirs of
56
 Octaviano filed with the then Court of
First Instance of Baguio, Branch II, a
Motion For Execution of Judgment
praying that the Heirs of Octaviano be
placed in possession of Lot 3. The
Court, presided over by Hon. Salvador
J. Valdez, on December 7, 1978, denied
the motion on the ground that the Court
of Appeals decision in CA-G.R. No.
38870 did not grant the Heirs of
Octaviano any affirmative relief.
On February 7, 1979, the Heirs of
Octaviano filed with the Court of
Appeals a petitioner for certiorari and
mandamus, docketed as CA-G.R. No.
08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez,
Jr. and Vicar. In its decision dated May
16, 1979, the Court of Appeals
dismissed the petition.
It was at that stage that the instant
cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607
(419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of
Juan Valdez filed Civil Case No. 3655
(429) on September 24, 1979, likewise
for recovery of possession of Lot 2
(Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs
Heirs of Egmidio Octaviano presented one (1) witness,
Fructuoso Valdez, who testified on the alleged ownership
of the land in question (Lot 3) by their predecessor-in-
interest, Egmidio Octaviano (Exh. C ); his written demand
(Exh. B—B-4 ) to defendant Vicar for the return of the land
to them; and the reasonable rentals for the use of the land
at P10,000.00 per month. On the other hand, defendant
Vicar presented the Register of Deeds for the Province of
Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio
Octaviano or any of the plaintiffs (Exh. 8). The defendant
dispensed with the testimony of Mons.William Brasseur
when the plaintiffs admitted that the witness if called to the
witness stand, would testify that defendant Vicar has been
in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed
permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the
material facts are not in dispute, submitted the case on the
sole issue of whether or not the decisions of the Court of
Appeals and the Supreme Court touching on the
ownership of Lot 2, which in effect declared the plaintiffs
the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant
Vicar is barred from setting up the defense of ownership
and/or long and continuous possession of the two lots in
question since this is barred by prior judgment of the Court
of Appeals in CA-G.R. No. 038830-R under the principle
of res judicata. Plaintiffs contend that the question of
possession and ownership have already been determined
by the Court of Appeals (Exh. C, Decision, CA-G.R. No.
038830-R) and affirmed by the Supreme Court (Exh. 1,
Minute Resolution of the Supreme Court). On his part,
defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues
of long possession and ownership because the dispositive
portion of the prior judgment in CA-G.R. No. 038830-R
merely dismissed their application for registration and
titling of lots 2 and 3. Defendant Vicar contends that only
the dispositive portion of the decision, and not its body, is
the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to
petitioner are as follows:
57
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2
AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT
DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED
LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED
ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT
LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE
PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE
RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3
ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER
ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF
APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME
COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830
TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE
RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION
OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH
FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION
OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN
COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND
BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND
REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R.
Nos. 05148 and 05149, when it clearly held that it was in agreement with the
findings of the trial court that the Decision of the Court of Appeals dated May
4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and
3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R)
did not positively declare private respondents as owners of the land, neither
was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with
claim of ownership in good faith from 1906 to 1951. Petitioner was in
possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When
petitioner applied for registration of Lots 2 and 3 in 1962, it had been in
possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title.
Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the
Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no
error in respondent appellate court's ruling that said findings are res
judicatabetween the parties. They can no longer be altered by presentation
of evidence because those issues were resolved with finality a long time
ago. To ignore the principle of res judicata would be to open the door to
endless litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession for ordinary acquisitive
58
prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan
Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was absolutely no documentary
evidence to support the same and the alleged purchases were never
mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by
Valdez and Octaviano. Both Valdez and Octaviano had Free Patent
Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots
since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not
in question, but not Lots 2 and 3, because the buildings standing thereon
were only constructed after liberation in 1945. Petitioner Vicar only declared
Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2,
3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947,
the church was constructed only in 1951 and the new convent only 2 years
before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest
offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by
request of petitioner Vicar only in 1962.
1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals
in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This
Court declined to review said decision, thereby in effect, affirming it. It has
become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less
grave abuse of discretion, when it held that the Decision of the Court of
Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-
G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is
DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos.
05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs
against petitioner.
SO ORDERED.
Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

Private respondents were able to prove that their predecessors' house was
borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner
the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of
the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private

respondents were possessors under claim of ownership in good faith from

59
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain
furniture which she lent him for his use. She appealed from the judgment of
the Court of First Instance of Manila which ordered that the defendant return
to her the three has heaters and the four electric lamps found in the
possession of the Sheriff of said city, that she call for the other furniture from

60
the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both
parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's
house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the
novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in
the third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The
plaintiff sold the property to Maria Lopez and Rosario Lopez and on
September 14, 1936, these three notified the defendant of the conveyance,
giving him sixty days to vacate the premises under one of the clauses of the
contract of lease. There after the plaintiff required the defendant to return all
the furniture transferred to him for them in the house where they were found.
On November 5, 1936, the defendant, through another person, wrote
to the plaintiff reiterating that she may call for the furniture in the ground floor
of the house. On the 7th of the same month, the defendant wrote another
letter to the plaintiff informing her that he could not give up the three gas
heaters and the four electric lamps because he would use them until the
15th of the same month when the lease in due to expire. The plaintiff refused
to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. On November 15th, before vacating the
house, the defendant deposited with the Sheriff all the furniture belonging to
the plaintiff and they are now on deposit in the warehouse situated at No.
1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court
incorrectly applied the law: in holding that they violated the contract by not
calling for all the furniture on November 5, 1936, when the defendant placed
them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all
the furniture from the Sheriff at their expenses; in ordering them to pay-half
of the expenses claimed by the Sheriff for the deposit of the furniture; in
ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in
denying the motions for reconsideration and new trial. To dispose of the
case, it is only necessary to decide whether the defendant complied with his
obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to
the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum,
because under it the plaintiff gratuitously granted the use of the furniture to
the defendant, reserving for herself the ownership thereof; by this contract
the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph
1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he
should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at
the disposal of the plaintiff, retaining for his benefit the three gas heaters and
the four eletric lamps. The provisions of article 1169 of the Civil Code cited
by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed
to comply with her obligation to get the furniture when they were offered to
her.
As the defendant had voluntarily undertaken to return all the furniture to the
plaintiff, upon the latter's demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled to place the
furniture on deposit; nor was the plaintiff under a duty to accept the offer to
return the furniture, because the defendant wanted to retain the three gas
heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled
to the payment thereof by the defendant in case of his inability to return
some of the furniture because under paragraph 6 of the stipulation of facts,
the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value
thereof should be latter determined by the trial Court through evidence which
the parties may desire to present.
The costs in both instances should be borne by the defendant because the
plaintiff is the prevailing party (section 487 of the Code of Civil Procedure).
The defendant was the one who breached the contract of commodatum, and
without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay
the legal expenses and other judicial costs which the plaintiff would not have
otherwise defrayed.
61
The appealed judgment is modified and the defendant is ordered to return
and deliver to the plaintiff, in the residence to return and deliver to the
plaintiff, in the residence or house of the latter, all the furniture described in
paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff
shall be for the account of the defendant. the defendant shall pay the costs
in both instances. So ordered.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur. SECOND DIVISION

[G.R. No. 123031. October 12, 1999]

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs. COURT OF APPEALS, VICENTE ALEGRE, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari assails respondent appellate courts

Decision,[1] dated December 8, 1995, in CA G.R. CV No. 44085, which
affirmed the ruling of the Regional Trial Court of Makati, Branch 132. The
dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is hereby rendered ordering defendant

[herein petitioner] to pay plaintiff [herein private respondent]:

(1) the principal sum of P514,390.94 with legal interest thereon

computed from August 6, 1991 until fully paid; and

(2) the costs of suit.

SO ORDERED.[2]

62
 Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking
institution, is engaged in money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with
CIFC, five hundred thousand (P500,000.00) pesos, in cash. Petitioner issued
a promissory note to mature on May 27, 1991. The note for five hundred
sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos
(P516,238.67) covered private respondents placement plus interest at
twenty and a half (20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the
CHECK) for five hundred fourteen thousand, three hundred ninety pesos and
ninety-four centavos (P514,390.94) in favor of the private respondent as
proceeds of his matured investment plus interest. The CHECK was drawn
from petitioners current account number 0011-0803-59, maintained with the
Bank of the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with
Rizal Commercial Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI
dishonored the CHECK with the annotation, that the Check (is) Subject of an
Investigation. BPI took custody of the CHECK pending an investigation of
several counterfeit checks drawn against CIFCs aforestated checking
account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored
CHECK and demanded, on several occasions, that he be paid in cash. CIFC
refused the request, and instead instructed private respondent to wait for its
ongoing bank reconciliation with BPI. Thereafter, private respondent, through
counsel, made a formal demand for the payment of his money market
placement. In turn, CIFC promised to replace the CHECK but required an
impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint [3] for
recovery of a sum of money against the petitioner with the Regional Trial
Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally
filed against BPI, a separate civil action[4] for collection of a sum of money
with the RTC-Makati, Branch 147. The collection suit alleged that BPI
unlawfully deducted from CIFCs checking account, counterfeit checks
amounting to one million, seven hundred twenty-four thousand, three
hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The
action included the prayer to collect the amount of the CHECK paid to
Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch
132, CIFC filed a motion for leave of court to file a third-party complaint
against BPI. BPI was impleaded by CIFC to enforce a right, for contribution
and indemnity, with respect to Alegres claim. CIFC asserted that the CHECK
it issued in favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI
moved to dismiss the third-party complaint on the ground of pendency of
another action with RTC-Makati, Branch 147. Acting on the motion, the trial
court dismissed the third-party complaint on November 4, 1992, after finding
that the third party complaint filed by CIFC against BPI is similar to its
ancillary claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on
May 27, and June 22, 1993, Vito Arieta, Bank Manager of BPI, testified that
the bank, indeed, dishonored the CHECK, retained the original copy and
forwarded only a certified true copy to RCBC. When Arieta was recalled on
July 20, 1993, he testified that on July 16, 1993, BPI encashed and deducted
the said amount from the account of CIFC, but the proceeds, as well as the
CHECK remained in BPIs custody. The banks move was in accordance with
the Compromise Agreement[5] it entered with CIFC to end the litigation in
RTC-Makati, Branch 147. The compromise agreement, which was submitted
for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of
P1,724,364.58 plus P 20,000 litigation expenses as full and
final settlement of all of plaintiffs claims as contained in the
Amended Complaint dated September 10, 1992. The
aforementioned amount shall be credited to plaintiffs current
account No. 0011-0803-59 maintained at defendants Main
Branch upon execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from
the aforesaid current account representing payment/discharge
of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil
Case No. 92-515 arising from the alleged dishonor of BPI
Check No. 513397, plaintiff cannot go after the
63
 defendant: otherwise stated, the defendant shall not be liable
to the plaintiff. Plaintiff [CIFC] may however set-up the
defense of payment/discharge stipulated in par. 2 above.[6]
On July 27, 1993, BPI filed a separate collection suit [7] against Vicente
Alegre with the RTC-Makati, Branch 62. The complaint alleged that Vicente
Alegre connived with certain Lina A. Pena and Lita A. Anda and forged
several checks of BPIs client, CIFC. The total amount of counterfeit checks
was P 1,724,364.58. BPI prevented the encashment of some checks
amounting to two hundred ninety five thousand, seven hundred seventy-five
pesos and seven centavos (P295,775.07). BPI admitted that the CHECK,
payable to Vicente Alegre for P514,390.94, was deducted from BPIs claim,
hence, the balance of the loss incurred by BPI was nine hundred fourteen
thousand, one hundred ninety-eight pesos and fifty-seven centavos
(P914,198.57), plus costs of suit for twenty thousand (P20,000.00)
pesos. The records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment
in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The
respondent court affirmed the decision of the trial court.
Hence this appeal,[8] in which petitioner interposes the following
assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding
of the Honorable Trial Court holding that petitioner was not
discharged from the liability of paying the value of the subject
check to private respondent after BPI has debited the value
thereof against petitioners current account.
2. The Honorable Court of Appeals erred in applying the
provisions of paragraph 2 of Article 1249 of the Civil Code in
the instant case. The applicable law being the Negotiable
Instruments Law.
3. The Honorable Court of Appeals erred in affirming the
Honorable Trial Courts findings that the petitioner was guilty of
negligence and delay in the performance of its obligation to
the private respondent.
4. The Honorable Court of Appeals erred in affirming the
Honorable Trial Courts decision ordering petitioner to pay
legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the
Honorable Trial Courts dismissal of petitioners third-party
complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL
CODE APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY
DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY
COMPLAINT OF PETITIONER AGAINST BPI BY REASON
OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the
Negotiable Instruments Law (NIL) are the pertinent laws to govern its money
market transaction with private respondent, and not paragraph 2 of Article
1249 of the Civil Code.Petitioner stresses that it had already been
discharged from the liability of paying the value of the CHECK due to the
following circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the
drawee bank, as defined under the Negotiable Instruments
Law, and therefore, BPI, the drawee bank, became primarily
liable for the payment of the check, and consequently, the
drawer, herein petitioner, was discharged from its liability
thereon;
2) Moreover, BPI, the drawee bank, has not validly
DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the
value of the check from petitioners account amounted to
and/or constituted a discharge of the drawers (petitioners)
liability under the instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which
states:
64
Liability of drawee retaining or destroying bill - Where a drawee to whom a
bill is delivered for acceptance destroys the same, or refuses within twenty-
four hours after such delivery or such other period as the holder may allow,
to return the bill accepted or non-accepted to the Holder, he will be deemed
to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became
primarily liable for the payment of the CHECK.Consequently, when BPI
offset the value of CHECK against the losses from the forged checks
allegedly committed by the private respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an
obligation and expressly provides for the medium in the payment of debts. It
provides that:
The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency, which
is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held
in abeyance.
Considering the nature of a money market transaction, the above-
quoted provision should be applied in the present controversy. As held
in Perez vs. Court of Appeals,[10] a money market is a market dealing in
standardized short-term creditinstruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a
middle man or dealer in open market. In a money market transaction, the
investor is a lender who loans his money to a borrower through a middleman
or dealer.[11]
In the case at bar, the money market transaction between the petitioner
and the private respondent is in the nature of a loan. The private respondent
accepted the CHECK, instead of requiring payment in money. Yet, when he
presented it to RCBC for encashment, as early as June 17, 1991, the same
was dishonored by non-acceptance, with BPIs annotation: Check (is) subject
of an investigation. These facts were testified to by BPIs manager. Under
these circumstances, and after the notice of dishonor,[12] the holder has an
immediate right of recourse against the drawer,[13] and consequently could
immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may
be paid in money, which is the legal tender or, by the use of a check. A
check is not a legal tender, and therefore cannot constitute valid tender of
payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals,[14] this
Court held:
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment
(citation omitted). A check, whether a managers check or ordinary check, is
not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or
creditor.Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until
the payment by commercial document is actually realized (Art. 1249, Civil
Code, par. 3.)[15]
Turning now to the second issue, when the bank deducted the amount
of the CHECK from CIFCs current account, this did not ipso facto operate as
a discharge or payment of the instrument. Although the value of the CHECK
was deducted from the funds of CIFC, it was not delivered to the payee,
Vicente Alegre. Instead, BPI offset the amount against the losses it incurred
from forgeries of CIFC checks, allegedly committed by Alegre. The
confiscation of the value of the check was agreed upon by CIFC and
BPI. The parties intended to amicably settle the collection suit filed by CIFC
with the RTC-Makati, Branch 147, by entering into a compromise agreement,
which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from
the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to
Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil
Case No. 92-515 arising from the alleged dishonor of BPI
65
 Check No. 513397, plaintiff cannot go after the defendant;
otherwise stated, the defendant shall not be liable to the
plaintiff. Plaintiff however (sic) set-up the defense of
payment/discharge stipulated in par. 2 above.[16]
A compromise is a contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already commenced. [17] It
is an agreement between two or more persons who, for preventing or putting
an end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing. [18] The compromise agreement
could not bind a party who did not sign the compromise agreement nor avail
of its benefits.[19] Thus, the stipulations in the compromise agreement is
unenforceable against Vicente Alegre, not a party thereto. His money could
not be the subject of an agreement between CIFC and BPI.Although Alegres
money was in custody of the bank, the banks possession of it was not in the
concept of an owner. BPI cannot validly appropriate the money as its
own. The codal admonition on this issue is clear:
Art. 1317 -
No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party.[20]
BPIs confiscation of Alegres money constitutes garnishment without
the parties going through a valid proceeding in court. Garnishment is an
attachment by means of which the plaintiff seeks to subject to his claim the
property of the defendant in the hands of a third person or money owed to
such third person or a garnishee to the defendant.[21] The garnishment
procedure must be upon proper order of RTC-Makati, Branch 62, the court
who had jurisdiction over the collection suit filed by BPI against Alegre. In
effect, CIFC has not yet tendered a valid payment of its obligation to the
private respondent. Tender of payment involves a positive and unconditional
act by the obligor of offering legal tender currency as payment to the obligee
for the formers obligation and demanding that the latter accept the
same.[22] Tender of payment cannot be presumed by a mere inference from
surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the
dismissal of an action, the following requisites must concur: (a) identity of
parties or at least such as to represent the same interest in both actions; (b)
identity of rights asserted and relief prayed for, the relief being founded on
the same acts; and (c) the identity in the two cases should be such that the
judgment which may be rendered in one would, regardless of which party is
successful, amount to res judicata in the other.[23]
The trial courts ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu
International Finance Corporation vs. Bank of the Philippine Islands now
pending before Branch 147 of this Court and the Third Party Complaint in the
instant case would readily show that the parties are not only identical but
also the cause of action being asserted, which is the recovery of the value of
BPI Check No. 513397 is the same. In Civil Case No. 92-1940 and in the
Third Party Complaint the rights asserted and relief prayed for, the reliefs
being founded on the facts, are identical.
xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third
Party Complaint is hereby ordered dismissed on ground of lis pendens. [24]
We agree with the observation of the respondent court that, as
between the third party claim filed by the petitioner against BPI in Civil Case
No. 92-515 and petitioners ancillary claim against the bank in Civil Case No.
92-1940, there is identity of parties as well as identity of rights asserted, and
that any judgment that may be rendered in one case will amount to res
judicata in another.
The compromise agreement between CIFC and BPI, categorically
provided that In case plaintiff is adjudged liable to Vicente Alegre in Civil
Case No. 92-515 arising from the alleged dishonor of BPI Check No.
513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise
stated, the defendant shall not be liable to the plaintiff. [25] Clearly, this
stipulation expressed that CIFC had already abandoned any further claim
66
against BPI with respect to the value of BPI Check No. 513397.To ask this Araneta and Zaragoza for appellants.
Court to allow BPI to be a party in the case at bar, would amount to res Eusebio Orense for appelle.
judicata and would violate terms of the compromise agreement between
CIFC and BPI. The general rule is that a compromise has upon the parties JOHNSON, J.:
the effect and authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should be deemed to
have been included therein.[26] This holds true even if the agreement has not PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
been judicially approved.[27]
The principal questions presented by this appeal are:
WHEREFORE, the instant petition is hereby DENIED. The Decision of
the Court of Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against
petitioner. (a) Is the contract in question a pacto de retro or a mortgage?

SO ORDERED. (b) Under a pacto de retro, when the vendor becomes a tenant of
Mendoza, and Buena, JJ., concur. the purchaser and agrees to pay a certain amount per month as
Bellosillo, (Chairman), J., on official leave. rent, may such rent render such a contract usurious when the
amount paid as rent, computed upon the purchase price, amounts
to a higher rate of interest upon said amount than that allowed by
law?

(c) May the contract in the present case may be modified by

parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants

purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with
Republic of the Philippines the camarin located thereon, situated in the municipality of Tarlac of the
SUPREME COURT Province of Tarlac for the price of P25,000, promising to pay therefor in three
Manila installments. The first installment of P2,000 was due on or before the 2d day
of May, 1921; the second installment of P8,000 was due on or before 31st
EN BANC day of May, 1921; the balance of P15,000 at 12 per cent interest was due
and payable on or about the 30th day of November, 1922. One of the
conditions of that contract of purchase was that on failure of the purchaser
G.R. No. 26085 August 12, 1927 (plaintiffs and appellants) to pay the balance of said purchase price or any of
the installments on the date agreed upon, the property bought would revert
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants, to the original owner.
vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee. The payments due on the 2d and 31st of May, 1921, amounting to P10,000
were paid so far as the record shows upon the due dates. The balance of

67
P15,000 due on said contract of purchase was paid on or about the 1st day
of December, 1922, in the manner which will be explained below. On the
date when the balance of P15,000 with interest was paid, the vendor of said
property had issued to the purchasers transfer certificate of title to said
property, No. 528. Said transfer certificate of title (No. 528) was transfer
certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the
property in question wrote a letter to the appellant Potenciana Manio (Exhibit
A, p. 50), notifying the latter that if the balance of said indebtedness was not
paid, an action would be brought for the purpose of recovering the property,
together with damages for non compliance with the condition of the contract
of purchase. The pertinent parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia
30 del corriente, procederemos judicialmente contra Vd.
para reclamar la devolucion del camarin y los daños y
perjuicios ocasionados a la compañia por su
incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the
vendor, there was due and payable upon said contract of purchase on the
30th day of November, 1922, the sum P16,965.09. Upon receiving the letter
of the vendor of said property of November 7, 1922, the purchasers, the
appellants herein, realizing that they would be unable to pay the balance
due, began to make an effort to borrow money with which to pay the balance
due, began to make an effort to borrow money with which to pay the balance
of their indebtedness on the purchase price of the property involved. Finally
an application was made to the defendant for a loan for the purpose of
satisfying their indebtedness to the vendor of said property. After some
negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs
the sum of P17,500 upon condition that the plaintiffs execute and deliver to
him a pacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by
means of a check the sum of P16,965.09. The defendant, in addition to said
amount paid by check, delivered to the plaintiffs the sum of P354.91 together
with the sum of P180 which the plaintiffs paid to the attorneys for drafting
said contract of pacto de retro, making a total paid by the defendant to the
plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of
said contract. Said contracts was dated the 28th day of November, 1922,
and is in the words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y
Potenciana Manio, ambos mayores de edad, residentes
en el Municipio de Calumpit, Provincia de Bulacan,
propietarios y transeuntes en esta Ciudad de Manila, de
una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de
edad, casado con Maria Santiago, comerciante y vecinos
de esta Ciudad de Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:
Primero. Que nosotros, Severino Tolentino y Potenciano
Manio, por y en consideracion a la cantidad de diecisiete
mil quinientos pesos (P17,500) moneda filipina, que en
este acto hemos recibido a nuestra entera satisfaccion de
Don Benito Gonzalez Sy Chiam, cedemos, vendemos y
traspasamos a favor de dicho Don Benito Gonzalez Sy
Chiam, sus herederos y causahabientes, una finca que,
68
segun el Certificado de Transferencia de Titulo No. 40
expedido por el Registrador de Titulos de la Provincia de
Tarlac a favor de "Luzon Rice Mills Company Limited" que
al incorporarse se donomino y se denomina "Luzon Rice
Mills Inc.," y que esta corporacion nos ha transferido en
venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el
mismo, situado en el Municipio de Tarlac. Linda por el O. y
N. con propiedad de Manuel Urquico; por el E. con
propiedad de la Manila Railroad Co.; y por el S. con un
camino. Partiendo de un punto marcado 1 en el plano,
cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del
mojon de localizacion No. 2 de la Oficina de Terrenos en
Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al
punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al
punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al
punto de partida; midiendo una extension superficcial de
cuatro mil doscientos diez y seis metros cuadrados
(4,216) mas o menos. Todos los puntos nombrados se
hallan marcados en el plano y sobre el terreno los puntos
1 y 2 estan determinados por mojones de P. L. S. de 20 x
20 x 70 centimetros y los puntos 3 y 4 por mojones del P.
L. S. B. L.: la orientacion seguida es la verdadera, siendo
la declinacion magnetica de 0 gds. 45' E. y la fecha de la
medicion, 1.º de febrero de 1913.
Segundo. Que es condicion de esta venta la de que si en
el plazo de cinco (5) años contados desde el dia 1.º de
diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil
quinientos pesos (P17,500) queda obligado dicho Sr.
Benito Gonzalez y Chiam a retrovendernos la finca arriba
descrita; pero si transcurre dicho plazo de cinco años sin
ejercitar el derecho de retracto que nos hemos reservado,
entonces quedara esta venta absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto
tendremos en arrendamiento la finca arriba descrita,
sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por
mensualidades vencidas a Don Benito Gonzalez
Sy Chiam y en su domicilio, era de trescientos
setenta y cinco pesos (P375) moneda filipina,
cada mes.
(b) El amillaramiento de la finca arrendada sera
por cuenta de dicho Don Benito Gonzalez Sy
Chiam, asi como tambien la prima del seguro
contra incendios, si el conviniera al referido Sr.
Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado
por dos meses consecutivos dara lugar a la
terminacion de este arrendamieno y a la perdida
del derecho de retracto que nos hemos
reservado, como si naturalmente hubiera
expirado el termino para ello, pudiendo en su
virtud dicho Sr. Gonzalez Sy Chiam tomar
posesion de la finca y desahuciarnos de la
misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez
otorgo que acepto esta escritura en los precisos terminos
en que la dejan otorgada los conyuges Severino Tolentino
y Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de
nuestra mano en Manila, por cuadruplicado en Manila, hoy
a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
69
 (Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question
above, shows clearly that it is a pacto de retro and not a mortgage. There is
no pretension on the part of the appellant that said contract, standing alone,
is a mortgage. The pertinent language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo
de cinco (5) años contados desde el dia 1.º de diciembre de 1922,
devolvemos al expresado Don Benito Gonzales Sy Chiam el
referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la
finca arriba descrita; pero si transcurre dicho plazo de cinco (5)
años sin ejercitar al derecho de retracto que nos hemos reservado,
entonces quedara esta venta absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed
clearly in said quotation that there can certainly be not doubt as to the
purpose of the plaintiff to sell the property in question, reserving the right
only to repurchase the same. The intention to sell with the right to
repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor,
recognizing the absolute sale of the property, entered into a contract with the
purchaser by virtue of which she became the "tenant" of the purchaser. That
contract of rent appears in said quoted document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos
en arrendamiento la finca arriba descrita, sujeto a condiciones
siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades
vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, sera
de trescientos setenta y cinco pesos (P375) moneda filipina, cada
mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de
dicho Don Benito Gonzalez Sy Chiam, asi como tambien la prima
del seguro contra incendios, si le conviniera al referido Sr. Benito
Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the
contract of pacto de retro is an absolute sale of the property with the right to
repurchase and not a mortgage; and, second, that by virtue of the said
contract the vendor became the tenant of the purchaser, under the
conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract
of pacto de retro, to declare the same to be a mortgage and not a sale
whenever the interpretation of such a contract justifies that conclusion. There
must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they
intended the contract to be a "mortgage" and not a pacto de retro.
(International Banking Corporation vs. Martinez, 10 Phil., 252;
Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415;
Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925;
Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not
favored and that the court will not construe an instrument to one of sale
with pacto de retro, with the stringent and onerous effect which follows,
unless the terms of the document and the surrounding circumstances require
it.
While it is general rule that parol evidence is not admissible for the purpose
of varying the terms of a contract, but when an issue is squarely presented
that a contract does not express the intention of the parties, courts will, when
a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties.
70
In the present case the plaintiffs allege in their complaint that the contract in
question is a pacto de retro. They admit that they signed it. They admit they
sold the property in question with the right to repurchase it. The terms of the
contract quoted by the plaintiffs to the defendant was a "sale" with pacto de
retro, and the plaintiffs have shown no circumstance whatever which would
justify us in construing said contract to be a mere "loan" with guaranty. In
every case in which this court has construed a contract to be a mortgage or
a loan instead of a sale with pacto de retro, it has done so, either because
the terms of such contract were incompatible or inconsistent with the theory
that said contract was one of purchase and sale. (Olino vs. Medina, supra;
Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325;
Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to
indicate the nature of the conveyance of the land was "pledged" instead of
"sold". In the case of Manlagnit vs. Dy Puico, while the vendor used to the
terms "sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor" the purchaser as a "creditor" and the
contract as a "mortgage". In the case of Rodriguez vs. Pamintuan and De
Jesus the person who executed the instrument, purporting on its face to be a
deed of sale of certain parcels of land, had merely acted under a power of
attorney from the owner of said land, "authorizing him to borrow money in
such amount and upon such terms and conditions as he might deem proper,
and to secure payment of the loan by a mortgage." In the case of Villa vs.
Santiago (38 Phil., 157), although a contract purporting to be a deed of sale
was executed, the supposed vendor remained in possession of the land and
invested the money he had obtained from the supposed vendee in making
improvements thereon, which fact justified the court in holding that the
transaction was a mere loan and not a sale. In the case of Cuyugan vs.
Santos (39 Phil., 970), the purchaser accepted partial payments from the
vendor, and such acceptance of partial payments is absolutely incompatible
with the idea of irrevocability of the title of ownership of the purchaser at the
expiration of the term stipulated in the original contract for the exercise of the
right of repurchase."
Referring again to the right of the parties to vary the terms of written
contract, we quote from the dissenting opinion of Chief Justice Cayetano S.
Arellano in the case of Government of the Philippine Islands vs. Philippine
Sugar Estates Development Co., which case was appealed to the Supreme
Court of the United States and the contention of the Chief Justice in his
dissenting opinion was affirmed and the decision of the Supreme Court of
the Philippine Islands was reversed. (See decision of the Supreme Court of
the United States, June 3, 1918.)1 The Chief Justice said in discussing that
question:
According to article 1282 of the Civil Code, in order to judge of the intention
of the contracting parties, consideration must chiefly be paid to those acts
executed by said parties which are contemporary with and subsequent to the
contract. And according to article 1283, however general the terms of a
contract may be, they must not be held to include things and cases different
from those with regard to which the interested parties agreed to contract.
"The Supreme Court of the Philippine Islands held the parol evidence was
admissible in that case to vary the terms of the contract between the
Government of the Philippine Islands and the Philippine Sugar Estates
Development Co. In the course of the opinion of the Supreme Court of the
United States Mr. Justice Brandeis, speaking for the court, said:
It is well settled that courts of equity will reform a written contract
where, owing to mutual mistake, the language used therein did not
fully or accurately express the agreement and intention of the
parties. The fact that interpretation or construction of a contract
presents a question of law and that, therefore, the mistake was one
of law is not a bar to granting relief. . . . This court is always
disposed to accept the construction which the highest court of a
territory or possession has placed upon a local statute. But that
disposition may not be yielded to where the lower court has clearly
erred. Here the construction adopted was rested upon a clearly
erroneous assumption as to an established rule of equity. . . . The
burden of proof resting upon the appellant cannot be satisfied by
mere preponderance of the evidence. It is settled that relief by way
of reformation will not be granted unless the proof of mutual
mistake be of the clearest and most satisfactory character.
The evidence introduced by the appellant in the present case does not meet
with that stringent requirement. There is not a word, a phrase, a sentence or
a paragraph in the entire record, which justifies this court in holding that the
said contract of pacto de retro is a mortgage and not a sale with the right to
repurchase. Article 1281 of the Civil Code provides: "If the terms of a
contract are clear and leave no doubt as to the intention of the contracting
parties, the literal sense of its stipulations shall be followed." Article 1282
provides: "in order to judge as to the intention of the contracting parties,
71
attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto."
We cannot thereto conclude this branch of our discussion of the question
involved, without quoting from that very well reasoned decision of the late
Chief Justice Arellano, one of the greatest jurists of his time. He said, in
discussing the question whether or not the contract, in the case of Lichauco
vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don
Macarion Berenguer declares and states that he is the proprietor in
fee simple of two parcels of fallow unappropriated crown land
situated within the district of his pueblo. The first has an area of
73 quiñones, 8 balitas and 8 loanes, located in the sitio of Batasan,
and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang has as area of 73 hectares, 22
ares, and 6 centares, and is bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de
retro) he sells the said properties to the aforementioned
Doña Cornelia Laochangco for P4,000 and upon the
following conditions: First, the sale stipulated shall be for
the period of two years, counting from this date, within
which time the deponent shall be entitled to repurchase
the land sold upon payment of its price; second, the lands
sold shall, during the term of the present contract, be held
in lease by the undersigned who shall pay, as rental
therefor, the sum of 400 pesos per annum, or the
equivalent in sugar at the option of the vendor; third, all the
fruits of the said lands shall be deposited in the sugar
depository of the vendee, situated in the district of Quiapo
of this city, and the value of which shall be applied on
account of the price of this sale; fourth, the deponent
acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender
currency of this country . . .; fifth, all the taxes which may
be assessed against the lands surveyed by competent
authority, shall be payable by and constitute a charge
against the vendor; sixth, if, through any unusual event,
such as flood, tempest, etc., the properties hereinbefore
enumerated should be destroyed, wholly or in part, it shall
be incumbent upon the vendor to repair the damage
thereto at his own expense and to put them into a good
state of cultivation, and should he fail to do so he binds
himself to give to the vendee other lands of the same area,
quality and value.'
xxx xxx xxx
The opponent maintained, and his theory was accepted by the trial
court, that Berenguer's contract with Laochangco was not one of
sale with right of repurchase, but merely one of loan secured by
those properties, and, consequently, that the ownership of the lands
in questions could not have been conveyed to Laochangco,
inasmuch as it continued to be held by Berenguer, as well as their
possession, which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The
instrument executed by Macario Berenguer, the text of which has
been transcribed in this decision, is very clear. Berenguer's heirs
may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the
instrument, Exhibit C. Not because the lands may have continued in
possession of the vendor, not because the latter may have
assumed the payment of the taxes on such properties, nor yet
because the same party may have bound himself to substitute by
another any one of the properties which might be destroyed, does
the contract cease to be what it is, as set forth in detail in the public
instrument. The vendor continued in the possession of the lands,
not as the owner thereof as before their sale, but as the lessee
which he became after its consummation, by virtue of a contract
executed in his favor by the vendee in the deed itself, Exhibit C.
Right of ownership is not implied by the circumstance of the
lessee's assuming the responsibility of the payment is of the taxes
on the property leased, for their payment is not peculiarly
incumbent upon the owner, nor is such right implied by the
obligation to substitute the thing sold for another while in his
possession under lease, since that obligation came from him and
72
 he continues under another character in its possession—a reason
why he guarantees its integrity and obligates himself to return the
thing even in a case of force majeure. Such liability, as a general
rule, is foreign to contracts of lease and, if required, is exorbitant,
but possible and lawful, if voluntarily agreed to and such agreement
does not on this account involve any sign of ownership, nor other
meaning than the will to impose upon oneself scrupulous diligence
in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by
its nature transfers the ownership and other rights in the thing sold.
A pacto de retro, or sale with right to repurchase, is nothing but a
personal right stipulated between the vendee and the vendor, to the
end that the latter may again acquire the ownership of the thing
alienated.
It is true, very true indeed, that the sale with right of repurchase is
employed as a method of loan; it is likewise true that in practice
many cases occur where the consummation of a pacto de retro sale
means the financial ruin of a person; it is also, unquestionable that
in pacto de retro sales very important interests often intervene, in
the form of the price of the lease of the thing sold, which is
stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is
no proof that the sale with right of repurchase, made by Berenguer
in favor of Laonchangco is rather a mortgage to secure a loan.
We come now to a discussion of the second question presented above, and
that is, stating the same in another form: May a tenant charge his landlord
with a violation of the Usury Law upon the ground that the amount of rent he
pays, based upon the real value of the property, amounts to a usurious rate
of interest? When the vendor of property under a pacto de retro rents the
property and agrees to pay a rental value for the property during the period
of his right to repurchase, he thereby becomes a "tenant" and in all respects
stands in the same relation with the purchaser as a tenant under any other
contract of lease.
The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, or the sum of P375 per month, based
upon the value of the property, amounted to usury. Usury, generally
speaking, may be defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or forbearance of money—
the taking of more interest for the use of money than the law allows. It seems
that the taking of interest for the loan of money, at least the taking of
excessive interest has been regarded with abhorrence from the earliest
times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages
the people of England, and especially the English Church, entertained the
opinion, then, current in Europe, that the taking of any interest for the loan of
money was a detestable vice, hateful to man and contrary to the laws of
God. (3 Coke's Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look
back upon history, we shall find that there is scarcely any people, ancient or
modern, that have not had usury laws. . . . The Romans, through the greater
part of their history, had the deepest abhorrence of usury. . . . It will be
deemed a little singular, that the same voice against usury should have been
raised in the laws of China, in the Hindu institutes of Menu, in the Koran of
Mahomet, and perhaps, we may say, in the laws of all nations that we know
of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is
condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992).
But is it unlawful for the owner of a property to enter into a contract with the
tenant for the payment of a specific amount of rent for the use and
occupation of said property, even though the amount paid as "rent," based
upon the value of the property, might exceed the rate of interest allowed by
law? That question has never been decided in this jurisdiction. It is one of
first impression. No cases have been found in this jurisdiction answering that
question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and
declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or
forbearance of any money, goods, chattels or credits, etc. The central idea of
said statute is to prohibit a rate of interest on "loans." A contract of "loan," is
very different contract from that of "rent". A "loan," as that term is used in the
statute, signifies the giving of a sum of money, goods or credits to another,
with a promise to repay, but not a promise to return the same thing. To
73
"loan," in general parlance, is to deliver to another for temporary use, on
condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute,
has a technical meaning. It never means the return of the same thing. It
means the return of an equivalent only, but never the same thing loaned. A
"loan" has been properly defined as an advance payment of money, goods
or credits upon a contract or stipulation to repay, not to return, the thing
loaned at some future day in accordance with the terms of the contract.
Under the contract of "loan," as used in said statute, the moment the
contract is completed the money, goods or chattels given cease to be the
property of the former owner and becomes the property of the obligor to be
used according to his own will, unless the contract itself expressly provides
for a special or specific use of the same. At all events, the money, goods or
chattels, the moment the contract is executed, cease to be the property of
the former owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of
"rent" the owner of the property does not lose his ownership. He simply loses
his control over the property rented during the period of the contract. In a
contract of "loan" the thing loaned becomes the property of the obligor. In a
contract of "rent" the thing still remains the property of the lessor. He simply
loses control of the same in a limited way during the period of the contract of
"rent" or lease. In a contract of "rent" the relation between the contractors is
that of landlord and tenant. In a contract of "loan" of money, goods, chattels
or credits, the relation between the parties is that of obligor and obligee.
"Rent" may be defined as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant
thereof. It is defined as the return or compensation for the possession of
some corporeal inheritance, and is a profit issuing out of lands or tenements,
in return for their use. It is that, which is to paid for the use of land, whether
in money, labor or other thing agreed upon. A contract of "rent" is a contract
by which one of the parties delivers to the other some nonconsumable thing,
in order that the latter may use it during a certain period and return it to the
former; whereas a contract of "loan", as that word is used in the statute,
signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases
it is called merely a "loan." In the case of a contract of "rent," under the civil
law, it is called a "commodatum."
From the foregoing it will be seen that there is a while distinction between a
contract of "loan," as that word is used in the statute, and a contract of "rent"
even though those words are used in ordinary parlance as interchangeable
terms.
The value of money, goods or credits is easily ascertained while the amount
of rent to be paid for the use and occupation of the property may depend
upon a thousand different conditions; as for example, farm lands of exactly
equal productive capacity and of the same physical value may have a
different rental value, depending upon location, prices of commodities,
proximity to the market, etc. Houses may have a different rental value due to
location, conditions of business, general prosperity or depression,
adaptability to particular purposes, even though they have exactly the same
original cost. A store on the Escolta, in the center of business, constructed
exactly like a store located outside of the business center, will have a much
higher rental value than the other. Two places of business located in
different sections of the city may be constructed exactly on the same
architectural plan and yet one, due to particular location or adaptability to a
particular business which the lessor desires to conduct, may have a very
much higher rental value than one not so located and not so well adapted to
the particular business. A very cheap building on the carnival ground may
rent for more money, due to the particular circumstances and surroundings,
than a much more valuable property located elsewhere. It will thus be seen
that the rent to be paid for the use and occupation of property is not
necessarily fixed upon the value of the property. The amount of rent is fixed,
based upon a thousand different conditions and may or may not have any
direct reference to the value of the property rented. To hold that "usury" can
be based upon the comparative actual rental value and the actual value of
the property, is to subject every landlord to an annoyance not contemplated
by the law, and would create a very great disturbance in every business or
rural community. We cannot bring ourselves to believe that the Legislature
contemplated any such disturbance in the equilibrium of the business of the
country.
In the present case the property in question was sold. It was an absolute
sale with the right only to repurchase. During the period of redemption the
purchaser was the absolute owner of the property. During the period of
redemption the vendor was not the owner of the property. During the period
of redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee
was that of landlord and tenant. That relation can only be terminated by a
74
repurchase of the property by the vendor in accordance with the terms of the
said contract. The contract was one of rent. The contract was not a loan, as
that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts
have no right to make contracts for parties. They made their own contract in
the present case. There is not a word, a phrase, a sentence or paragraph,
which in the slightest way indicates that the parties to the contract in
question did not intend to sell the property in question absolutely, simply with
the right to repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by
parol evidence, sufficiently answers the third questions presented above.
The language of the contract is explicit, clear, unambiguous and beyond
question. It expresses the exact intention of the parties at the time it was
made. There is not a word, a phrase, a sentence or paragraph found in said
contract which needs explanation. The parties thereto entered into said
contract with the full understanding of its terms and should not now be
permitted to change or modify it by parol evidence.
I regret to have to dissent from the comprehensive majority decision. I stand
squarely on the proposition that the contract executed by the parties was
merely a clever device to cover up the payment of usurious interest. The fact
that the document purports to be a true sale with right of repurchase means
nothing. The fact that the instrument includes a contract of lease on the
property whereby the lessees as vendors apparently bind themselves to pay
rent at the rate of P375 per month and whereby "Default in the payment of
the rent agreed for two consecutive months will terminate this lease and will
forfeit our right of repurchase, as though the term had expired naturally"
does mean something, and taken together with the oral testimony is
indicative of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655,
sec. 7, as amended; Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan
Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S.,
139 Monagas vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa,
Codigo Civil Español, 3rd ed., p. 318.) The transaction should be considered
as in the nature of an equitable mortgage. My vote is for a modification of the
judgment of the trial court.

With reference to the improvements made upon said property by the

plaintiffs during the life of the contract, Exhibit C, there is hereby reserved to
the plaintiffs the right to exercise in a separate action the right guaranteed to
them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the
record, in relation with the law applicable thereto, that the judgment
appealed from should be and is hereby affirmed, with costs. So ordered.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

MALCOLM, J., dissenting:

75
 On 7 May 1980, PBC wrote[6] to Petitioners demanding that the amount
be paid within seven days from notice. Instead of complying with PBCs
demand, Veloso confessed that they lost P19,195.83 in the Carmelite
Monastery Project and requested for a grace period of until 15 June 1980 to
settle the account.[7]
PBC sent a new demand letter[8]to Petitioners on 16 October 1980 and
FIRST DIVISION informed them that their outstanding balance as of 17 November 1979
was P20,824.40 exclusive of attorneys fees of 25%.[9]
On 2 December 1980, Petitioners proposed[10] that the terms of
payment of the loan be modified as follows: P2,000 on or before 3 December
[G.R. No. 90828. September 5, 2000] 1980, and P1,000 per month starting 31 January 1980 until the account is
fully paid. Pending approval of the proposal, Petitioners paid P1,000 to PBC
on 4 December 1980,[11] and thereafter P500 on 11 February 1981,[12] 16
March 1981,[13] and 20 April 1981.[14] Concurrently with the separate demand
for attorneys fees by PBCs legal counsel, PBC continued to demand
MELVIN COLINARES and LORDINO VELOSO, petitioners, payment of the balance.[15]
vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF
THE PHILIPPINES, respondents. On 14 January 1983, Petitioners were charged with the violation of
P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised
DECISION Penal Code in an Information which was filed with Branch 18, Regional Trial
Court of Cagayan de Oro City. The accusatory portion of the Information
DAVIDE, JR., C.J.: reads:

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) That on or about October 31, 1979, in the City of Cagayan de Oro,
were contracted for a consideration of P40,000 by the Carmelite Sisters of Philippines, and within the jurisdiction of this Honorable Court, the above-
Cagayan de Oro City to renovate the latters convent at Camaman-an, named accused entered into a trust receipt agreement with the Philippine
Cagayan de Oro City. Banking Corporation at Cagayan de Oro City wherein the accused, as
entrustee, received from the entruster the following goods to wit:
On 30 October 1979, Petitioners obtained 5,376 SF Solatone
acoustical board 2x4x, 300 SF tanguile wood tiles 12x12, 260 SF Marcelo
economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders Solatone Acoustical board
Centre for the construction project.[1] The following day, 31 October 1979,
Petitioners applied for a commercial letter of credit [2] with the Philippine Tanguile Wood Tiles
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor
of CM Builders Centre. PBC approved the letter of credit[3] for P22,389.80 to Marcelo Cement Tiles
cover the full invoice value of the goods.Petitioners signed a pro-forma trust
receipt[4] as security. The loan was due on 29 January 1980.
Umylin Cement Adhesive
On 31 October 1979, PBC debited P6,720 from Petitioners marginal
deposit as partial payment of the loan.[5]

76
with a total value of P22,389.80, with the obligation on the part of the
accused-entrustee to hold the aforesaid items in trust for the entruster and/or
to sell on cash basis or otherwise dispose of the said items and to turn over
to the entruster the proceeds of the sale of said goods or if there be no sale
to return said items to the entruster on or before January 29, 1980 but that
the said accused after receipt of the goods, with intent to defraud and cause
damage to the entruster, conspiring, confederating together and mutually
helping one another, did then and there wilfully, unlawfully and feloniously
fail and refuse to remit the proceeds of the sale of the goods to the entruster
despite repeated demands but instead converted, misappropriated and
misapplied the proceeds to their own personal use, benefit and gain, to the
damage and prejudice of the Philippine Banking Corporation, in the
aforesaid sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. [16]
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a clean
loan as per verbal guarantee of Cayo Garcia Tuiza, PBCs former
manager. He and petitioner Colinares signed the documents without reading
the fine print, only learning of the trust receipt implication much later. When
he brought this to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality.[17]
On 7 July 1986, the trial court promulgated its decision[18] convicting
Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of the
Revised Penal Code and sentencing each of them to suffer imprisonment of
two years and one day of prision correccional as minimum to six years and
one day of prision mayor as maximum, and to solidarily indemnify PBC the
amount of P20,824.44, with legal interest from 29 January 1980, 12 %
penalty charge per annum, 25% of the sums due as attorneys fees, and
costs.
The trial court considered the transaction between PBC and Petitioners
as a trust receipt transaction under Section 4, P.D. No. 115. It considered
Petitioners use of the goods in their Carmelite monastery project an act of
disposing as contemplated under Section 13, P.D. No. 115, and treated the
charge invoice[19] for goods issued by CM Builders Centre as a document
within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which
was docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that
the trial court erred in ruling that they violated the Trust Receipt Law, and in
holding them criminally liable therefor. In the alternative, they contend that
at most they can only be made civilly liable for payment of the loan.
In its decision[20] 6 March 1989, the Court of Appeals modified the
judgment of the trial court by increasing the penalty to six years and one day
of prision mayor as minimum to fourteen years eight months and one day
of reclusion temporal as maximum. It held that the documentary evidence of
the prosecution prevails over Velosos testimony, discredited Petitioners
claim that the documents they signed were in blank, and disbelieved that
they were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New
Trial/Reconsideration[21] alleging that the Disclosure Statement on
Loan/Credit Transaction[22] (hereafter Disclosure Statement) signed by them
and Tuiza was suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it bears a 14%
interest as opposed to the trust receipt which does not at all bear any
interest. Petitioners further maintained that when PBC allowed them to pay
in installment, the agreement was novated and a creditor-debtor relationship
was created.
In its resolution[23]of 16 October 1989 the Court of Appeals denied the
Motion for New Trial/Reconsideration because the alleged newly discovered
evidence was actually forgotten evidence already in existence during the
trial, and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on 16
November 1989. They raised the following issues:
I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL
ON THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY,
DISCLOSURE ON LOAN/CREDIT TRANSACTION, WHICH IF
INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT,
DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR
NOT THE ACCUSED WERE PROPERLY CHARGED, TRIED AND
CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO
ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION
77
OF THE SO-CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-
TRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General
urged us to deny the petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on
the ground that they had already fully paid PBC on 2 February 1990 the
amount of P70,000 for the balance of the loan, including interest and other
charges, as evidenced by the different receipts issued by PBC,[24] and that
the PBC executed an Affidavit of desistance.[25]
We required the Solicitor General to comment on the Motion to
Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that
payment of the loan was akin to a voluntary surrender or plea of guilty which
merely serves to mitigate Petitioners culpability, but does not in any way
extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the
Petition and required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to
the ponente. Thereafter, we required the parties to move in the premises and
for Petitioners to manifest if they are still interested in the further prosecution
of this case and inform us of their present whereabouts and whether their
bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of
Appeals of Petitioners Motion for New Trial and the true nature of the
contract between Petitioners and the PBC. As to the latter, Petitioners
assert that it was an ordinary loan, not a trust receipt agreement under the
Trust Receipts Law.
The grant or denial of a motion for new trial rests upon the discretion of
the judge. New trial may be granted if: (1) errors of law or irregularities have
been committed during the trial prejudicial to the substantial rights of the
accused; or (2) new and material evidence has been discovered which the
accused could not with reasonable diligence have discovered and produced
at the trial, and which, if introduced and admitted, would probably change the
judgment.[26]
For newly discovered evidence to be a ground for new trial, such
evidence must be (1) discovered after trial; (2) could not have been
discovered and produced at the trial even with the exercise of reasonable
diligence; and (3) material, not merely cumulative, corroborative, or
impeaching, and of such weight that, if admitted, would probably change the
judgment.[27] It is essential that the offering party exercised reasonable
diligence in seeking to locate the evidence before or during trial but
nonetheless failed to secure it.[28]
We find no indication in the pleadings that the Disclosure Statement is
a newly discovered evidence.
Petitioners could not have been unaware that the two-page document
exists. The Disclosure Statement itself states, NOTICE TO BORROWER:
YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL
SIGN.[29] Assuming Petitioners copy was then unavailable, they could have
compelled its production in court,[30]which they never did. Petitioners have
miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that they searched again their
voluminous records, meticulously and patiently, until they discovered this
new and material evidence only upon learning of the Court of Appeals
decision and after they were shocked by the penalty imposed. [31] Clearly, the
alleged newly discovered evidence is mere forgotten evidence that
jurisprudence excludes as a ground for new trial.[32]
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt
transaction as any transaction by and between a person referred to as the
entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain
specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein the entrustee
binds himself to hold the designated goods, documents or instruments with
the obligation to turn over to the entruster the proceeds thereof to the extent
of the amount owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold or not
78
otherwise disposed of, in accordance with the terms and conditions specified
in the trust receipt.
There are two possible situations in a trust receipt transaction. The first
is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the
owner.[33]
Failure of the entrustee to turn over the proceeds of the sale of the
goods, covered by the trust receipt to the entruster or to return said goods if
they were not disposed of in accordance with the terms of the trust receipt
shall be punishable as estafa under Article 315 (1) of the Revised Penal
Code,[34] without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case at bar reveals
that the transaction intended by the parties was a simple loan, not a trust
receipt agreement.
Petitioners received the merchandise from CM Builders Centre on 30
October 1979. On that day, ownership over the merchandise was already
transferred to Petitioners who were to use the materials for their construction
project. It was only a day later, 31 October 1979, that they went to the bank
to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the
importer in trust subsequent to the grant of the loan. The bank acquires a
security interest in the goods as holder of a security title for the advances it
had made to the entrustee.[35] The ownership of the merchandise continues
to be vested in the person who had advanced payment until he has been
paid in full, or if the merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his representative or
successor in interest.[36] To secure that the bank shall be paid, it takes full
title to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called upon
to pay for them; hence, the importer has never owned the goods and is not
able to deliver possession.[37] In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer becomes absolute owner
of the imported merchandise as soon as he has paid its price.[38]
Trust receipt transactions are intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise imported
or purchased.[39]
The antecedent acts in a trust receipt transaction consist of the
application and approval of the letter of credit, the making of the marginal
deposit and the effective importation of goods through the efforts of the
importer.[40]
PBC attempted to cover up the true delivery date of the merchandise,
yet the trial court took notice even though it failed to attach any significance
to such fact in the judgment. Despite the Court of Appeals contrary view that
the goods were delivered to Petitioners previous to the execution of the letter
of credit and trust receipt, we find that the records of the case speak volubly
and this fact remains uncontroverted. It is not uncommon for us to peruse
through the transcript of the stenographic notes of the proceedings to be
satisfied that the records of the case do support the conclusions of the trial
court.[41] After such perusal Grego Mutia, PBCs credit investigator, admitted
thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and
trust receipt agreement were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this
letter of credit and trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this
document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?
A October 31, 1979.
79
 COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been
superimposed with numeral 1.[42]
During the cross and re-direct examinations he also impliedly admitted
that the transaction was indeed a loan.Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a
loan to the accused you admit that?
A Because in the bank the loan is considered part of the loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The
borrower will pay the bank on a certain specified date with
interest[43]
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the
transaction was a loan was also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In
short it was a special kind of loan. What can you say as to that?
A I dont think that would be a trust receipt because we were made to
understand by the manager who encouraged us to avail of their
facilities that they will be granting us a loan[44]
PBC could have presented its former bank manager, Cayo Garcia Tuiza,
who contracted with Petitioners, to refute Velosos testimony, yet it only
presented credit investigator Grego Mutia. Nowhere from Mutias testimony
can it be gleaned that PBC represented to Petitioners that the transaction
they were entering into was not a pure loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether the latter
is the owner.[45] Here, it is crystal clear that on the part of Petitioners there
was neither dishonesty nor abuse of confidence in the handling of money to
the prejudice of PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.
The Information charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The mala
prohibita nature of the alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade payment
of their obligation nor attempt to abscond. Instead, Petitioners sought
favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring
the goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their
construction project. At no time did title over the construction materials pass
to the bank, but directly to the Petitioners from CM Builders Centre. This
impresses upon the trust receipt in question vagueness and ambiguity,
which should not be the basis for criminal prosecution in the event of
violation of its provisions.[46]
The practice of banks of making borrowers sign trust receipts to
facilitate collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and inequitable, if
not reprehensible. Such agreements are contracts of adhesion which
borrowers have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at the mercy of
banks, and is prone to misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and admitted that it was only
after collection of the money, as manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the
Resolution of 16 October 1989 of the Court of Appeals in CA-GR. No. 05408
are REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the
crime charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of
the Revised Penal Code.
No costs.
SO ORDERED.
80
Kapunan, and Pardo, JJ., concur.
Puno, J., no part.
Ynares-Santiago, J., on leave.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

81
Office of the Solicitor General for plaintiff-appellee.
Isabelo P. Samson for defendant-appellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch
office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of
P1,281.97 with interest at the rate of 6% per annum, compounded quarterly.
These loans are evidenced by five promissory notes executed by the
appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943,
P600.00; on June 3, 1943, P159.11; on June 18, 1943, P22.86; on August 9,
1943,P300.00; on August 13, 1943, P200.00, all notes without due dates,
but because the loans were due one year after they were incurred. To
secure the payment of the loans the appellant executed a chattel mortgage
on the standing crops on his land, Lot No. 1494 known as Hacienda
Campugas in Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the
authority provided for in the Trading with the Enemy Act, as amended, the
assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the Philippine Property Act of
1946 of the United States, these assets, including the loans in question,
were subsequently transferred to the Republic of the Philippines by the
Government of the United States under Transfer Agreement dated July 20,
1954. These assets were among the properties that were placed under the
administration of the Board of Liquidators created under Executive Order No.
372, dated November 24, 1950, and in accordance with Republic Acts Nos.
8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines,
represented by the Chairman of the Board of Liquidators, made a written
extrajudicial demand upon the appellant for the payment of the account in
question. The record shows that the appellant had actually received the
written demand for payment, but he failed to pay.
The aggregate amount due as principal of the five loans in question,
computed under the Ballantyne scale of values as of the time that the loans
were incurred in 1943, was P889.64; and the interest due thereon at the rate
of 6% per annum compounded quarterly, computed as of December 31,
1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the
Peace Court of Hinigaran, Negros Occidental, to collect from the appellant
the unpaid account in question. The Justice of the Peace Of Hinigaran, after
hearing, dismissed the case on the ground that the action had prescribed.
The appellee appealed to the Court of First Instance of Negros Occidental
and on March 26, 1962 the court a quo rendered a decision ordering the
appellant to pay the appellee the sum of P2,377.23 as of December 31,
1959, plus interest at the rate of 6% per annum compounded quarterly from
the date of the filing of the complaint until full payment was made. The
appellant was also ordered to pay the sum equivalent to 10% of the amount
due as attorney's fees and costs.
The appellant appealed directly to this Court. During the pendency of this
appeal the appellant Jose Grijaldo died. Upon motion by the Solicitor
General this Court, in a resolution of May 13, 1963, required Manuel
Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are
the legal heirs of Jose Grijaldo to appear and be substituted as appellants in
accordance with Section 17 of Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that the appellee has no
cause of action against the appellant; (2) that if the appellee has a cause of
action at all, that action had prescribed; and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.
In discussing the first point of contention, the appellant maintains that the
appellee has no privity of contract with the appellant. It is claimed that the
transaction between the Taiwan Bank, Ltd. and the appellant, so that the
appellee, Republic of the Philippines, could not legally bring action against
the appellant for the enforcement of the obligation involved in said
transaction. This contention has no merit. It is true that the Bank of Taiwan,
Ltd. was the original creditor and the transaction between the appellant and
the Bank of Taiwan was a private contract of loan. However, pursuant to the
Trading with the Enemy Act, as amended, and Executive Order No. 9095 of
the United States; and under Vesting Order No. P-4, dated January 21,
1946, the properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country (Japan), were
vested in the United States Government and the Republic of the Philippines,
82
the assets of the Bank of Taiwan, Ltd. were transferred to and vested in the
Republic of the Philippines. The successive transfer of the rights over the
loans in question from the Bank of Taiwan, Ltd. to the United States
Government, and from the United States Government to the government of
the Republic of the Philippines, made the Republic of the Philippines the
successor of the rights, title and interest in said loans, thereby creating a
privity of contract between the appellee and the appellant. In defining the
word "privy" this Court, in a case, said:
The word "privy" denotes the idea of succession ... hence an
assignee of a credit, and one subrogated to it, etc. will be privies; in
short, he who by succession is placed in the position of one of
those who contracted the judicial relation and executed the private
document and appears to be substituting him in the personal rights
and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).
The United States of America acting as a belligerent sovereign power seized
the assets of the Bank of Taiwan, Ltd. which belonged to an enemy country.
The confiscation of the assets of the Bank of Taiwan, Ltd. being an
involuntary act of war, and sanctioned by international law, the United States
succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the
assets of said bank. As successor in interest in, and transferee of, the
property rights of the United States of America over the loans in question,
the Republic of the Philippines had thereby become a privy to the original
contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It
follows, therefore, that the Republic of the Philippines has a legal right to
bring the present action against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his contention that the
appellee has no cause of action, that because the loans were secured by a
chattel mortgage on the standing crops on a land owned by him and these
crops were lost or destroyed through enemy action his obligation to pay the
loans was thereby extinguished. This argument is untenable. The terms of
the promissory notes and the chattel mortgage that the appellant executed in
favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The
obligation of the appellant under the five promissory notes was not to deliver
a determinate thing namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing — the amount of money representing
the total sum of the five loans, with interest. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of
simple loan of sums of money. "By a contract of (simple) loan, one of the
parties delivers to another ... money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be paid."
(Article 1933, Civil Code) The obligation of the appellant under the five
promissory notes evidencing the loans in questions is to pay the value
thereof; that is, to deliver a sum of money — a clear case of an obligation to
deliver, a generic thing. Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood
as a security for the fulfillment of appellant's obligation covered by the five
promissory notes, and the loss of the crops did not extinguish his obligation
to pay, because the account could still be paid from other sources aside from
the mortgaged crops.
In his second point of contention, the appellant maintains that the action of
the appellee had prescribed. The appellant points out that the loans became
due on June 1, 1944; and when the complaint was filed on January 17,1961
a period of more than 16 years had already elapsed — far beyond the period
of ten years when an action based on a written contract should be brought to
court.
This contention of the appellant has no merit. Firstly, it should be considered
that the complaint in the present case was brought by the Republic of the
Philippines not as a nominal party but in the exercise of its sovereign
functions, to protect the interests of the State over a public property. Under
paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive
and extinctive, does not run against the State. This Court has held that the
statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs.
Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the period
of prescription of the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Orders No. 25, dated
November 18, 1944; Executive Order No. 32. dated March 10, 1945; and
Republic Act No. 342, approved on July 26, 1948). The loan in question, as
evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is
83
squarely covered by Executive Order No. 25, which became effective on
November 18, 1944, providing for the suspension of payments of debts
incurred after December 31, 1941. The period of prescription was, therefore,
suspended beginning November 18, 1944. This Court, in the case of Rutter
vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953
that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and
32, are unconstitutional; but in that case this Court ruled that the moratorium
laws had suspended the prescriptive period until May 18, 1953. This ruling
was categorically reiterated in the decision in the case of Manila Motors vs.
Flores, L-9396, August 16, 1956. It follows, therefore, that the prescriptive
period in the case now before US was suspended from November 18,1944,
when Executive Orders Nos. 25 and 32 were declared unconstitutional by
this Court. Computed accordingly, the prescriptive period was suspended for
8 years and 6 months. By the appellant's own admission, the cause of action
on the five promissory notes in question arose on June 1, 1944. The
complaint in the present case was filed on January 17, 1961, or after a
period of 16 years, 6 months and 16 days when the cause of action arose. If
the prescriptive period was not interrupted by the moratorium laws, the
action would have prescribed already; but, as We have stated, the
prescriptive period was suspended by the moratorium laws for a period of 8
years and 6 months. If we deduct the period of suspension (8 years and 6
months) from the period that elapsed from the time the cause of action arose
to the time when the complaint was filed (16 years, 6 months and 16 days)
there remains a period of 8 years and 16 days. In other words, the
prescriptive period ran for only 8 years and 16 days. There still remained a
period of one year, 11 months and 14 days of the prescriptive period when
the complaint was filed.
In his third point of contention the appellant maintains that the lower court
erred in ordering him to pay the amount of P2,377.23. It is claimed by the
appellant that it was error on the part of the lower court to apply the
Ballantyne Scale of values in evaluating the Japanese war notes as of June
1943 when the loans were incurred, because what should be done is to
evaluate the loans on the basis of the Ballantyne Scale as of the time the
loans became due, and that was in June 1944. This contention of the
appellant is also without merit.
The decision of the court a quo ordered the appellant to pay the sum of
P2,377.23 as of December 31, 1959, plus interest rate of 6% per annum
compounded quarterly from the date of the filing of the complaint. The sum
total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd.
was P1,281.97 in Japanese war notes. Computed under the Ballantyne
Scale of values as of June 1943, this sum of P1,281.97 in Japanese war
notes in June 1943 is equivalent to P889.64 in genuine Philippine currency
which was considered the aggregate amount due as principal of the five
loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at
after computing the interest on the principal sum of P889.64 compounded
quarterly from the time the obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be
applied as of the time the obligation was incurred, and that was in June
1943. This stand of the appellee was upheld by the lower court; and the
decision of the lower court is supported by the ruling of this Court in the case
of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472),
which states:
... Contracts stipulating for payments presumably in Japanese war
notes may be enforced in our Courts after the liberation to the
extent of the just obligation of the contracting parties and, as said
notes have become worthless, in order that justice may be done
and the party entitled to be paid can recover their actual value in
Philippine Currency, what the debtor or defendant bank should
return or pay is the value of the Japanese military notes in relation
to the peso in Philippine Currency obtaining on the date when and
at the place where the obligation was incurred unless the parties
had agreed otherwise. ... . (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with
costs against the appellant. Inasmuch as the appellant Jose Grijaldo died
during the pendency of this appeal, his estate must answer in the execution
of the judgment in the present case.
Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes,
J.B.L., Makalintal and Bengzon, J.P., JJ., concur.
84
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-43579 June 14, 1938

JOSUE SONCUYA, plaintiff-appellant,

vs.
JUAN AZARRAGA, ET AL., defendants-appellants.

Gervasio Diaz, Joaquin Azarraga, Sumulong Lavidez and Sumulong, and

Laurel,
Del Rosario and Sabido for defendants and appellants.
Joseu Soncuya in his own behalf.

DIAZ, J.:

This case is now before us on appeal from the Court of First Instance of
Capiz. After trial, the plaintiff filed a second amended complaint, which the
lower court at first refused to consider, but later on admitted after it was
convinced that the allowance thereof was proper in order to make the
allegations conform to the established facts. This was done without the
defendants interposing any exception, notwithstanding that they had

85
previously opposed the admission of the amendment. They not afterwards
and not now, in their brief on appeal, question the aforesaid amendment.
It appears from the allegations of the complaint thus amended that the
plaintiff has four causes of action. Under the first cause he seeks to recover
from the defendants the sum of P118,635.68 as damages, which he alleges
to have been caused by the defendants in fraudulently depriving him of the
possession of four parcels of land with a total area of 296 hectares, 58 ares
and 92 centares, which they, with knowledge that said real properties
belonged to him exclusively, registered in their names in the registry of
property and mortgaged in favor of "Hijos de I. de la Rama" to pay a certain
obligation which they had contracted with the Panay Municipal Cadastre.
Under the second cause, plaintiff seeks to recover P6,080 as the supposed
value of the heads of cattle belonging to him, which the tenants of the
defendants had slaughtered. Under the third cause, he seeks payment of the
sum of P5,575 as the supposed value of 1,115 coconut trees which he had
planted on the four parcels of land in question. Under the fourth and last
cause of action, plaintiff prays that the defendants surnamed Azarraga, with
the exception of Joaquin Azarraga, be ordered to make up to 123 hectares,
13 ares and 99 centares the land which the latter had sold to him, because
plaintiff did not take possession of the land, except a portion thereof, having
an area of 72 hectares, 83 ares and 5 centares. In other words, the
defendants should deliver to the plaintiff an additional 50 hectares , 30 ares
and 94 centares inasmuch as the participation of said Joaquin Azarraga in
the estate left to him and his brothers, his co-defendants herein, by their
common grandfather, Juan Azarraga y Galvez, which Joaquin Azarraga sold
to plaintiff, had that area according to the deed of partition, executed by all of
them, and the plan of said estate which was subsequently drawn up.
In their answer of February 26, 1931, the defendants Azarraga interposed a
general denial of each and all the allegations of the plaintiff's complaint,
excepting those relating the following special defenses; First, that the
complaint does not allege facts constituting causes of action; second, that
the plaintiff and his predecessor in interest were negligent in failing to
inscribe in the office of the register of deeds the supposed encumbrances in
their favor over the lands in question, granting that said encumbrances had
ever existed; third, that the plaintiff knew and was personally informed that
the lands aforesaid would be surveyed at their instance and inscribed in their
names as their own property, but that he did nothing to defend or protect his
rights either during the pendency of the proceedings for the registration of
the lands in question or during the period prescribed by law after the
issuance of a decree and title, within which the validity of the same may be
assailed; fourth, that at the time of filing their application for registration as
well as of the issuance of the decree ordering the inscription in their names
in the registry of property of the lands in question, they were the sole owners
of the same, and that admitting for the sake of argument the theory of the
plaintiff that he had a right to said lands, it was nothing more than an
expectation that he would be someday their owner; fifth, that the plaintiff had
no right to apply for or obtain from the court a writ of preliminary injunction,
wherefore, that obtained was illegal; and sixth, that the right of action of the
plaintiff, if any, had prescribed.
The defendants Azarraga further alleged the following counterclaims:
(a) That plaintiff is liable to them in damages in the sum of
P100,000 because while the contract which the defendants had
entered into with Leodegario Azarraga was still in force, the plaintiff
took possession of their lands not covered by the said contract; that
he set loose therein his cattle, utilizing the same as grazing ground
in a negligent manner and without taking the necessary steps to
avoid damages to their plantations; that notwithstanding repeated
requests, the plaintiff refused to fence the lands in which he had set
loose his animals, thereby causing damages and destruction to
their plantations; that the animals belonging to the plaintiff not only
destroyed and damaged the coconut, palay and corn plantation
existing already on the lands before said animals were brought
thereto, but also destroyed their farms and plantations on their
enclosed lands; that all this was due to the neglect and
carelessness of the plaintiff; that by reason of his refusal to
enclosed the lands converted into grazing grounds, the defendants
were unable to derive any benefits from their lands or to sell or rent
them to those who desire to do so.
(b) That the plaintiff is further liable and should be sentenced to pay
them in damages the sum of P 15,000 for having caused the
annotation in the corresponding registry of the book of the office of
the register of deeds of the Province of Capiz of a notice of lis
pendens not only with regard to the 150 hectares, 48 ares and 50
centares which he claims in his complaint, but also with regard to
the whole area of 246 hectares, 27 ares and 98 centares, described
in the original certificate of title No. 9785 issued in the name of the
86
 defendants; that as a result of this act of the plaintiff, they could not
enter into any transactions over that unquestioned portion of the
land to which said title relates.
(c) That the plaintiff is likewise liable and the defendants pray that
he should be sentenced to pay them the sum of P30,000 also in
damages, for having sought and secured the issuance of an order
of preliminary attachment of their properties described in certificates
of title No. 9804 and 10361.
(d) That the plaintiff is liable and should be sentenced to pay them
in damages the sum of P10,000 for having asked and secured from
the court on February 7, 1931 a writ of preliminary injunction in the
same case, thereby preventing the defendants from exercising acts
of ownership not only on the four parcels in questions, but also on
all the other lands belonging to them.
(e) That in case it is adjudged that the lands in controversy had
been improperly inscribed by the defendants in their names in the
registry of property, they pray that the plaintiff be ordered to
reimburse them in the sum of P5,000 which represent the taxes
paid by them on said lands, plus interest from the dates said taxes
were paid;
(f) The defendants lastly pray that upon the dissolution of the writ of
preliminary injunction issued against them on the date above-stated
and the cancellation of the annotation of said writ in the
corresponding book of the office of the register of deeds of Capiz,
the plaintiff be sentenced to pay the costs of the suit.
"Hijos de I. de la Rama" and Panay Municipal Cadastre were included in the
complaint only for the purpose of enjoining the former from increasing to
P25,000 the credit it had extend to the defendants Azarraga, who had
already obtained P16,000 on a mortgage of the lands in questions executed
by them in its favor; and of restraining the latter from collecting from said
loan of P25,000, extended by "Hijos de I. de la Rama" to the defendants, the
credit which it claims to have against them under a contract whereby they
bound themselves to provide it with funds to carry on the enterprise for which
it has been organized.
"Hijos de I. de la Rama" showed very little interest in the case, for, according
to the lower court, it merely filed an answer with a general denial.
Panay Municipal Cadastre, in its answer, denied all the allegations of the
complaint in so far as it might be affected thereby, and alleged as special
defense that the plaintiff had no right to ask for, and much less obtain, a writ
of preliminary injunction against it. It further alleged as a counterclaim that
the said plaintiff has become liable to it in damages in the sum of P15,000,
plus P5,000, plus P5,000 every month, beginning February 7, 1931, because
the plaintiff prevented if from receiving from the defendants Azarraga or from
"Hijos de I. de la Rama" the sums which they had bound themselves to
deliver under a contract which they had executed on September 20, 1929.
After trial, the court rendered judgment as follows:
Wherefore, the defendants Juan, Jose, Salvador, Joaquin, Emilio,
Luis, Rosario, Julio, all surnamed Azarraga, are hereby sentenced
to pay the plaintiff, jointly and severally, the sum of P24,627.98,
with legal interest from November 10, 1926, as damages because
they fraudulently deprived the plaintiff of his lands in Bay-ang, and
likewise to pay the plaintiff, jointly and severally, the sum of P5,575
with legal interest from November 10, 1926, representing the value
of 1,115 coconut trees as improvements on said lands, and, with
the exception of Joaquin Azarraga, to pay the plaintiff, jointly and
severally, the sum of P5,030.94 with interest at the legal rate from
November 10, 1926 for eviction and warranty.
In case the defendants Azarraga have no unencumbered properties
or can not redeem the mortgage over their properties, with which to
satisfy the indemnity for damages, the payment of said indemnity
shall be charged against the bond of the sureties, who secured the
lifting of the attachment on the properties of the defendants.
The writ of preliminary injunction issued in this case on February 7,
1931 against the defendants Azarraga, Hijos de I. de la Rama and
Panay Municipal Cadastre is hereby made final, with the exception
of that portion which enjoins Hijos de I. de la Rama from delivering
to the defendants surnamed Azarraga and Panay Municipal
Cadastre more than the sum of P16,000, which had already been
delivered, and which likewise enjoins the latter from demanding
87
 from said entity more than the above-mentioned sum of P16,000,
which portion is hereby declared dissolved.
The plaintiff is absolved from the counterclaims interposed by the
defendants Azarraga and by the Panay Municipal Cadastre. The
defendants Azarraga and by the Panay Municipal Cadastre. The
defendants Azarraga shall pay the costs.
From the foregoing judgment the defendants as well as the plaintiff
appealed, and in their respective briefs they assign the following errors;
ASSIGNMENTS OF ERROR OF THE DEFENDANTS
I. The trial court erred in holding that the true nature of the
stipulation between Attorney Leodegario Azarraga and the heirs of
Don Juan and the heirs of Don Juan Azarraga y Galvez as
contained in the plan of partition Exhibit "A" is one of cession of
property in payment of a debt known in Spanish law as "dacion en
pago."
II. the trial court erred in not holding that the stipulation between
Attorney Leodegario Azarraga and the heirs of the deceased Juan
Azarraga y Galvez to the effect that the lands were to become the
property of Attorney Leodegario Azarraga in case the defendants
failed to pay his fees within five years and that during this period the
said attorney had the usufruct and possession of the lands, as
contained in Exhibit "A", is one of pacto comisorio, which is
prohibited by article 1884 of the Civil Code.
III. The trial court erred in finding that the three parcels of land in
question, lots Nos. 81, 82, and 83, were sold by Attorney
Leodegario Azarraga to the plaintiff herein.
IV. The trial court erred in not holding that the right established by
Attorney Leodegario Azarraga by virtue of Exhibit "A" and
transferred to the plaintiff is at most an attorney's lien over the
properties in question and that the action of the plaintiff as
transferee of this lien should be to compel the defendants to
recognize it as a lien.
V. The trial court erred in holding that the defendants procured the
registration of the lands in question by fraudulent means.
VI. The trial court erred in not holding that the plaintiff, having no
real right over the lands in question, the omission of his name from
the application is not fraudulent and not fatal to the registration of
the lands.
VII. The trial court erred in not holding that the plaintiff, being a
mere usufructuary of the lands in question for a limited period of
time by grace of the owners, was not entitled to be mentioned in the
application for registration and to be notified personally of its
proceedings.
VIII. The trial court erred in not holding that the plaintiff had been
negligent in not asking for the review of the decree within one year,
and in not holding that the plaintiff purposely allowed the one-year
period, within which he could petition for review of the decree, to
elapse in order that he might have a cause of action for damages
against the defendants.
IX. The trial court erred in permitting the plaintiff to prove the market
value of the lands in question although there was absolutely no
allegation to that effect in the complaint notwithstanding the
objection thereto and the exception taken by the defendants.
X. The trial court erred in not holding that Joaquin Azarraga has not
intervened in the registration of the lands in question, he being only
a coowner pro indiviso and as such has not been guilty of fraud in
connection with the registration of the lands.
XI. The trial court erred in not holding that the plaintiff had no real
right over the land referred to in Exhibit 'E' in view of the fact that
the said document had not been registered.
XII. The trial court erred in holding that the land referred to in
Exhibit "E" contains an area of 164 hectares instead of 63 hectares
only.
88
 XIII. the trial court erred in finding that the total area of lots 81, 82,
and 83, which are the subject matter of the "pactum commissorium"
between Attorney Leodegario Azarraga and the defendants, is 243
hectares instead of 87 hectares only.
XIV. The trial court erred in sentencing the defendants to pay to the
plaintiff the sum of P35,233.92 and in not absolving them from the
complaint.
XV. The trial court erred in disallowing all the five counterclaims of
the defendants amounting to P58,000.
ASSIGNMENTS OF ERROR OF THE PLAINTIFF
(a) The lower court erred in not finding that the market value of the
lands in litigation in 1926 was P118,635.68;
(b) The lower court erred in not sentencing the defendants to pay
the plaintiff the sum of P6,080 as indemnity for the wrongful
slaughter of his animals; and
(c) The lower court erred in not sentencing the defendants to pay
the plaintiff, jointly and severally, the sum of P13,290.68 as
indemnity, plus legal interest from November 10, 1926.
The salient facts established at the trial which may serve as a basis for an
intelligent discussion of the questions raised by the parties and for a proper
decision of the same, may be briefly stated as follows:
By reason of the proceedings had in case No. 11489 of the Court of First
Instance of Manila, entitled "Testate Estate of the Deceased Juan Azarraga
y Galvez", the defendants surnamed Azarraga became indebted to Attorney
Leodegario Azarraga, who represented them in said case, for attorney's
fees, which on October 21, 1919 the court, which took cognizance of the
case, fixed at P3,000 (Exhibit B).
The defendants Azarraga had previously agreed among themselves to pay
Attorney Leodegario Azarraga attorney's fees in the manner set out in
Exhibit A, which they executed on January 20, 1919 and approved by the
court on August 29, of the same year. (Exhibit C.) The pertinent part of the
aforesaid Exhibit A reads as follows:
The parties also agree that the parcels of land located in Bay-ang, New
Washington, Capiz, P. I., which are enumerated in the inventory of this
partition as Nos. 81, 82 and 83, are specially mortgaged and subject to the
payment of the fees of said attorney of the testate estate, which fees shall be
fixed by the court, and said attorney may hold said lands under no obligation
to pay any rent until his fees shall have been fully paid: Provided, however,
that if, at the end of the period of five years from the date of the approval of
this project of partition, said parties shall not have been able to pay in full the
fees of said attorney, then said parcels of land, Nos. 81, 82 and 83, located
in Bay-ang, shall be definitely adjudicated to said attorney, Mr. Leodegario
Azarraga, as his property, in payment of his fees, and all sums which he may
have received from time to time from the interested parties in these testate
proceedings, within the said period, shall be returned to said
parties: Provided, further, that in case said interested parties in the testate
proceedings shall be able to pay in full the fees of the attorney for the estate
before the expiration of said period of five years, then said parcels of land
situated in Bay-ang shall continue in the possession of said attorney for an
additional period of three years from the date of the last payment in the
event that said attorney may have kept livestock in said lands.
About nine months after the court approved Exhibit A, or to be exact, on
June 9, 1920, which was long before the expiration of the period of five years
within which the defendants Azarraga were bound to pay Attorney
Leodegario Azarraga his fees, which had been fixed at P3,000, said attorney
decided to sell and did sell to the plaintiff his credit against the defendants
for the sum of P2,500 with all the rights inherent therein in accordance with
the agreements and stipulations appearing in said document (Exhibit C).
One of said agreement was that Attorney Leodegario Azarraga would take
possession of the said parcels of land and, occupy the same, if he so
desired, without paying any rent or annuity, until fees shall have been fully
paid. Said parcels were identical with lots Nos. 81, 82 and 83 described in
paragraph II of the plaintiff's second amended complaint.
When the plaintiff became the creditor of the defendants Azarraga by virtue
of the sale and cession which Attorney Azarraga had made in his favor of the
rights which said attorney had under Exhibit A, he allowed the defendants an
89
extension of a few years over the five years with in which they would have to
pay him his credit, or up to February 16, 1926, but with the express condition
that they would pay him interest at the rate of 12 per cent per annum, from
August 30, 1924 (Exhibit 5). This term was later extended to April 26, 1926
on the request of the defendants, but also with the condition that they would
pay the plaintiff the same interest of 12 per cent. (Exhibits l and M.) The
plaintiff granted another extension to expire on October 31, 1928, but subject
to the condition that instead of seven thousand and odd pesos, which
undoubtedly referred to the interest of 12 per cent per annum charged the
defendants, they should pay him P12,000 (Exhibit 2). In said two amounts of
P7,000 and P12,000 the sum of P4,000 which the plaintiff had given to the
defendant Joaquin Azarraga and which will be dealt with further in detail,
was included.
Aside from the above transactions between the plaintiff and the defendants
Azarraga, one of the latter, Joaquin Azarraga, executed in favor of the
former, the deed known as Exhibit E of the record and dated October 14,
1922, by which he sold to the plaintiff, for the sum of P4,000, his portion of
the inheritance in the testate estate of the late Juan Azarraga y Galvez,
consisting of an undivided tract of land containing an estimated area of 63
hectares and located in Bay-ang Chico, New Washington, Capiz. It is further
stated therein that the period of redemption would be five years to be
counted from February 16, 1921, which was later extended to April 26, 1926.
In granting him this extension, the plaintiff imposed on Joaquin Azarraga the
condition that he should pay him interest at the rate of 12 per cent from the
expiration of the first term (Exhibit M; par. III of the second amended
complaint of plaintiff; and page 5 of the brief of the plaintiff as appellant). A
second extension was further granted, but under the condition that he
should, together with his brothers, pay the plaintiff instead of seven thousand
and odd pesos, representing the interest referred to in the preceding
paragraph, in which the P3,000 mentioned in Exhibit A were included,
P12,000 (Exhibit 20. The deed referred to was never annotated or inscribed
in any register in the office of the register of deeds of said province.
By virtue of the transfer made to him by Joaquin Azarraga and also of the
terms conditions enumerated in said Exhibit A, the plaintiff took possession
of practically the whole land of the defendants Azarraga, located in Bay-ang,
placing therein livestock from the month of August, 1920 and in the same
year built sheepfolds therein, besides erecting some wire fences. When the
plaintiff took possession of part of the land in question in August, 1920 and
another part thereof in February, 1922, after the execution in his favor of the
deed of transfer, which is a clarification of Exhibit E, he found fruit-bearing
and young coconut trees, the latter being more numerous. In 1925, 1926 and
1927, Joaquin Azarraga, either by himself or his laborers, planted therein
hundreds of coconut trees of which but a few hundreds, as we the case with
the old ones, remained on account of the long droughts or other causes.
There is nothing definite in the record to show the exact number of animals
which the plaintiff had brought to Bay-ang or the cause of the death of some
of them. It seems that some had been wounded, by whom it is not known,
much less it is known whether they were wounded by men of the defendants
Azarraga. The plaintiff himself has not spoken with certainly; his statements
on this point are mere conjectures uncorroborated by anybody or anything
(transcript of stenographic notes, pages 145-147). There have been also no
exact accounts as to whether the animals of the plaintiff where those which
destroyed the coconut trees planted on the land by Joaquin Azarraga during
the years 1925, 1926 and 1927 above-mentioned, or were the animals of
other persons.
Sometimes in May, 1928, the plaintiff went to the house of the defendants
Joaquin Azarraga to collect not only his credit against all the defendants
Azarraga, but also the special credit which, according to him, he had against
Joaquin Azarraga. And on October 9, 1928, he addressed a letter to each
and every one of the defendants including Joaquin Azarraga whom he
expressly mentioned therein, and, among other things, told them that:
Last May, Messrs. Salvador and Joaquin came to an agreement
with me whereby they were to redeem the land in Bay-ang for
seven thousand and odd pesos las September, and in default
thereof to transfer in my name the Torrens title of the portion
belonging to me; but until now neither of these has been done.
For this reason and in view of the fact that you have not stated in
the Torrens title of the land in Bay-ang when you applied for the
same, the two encumbrances thereon in my favor, I am compelled
by this omission, which is a clear disregard of my rights, to seek
redress therefor in the courts, if you refuse the same to me.
Therefore, if you desire to redeem the land, you may do so for the
sum of twelve thousand pesos (P12,000) until the 31st of this
month of October; but should you not wish to redeem it, then in
order to avoid the inconvenience of a law suit, I would request that
on the same day or prior thereto that you shall have at least
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 submitted to the court your motion praying for an order approving
the segregation and transfer of the portion of said land which
belongs to me, together with the corresponding plan, namely, that
corresponding to the land which shall be in my name in the Torrens
title. In the understanding that if said date, October 31st, arrives,
and you have not done anything either one way or the other, then
through your own fault, I would be compelled to resort to the courts
to ask protection of my rights before I lose them, urging the court to
order you to pay me by reason of such fraudulent omission a sum
more than double the amount above-mentioned. (Exhibit 2.)
The land in Bay-ang to which the above-transcribed letters refers is the
same land made up by the four parcels mentioned in paragraph II of the
second amended complaint of the plaintiff, as parcels 81, 82, 83 and that
having an area of 63 hectares.
Between the date of the execution of the document Exhibit A (January 20,
1919) and the date of said letter Exhibit 2 (October 9, 1928), the defendants
secured the inscription in the registry of property and the issuance in their
favor of the corresponding certificate of title of the lands described in original
certificate of title No. 9785, by virtue of the decree of registration of October
27, 1925 (Exhibit Q). Of this fact the plaintiff had full knowledge by reason of
the letter dated July 9, 1924, which was sent to him by the defendant Juan
Azarraga, wherein the latter, besides asking for an extension of three years,
informed him (plaintiff) of the registration proceedings which were then going
on. (Exhibit 1.) The plaintiff did not then nor thereafter take any step to
oppose the same, or to ask at least for the revision of the decree of
registration, which was issued later, within the period of one year prescribed
by law. To this letter, the plaintiff replied on the 30th of the same month and
year, stating, among other things:
Now that I am somewhat relieved from the pressure of work, I am
writing to inform you that, although I need cash to meet my pressing
financial obligations, your requests have compelled me to grant
you, as administrator the undivided properties of the Azarraga
brothers, an extension of the term for the payment of the credit
which encumbers the land in Bay-ang, and, consequently, of the
redemption of the same, up to February 16, 1926. Said land and its
encumbrances are described in the deed of sale of the said credit
with all the rights inherent therein, executed by Mr. Leodegario
Azarraga in favor of the undersigned on July 9, 1920.
As the granting of this extension is causing me a real sacrifice and
a great financial strain, in justice and equity, I also ask from you, as
administrator of the undivided properties of the Azarraga brothers,
the lucrum cessans so that from August 30, 1924 the aforesaid
credit of P3,000 shall earn 12 per cent annual interest.
This letter will serve you as evidence of the granting of the
extension of the term for redemption of the said land in Bay-ang
and, therefore, there is no necessity for executing another
document to that effect. (Exhibit 5.)
At the time of the filing of the original complaint, plaintiff simultaneously
asked for and obtained on February 7, 1931, upon posting a bond in the
amount of P2,000, a writ of preliminary injunction against the defendants
(Exh. 15), and in due time caused the annotation in the office of the register
of deeds of the Province of Capiz of a notice of lis pendens not only with
regard to the portion having an area of 150 hectares, 48 ares and 50
centares of the lands of the defendants Azarraga, but also with regard to the
whole area of 246 hectares, 27 ares and 98 centares described in original
certificate of title No. 9785.
The plaintiff also secured from the Court of First Instance a preliminary
attachment of the properties of the defendants, described in certificates of
title No. 9804 and 10351, on February 5, 1929 (Exhibit R); and the same
was annotated in the registry of property in the same month. Seven months
after, or on September 9, of said year, the aforementioned attachment was
lifted by order of September 7, 1929 (Exhibit X) upon the filing of a bond
required by the court in the sum of P12,500 by the interested parties. Said
bond having been filed by the defendants, the court, on the same day,
ordered the cancellation of the notice of lis pendens annotated in the office
of the register of deeds and the inscription of all the necessary annotations.
(Exhibit Y.)
As clearly proven as the foregoing are the facts that the defendant "Hijos de
I. de la Rama" entered into a contract with its co-defendants Azarraga for the
purpose of granting them a credit of P25,000, having delivered to them on
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different occasions after the execution by said defendants of a deed of
mortgage Exhibit 16 in its favor on September 20, 1929, as part of the
aforementioned sum, the total amount of P16,000. The Azarragas needed
said amount for carrying on the business for which the defendant Panay
Municipal Cadastre, Inc., had been organized, as set forth in said Exhibit 16
and clarified in Exhibit 17.
By virtue of the writ of injunction issued by the lower court on February 7,
1931, enjoining the defendants Azarraga and the Panay Municipal Cadastre
from obtaining from their co-defendant "Hijos de I. de la Rama" another loan,
arise from the P16,000 which they had previously obtained (Exhibit 14), said
defendant "Hijos de I. de la Rama" did not extend the credit, which it had
opened to its co-defendants, to P25,000 as required by the contracts
Exhibits 16 and 17 above-referred to. In connection with the issuance of the
writ of preliminary injunction, the following facts must be mentioned: After the
plaintiff commenced the present case against the defendants Azarraga on
January 28, 1929 by means of his original complaint, he instituted another
action against them, which was civil case No. 2643, for the purpose of
obtaining a writ of injunction to prevent them from securing the
aforementioned loan of P25,000 from "Hijos de I. de la Rama". This latter
case reached this court on certiorari filed on March 22, 1930. As its sole
object was the issuance of a writ of preliminary injunction, this court,
reiterating once more the ruling that said remedy is purely subsidiary
available only in aid of the right sought to be enforced in the action wherein
the same is issued, and that a separate action to secure the same does not
lie as it would permit of multiplicity of suits with the consequent needless
expenses (Panay Municipal Cadastre vs. Garduño and Soncuya, 55 Phil.,
574, 578), granted the certiorari prayed for on January 22, 1931, thus setting
aside the writ of preliminary injunction issued by the court of Capiz on
October 21, 1929, hence, it was in being for not more than one year, three
months and one day.
The writ of preliminary injunction subsequently issued on February 7, 1931,
has remained in force up to the present, as the lower court declared in its
judgment that it shall be final with respect to the P9,000 still owing from
"Hijos de I, de la Rama" on account of the loan which it had agreed to extend
to the other defendants.
The works for which the Panay Municipal Cadastre had been organized
were begun in October, 1929. According to the testimony of Gaspar
Ferraren, for all the work which they intended of Gaspar Ferraren, for all the
work which they intended to undertake, they needed a capital of not more
than P40,000 to make a gross profit of P100,000. Of this estimated capital
they invested the P16,000, obtained from "Hijos de I. de la Rama", which
immediately yielded a return of P6,000. He also stated that the Panay
Municipal Cadastre completed half of its works with only the capital obtained
from "Hijos de I. de la Rama" (P16,000), plus its first profit of P6,000 and that
it made a profit of P24,277.15 meaning thereby that with the aforemention
P16,000 it obtained P30,277. 15, or a net profit of P14,277.15.
Another fact which has been clearly established by the testimony of the
plaintiff himself is that he decided to sell all the animals which he had placed
on the land in question because he became discouraged by the destruction
of said animals by the tenants of the defendants Azarraga. This fact,
however, has been established not by competent evidence, but by hearsay
testimony, which was of course timely objected to; and, although he testified
in the same breath that he had still some cattle there, he could not state their
exact number, but limited himself to saying "I cannot tell whether there were
fifty of them." (Transcript, page 14.)
In his subsequent dealings with the defendants Azarraga, including Joaquin
Azarraga, as in his pleadings and testimony, the plaintiff, in referring to the
amount of P2,700 or P3,000, the value of the credit which he had purchased
from Attorney Leodegario Azarraga, and to that of P4,000 which he gave to
Joaquin Azarraga on the date and under the circumstances stated in Exhibit
E, he alluded to, and considered them as his "credit". Thus, on page 176 of
the transcript of the stenographic notes, he said: ". . . land mortgaged to me .
. .;" and on pages 192 and 194 of said transcript, he also said: "Now I am not
collecting the credit; I am collecting the damages. Although they may have
sold that property to me for P1, if its commercial value has increased after
they have deprive me of the same, I should collect from them such value;"
and ". . . I want so say again that what I am collecting now is not the credit
which I have against them, but the damages they have caused me by
depriving me of the property."
The facts of the case being as above set out, the questions raised by the
parties in their respective assignments of error, should now be considered.
In fact, the most important or those discussed in the first fourteen errors
attributed by the defendants to the lower court, and in the first and last
errors, which plaintiff, in turn, assigned, may be reduced to the following:
92
I. Was the contract entered into by-the Azarraga brothers, the defendants
herein, with Attorney Leodegario Azarraga from whom the plaintiff derived
his right, a sale with pacto de retro, or an assignment in payment of a debt,
or was it an antichresis partaking of the nature of what was anciently known
as pacto comisorio, or a mortgage, or was it merely a loan with real estate
security?
II. Was the contract executed by the defendant Joaquin Azarraga, on the
one hand, and the plaintiff, on the other, embodied in Exhibit E, a sale
with pacto de retro or simply a loan with real estate security?
The first question offers no difficulty if account is taken of the established
facts and the conduct of the interested parties after the expiration of the term
of five years fixed in Exhibit A. When the plaintiff extended the period to
February 16, 1926 within which the defendants Azarraga could pay him his
credit, but imposed on them the condition that they pay him 12 per cent
annual interest from August 30, 1924 on the principal of P3,000 (Exh. 5) and
gave them another extension up to April 26, 1926, under the same
conditions as regard interest (Exh. M), what perhaps could have been
considered as a antichresis or pacto comisorio — not an assignment in
payment of a debt, or a sale with pacto de retro because there is nothing in
Exhibit A to indicate that such was the intention of the defendants Azarraga
or, at least, that they bound themselves to deliver the land in question to the
plaintiff and that the latter should pay them the value thereof; and because
there was what may be considered the resolutory condition of five years —
was converted into a simple loan by the decisive circumstance that plaintiff
chose to collect thereafter, and the obligors agreed to pay him, 12 per cent
annual interest. It is only in contracts of loan, with or without guaranty, that
interest may be demanded (articles 1108, 1740, 1755, 1868, 1876, and 1881
of the Civil Code. As a matter of fact, the contract embodied in Exhibit A was
novated by Exhibits 5 and M, and the plaintiff wanted to have it novated for
the third time by means of Exhibit 2. It does not appear of record, however,
that the defendants Azarraga ever assented to the latter novation. Perhaps,
their refusal to agree to the same was due to the fact that the plaintiff wanted
to raise their old obligation (P3,000 or P2,700 of all the Azarraga brothers,
plus P4,000 which Joaquin Azarraga alone owed, which two accounts both
the plaintiff and the defendants considered as amounting to P7,000,
exclusive of the annual interest of 12 per cent) to the round sum of P12,000.
From all this it may easily be inferred that the obligation which the
defendants had imposed upon themselves by Exhibit A had ceased to exist
and became a simple loan with security, if so desired, of the lands in
question, but without prejudice to third parties as neither Exhibit A nor the
deed of assignment Exhibit C, executed by Leodegario Azarraga in favor of
the plaintiff, was inscribed in the registry of deeds.
There is also no difficulty in disposing of the second question, considering
the various novations which, as has been said, had taken place and had
been extended not only to the Azarraga brothers with respect to their
obligation of P3,000 or P2,700, but also to the defendant Joaquin Azarraga
as regard his personal debt of P4,000. We must not lose sight of the fact that
the plaintiff never considered the contract entered into by him with Joaquin
Azarraga as, strictly speaking, a sale with pacto de retro. And if he had ever
considered it as such, it is, nevertheless, true that he novated it on February
16, 1926, considering it from the time on as a simple loan, inasmuch as on
that date he began to charge the said defendant 12 per cent annual interest
with the latter's assent and confirmity. This clearly appears in Exhibit M
which must be considered together with paragraphs 7 and 8 of Exhibit E, as
the plaintiff himself does in his brief (brief for the plaintiff as appellant, pages
4 and 5), because the term of five years to which said Exhibit E refers and
which should have expired on February 16, 1926 was extended by the said
plaintiff, by Exhibit M, up to April 26, 1926 under the aforementioned
condition that he should be paid 12 per cent annual interest.
Consequently, the contention of the defendants that the plaintiff did not and
could never receive the lands in question as an assignment in payment of a
debt, and much less did he acquire them by purchase with pacto de retro, is
well taken. It must also be noted that at no time did the plaintiff claim any
rights of dominion over the lands since he did not even intimate to the
defendants, either directly or indirectly, that for their failure to pay him his
credit within the time provided therefor, he become the absolute owner
thereof. Notwithstanding the fact that all the extensions he had given
defendants had expired, he did not, even only for tax declaration purposes,
declare the lands as his property. Having reached this conclusion, it is
needless to state that the plaintiff has no right to the various sums which he
seeks in his complaint and to which he refers in the first and last errors
assigned by him. If, as has been shown, he never became the owner of the
lands in question, he can neither claim payment of the value of the same nor
ask to be indemnified for the deprivation of their possession. The plaintiff,
moreover, has no reason to complain that his lien, if his right over said lands
could be termed as such, was not annotated in the certificate of title which
the defendants Azarraga had obtained, or that the latter did not ask that it be
stated therein that the lands to which it refers are charged with his credit
93
against them; inasmuch as he was himself negligent in that he did not ask
the court, while the registration case relating to said lands was being heard,
for the annotation of what he considered necessary to protect his rights, and
in not seeking the revision of modification of the decree of registration within
the period of one year provided for the purpose.
As to the fifteenth error attributed to the lower court by the defendants
Azarraga, we hold that, in view of the established facts above-related, they
have failed to show satisfactorily that they have any right under all or any of
their several counterclaims. If the coconut trees planted by Joaquin Azarraga
on a portion of the land in question were indeed lost or destroyed, it was due
more to his own negligence than to the of the plaintiff; for he well knew on
planting them in 1925, 1926 and 1927 that the plaintiff maintained therein,
with his (Joaquin Azarraga's) approval, livestock which might destroy them,
and he did not take the necessary precautions against such occurrence. This
is, of course, upon the supposition that his coconut plantations died by
reason of the devastation caused by the animals of the plaintiff. The
preponderance of the evidence, however, has shown that they died on
account of the drought alone.
We likewise hold that the issuance of the writs of preliminary injunction and
attachment at the instance of the plaintiff did not prejudice the defendants,
inasmuch as there is no competent evidence of record to the contrary. On
the other hand, there is evidence to show that from the loan which the
defendants Azarraga had obtained from "Hijos de I. de la Rama" they
derived a net profit of P14,277.15 within the short period of one year and a
few months.
There is no support for the contention of the defendants that they suffered
damages by reason of the preliminary attachment ordered by the lower court
because they were unable to sell one of their houses to the Calibo Institute
for the price agreed upon by them and said entity. The record shows that
they lost nothing because the Calibo Institute is at present occupying a
portion of said house and they may, if they so desire, sell it even now to the
occupant. It does not appear, on the other hand, that the latter desisted from
buying it on finding a better building.
As to the second error assigned by the plaintiff, it suffices to recall that the
established facts do not show that the tenants of the defendants were
responsible for the killing and wounding of the animals belonging to him or
that said tenants acted upon the instigation of the defendants. Consequently,
the plaintiff's claim to this effect is entirely without merit.
In view of all the foregoing and in resume, we hold that the plaintiff alone has
the right (1) to recover from the defendants Azarraga, by virtue of the
assignment and sale made to him by Attorney Leodegario Azarraga of the
latters' credit of P2,700 against the said defendants, the aforesaid sum plus
interest at the rate of 12 per cent per annum from August 30, 1924; (2) to
recover from the defendant Joaquin Azarraga, in particular, the sum of
P4,000 plus interest at the rate of 12 per cent per annum from April 26,
1926. We also hold that the defendants are not entitled to anything under
their counterclaims.
Wherefore, reversing the appealed judgment,
(a) All the defendants are hereby sentenced to pay jointly the sum
of P2,700 to the plaintiff, with 12 per cent annual interest from
August 30, 1924 until said sum is fully paid; ;and
(b) The defendant Joaquin Azarraga is sentenced to pay the
plaintiff the sum of P4,000 plus interest at the rate of 12 per cent
per annum from April 26, 1926, until fully paid.
The plaintiff is absolved from defendants' counterclaims and the writ of
preliminary injunction issued by the lower court on February 7, 1931, is
hereby dissolved. There is no special pronouncement as to costs. So
ordered.
Avanceña, C.J., Villa-Real, Abad Santos, Imperial and Concepcion, JJ.,
concur.
94
 Padilla Law Office for petitioner.
Rodolfo T. Galing and Chaves, Hechanova & Lim Law Offices for private
respondents.

FELICIANO, J.:

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged

certain shares of stock to petitioner State Investment House, Inc. ("State") in
order to secure a loan of P120,000.00 designated as Account No. IF-82-
0631-AA. Prior to the execution of the pledge, respondent-spouses, as an
accommodation to and together with the spouses Jose and Marcelina
Aquino, signed an agreement (Account No. IF-82-1379-AA) with petitioner
State for the latter's purchase of receivables amounting to P375,000.00.
When Account No. IF-82-0631-AA fell due, respondent spouses paid the
same partly with their own funds and partly from the proceeds of another
loan which they obtained also from petitioner State designated as Account
No. IF-82-0904-AA. This new loan was secured by the same pledge
agreement executed in relation to Account No. IF-820631-AA. When the new
loan matured, State demanded payment. Respondents expressed
willingness to pay, requesting that upon payment, the shares of stock
pledged be released. Petitioner State denied the request on the ground that
the loan which it had extended to the spouses Jose and Marcelina Aquino
Republic of the Philippines (Account No. IF-82-1379- AA) had remained unpaid.
SUPREME COURT
Manila
On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a
Notice of Notarial Sale stating that upon request of State and by virtue of the
THIRD DIVISION pledge agreement, he would sell at public auction the shares of stock
pledged to State. This prompted respondents to file a case before the
G.R. No. 90676 June 19, 1991 Regional Trial Court of Quezon City alleging that the intended foreclosure
sale was illegal because from the time the obligation under Account No. IF-
82-0904-AA became due, they had been able and willing to pay the same,
STATE INVESTMENT HOUSE, INC., petitioner,
but petitioner had insisted that respondents pay even the loan account of
vs.
Jose and Marcelina Aquino which had not been secured by the pledge. It
THE HONORABLE COURT OF APPEALS, HON. JUDGE PERLITA J.
was further alleged that their failure to pay their loan (Account No. IF-82-
TRIA TIRONA, Presiding Judge of the Regional Trial Court of Quezon
0904-AA) was excused because the petitioner State itself had prevented the
City, Branch CII and SPS. RAFAEL and REFUGIO AQUINO, respondents.
satisfaction of the obligation.

95
The trial court, in a decision dated 14 December 1984 rendered by Judge
Willelmo Fortun, initially dismissed the complaint. Respondent spouses filed
a motion for reconsideration praying for a new decision ordering petitioner
State to release the shares upon payment of respondents' loan "without
interest," as the latter had not been in delay in the performance of their
obligation. State countered that the pledge executed by respondent spouses
also covered the loan extended to Jose and Marcelina Aquino, which too
should be paid before the shares may be released.
Acting on the motion for reconsideration, Judge Fortun set aside his original
decision and rendered a new judgment dated 29 January 1985, ordering
State to immediately release the pledge and to deliver to respondents the
share of stock "upon payment of the loan under Code No. 82-0904-AA."
On appeal, the Court of Appeals affirmed in toto the new decision of the trial
court, holding that the loan extended to Jose and Marcelina Aquino, having
been executed prior to the pledge was not covered by the pledge which
secured only loans executed subsequently. Thus, upon payment of the loan
under Code No. IF-0904-AA, the shares of stock should be released. The
decisions of the Court of Appeals and of Judge Fortun became final and
executory.
Upon remand of the records of the case to the trial court for execution, there
developed disagreement over the amount which respondent spouses Rafael
and Refugio Aquino should pay to secure the release of the shares of stock
— petitioner State contending that respondents should also pay interest and
respondents arguing they should not. Respondent spouses then filed a
motion with the trial court to clarify the Fortun decision praying that an order
issue clarifying the phrase "upon payment of plaintiffs' loan" to mean upon
payment of plaintiff' loan in the principal amount of P110,000.00 alone,
"without interest, penalties and other charges."
On 17 February 1989, the trial court, speaking this time through Judge
Perlita Tria Tirona, rendered a decision purporting to clarify the decision of
Judge Fortun and ruling that petitioner State shall release respondents'
shares of stock upon payment by respondents of the principal of the loan as
set forth in PN No. 82-0904-AA in the amount of P110,000.00, without
interest, penalties and other charges.
Petitioner State appealed Judge Tirona's decision to the Court of Appeals;
the appeal was dismissed. The Court of Appeals agreed with Judge Tirona
that no interest need be paid and added that the clarificatory (Tirona)
decision of the trial court merely restated what had been provided for in the
earlier (Fortun) decision; that the Tirona decision did not go beyond what
had been adjudged in the earlier decision. The motion for reconsideration
filed by petitioner was accordingly denied.
Hence, this Petition for Review contending that no manifest ambiguity
existed in the decision penned by Judge Fortun; that the trial court through
Judge Tirona, erred in clarifying the decision of Judge Fortun; and that the
amendment sought to be introduced in the Fortun decision by respondents
may not be made as the same was substantial in nature and the Fortun
decision had become final.
We begin by noting that the trial court has asserted authority to issue the
clarificatory order in respect of the decision of Judge Fortun, even though
that judgment had become final and executory. In Reinsurance Company of
the Orient, Inc. v. Court of Appeals,1 this Court had occasion to deal with the
applicable doctrine to some extent:
- - - [E]ven a judgment which has become final and executory may
be clarified under certain circumstances. The dispositive portion of
the judgment may, for instance, contain an error clearly clerical in
nature (perhaps best illustrated by an error in arithmetical
computation) or an ambiguity arising from inadvertent omission,
which error may be rectified or ambiguity clarified and the omission
supplied by reference primarily to the body of the decision itself
Supplementary reference to the pleadings previously filed in the
case may also be resorted to by way of corroboration of the
existence of the error or of the ambiguity in the dispositive part of
the judgment. In Locsin, et al. v. Parades, et al., this Court allowed
a judgment which had become final and executory to be clarified by
supplying a word which had been inadvertently omitted and which,
when supplied, in effect changed the literal import of the original
phraseology:
. . . it clearly appears from the allegations of the complaint,
the promissory note reproduced therein and made a part
thereof, the prayer and the conclusions of fact and of law
96
 contained in the decision of the respondent judge, that the
obligation contracted by the petitioners is joint and several
and that the parties as well as the trial judge so
understood it. Under the juridical rule that the judgment
should be in accordance with the allegations, the evidence
and the conclusions of fact and law, the dispositive part of
the judgment under consideration should have ordered
that the debt be paid 'severally' and in omitting the word or
adverb 'severally' inadvertently, said judgment became
ambiguous. This ambiguity may be clarified at any time
after the decision is rendered and even after it had
become final (34 Corpus Juris, 235, 326). This respondent
judge did not, therefore, exceed his jurisdiction in clarifying
the dispositive part of the judgment by supplying the
omission. (Emphasis supplied)
In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable
principle was set out in the following terms:
[W]here there is ambiguity caused by an omission or mistake in the
dispositive portion of a decision, the court may clarify such ambiguity by an
amendment even after the judgment had become final, and for this purpose
it may resort to the pleadings filed by the parties, the court's findings of facts
and conclusions of law as expressed in the body of the decision. (Emphasis
supplied)
In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate
Court, the Court, in applying the above doctrine, said:
. . . We clarify, in other words, what we did affirm. That is involved here is not
what is ordinarily regarded as a clerical error in the dispositive part of the
decision of the Court of First Instance, . . . At the same time, what is involved
here is not a correction of an erroneous judgment or dispositive portion of a
judgment. What we believe is involved here is in the nature of an inadvertent
omission on the part of the Court of First Instance (which should have been
noticed by private respondents' counsel who had prepared the complaint), of
what might be described as a logical follow-through of something set forth
both in the body of the decision and in the dispositive portion thereof; the
inevitable follow-through, or translation into, operational or behavioral terms,
of the annulment of the Deed of Sale with Assumption of Mortgage, from
which petitioners' title or claim of title embodied in TCT 133153 flows.
(Emphasis supplied)2 (Underscoring in the original; citations omitted)
The question we must resolve is thus whether or not there is an ambiguity or
clerical error or inadvertent omission in the dispositive portion of the decision
of Judge Fortun which may be legitimately clarified by referring to the body
of the decision and perhaps even the pleadings filed before him. The
decision of Judge Fortun disposing of the motion for reconsideration filed by
respondent spouses Rafael and Refugio Aquino consisted basically of
quoting practically the whole motion for reconsideration. In its dispositive
portion, Judge Fortun's decision stated:
WHEREFORE, plaintiffs "Motion for Reconsideration" dated
January 3, 1985, is granted and the decision of this Court dated
December 14, 1984 is hereby revoked and set aside and another
judgment is hereby rendered in favor of plaintiffs as follows:
(1) Ordering defendants to immediately release the pledge on, and
to deliver to plaintiffs, the shares of stocks enumerated and
described in paragraph 4 of plaintiffs' complaint dated July 17,
1984, upon payment of plaintiffs loan under Code No. 82-0904-AA
to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to
plaintiffs P10,000.00 as moral damages, P5,000.00 as exemplary
damages, P6,000.00 as attorney's fees, plus costs;
(3) Dismissing defendants' counterclaim, for lack of merit and
making the preliminary injunction permanent.
SO ORDERED.3
Judge Fortun evidently meant to act favorably on the motion for
reconsideration of the respondent Aquino spouses and in effect accepted
respondent spouses' argument that they had not incurred mora considering
that their failure to pay PN No. IF82-0904-AA on time had been due to
petitioner State's unjustified refusal to release the shares pledged to it. It is
not, however, clear to what precise extent Judge Fortun meant to grant the
motion for reconsideration. The promissory note in Account No. IF-82-0904-
97
AA had three (3) components: (a) principal of the loan in the amount of
P110,000.00; (b) regular interest in the amount of seventeen percent
(17%) per annum; and (c) additional or penalty interest in case of non-
payment at maturity, at the rate of two percent (2%) per month or twenty-four
percent (24%) per annum. In the dispositive part of his resolution, Judge
Fortun did not specify which of these components of the loan he was
ordering respondent spouses to pay and which component or components
he was in effect deleting. We cannot assume that Judge Fortun meant to
grant the relief prayed for by respondent spouses in all its parts. For one
thing, respondent spouses in their motion for reconsideration asked for "at
least P50,000.00" for moral damages and "at least P50,000.00" for
exemplary damages, as well as P20,000.00 by way of attorney's fees and
litigation expenses. Judge Fortun granted respondent spouses only
P10,000.00 as moral damages and P5,000.00 as exemplary damages, plus
P6,000.00 as attorney's fees and costs. For another, respondent spouses
asked Judge Fortun to order the release of the shares pledged "upon
payment of [respondent spouses'] loan under Code No. 82-0904-AA without
interest, as plaintiffs were not in delay in accordance with Article 69 of the
New Civil Code –– " (Emphasis supplied). In other words, respondent
spouses did not themselves become very clear what they were asking Judge
Fortun to grant them; they did not apparently distinguish between regular
interest or "monetary interest" in the amount of seventeen percent (17%) per
annum and penalty charges or "compensatory interest" in the amount of two
percent (2%) per month or twenty-four percent (24%) per annum.
It thus appears that the Fortun decision was ambiguous in the sense that it
was cryptic. We believe that in these circumstances, we must assume that
Judge Fortun meant to decide in accordance with law, that we cannot fairly
assume that Judge Fortun was grossly ignorant of the law, or that he
intended to grant the respondent spouses relief to which they were not
entitled under law. Thus, the ultimate question which arises is: if respondent
Aquino spouses were not in delay, what should they have been held liable
for in accordance with law?
We believe and so hold that since respondent Aquino spouses were held not
to have been in delay, they were properly liable only for: (a) the principal of
the loan or P110,000.00; and (b) regular or monetary interest in the amount
of seventeen percent (17%) per annum. They were not liable for penalty or
compensatory interest, fixed by the promissory note in Account No. IF-82-
0904-AA at two percent (2%) per month or twenty-four (24%) per annum. It
must be stressed in this connection that under Article 2209 of the Civil Code
which provides that
. . . [i]f the obligation consists in the payment of a sum of money,
and the debtor incurs in delay. the indemnity for damages, there
being no stimulation to the contrary. shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
the appropriate measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum or money, is the payment of
penalty interest at the rate agreed upon; and in the absence of a stipulation
of a particular rate of penalty interest, then the payment of additional interest
at a rate equal to the regular monetary interest; and if no regular interest had
been agreed upon, then payment of legal interest or six percent (6%) per
annum.4
The fact that the respondent Aquino spouses were not in default
did not mean that they, as a matter of law, were relieved from the payment
not only of penalty or compensatory interest at the rate of twenty-four
percent (24%) per annum but also of regular or monetary interest of
seventeen percent (17%) per annum. The regular or monetary interest
continued to accrue under the terms of the relevant promissory note until
actual payment is effected. The payment of regular interest constitutes the
price or cost of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since the debtor
continues to use such principal amount. The relevant rule is set out in Article
1256 of the Civil Code which provides as follows:
Art. 1256. If the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released
from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following
cases:
(1) When the creditor is absent or unknown, or does not appear at
the place of payment;
98
 (2) When he is incapacitated to receive the payment at the time it is 17954 and the Decision of the Regional Trial Court dated 17 February 1989
due; in Civil Case No. Q-42188 are hereby REVERSED and SET ASIDE. The
dispositive portion of the decision of Judge Fortun is hereby clarified so as to
(3) When, without just cause, he refuses to give a receipt; read as follows:

(4) When two or more persons claim the same right to collect; (1) Ordering defendants to immediately release the pledge and to deliver to
the plaintiff spouses Rafael and Refugio Aquino the shares of stock
enumerated and described in paragraph 4 of said spouses' complaint dated
(5) When the title of the obligation has been lost. (Emphasis 17 July 1984, upon full payment of the amount of P110,000.00 plus
supplied) seventeen percent (17%) per annum regular interest computed from the time
of maturity of the plaintiffs' loan (Account No. IF-82-0904-AA) and until full
Where the creditor unjustly refuses to accept payment, the debtor desirous payment of such principal and interest to defendants;
of being released from his obligation must comply with two (2) conditions: (a)
tender of payment; and (b) consignation of the sum due. Tender of payment (2) Ordering defendant State Investment House, Inc. to pay to the plaintiff
must be accompanied or followed by consignation in order that the effects of spouses Rafael and Refugio Aquino P10,000.00 as moral damages,
payment may be produced. Thus, in Llamas v. Abaya,5 the Supreme Court P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs;
stressed that a written tender of payment alone, without consignation in court and
of the sum due, does not suspend the accruing of regular or monetary
interest.
(3) Dismissing defendants' counterclaim for lack of merit and making the
preliminary injunction permanent."
In the instant case, respondent spouses Aquino, while they are properly
regarded as having made a written tender of payment to petitioner State,
failed to consign in court the amount due at the time of the maturity of No pronouncement as to costs.
Account No. IF-820904-AA. It follows that their obligation to pay principal-
cum-regular or monetary interest under the terms and conditions of Account SO ORDERED.
No. IF-82-0904-AA was not extinguished by such tender of payment alone.
Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.
For the respondent spouses to continue in possession of the principal of the
loan amounting to P110,000.00 and to continue to use the same after
maturity of the loan without payment of regular or monetary interest, would
constitute unjust enrichment on the part of the respondent spouses at the
expense of petitioner State even though the spouses had not been guilty
of mora. It is precisely this unjust enrichment which Article 1256 of the Civil
Code prevents by requiring, in addition to tender of payment, the
consignation of the amount due in court which amount would thereafter be
deposited by the Clerk of Court in a bank and earn interest to which the
creditor would be entitled.

WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE.

The Decision of the Court of Appeals dated 30 August 1989 in C.A.-G.R. No.

99

Spouses Sy v. Westmont Bank
G.R. No. 201074, October 19, 2016
MENDOZA, J.:
This is a Petition for Review on Certiorari seeking to reverse and set aside
the August 4, 2011 Decision[1] and the March 19, 2012 Resolution[2] of the
Court of Appeals (CA) in CA-G.R. CV No, 90425, which affirmed the
November 9, 2007 Decision[3]and February 6, 2008 Order[4] of the Regional
Trial Court, Branch 12, Manila (RTC) in Civil Case No. 99-95945.
The Facts
The present case stemmed from a Complaint for Sum of Money,[5] dated
August 30, 1999, filed by respondent Westmont Bank (Westmont), now
United Overseas Bank Philippines (UOBP), against petitioners Spouses
Ramon Sy and Anita Ng, Richard Sy, Josie Ong, William Sy, and Jackeline
de Lucia (petitioners) before the RTC.
Westmont alleged that on October 21, 1997, petitioners, doing business
under the trade name of Moondrops General
Merchandising (Moondrops), obtained a loan in the amount of
P2,429,500.00, evidenced by Promissory Note No. GP-5280[6] (PN
5280), payable on November 20, 1997. Barely a month after, or on
November 25, 1997, petitioners obtained another loan from Westmont Bank
in the amount of P4,000,000.00, evidenced by Promissory Note No. GP-
5285[7] (PN 5285), payable on December 26, 1997. Disclosure Statements
on the Loan/Credit Transactions[8]were signed by the parties. Earlier, a
Continuing Suretyship Agreement,[9] dated February 4, 1997, was executed
between Westmont and petitioners for the purpose of securing any future
indebtedness of Moondrops.
Westmont averred that petitioners defaulted in the payment of their loan
obligations. It sent a Demand Letter,[10] dated August 27, 1999, to
petitioners, but it was unheeded. Hence, Westmont filed the subject
complaint.
In their Answer,[11] petitioners countered that in August 1997, Ramon Sy and
Richard Sy applied for a loan with Westmont Bank, through its bank
manager William Chu Lao (Lao). According to them, Lao required them to
sign blank forms of promissory notes and disclosure statements and
promised that he would notify them immediately regarding the status of their
loan application.
In September 1997, Lao informed Ramon Sy and Richard Sy that their
application was disapproved. He, however, offered to help them secure a
loan through Amado Chua (Chua), who would lend them the amounts of
P2,500,000.00 and P4,000,000.00, both payable within three (3) months.
Ramon Sy and Richard Sy accepted Lao's offer and received the amounts of
P2,429,500.00 and P3,994,000.00, respectively, as loans from Chua.
Petitioners claimed that they paid Chua the total amount of their loans.
Petitioners insisted that their loan applications from Westmont were denied
and it was Chua who lent them the money. Thus, they contended that
Westmont could not demand the payment of the said loans.
In the pre-trial conference, the parties agreed on one issue - whether or not
the defendants obtained loans from Westmont in the total amount of
P6,429,500.00.[12]During trial, Westmont presented, among others, its
employee Consolacion Esplana, who testified that the proceeds of the loan
were credited to the account of Moondrops per its loan
manifold.[13] Westmont, however, never offered such loan manifold in
evidence.[14]
On the other hand, petitioners presented a Cashier's Check,[15] dated
October 21, 1997, in the amount of P2,429,500.00, purchased from Chua, to
prove that the said loan was obtained from Chua, and not from Westmont.
The cashier's check for the subsequent loan of P4,000,000.00 could not
have been obtained from Westmont.
The RTC Ruling
In its decision, dated November 9, 2007, the RTC ruled in favor of
100
Westmont. It held that Westmont's cause of action was based on PN 5280
and PN 5285, the promissory notes executed by petitioners. The RTC
opined that petitioners admitted the genuineness and due execution of the
said actionable documents because they failed to make a specific denial in
the answer. It added that it should be presumed that the two (2) loan
transactions were fair and regular; that the ordinary course of business was
followed; and that they were issued for a sufficient consideration.
The RTC underscored that Ramon Sy never took any steps to have the
promissory notes cancelled and annulled, which led to the conclusion that
their obligations to Westmont were valid and binding. The fallo of the
decision reads:
WHEREFORE, the foregoing premises considered, judgment is hereby
rendered in favor of plaintiff WESTMONT BANK (now United Overseas
Bank) and against defendants Spouses Ramon Sy and Anita Ng, Richard
Sy, Josie Ong, William Sy and Jackeline De Lucia, and to pay plaintiff the
following amounts, as follows:
1. P20,573,948.66, representing the outstanding amounts due on the
aforementioned loan accounts as of February 15, 2001;
2. Interests and penalty charges due thereon as stipulated under the
respective promissory notes from and after February 15, 2001, until
fully paid;
3. 20% of the total outstanding sum, as and by way of attorney's fees;
and
4. Costs of suit.
SO ORDERED.[16]
Petitioners moved for reconsideration, arguing that it had sufficiently denied
the genuineness and due execution of the promissory notes in their answer.
In its Order, dated February 6, 2008, the RTC repeated that petitioners were
deemed to have admitted the genuineness and due execution of the
actionable documents. It, however, modified the dispositive portion of its
decision as follow:
WHEREFORE, the foregoing premises considered, judgment is hereby
rendered in favor of plaintiff WESTMONT BANK (now United Overseas
Bank) and against defendants Spouses Ramon Sy and Anita Ng, Richard
Sy, Josie Ong, William Sy and Jackeline De Lucia, and to pay plaintiff the
following amounts, as follows:
1. On Promissory Note No. PN-GP 5280:
The sum of Two Million Four Hundred Twenty Nine Thousand Five
a) Hundred Pesos (P2,429,500.00), representing the principal amount of
the promissory note;
The sum of Seven Hundred Twenty Eight Thousand Eight Hundred Fifty
b) Pesos (P728,850.00), representing interest due on the promissory note
payable on November 20,1997;
The above amounts shall collectively earn interest at the rate of thirty-six
c) (36) percent per annum by way of liquidated damages, reckoned from
November 20,1997, until fully paid.
2.
3. On Promissory Note No. PN-GP 5285:
The sum of Four Million Pesos (P4,000,000.00), representing the
a)
principal amount of the promissory note;
The sum of One Million One Hundred Sixty Thousand Pesos
b) (P1,160,000.00), representing interest due on the promissory note
payable on December 26,1997;
The above amounts shall collectively earn interest at the rate of thirty-six
c) (36) percent per annum by way of liquidated damages, reckoned from
December 26,1997, until fully paid.
4.
101
 5. The sum equivalent to twenty (20) percent of the total amount due
(referred to in Items 1 and 2 hereof), by way of attorney's fees; and
costs of suit.
SO ORDERED.[17]
Aggrieved, petitioners elevated an appeal before the CA.
The CA Ruling
In its assailed August 4, 2011 decision, the CA affirmed the ruling of the
RTC. It wrote that petitioners failed to specifically deny the genuineness and
due execution of the promissory notes in their answer before the trial court.
Accordingly, the CA ruled that under Section 8, Rule 8 of the Rules of
Court (Section 8 of Rule 8), the genuineness and due execution of the
promissory notes were deemed admitted by petitioners. It added that the
admission of the said actionable documents created a prima facie case in
favor of Westmont which dispensed with the necessity of presenting
evidence that petitioners actually received the loan proceeds. The CA
disposed the case in this wise:
WHEREFORE, the instant appeal is DENIED. The assailed Decision dated
November 9, 2007 as amended by the assailed Order dated February 6,
2008 of the Regional Trial Court of Manila, Branch 12, is hereby AFFIRMED.
SO ORDERED.[18]
Petitioners filed a motion for reconsideration, but it was denied by the CA in
its assailed decision, dated March 19, 2012.
Hence, this petition, raising the following
ISSUES
I.
THE HONORABLE COURT OF APPEALS ERRONEOUSLY RULED, AS A
MATTER OF LAW, THAT PETITIONERS SPS. RAMON SY AND ANITA
NG, RICHARD SY, JOSIE ONG, WILLIAM SY AND JACKELINE DE
LUCIA FAILED TO SPECIFICALLY DENY THE ACTIONABLE
DOCUMENTS UNDER OATH AND THUS, PETITIONERS DEEMED TO
HAVE ADMITTED THEIR GENUINENESS AND DUE EXECUTION.
II.
THE HONORABLE COURT OF APPEALS FAILED TO RULE THAT THE
PIECES OF EVIDENCE PRESENTED AND FORMALLY OFFERED BY
WESTMONT BANK ARE INADMISSIBLE AND HENCE, SHOULD NOT
HAVE BEEN CONSIDERED.[19]
Petitioners argue that: they specifically denied the allegations of Westmont
under oath in their answer filed before the RTC; although they signed blank
forms of promissory notes, disclosure statements and continuing suretyship
agreements, they were informed that their loan application were denied;
these should be considered as sufficient compliance with Section 8 of Rule
8; Westmont Bank failed to prove the existing loan obligations; and the
original copy of the promissory notes were never presented in court.
In a Resolution,[20] dated July 4, 2012, the Court initially denied the petition
for failure to show any reversible error in the challenged decision and
resolution of the CA. In a Resolution,[21] dated June 15, 2015, however, the
Court granted petitioners' motion for reconsideration, reinstated the petition
and required the respondents to file their comment.
In its Entry of Appearance with Compliance/Manifestation,[22] dated October
19, 2015, UOBP, formerly Westmont, informed the Court that all their
interests in the present litigated case were already transferred to the
Philippine Deposit Insurance Corporation (PDIC).
In its Comment,[23] dated September 23, 2015, the PDIC stated that the CA
correctly ruled that petitioners failed to specifically deny the actionable
documents in their answer and were deemed to have admitted the
102
genuieness and due execution thereof Citing Permanent Savings and Loan
Bank v. Velarde,[24] the PDIC underscored that the specific denial meant that
the defendant must declare under oath that he did not sign the document or
that it was otherwise false or fabricated.
In their Reply,[25] dated November 2, 2015, petitioners insisted that they
made a categorical specific denial in their answer and never admitted the
genuineness and due execution of the promissory notes, disclosure
statements and continuing surety agreements; the promissory notes
presented by Westmont were mere photocopies; and Westmont failed to
establish that they received the proceeds of any loan.
The Court's Ruling
The Court finds the petition meritorious.
Whenever an action or defense is based upon a written instrument or
document, the substance of such instrument or document shall be set forth
in the pleading, and the original or a copy thereof shall be attached to the
pleading as an exhibit, which shall be deemed to be a part of the pleading, or
said copy may with like effect be set forth in the pleading. [26] The said
instrument or document is called an actionable document and Section 8 of
Rule 8 provides the proper method for the adverse party to deny its
genuineness and due execution, to wit:
Sec. 8. How to contest such documents. — When an action or defense is
founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding Section, the
genuineness and due execution of the instrument shall be deemed admitted
unless the adverse party, under oath, specifically denies them, and sets
forth what he claims to be the facts;but the requirement of an oath does
not apply when the adverse party does not appear to be a party to the
instrument or when compliance with an order for an inspection of the original
instrument is refused. [Emphasis supplied]
Accordingly, to deny the genuineness and due execution of an actionable
document: (1) there must be a specific denial in the responsive pleading of
the adverse party; (2) the said pleading must be under oath; and (3) the
adverse party must set forth what he claims to be the facts. Failure to comply
with the prescribed procedure results in the admission of the genuineness
and due execution of the actionable document.
In Toribio v. Bidin,[27] the Court expounded that the purpose of specifically
denying an actionable document "appears to have been to relieve a party of
the trouble and expense of proving in the first instance an alleged fact, the
existence or non-existence of which is necessarily within the knowledge of
the adverse party, and of the necessity (to his opponent's case) of
establishing which such adverse party is notified by his opponent's
pleading."[28] In other words, the reason for the rule is to enable the adverse
party to know beforehand whether he will have to meet the issue of
genuineness or due execution of the document during trial.[29]
In that said case, the petitioners therein failed to file a responsive pleading to
specifically deny a deed of sale, the actionable document, attached in the
answer of the respondents therein. Despite such failure, the Court held that
Section 8, Rule 8, was sufficiently complied with because they had already
stated under oath in their complaint that they never sold, transferred, or
disposed of their shares in the inheritance to others. Thus, respondents
therein were placed on adequate notice that they would be called upon
during trial to prove the genuineness or due execution of the disputed deeds
of sale. Notably, the Court exercised liberality in applying the rules of
procedure so that substantial justice may be served.
Similarly, in Titan Construction Corporation v. David, Sr.,[30] the Court
relaxed the rules of procedure regarding Section 8 of Rule 8. In that case,
the respondent failed to file a responsive pleading under oath to specifically
deny the special power of attorney, the actionable document therein, which
was attached to the answer of the petitioner therein. Notwithstanding such
deficiency, the Court ruled that there was substantial compliance because
the respondent therein consistently denied the genuineness and due
execution of the actionable document in his complaint and during trial.
In fine, although Section 8 of Rule 8 provides for a precise method in
denying the genuineness and due execution of an actionable document and
the dire consequences of its non-compliance, it must not be applied with
absolute rigidity. What should guide judicial action is the principle that a
party-litigant is to be given the fullest opportunity to establish the merits of
his complaint or defense rather than for him to lose life, liberty, honor, or
103
property on technicalities.
In the present case, the actionable documents attached to the complaint of
Westmont were PN 5280 and PN 5285. The CA opined that petitioners failed
to specifically deny the genuineness and due execution of the said
instruments because nowhere in their answer did they "specifically deny" the
genuineness and due execution of the said documents.
After a judicious study of the records, the Court finds that petitioners
sufficiently complied with Section 8 of Rule 8 and grants the petition.
Petitioners specifically
denied the genuineness
and due execution of the
promissory notes
The complaint of Westmont alleged, among others, that:
3. On or about October 21, 1997, defendants Richard Sy and Ramon Sy,
under the trade name and style of "Moondrops General Merchandising,"
obtained a loan from the plaintiff in the principal amount of Two Million Four
Hundred Twenty-Nine Thousand Five Hundred Pesos (P2, 429, 500.00),
Philippine Currency, in evidence of which said defendants executed in
plaintiffs favor Promissory Note No. GP- 5280, xxx.
4. Again, on or about November 25, 1997, defendants Richard Sy and
Ramon Sy, under the trade name and style of "Moondrops General
Merchandising," applied for and were granted another loan by the plaintiff in
the principal amount of Four Million Pesos (P4, 000, 000.00), Philippine
Currency, in evidence of which said defendants executed in plaintiffs favor
Promissory Note No. GP- 5285, xxx.
6. The defendants Anita Ng, Josie Ong, William Sy and Jackeline De Lucia,
for purposes of securing the payment of said loans, collectively executed a
Continuing Suretyship Agreement, xxx, whereby they jointly and severally
bound themselves to plaintiff for the payment of the obligations of
defendants Richard Sy and Ramon Sy/Moondrops General Merchandising
thereto.
7. The defendants defaulted in the payment of the aforementioned loan
obligations when the same fell due and, despite demands, continue to fail
and/or refuse to pay the same, to the prejudice of the plaintiff, xx.
8. As of November 9, 1999, the defendants' outstanding obligation to the
plaintiff on both loans amounted to Fifteen Million Six Hundred Thirty-Nine
Thousand Five Hundred Eighty Nine and 25/100 Pesos, xxx. [31]
On the other hand, petitioners alleged in the answer, under oath:
2. Paragraphs 3, 4, 5, 6, 7 and 8 are specifically denied, the truth of the
matter being those alleged in the Special and Affirmative Defenses
hereunder.
3. Paragraph 9 is specifically denied for want of knowledge or information
sufficient to form a belief as to the truth or falsity thereof. Besides, the
plaintiff has no one to blame except itself and its personnel for maliciously
filing the instant complaint for collection knowing fully well that the alleged
loan obligations were not consummated; and by way of -
SPECIAL AND AFFIRMATIVE DEFENSES
4. The complaint does not state a cause of action.
5. While the limited partnership Moondrops General Merchandising Co., Ltd.
(Moondrops for brevity) appears in the alleged loan documents to be the
borrower and, therefore, the real party in interest, it is not impleaded as a
party, xxx.
6. The alleged loan obligations were never consummated for want of
consideration.
7. Sometime in August, 1997, Moondrops desperately needed additional
working capital, thus it applied for a loan of P6,500, 000.00 with the plaintiff
Westmont Bank through the Manager of Grace Park Branch William Chu
Lao.
8. Manager William Chu Lao required herein defendants to sign blank forms
104
of plaintiffs promissory notes, Disclosure Statements and Continuing
Suretyship Agreement.
9. Sometime in September, 1997, Manager William Chu Lao informed herein
defendants that the application of Moondrops for an additional working
capital was disapproved by Westmont Bank but that, however, he offered to
lend the defendants, through Mr. Amado Chua, the initial amount of
P2,500,000.00 payable in three (3) months, and then another P4,000,000.00
likewise payable in three (3) months, against customers' checks.
10. Since Moondrops desperately needed the additional working capital,
defendants agreed to and accepted the offer of Manager William Chu Lao,
thus Mr. Amado Chua loaned to defendants the amounts of P2,500,000.00
and P4,000, 000.00.
11. Pursuant to the agreement between Mr. Amado Chua and the
defendants, the latter delivered to the former customers' checks in the total
amount of P6,500,000.00.
12. Defendants have fully paid Mr. Amado Chua the loan obligations in the
amounts of P2,500, 000.00 and P4,000,000.00, including the interests
thereon.[32]
The answer above readily shows that petitioners did not spell out the words
"specifically deny the genuineness and due execution of the promissory
notes." Nevertheless, when the answer is read as whole, it can be deduced
that petitioners specifically denied the paragraphs of the complaint regarding
the promissory notes. More importantly, petitioners were able to set forth
what they claim to be the facts, which is a crucial element under Section 8 of
Rule 8. In particular, they alleged that although Ramon Sy and Richard Sy
signed blank forms of promissory notes and disclosure statements, they
were later informed that their loans were not approved. Such disapproval led
them to seek loans elsewhere, through Lao and Chua, but definitely not with
the bank anymore.
Verily, petitioners asserted throughout the entire proceedings that the loans
they applied from Westmont were disapproved, and that they never received
the loan proceeds from the bank. Stated differently, they insisted that the
promissory notes and disclosure statement attached to the complaint were
false and different from the documents they had signed. These significant
and consistent denials by petitioners sufficiently informed Westmont
beforehand that it would have to meet the issue of genuineness or due
execution of the actionable documents during trial.
Accordingly, petitioners substantially complied with Section 8 of Rule 8.
Although their answer did not indicate the exact words contained in the said
provision, the questionable loans and the non-delivery of its proceeds
compel the Court to relax the rules of procedure in the present case. Law
and jurisprudence grant to courts the prerogative to relax compliance with
procedural rules of even the most mandatory character, mindful of the duty
to reconcile both the need to put an end to litigation speedily and the parties'
right to an opportunity to be heard.[33]
Westmont failed to prove
that it delivered the
proceeds of the loan to
petitioners
A simple loan or mutuum is a contract where one of the parties delivers to
another, either money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid. [34] A simple loan is
a real contract and it shall not be perfected until the delivery of the object of
the contract.[35] Necessarily, the delivery of the proceeds of the loan by the
lender to the borrower is indispensable to perfect the contract of loan. Once
the proceeds have been delivered, the unilateral characteristic of the
contract arises and the borrower is bound to pay the lender an amount equal
to that received.[36]
Here, there were purported contracts of loan entered between Westmont
and petitioners for the amounts of P2,429,500.00 and P4,000,000.00,
respectively. The promissory notes evidencing such loans were denied by
petitioners, thus, the genuineness and due execution of such documents
were not admitted. Petitioners averred that they never received such loans
because their applications were disapproved by the bank and they had to
acquire loans from other persons. They presented a cashier's check, in the
amount of P2,429,500.00, obtained from Chua, which showed that the latter
personally provided the loan, and not the bank. As the proceeds of the loan
were not delivered by the bank, petitioners stressed that there was no
perfected contract of loan. In addition, they doubt the reliability of the
promissory notes as their original copies were not presented before the
RTC.
105
Due to the doubtful circumstances surrounding the loan transactions, Carpio, (Chairperson), Brion, and Del Castillo, JJ., concur.
Westmont cannot rely on the disputable presumptions that private Leonen, J., on official leave.
transactions have been fair and regular and that the ordinary course of
business has been followed. The afore-stated presumptions are disputable,
meaning, they are satisfactory if uncontradicted, but may be contradicted
and overcome by other evidence.[37]

At any rate, granting that they did execute the promissory note and other
actionable documents, still it was incumbent on Westmont, as plaintiff, to
establish that the proceeds of the loans were delivered to petitioners,
resulting into a perfected contract of loan.[38] Notably, these documents also
did not state that the loan proceeds had been delivered to petitioners, and
that they had acknowledged its receipt.

In civil cases, the burden of proof rests upon the plaintiff who is required to
establish his case by a preponderance of evidence.[39] As aptly stated by the
RTC, the primordial issue that must be resolved is whether petitioners
obtained loans from Westmont in the total amount of P6,429,500.00.[40]

The Court finds that Westmont miserably failed to establish that it released
and delivered the proceeds of the loans in the total amount of P6,429,500.00
to petitioners. Westmont could have easily presented a receipt, a ledger, a
loan release manifold, or a statement of loan release to indubitably prove
that the proceeds were actually released and received by petitioners. During
trial, Westmont committed to the RTC that it would submit as evidence a
loan manifold indicating the names of petitioners as recipients of the
loans,[41] but these purported documents were never presented, identified or
offered.[42]

As Westmont failed to prove that it had delivered the loan proceeds to

respondents, then there is no perfected contract of loan.

WHEREFORE, the petition is GRANTED. The August 4, 2011 Decision and

the March 19, 2012 Resolution of the Court of Appeals in CA-G.R. CV No.
90425 are hereby REVERSED and SET ASIDE. The Complaint, dated
August 30, 1999, docketed as Civil Case No. 99-95945 filed before the
Regional Trial Court, Branch 12, City of Manila, is DISMISSED.

SO ORDERED.

106