Mutuum Cases separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
1. PEOPLE V. PUIG AND PORRAS
A case of Qualified Theft was filed against the respondents. This was filed by
the Iloilo provincial prosecutor, for the private complainant, Rural Bank of
Potoan. It was alleged in the complaint that Puig was the cashier & Porras
was the Bookkeeper in the said bank, and that they took away money
amounting to 15k without the consent of the bank owner, to the prejudice of
the bank. However, the RTC dismissed the complaint for insufficiency of the
information ruling that the real parties in interest are the depositors-clients
and not the bank because the bank does not acquire ownership of the
money deposited in it. It also denied the MR.
(Simple Loan)
· Depositors who place their money with the bank are considered creditors
of the bank. The bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as belonging to the bank.
· The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
· Article 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
· Article 1980. (supra)
· In summary, the Bank acquires ownership of the money deposited by its
clients; and the employees of the Bank, who are entrusted with the
possession of money of the Bank due to the confidence reposed in them,
occupy positions of confidence. The Informations, therefore, sufficiently
allege all the essential elements constituting the crime of Qualified Theft.
2. BPI FAMILY BANK V. FRANCO
This case has its genesis in an ostensible fraud perpetrated on the petitioner
BPI Family Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in
conspiracy with other individuals,[3] some of whom opened and maintained
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco)
opened a savings and current account with BPI-FB. Soon thereafter, or on
August 25, 1989, First Metro Investment Corporation (FMIC) also opened a
time deposit account with the same branch of BPI-FB with a deposit
of P100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a
current,[4] savings,[5] and time deposit,[6] with BPI-FB. The current and savings
accounts were respectively funded with an initial deposit of P500,000.00 each,
while the time deposit account had P1,000,000.00 with a maturity date
of August 31, 1990. The total amount of P2,000,000.00 used to open these
accounts is traceable to a check issued by Tevesteco allegedly in
consideration of Francos introduction of Eladio Teves,[7] who was looking for
a conduit bank to facilitate Tevestecos business transactions, to Jaime
Sebastian, who was then BPI-FB SFDMs Branch Manager. In turn, the funding
for the P2,000,000.00 check was part of the P80,000,000.00 debited by BPI-FB
from FMICs time deposit account and credited to Tevestecos current account
pursuant to an Authority to Debit purportedly signed by FMICs officers.
It appears, however, that the signatures of FMICs officers on the Authority to
Debit were forged.[8] On September 4, 1989, Antonio Ong,[9] upon being
shown the Authority to Debit, personally declared his signature therein to be
a forgery. Unfortunately, Tevesteco had already effected several withdrawals
from its current account (to which had been credited the P80,000,000.00
covered by the forged Authority to Debit) amounting to P37,455,410.54,
including the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests
in light of FMICs forgery claim, BPI-FB, thru its Senior Vice-President, Severino
Coronacion, instructed Jesus Arangorin[10] to debit Francos savings and
current accounts for the amounts remaining therein.[11] However, Francos
time deposit account could not be debited due to the capacity limitations of
[12]
BPI-FBs computer.
[13]
In the meantime, two checks drawn by Franco against his BPI-FB current
account were dishonored upon presentment for payment, and stamped with
a notation account under garnishment. Apparently, Francos current account
was garnished by virtue of an Order of Attachment issued by the Regional
Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case),
which had been filed by BPI-FB against Franco et al.,[14] to recover
the P37,455,410.54 representing Tevestecos total withdrawals from its
account.
Notably, the dishonored checks were issued by Franco and presented
for payment at BPI-FB prior to Francos receipt of notice that his accounts
were under garnishment.[15] In fact, at the time the Notice of Garnishment
dated September 27, 1989 was served on BPI-FB, Franco had yet to be
impleaded in the Makati case where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded in
[16]
the Makati case. Immediately, upon receipt of such copy, Franco filed a
Motion to Discharge Attachment which the Makati RTC granted on May 16,
1990. The Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the funds in his
savings and current accounts. Jesus Arangorin, BPI-FBs new manager, could
not forthwith comply with the demand as the funds, as previously stated, had
already been debited because of FMICs forgery claim. As such, BPI-FBs
computer at the SFDM Branch indicated that the current account record was
not on file.
With respect to Francos savings account, it appears that Franco agreed to an
arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate of deposit
which Quiaoit needed in connection with his visa application at the Taiwan
Embassy. As part of the arrangement, Sebastian retained custody of Quiaoits
savings account passbook to ensure that no withdrawal would be effected
therefrom, and to preserve Francos deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB
deducted the amount of P63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had
already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount
of P80,000,000.00 debited from its account. [17] The case eventually reached
this Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment
Corporation,[18] we upheld the finding of the courts below that BPI-FB failed
to exercise the degree of diligence required by the nature of its obligation to
treat the accounts of its depositors with meticulous care. Thus, BPI-FB was
found liable to FMIC for the debited amount in its time deposit. It was
ordered to pay P65,332,321.99 plus interest at 17% per annum from August
29, 1989 until fully restored. In turn, the 17% shall itself earn interest at 12%
from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda
Tica (Buenaventura, et al.),[19] recipients of a P500,000.00 check proceeding
from the P80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals[20] from their current account with BPI-FB, Bonifacio
Market, Edsa, Caloocan City Branch. Likewise, when the case was elevated to
this Court docketed as BPI Family Bank v. Buenaventura,[21] we ruled that BPI-
FB had no right to freeze Buenaventura, et al.s accounts and adjudged BPI-FB
liable therefor, in addition to damages.
 Meanwhile, BPI-FB filed separate civil and criminal cases against those
[22]
believed to be the perpetrators of the multi-million peso scam. In the
criminal case, Franco, along with the other accused, except for Manuel
Bienvenida who was still at large, were acquitted of the crime of Estafa as
defined and penalized under Article 351, par. 2(a) of the Revised Penal
[23] [24]
Code. However, the civil case remains under litigation and the respective
rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to
unfreeze his accounts and release his deposits therein, the latter filed on June
4, 1990 with the Manila RTC the subject suit. In his complaint, Franco prayed
[25]
for the following reliefs: (1) the interest on the remaining balance of his
current account which was eventually released to him on October 31, 1991;
[26]
(2) the balance on his savings account, plus interest thereon; (3) the
[27]
advance interest paid to him which had been deducted when he pre-
terminated his time deposit account; and (4) the payment of actual, moral
and exemplary damages, as well as attorneys fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the
accounts of Franco and refusing to release his deposits, claiming that it had a
better right to the amounts which consisted of part of the money allegedly
fraudulently withdrawn from it by Tevesteco and ending up in Francos
accounts. BPI-FB asseverated that the claimed consideration of P2,000,000.00
for the introduction facilitated by Franco between George Daantos and Eladio
Teves, on the one hand, and Jaime Sebastian, on the other, spoke volumes of
Francos participation in the fraudulent transaction.
(Simple Loan)
· Article 1980 of the Civil Code: Fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning loan.
· As there is a debtor-creditor relationship between a bank and its depositor,
BPI-FB ultimately acquired ownership of Franco’s deposits, but such
ownership is coupled with a corresponding obligation to pay him an equal
amount on demand. Although BPI-FB owns the deposits in Franco’s accounts,
it cannot prevent him from demanding payment of BPI-FB’s obligation by
drawing checks against his current account, or asking for the release of the
funds in his savings account. Thus, when Franco issued checks drawn against
his current account, he had every right as creditor to expect that those checks
would be honored by BPI-FB as debtor.
We find, as the trial court did, that BPI-FB acted out of the impetus of self-
protection and not out of malevolence or ill will. BPI-FB was not in the
corrupt state of mind contemplated in Article 2201 and should not be held
liable for all damages now being imputed to it for its breach of obligation.
For the same reason, it is not liable for the unearned interest on the time
deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it
partakes of the nature of fraud.[44] We have held that it is a breach of a known
duty through some motive of interest or ill will.[45] In the instant case, we
cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the
trial court found, there was no denial whatsoever by BPI-FB of the existence
of the accounts. The computer-generated document which indicated that the
current account was not on file resulted from the prior debit by BPI-FB of the
deposits. The remedy of freezing the account, or the garnishment, or even
the outright refusal to honor any transaction thereon was resorted to solely
for the purpose of holding on to the funds as a security for its intended court
action,[46] and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad
faith,[47] moral damages cannot be awarded; and that the adverse result of an
action does not per se make the action wrongful, or the party liable for it.
One may err, but error alone is not a ground for granting such damages.[48]
An award of moral damages contemplates the existence of the following
requisites: (1) there must be an injury clearly sustained by the claimant,
whether physical, mental or psychological; (2) there must be a culpable act or
 omission factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and
(4) the award for damages is predicated on any of the cases stated in Article
[49]
2219 of the Civil Code.
Franco could not point to, or identify any particular circumstance in Article
2219 of the Civil Code,[50] upon which to base his claim for moral damages.
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral
[51]
damages under Article 2220 of the Civil Code for breach of contract.
3. FRIAS V. SAN DIEGO-SISON
(Conventional Interest )
*example of forbearance
· Parties: Petitioner Frias as the property owner and Respondent Dra. Flora
San Diego-Sison, entered into a Memorandum of Agreementover the subject
property.
· MOA: Petitioner received P3M from respondent with the following
agreement:
Ø That respondent has a period 6 months from the date of the execution of this
contract within which to notify petitioner of her intention to purchase the
land at the price ofP6.4M. Upon notice to the petitioner
respondent’s intention to purchase the same, the latter has a period of
another 6 months within which to pay the remaining balance of P3.4 million.
Ø In the event that on the sixth month the respondent would decide NOT to
purchase the property, the petitioner has a period of another 6 months
within which to pay the sum of P3 million pesos provided that the said
amount shall earn compounded bank interest for the last 6 months
only. Under this circumstance, the amount of P3 million given by the
respondent shall be treated as a loan.
· Respondent decided not to purchase the property and demanded the
return of her money with 36% interest.
· Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential
Bank, the interest rate for loans in 1991 ranged from 25% to 32% per
annum. The CA reduced the interest rate to 25% instead of the 32% awarded
by the trial court which petitioner no longer assailed.
Monetary Interest: 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. It has been held that for a debtor to continue
in possession of the principal of the loan and to continue to use the same
after maturity of the loan without payment of the monetary interest, would
constitute unjust enrichment on the part of the debtor at the expense of the
creditor.
SC: Affirmed the ruling of the CA as to the 25% interest rate. Thus, the
interest rate of 25% per annum awarded by the CA to a P2 million loan is fair
and reasonable.
4. SIGA-AN V. VILLANUEVA, (2009)
FACTS: Herein respondent Alicia Villanueva is engaged in supplying office
of materials and equipments to the Philippine Navy Office (PNO) where herein
Sebastian Siga-an works as a military officer and comptroller. Villanueva
alleged that Siga-an offered to loan her the amount of P540,000.00. Having
needed capital for her business transactions with the PNO, Villanueva
accepted petitioner’s proposal. The loan agreement was not reduced in
writing and there was no stipulation as to the payment of interest for the
loan. Villanueva issued two checks worth P500,000.00 and P200,000.00. Siga-
an wanted to apply the payment of P540,000.00 to the principal amount and
the excess amount of P160,000.00 would be applied for the interest. He
demanded from Villanueva to pay additional interest with a threat to block or
disapprove her transactions with the PNO if she would not comply with his
demand thus respondent paid additional amounts as interests for the loan.
 Villanueva asked Siga-an for receipt but petitioner refused to give as it was
not necessary as there was mutual trust and confidence between them. The
total amount paid by Villanueva totalled P1,200,000.00. When Villanueva was
advised by her lawyer that she made an overpayment, she sent a demand
letter to Siga-an asking for the return of the excess amount of P660,000.00.
Siga-an just ignored Villanueva’s claim for reimbursement. Hence, Villanueva
instituted a complaint for sum of money against herein petitioner Sebastian
Siga-an. After trial of the case, the Trial Court ordered petitioner Siga-an to
refund the excess amount to Villanueva pursuant to the principle of solutio
indebiti. On appeal of the case, the appellate court affirmed the decision of
the RTC. Petitioner filed a motion for reconsideration but this was denied.
Hence, the instant petition.
(Compensatory, Penalty or Indemnity Interest)
Interests:
a) Monetary interest is a compensation fixed by the parties for the use or
forbearance of money.
b) Compensatory interest - imposed by law or by courts as penalty or
indemnity for damages.
The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded.
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated
in writing.
I. Hence, payment of monetary interest is allowed only if:
1) there was an express stipulation for the payment of interest; and
2) the agreement for the payment of interest was reduced in writing.
· The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.
· Monetary interest is due only when these requirements are present.
II. However, there are instances in which an interest may be imposed even in
the absence of express stipulation, verbal or written, regarding payment of
interest. Article 2209 of the Civil Code states that if the obligation consists in
the payment of a sum of money, and the debtor incurs delay, a legal interest
of 12% (now 6%) per annum may be imposed as indemnity for damages if
no stipulation on the payment of interest was agreed upon. (Compensatory
interest)
· This interest may be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation for the use
or forbearance of money. This applies only to compensatory interest and not
to monetary interest.
Solutio Indebiti
Under Article 1960 of the Civil Code, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied.
Article 2154 provides that 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. We have held that the principle of solutio indebiti applies in
case of erroneous payment of undue interest.
ISSUE: Whether or not there was interest due to petitioner
HELD: It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because there was no
express stipulation in writing to that effect. There was no binding relation
between petitioner and respondent as regards the payment of interest. The
payment was clearly a mistake. Since petitioner received something when
there was no right to demand it, he has an obligation to return it. It appears
that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between
the two regarding the payment of interest. Compensatory interest is not
chargeable in the instant case because it was not duly proven that
respondent defaulted in paying the loan. Also, as earlier found, no interest
was due on the loan because there was no written agreement as regards
payment of interest.
5. SPOUSES JUICO V. CHINA BANKING CORP.
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from
China Banking Corporation (respondent) as evidenced by two Promissory
Notes both dated October 6, 1998 and numbered 507-001051-34and 507-
001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan
was secured by a Real Estate Mortgage (REM) over petitioners’ property
located at 49 Greensville St., White Plains, Quezon City
respondent demanded the full payment of the outstanding balance with
accrued monthly interests.
As of February 23, 2001, the amount due on the two promissory notes
totaled P19,201,776. On the same day, the mortgaged property was sold at
public auction, with respondent China bank as highest bidder for the amount
of P10,300,000.
petitioners received 8a demand letter9 dated May 2, 2001 from respondent
for the payment ofP8,901,776.63, the amount of deficiency after applying the
proceeds of the foreclosure sale
respondent prayed that judgment be rendered ordering the petitioners to
pay jointly and severally: (1)P8,901,776.63 representing the amount of
deficiency, plus interests at the legal rate, from February 23, 2001 until fully
paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total
amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs
of suit.
Ms. Annabelle Cokai Yu, its Senior Loans Assistant stated that as of now the
outstanding balance of petitioners was P15,190,961.48. Yu reiterated that the
interest rate changes every month based on the prevailing market rate. she
notified petitioners of the prevailing rate by calling them monthly .It was
increased unilaterally
RTC: ordered Spouses to pay bank 9M plus the interest which amounted to
15M.CA AFFIRMED
PETITIONER: They insist that the increase in interest rates were unilaterally
imposed by the bank and thus violate the principle of mutuality of contracts.
Issue: whether the increase in interest rates is void for violating the
mutuality of contracts
(Conventional Interest; Escalation Clause)
(Include Concurring Opinion)
· Bank: that the interest rate changes every month based on the prevailing
market rate and notified petitioners of the prevailing rate by calling them
thru a telephone monthly before their account becomes past due. When
asked if there was any written authority from petitioners for respondent to
increase the interest rate unilaterally, respondent answered that petitioners
signed a promissory note indicating that they agreed to pay interest at the
prevailing rate.
· China Bank unilaterally increased the interest rates from 15% to as high as
24.50%.
RULES on Escalation Clauses:
a) Escalation clauses are not void per se.
Escalation clauses refer to stipulations allowing an increase in the interest
rate agreed upon by the contracting parties. This Court has long recognized
that there is nothing inherently wrong with escalation clauses which are valid
stipulations in commercial contracts to maintain fiscal stability and to retain
the value of money in long term contracts. Hence, such stipulations are not
void per se.
b) Escalation clauses violating the principle of mutuality of contracts are void.
Nevertheless, an escalation clause "which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving
 the debtor of the right to assent to an important modification in the
agreement" is void. A stipulation of such nature violates the principle of
mutuality of contracts. Thus, this Court has previously nullified the unilateral
determination and imposition by creditor banks of increases in the rate of
interest provided in loan contracts.
Ø Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation clauses
in general are considered valid, we ruled that Banco Filipino may not increase
the interest on respondent borrower’s loan, pursuant to Circular No. 494
issued by the Monetary Board, because said circular is not a law although it
has the force and effect of law and the escalation clause has no de-escalation
clause.
Ø De-escalation Clause: provision for reduction of the stipulated interest "in the
event that the applicable maximum rate of interest is reduced by law or by
the Monetary Board."
It is now settled that an escalation clause is void where the creditor
unilaterally determines and imposes an increase in the stipulated rate of
interest without the express conformity of the debtor. Such unbridled right
given to creditors to adjust the interest independently and upwardly would
completely take away from the debtors the right to assent to an important
modification in their agreement and would also negate the element of
34
mutuality in their contracts. While a ceiling on interest rates under the
Usury Law was already lifted under Central Bank Circular No. 905, nothing
therein "grants lenders carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their
assets."
Ecalation clause in this case: I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any advance
notice to me/us in the event a law or Central Bank regulation is passed or
promulgated by the Central Bank of the Philippines or appropriate
government entities, increasing or decreasing such interest rate or service
charge.
RULING: At no time did petitioners protest the new rates imposed on their
loan even when their property was foreclosed by respondent. This
notwithstanding, we hold that the escalation clause is still VOID because it
grants respondent the power to impose an increased rate of interest without
a written notice to petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based on the
new imposed interest with corresponding computation of the total debt
should have been provided by the respondent to enable petitioners to make
an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with
these requisites is essential to preserve the mutuality of contracts. For indeed,
one-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential equality.
Effect: Modifications in the rate of interest for loans pursuant to an escalation
clause must be the result of an agreement between the parties. Unless such
important change in the contract terms is mutually agreed upon, it has no
binding effect. In the absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot bind them.
NOTE: The lender and the borrower should agree on the imposed rate, and
such imposed rate should be in writing. Escalation clauses are not basically
wrong or legally objectionable as long as they are not solely potestative but
based on reasonable and valid grounds.
Concurring Opinion:
Points to consider in drafting a valid escalation clause: (DAP)
1) Firstly, as a matter of equity and consistent with P.O. No. 1684, the
escalation clause must be paired with a de-escalation clause.
2) Secondly, so as not to violate the principle of mutuality, the escalation must
be pegged to theprevailing market rates, and not merely make a
 generalized reference to "any increase or decrease in the interest rate" in the
event a law or a Central Bank regulation is passed.
3) Thirdly, consistent with the nature of contracts, the proposed modification
must be the result of anagreement between the parties.
6. SPOUSES SILOS v. PNB
Philippines (PDCP) entered into a loan agreement with Falcon Minerals, Inc.
whereby PDCP agreed to make available and lend to Falcon a sum certain.
Respondent Rafael Ortigas, Jr., et al., stockholder officers of Falcon, executed
an Assumption of Solidary Liability whereby they agreed to assume in their
individual capacity, solidary liability with Falcon for the due and punctual
payment of the loan contracted by Falcon with PDCP. Two separate
guaranties were executed to guarantee the payment of the same loan by
other stockholders and officers of Falcon, acting in their personal and
individual capacities. One Guaranty was executed by petitioner Salvador
Escaño, while the other by petitioners Mario M. Silos, Ricardo C. Silverio, et al.
Two years later, an agreement developed to cede control of Falcon to Escaño,
Silos and Joseph M. Matti. Thus, contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then already deceased George
T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti.
Part of the consideration that induced the sale of stock was a desire by
Ortigas, et al., to relieve themselves of all liability arising from their previous
joint and several undertakings with Falcon, including those related to the
loan with PDCP. Thus, an Undertaking was executed by the concerned parties
with Escaño, Silos and Matti identified in the document as “sureties,” on one
hand, and Ortigas, Inductivo and the Scholeys as “obligors,” on the other.
However, Falcon subsequently defaulted in its payments. After PDCP
foreclosed on the chattel mortgage, there remained a subsisting deficiency of
P5,000,000, which Falcon did not satisfy despite demand. In order to recover
the indebtedness, PDCP filed a complaint for sum of money against Falcon,
Ortigas, Escaño, Silos, Silverio and Inductivo. Ortigas filed together with his
answer a cross-claim against his co-defendants Falcon, Escaño and Silos, and
also manifested his intent to file a third-party complaint against the Scholeys
and Matti. The cross-claim lodged against Escaño and Silos was predicated
on the 1982 Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan. Escaño, Ortigas and Silos each sought
to seek a settlement with PDCP. The first to come to terms with PDCP was
Escaño, who entered into a compromise agreement. In exchange, PDCP
waived or assigned in favor of Escaño 1/3 of its entire claim in the complaint
against all of the other defendants in the case. Then Ortigas entered into his
own compromise agreement with PDCP, allegedly without the knowledge of
Escaño, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1.3M as full
satisfaction of the PDCP’s claim against Ortigas. Silos and PDCP entered into
a Partial Compromise Agreement whereby he agreed to pay P500k in
exchange for PDCP’s waiver of its claims against him. In the meantime, after
having settled with PDCP, Ortigas pursued his claims against Escaño, Silos
and Matti, on the basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos, while he maintained his cross-claim
against Escaño. RTC issued the Summary Judgment, ordering Escaño, Silos
and Matti to pay Ortigas, jointly and severally, the amount of P1.3M, as well
as P20K in attorney’s fees. The trial court ratiocinated that none of the third-
party defendants disputed the 1982 Undertaking.
ISSUE: Whether or not petitioners are solidarily liable to respondent Ortigas.
Held: Petitioners are not solidarily liable to respondent Ortigas. In case there
is a concurrence of two or more creditors or of two or more debtors in one
and the same obligation, Article 1207 of the Civil Code states that among
them, there is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.” Article
1210 supplies further that the indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility. Thus, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners
agreed “to bind themselves jointly and severally” in their obligations to the
Ortigas group, or any such terms to that effect. Hence, such obligation
 established in the Undertaking is presumed only to be joint. Ortigas, as the
party alleging that the obligation is in fact solidary, bears the burden to
overcome the presumption of jointness of obligations. He has failed to
discharge such burden. The term “surety” has a specific meaning under our
Civil Code. As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus, a surety
agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigas’ argument rests solely on the
solidary nature of the obligation of the surety under Article2047. In tandem
with the nomenclature “sureties” accorded to petitioners and Matti in the
Undertaking, however, this argument can only be viable if the obligations
established in the Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature “sureties” in the Undertaking.
7. LIGUTAN V. CA, (2002)
FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a the core of a bank's existence. The Court of Appeals, exercising its good
loan from private respondent Security Bank and Trust Company. Petitioners
executed a promissory note to pay the sum loaned with an interest of
15.189% per annum upon maturity and to pay a penalty of 5% every month
on the outstanding principal and interest in case of default. On maturity of
the obligation, petitioners failed to settle the debt despite several demands
from the bank. Consequently, the bank filed a complaint for recovery of the
due amount. After trial of the case, the Trial court ruled in favour of the Bank,
ordering petitioners to pay the respondent the sum of P114,416.00 with
interest thereon at the rate of 15.189% per annum and 5% per month penalty
charge among others. On appeal of the case, petitioners prayed for the
reduction of the 5% stipulated penalty for being unconscionable. The Court
of Appeals ruled that in the interest of justice and public policy, a penalty of
3% per month or 36% per annum would suffice. But still, petitioners dispute
the said decision.
ISSUE: Whether or not the 15.189% interest and the penalty of three (3%)
percent per month or thirty-six (36%) percent per annum imposed by private
respondent bank on petitioners’ loan obligation are exorbitant, iniquitous
and unconscionable.
HELD: The question of whether a penalty is reasonable or iniquitous can be
partly subjective and partly objective. Its resolution would depend on such
factors as, but not necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to
the sound discretion of the court. The essence or rationale for the payment of
interest is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest. What may justify a court in
not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the
non-payment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and
judgment in the instant case, has rightly reduced the penalty interest from
5% a month to 3% a month.
The essence or rationale for the payment of interest, quite often referred to
as cost of money, is not exactly the same as that of a surcharge or a
penalty. A penalty stipulation is not necessarily preclusive of interest, if there
is an agreement to that effect, the two being distinct concepts which may
separately be demanded. What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify the non-
payment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and
the core of a bank's existence.
· Here, the stipulated interest of 15.189% on the forbearance of money was
upheld by the court as reasonable.

8. EASTERN SHIPPING LINES, INC. V. CA (1994)
FACTS: Two fiber drums of riboflavin were shipped from Yokohama, Japan
on board the vessel owned by herein petitioner Eastern Shipping Lines. When
it arrives in Manila, it was put unto the custody of Metro Port Service, Inc. The
latter excepted to one drum which is said to be in bad order and which
damage was unknown to Eastern Shipping Lines. Later, Allied Brokerage
Corporation received the shipment from Metro Port Service, Inc. With one
drum damaged, Allied Brokerage Corporation made deliveries to the
consignee's warehouse. The latter excepted to one drum that is damaged.
Eastern Shipping Lines averred that due to the one drum that is damaged
and due to the fault and negligence of Metro Port Service, Inc. and Allied
Brokerage Corporation, the consignee suffered losses. The two failed and
refused to pay the claims for damages. Consequently, Eastern Shipping Lines
was compelled to pay the consignee being subrogated to all the rights of
action of said consignee against Metro Port Service, Inc. and Allied Brokerage
Corporation. Trial ensued and on appeal of the case, the appellate court
affirmed the decision of the trial court ordering Metro Port Service and Allied
Brokerage to pay Eastern Shipping Lines, jointly and severally, the amount of
P19,032.95, with the present legal interest of 12% per annum from the date
of filing of the complaints, until fully paid. Metro Port Service and Allied
Brokerage opposed especially as to the payment of interest contending that
the legal interest on an award for loss or damage should be 6% in view of
Article 2209 of the Civil Code.
ISSUE: Whether or not the payment of legal interest on an award for loss or
damage is twelve percent (12%) or six percent (6%).
i)
(Compensatory, Penalty or Indemnity Interest)
Rules on Interest:
· Interest upon an obligation which calls for the payment of money, absent a ii)
stipulation, is thelegal rate. Such interest normally is allowable from the date
of demand, judicial or extrajudicial. The trial court opted for judicial demand
as the starting point.
· But then upon the provisions of Article 2213 of the Civil Code, interest
"cannot be recovered upon unliquidated claims or damages, except when the
demand can be established with reasonable certainty. Here, interest should
be counted from the date of the decision (when the amount of damages are
ascertained).
· Art. 2209, CC. — If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of interest agreed
upon, and in the absence of stipulation, the legal interest which is six
percent per annum.
Rules of thumb (on the award of interests):
*NOTE: The legal rate of 12% has been amended to 6%. See Circular No. 799 (amending Circular No. 905) effective July
1, 2013, and the case of NACAR V. GALLERY FRAMES AND/OR BORDEY (2013). Therefore, there is no need to
distinguish now the obligations breached as the legal interest applicable is 6%.
1) When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages.
2) With regard particularly to an award of interest in the concept of ACTUAL
AND COMPENSATORY DAMAGES, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
a) Obligation breached: consists in the payment of a sum of money, i.e., a loan
or forbearance of money
Interest Due:
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 3. In a letter in 2000, Spouses demanded the return of the amount within
Code. (amended to 6%) 15 days from receipt
b) Obligation breached: not constituting a loan or forbearance of money, 4. In reply, Estores promised to return the same within 120 days
Interest due: may be imposed at the discretion of the court at the rate of 5. Spouses agreed but imposed an interest of 12% annually
6% per annum. 6. Estores still failed despite demands
Ø No interest, however, shall be adjudged on unliquidated claims or damages 7. Spouses filed a complaint with the RTC against Estores and Roberto Arias
except when or until the demand can be established with reasonable (allegedly acted as Estores’ agent)
certainty. 8. In Answer, Estores said they were willing to pay the principal amount but
o Accordingly, where the demand is established with reasonable certainty, the without the interest as it was not agreed upon
interest shall begin to run from the time the claim is made judicially or a. That since the Conditional Deed of Sale provided only for the
extrajudicially (Art. 1169, Civil Code) return of the downpayment in case of breach, they cant be liable
o When such certainty cannot be so reasonably established at the time the for legal interest as well
demand is made, the interest shall begin to run only from the date the 9. RTC ruled saying that the Spouses are entitled to the interest but only at
judgment of the court is made (at which time the quantification of damages 6% per annum and also entitled to atty’s fees
may be deemed to have been reasonably ascertained). The actual base for 10. On appeal, CA said that the issue to resolve is
the computation of legal interest shall, in any case, be on the amount finally a. whether it is proper to impose interest for an obligation that
adjudged. does not involve a loan or forbearance of money in the absence
c) When the judgment of the court awarding a sum of money becomes final of stipulation of the parties
and executory, the rate of legal interest, whether the case falls under 11. CA affirmed RTC
paragraph 1 or paragraph 2, above, shall be 12% per annum from such a. That interest should start on date of formal demand by Spouses
finality until its satisfaction, this interim period being deemed to be by then to return the money not when contract was executed as stated
an equivalent to a forbearance of credit. (amended to 6%) by the RTC
b. That Arias not be solidarily liable as he acted as agent only and
9. ESTORES V. SPOUSES SUPANGAN, (2012) did not expressly bind himself or exceeded his authority
12. Estores contends:
a. Not bound to pay interest because the deed only provided for

Facts: the return of the downpayment in case of failure to comply with

her obligations
1. In Oct. 1993, Hermojina Estores and Spouses Supangan entered into a b. That atty fees not proper because both RTC and CA sustained
Conditional Deed of Sale where Estores offered to sell, and Spouses her contention that 12% interest was uncalled for so it showed
offered to buy a parcel of land in Cavite for P4.7M. that Spouses did not win
2. After almost 7 years and despite the payment of P3.5M by the Spouses, 13. Spouses contend:
Estores still failed to comply with her obligation to handle the peaceful
transfer of ownership as stated in 5 provisions in the contract.
 a. It is only fair that interest be imposed because Estores failed to
return the amount upon demand and used the money for her
benefit
b. Estores failed to relocate the house outside the perimeter of the
subject lot and complete the necessary documents
c. As to the fees, they claim that they were forced to litigate when
Estores unjustly held the amount
HELD:
YES. Interest may be imposed even in the absence of stipulation in the
contract.
Article 2210 of the Civil Code expressly provides that “[i]nterest may, in the
discretion of the court, be allowed upon damages awarded for breach of
contract.” In this case, there is no question that petitioner is legally obligated to
return the P3.5 million because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand. Petitioner enjoyed the use of the money
from the time it was given to her until now. Thus, she is already in default of her
obligation from the date of demand.
 Gen Rule: the applicable interest rate shall be computed in accordance
with the stipulation of the parties
 Exc: if no stipulation, applicable rate of interest shall be 12% per annum
o When obligation arises out of a loan or forbearance of money,
goods or credits
 In other cases, it shall be 6%
 In this case, no stipulation was made
 Contract involved in this case is not a loan but a Conditional Deed of
Sale.
o No question that the obligations were not met and the
return of money not made
 Even if transaction was a Conditional Deed of Sale, the stipulation
governing the return of the money can be considered as a
forbearance of money which requires 12% interest
Forbearance is defined as a “contractual obligation of lender or creditor to refrain
during a given period of time, from requiring the borrower or debtor to repay a loan
or debt then due and payable.” This definition describes a loan where a debtor is
given a period within which to pay a loan or debt. In such case, “forbearance of
money, goods or credits” will have no distinct definition from a loan. We believe
however, that the phrase “forbearance of money, goods or credits” is meant to have
a separate meaning from a loan, otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined in the Civil Code.
Forbearance of money, goods or credits should therefore refer to arrangements
other than loan agreements, where a person acquiesces to the temporary use of his
money, goods or credits pending happening of certain events or fulfillment of certain
conditions.
In this case, the respondent-spouses parted with their money even before the
conditions were fulfilled. They have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of the conditions. They were
deprived of the use of their money for the period pending fulfillment of the
conditions and when those conditions were breached, they are entitled not only to
the return of the principal amount paid, but also to compensation for the use of their
money. And the compensation for the use of their money, absent any stipulation,
should be the same rate of legal interest applicable to a loan since the use or
deprivation of funds is similar to a loan.
10. UNITED COCONUT PLANTERS BANK v. SAMUEL & BELUSO
Facts:
1. Petition for Review on Certiorari declaring void the interest
rate provided in the promissory notes executed by the
respondents Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut Planters Bank
(UCPB)
2. UCPB granted the spouses Beluso a Promissory Notes Line
under a Credit Agreement whereby the latter could avail
 from the former credit of up to a maximum amount of P1.2 7. Trial court declared in its judgment that:
Million pesos for a term ending on 30 April 1997. The a. the interest rate used by [UCPB] void
spouses Beluso constituted, other than their promissory b. the foreclosure and Sheriff’s Certificate of Sale void
notes, a real estate mortgage over parcels of land c. UCPB is ordered to return to [the spouses Beluso] the
in Roxas City, covered by Transfer Certificates of Title No. T- properties subject of the foreclosure
31539 and T-27828, as additional security for the d. UCPB to pay [the spouses Beluso] the amount
obligation. The Credit Agreement was subsequently of P50,000.00 by way of attorney’s fees
amended to increase the amount of the Promissory Notes e. UCPB to pay the costs of suit.
Line to a maximum of P2.35 Million pesos and to extend the f. Spouses Beluso] are hereby ordered to pay [UCPB] the
term thereof to 28 February 1998. sum of P1,560,308.00.
3. On 30 April 1997, the payment of the principal and interest 8. Court of Appeals affirmed Trial court's decision subject to the
of the latter two promissory notes were debited from the modification that defendant-appellant UCPB is not liable for
spouses Beluso’s account with UCPB; yet, a consolidated loan attorney’s fees or the costs of suit.
for P1.3 Million was again released to the spouses Beluso
under one promissory note with a due date of 28 February
1998. To completely avail themselves of the P2.35 Million ISSUES:
credit line extended to them by UCPB, the spouses Beluso
executed two more promissory notes for a total 1. Whether or not interest rate stipulated was void
of P350,000.00. However, the spouses Beluso alleged that the
Yes, stipulated interest rate is void because it contravenes on the principle
amounts covered by these last two promissory notes were
of mutuality of contracts and it violates the Truth in lending Act.
never released or credited to their account and, thus, claimed
that the principal indebtedness was only P2 Million.
4. The spouses Beluso, however, failed to make any payment of
the foregoing amounts. The provision stating that the interest shall be at the “rate indicative of
5. On 2 September 1998, UCPB demanded that the spouses DBD retail rate or as determined by the Branch Head” is indeed
Beluso pay their total obligation of P2,932,543.00 plus 25% dependent solely on the will of petitioner UCPB. Under such provision,
attorney’s fees, but the spouses Beluso failed to comply petitioner UCPB has two choices on what the interest rate shall be: (1) a
therewith. On 28 December 1998, UCPB foreclosed the rate indicative of the DBD retail rate; or (2) a rate as determined by the
properties mortgaged by the spouses Beluso to secure their Branch Head. As UCPB is given this choice, the rate should be
credit line, which, by that time, already ballooned categorically determinable in both choices. If either of these two choices
to P3,784,603.00. presents an opportunity for UCPB to fix the rate at will, the bank can
6. On 9 February 1999, the spouses Beluso filed a Petition for easily choose such an option, thus making the entire interest rate
Annulment, Accounting and Damages against UCPB with the provision violative of the principle of mutuality of contracts.
RTC of Makati City.
In addition, the promissory notes, the copies of which were presented to
the spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes which is required in TRuth in
Lending Act
No. The foreclosure proceedings are valid since there was a valid demand
made by UCPB upon the spouses Beluso. Despite being excessive, the
spouses Beluso are considered in default with respect to the proper
amount of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed. Consequently,
proceeds of the foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled.

2. Whether or not Spouses Beluso are subject to 12% interest and

compounding interest stipulations even if declared amount by UCPB 11. ADVOCATES FOR TRUTH IN LENDING, INC. AND OLAGUER V. BS-MB
was excessive.
FACTS:
Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim
that they are raising issues of transcendental importance to the public and so
Yes. Default commences upon judicial or extrajudicial demand. [26] The
they filed Petition for Certiorari under Rule 65 ROC seeking to declare that
excess amount in such a demand does not nullify the demand itself,
the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the
which is valid with respect to the proper amount. There being a valid
Central Bank Monetary Board (CB-MB) by virtue of R.A. No. 7653, has no
demand on the part of UCPB, albeit excessive, the spouses Beluso are
authority to continue enforcing Central Bank Circular No. 905, issued by the
considered in default with respect to the proper amount and, therefore,
CB-MB in 1982, which "suspended" the Usury Law of 1916 (Act No. 2655).
the interests and the penalties began to run at that point. As regards the
award of 12% legal interest in favor of petitioner, the RTC actually
R.A. No. 265, which created the Central Bank (CB) of the Philippines,
recognized that said legal interest should be imposed, thus: “There being
empowered the CB-MB to, among others, set the maximum interest rates
no valid stipulation as to interest, the legal rate of interest shall be
which banks may charge for all types of loans and other credit operations,
charged.”[27] It seems that the RTC inadvertently overlooked its non-
within limits prescribed by the Usury Law.
inclusion in its computation. It must likewise uphold the contract
stipulation providing the compounding of interest. The provisions in the
In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of
Credit Agreement and in the promissory notes providing for the
1982. Section 1 of the Circular, under its General Provisions, removed the
compounding of interest were neither nullified by the RTC or the Court of
ceilings on interest rates on loans or forbearance of any money, goods or
Appeals, nor assailed by the spouses Beluso in their petition with the
credits.
RTC. The compounding of interests has furthermore been declared by
this Court to be legal.
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653
establishing the Bangko Sentral ng Pilipinas (BSP) to replace the CB.

3. Whether or not foreclosure was void ISSUE/S:

1. Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, 1) Lifted interest ceiling.
which removed all interest ceilings and thus suspended Act No. 2655 as 2) Upheld the parties’ freedom of contract to agree freely on the rate of
regards usurious interest rates. NO interest.

2. Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB The BSP-MB has authority to enforce CB Circular No. 905
Circular No. 905. YES Under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe
the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low
priority such as consumer loans, as well as such loans made by pawnshops,
(Usury) finance companies and similar credit institutions. It even authorizes the BSP-
Relevant Laws:
MB to prescribe different maximum rate or rates for different types of
· Act No. 2655, or the Usury Law of 1916.
borrowings, including deposits and deposit substitutes, or loans of financial
· R.A. No. 265 - created the Central Bank (CB) of the Philippines on June 15,
intermediaries.
1948, empowered the CB-MB to, among others, set the maximum interest
Petitioners contend that, granting that the CB had power to "suspend" the
rates which banks may charge for all types of loans and other credit
Usury Law, the new BSP-MB did not retain this power of its predecessor, in
operations, within limits prescribed by the Usury Law.
view of Section 135 of R.A. No. 7653, which expressly repealed R.A. No. 265.
· P.D. No. 1684 – Amended the Usury Law was amended on March 17, 1980,
The petitioners point out that R.A. No. 7653 did not reenact a provision
giving the CB-MB authority to prescribe different maximum rates of interest
similar to Section 109 of R.A. No. 265.
which may be imposed for a loan or renewal thereof or the forbearance of
any money, goods or credits, provided that the changes are effected
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans
gradually and announced in advance.
extended by banks, whereas under Section 1-a of the Usury Law, as
· CB Circular No. 905, Series of 1982 – issued by the CB-MB, effective on
amended, the BSP-MB may prescribe the maximum rate or rates of interest
January 1, 1983. Section 1 of the Circular, under its General Provisions,
for all loans or renewals thereof or the forbearance of any money, goods or
removed the ceilings on interest rates on loans or forbearance of any money,
credits, including those for loans of low priority such as consumer loans, as
goods or credits.
well as such loans made by pawnshops, finance companies and similar credit
· RA 7653 – established BSP to replace CB. Repealed RA 265.
institutions. It even authorizes the BSP-MB to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit
CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but
substitutes, or loans of financial intermediaries. Act No. 2655, an earlier law, is
simply suspended the latter’s effectivity. By virtue of CB Circular No. 905, the
much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely
Usury Law has been rendered ineffective and legally non-existent in our
supplemented it as it concerns loans by banks and other financial institutions.
jurisdiction. Interest can now be charged as lender and borrower may agree
Had R.A. No. 7653 been intended to repeal Section 1-a of Act No. 2655, it
upon.
would have so stated in unequivocal terms.

Effect of PD 1684 and CB 905 suspending the effectivity of the Usury

Law
Further, the lifting of the ceilings for interest rates does not authorize 905, the Usury Law has been rendered ineffective;" and "Usury has been
stipulations charging excessive, unconscionable, and iniquitous interest. It is legally non-existent in our jurisdiction. Interest can now be charged as lender
settled that nothing in CB Circular No. 905 grants lenders a carte blanche and borrower may agree upon."
authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’
iniquitous or unconscionable interests have been invariably struck down for freedom of contract to agree freely on the rate of interest. It cited Article
being contrary to morals, if not against the law. 1306 of the New Civil Code, under which the contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.
The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous interest
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche
12. CARPO v. CHUA & DY NG
authority to raise interest rates to levels which will either enslave their
CARPO vs. CHUA & DY NG, GR. Nos. 150773 & 153599, September 30,
borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing
2005
iniquitous or unconscionable interests have been invariably struck down for
being (void) contrary to morals, if not against the law.
FACTS: Herein petitioner spouses David Carpo and Rechilda Carpo
contracted a loan from Eleanor Chua and Elma Dy Ng for a certain sum of
Nonetheless, the nullity of the stipulation of usurious interest does not affect
money payable within six (6) months with an interest rate of six percent (6%)
the lender’s right to recover the principal of a loan, nor affect the other terms
per month secured by a mortgaged of the spouses Carpo of their residential
thereof. Thus, in a usurious loan with mortgage, the right to foreclose the
house and lot. Petitioners failed to pay the loan upon demand.
mortgage subsists, and this right can be exercised by the creditor upon
Consequently, the real estate mortgage was extrajudicially foreclosed,
failure by the debtor to pay the debt due. The debt due is considered as
mortgaged property sold at a public auction, and the house and lot was
without the stipulated excessive interest, and a legal interest of 12% (now
awarded to respondents, who were the only bidders. Unable to exercise their
6%) per annum will be added in place of the excessive interest formerly
right of redemption by petitioners, a certificate of sale was issued in the
imposed.
name of respondents. However, petitioners continued to occupy the said
house and lot, thus respondents file a petition for writ of possession which
The CB-MB merely suspended the effectivity of the Usury Law when it issued
was granted by the Trial Court. Petitioners filed a complaint for annulment of
CB Circular No. 905.
real estate mortgage and the consequent foreclosure proceedings claiming
The power of the CB to effectively suspend the Usury Law pursuant to P.D.
that the rate of interest stipulated in the principal loan agreement is clearly
No. 1684 has long been recognized and upheld in many cases. As the Court
null and void for being excessive, iniquitous, unconscionable and exorbitant.
explained in the landmark case of Medel v. CA, citing several cases, CB
Consequently, they also argue that the nullity of the agreed interest rate
Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
affects the validity of the real estate mortgage.
simply suspended the latter’s effectivity;" that "a CB Circular cannot repeal a
law, [for] only a law can repeal another law;" that "by virtue of CB Circular No.
ISSUE: Whether or not the agreed rate of interest of 6% per month or 72%
per annum is so excessive, iniquitous, unconscionable and exorbitant that it
should have been declared null and void.

HELD: In a long line of cases, the Supreme Court has invalidated similar
stipulations on interest rates for being excessive, iniquitous, unconscionable
and exorbitant. Pursuant to the freedom of contract principle embodied in
Article 1306 of the Civil Code, contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or
public policy. In the ordinary course, the codal provision may be invoked to
annul the excessive stipulated interest. In the case at bar, the stipulated
interest rate is 6% per month, or 72% per annum. By the standards set by
jurisprudence, this stipulation is similarly invalid.