ACME SHOE, RUBBER & PLASTIC CORP.
v agreement covering the newly contracted debt is executed
COURT OF APPEALS
G.R. No. 103576 — August 22, 1996
FACTS: Herein petitoner, through its President, Chua Pac,
executed for and in behalf of the company, a chattel
mortgage in favor of private respondents Producers Bank of
the Philippines. It stood by way of security for petitioner’s
corporate loan of P3,000,000.00. The chattel mortgage had
in it the provision that: “...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 (...), 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 or notes
and/or accommodations were existing on the date thereof.
This mortgage shall also stand as security for said
obligations and any and all pther obligations of the
mortgagor to the mortgagre of whatever kind and nature,
whether such obligations have been contracted before,
during or after the constitution of this mortgage.”
The first loan was duly paid by petitioner corporation.
Subsequently in 1981, it obtained from respondent bank
additional financial accommodations totalling
P2,700,000.00. These borrowings were also duly paid on
due date.
In January 1984, the bank yet again extended to petitioner
corporation a loan of P1,000,000.00 covered by 4
promissory notes. Due to financial constraints, the loan was
not settled at maturity. Thus, respondent bank was
prompted to apply for an extrajudicial foreclosure of the
chattel mortgage – to which petitioner corporation
answered by way of an action for injunction, with damages
and a prayer for a writ of preliminary injunction.
Ultimately, the court dismissed the complaint and ordered
the foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations of the chattel
mortgage. The CA affirmed the lower court’s decision in all
respects.
ISSUE: WON a clause in a chattel mortgage that puports
to likewise extend its coverage to obligations yet to be
contracted or incurred is valid and effective.
HELD: NO.
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as
these future debts are accurately described, 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
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either by concluding a fresh chattel mortgage or by
amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. 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.
As per Section 5 of the Chattel Mortgage Law, one of the
requisites of a chattel mortgage 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, the fact however, that the
statute has provided that the parties to the contract must
execute an oath that: “...(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,” 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 fullyn paid. By virtue of Section
3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage
void or terminated.
NAVOA v. COURT OF APPEALS
G.R. No. 59255 — December 29, 1995
FACTS: Private respondent Teresita Domdoma gave
herein petitioner Olivia Navoa a loan. The first instance
was when Teresita gave Olivia a diamond ring valued at
15,000.00 which was secured by a PCIB check under the
condition that if the ring was not returned within 15 days
from August 15, 1977, the ring is considered sold. After 15
days, Teresita asked defendant Olivia if she could deposit
the check, but the latter told her to hold it for sometime
until she tells her to deposit the same. When deposited in
November, it was dishonored for lack of sufficient funds;
the same reason why Olivia was held liable for interest at
the rate of 1% per month, from the date of issue, until the
same is fully paid.
After this instance, there were other loans, totaling to 6
loans of various amounts that were extended by Teresita to
Olivia. These loans were secured by PCIB checks, which
were all dated to 1 month after the loan. All these checks
were not honored under the same reason as the first loan.
On 17 December 1977 private respondents filed with the
RTC of Manila an action against petitioners for collection
1
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 clause of action and that plaintiffs had no capacity
to sue.
The trial court dismissed the case and the motion to
reconsider the dismissal was denied. Private respondents
appealed to the Court of Appeals which modified the order
of dismissal “by returning the records of this case for trial
on the merits.
ISSUE: WON there is a cause of action in this case.
HELD: YES.
The Supreme Court held that:
“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
protecting some interest in property. It may be personal, as
when an individual becomes a surety or a guarantor; or a
property security, as when a 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 loss.
Security is something to answer for as a promissory note.
That is why a secured creditor is one who holds a security
from his debtor for payment of a debt. From the allegations
in the complaint there is no other fair inference 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 private respondents.
Petitioners failed to make good the checks on their due
dates for the payment of their obligations. Hence, private
respondents filed the action with the trial court precisely to
compel petitioners to pay their due and 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 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 existence of a cause of action on the part of the
latter against the former.
Quite obviously, the trial court erred in dismissing the case
on the ground of lack of cause of action.
PEOPLE vs. CONCEPCION
44 PHIL 126 (1992)
FACTS:
Venancio Concepcion, President of the Philippine National
Bank and a member of the Board thereof, gave an
authorization for an extension of credit in favor of "Puno y
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Concepcion, S. en C.” to the manager of the Aparri branch
of the Philippine National Bank. "Puno y Concepcion, S.
en C.", which was a co-partnership where Concepcion is a
partner. Subsequently, Concepcion was charged and found
guilty in the Court of First Instance of Cagayan with
violation of section 35 of Act No. 2747, which provides that
“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”.
Counsel for the defense argue that the documents of record
do not prove that authority to make a loan was given, but
only show the concession of a credit. They averred that the
granting of a credit to the co-partnership "Puno y
Concepcion, S. en C." by Venancio Concepcion, President
of the Philippine National Bank, is not a "loan" within the
meaning of section 35 of Act No. 2747.
The lower courts found Concepcion guilty of violating Act
No. 2747.
ISSUE:
Whether or not the granting of a credit of P300,000 to the
co-partnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, a
"loan" within the meaning of section 35 of Act No. 2747.
HELD:
The Supreme Court ruled in the affirmative. The "credit"
of an individual means his ability to borrow money by
virtue of the confidence or trust reposed by a lender that he
will pay what he may promise. A "loan" means the delivery
by one party and the receipt by the other party of a given
sum of money, upon an agreement, express or implied, to
repay the sum loaned, with or without interest. The
concession of a "credit" necessarily involves the granting of
"loans" up to the limit of the amount fixed in the "credit,"
The contention that the granting of a P300,000 credit to
the co-partnership is also unmeritorious. (1) In a discount,
interest is deducted in advance, while in a loan, interest is
taken at the expiration of a credit; (2) a discount is always
on double-name paper; a loan is generally on single-name
paper. Conceding, without deciding, that, as ruled by the
Insular Auditor, the law covers loans and not discounts, yet
the conclusion is inevitable that the demand notes signed by
the firm "Puno y Concepcion, S. en C." were not discount
paper but were mere evidences of indebtedness, because (1)
interest was not deducted from the face of the notes, but
was paid when the notes fell due; and (2) they were single-
name and not double-name paper.
Thus, SC affirmed the lower court’s decision declaring
Concepcion guilty of aforementioned violation.
REPUBLIC vs. PNB
GR No. L-16106 DECEMBER 30, 1961
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FACTS:
The Republic of the Philippines filed before the CFI of
Manila a complaint for escheat of certain unclaimed bank
deposits balances against several banks. It is alleged that the
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.
The First National City Bank of New York claims that
while some of the various savings deposits subject to escheat
are, properly speaking, not credits or deposits within the
contemplation of Act No. 3936. Hence, it prayed that said
items not to be included in the claim of plaintiff.
The court a quo rendered judgment holding that cashier’s
or manager’s checks and demand drafts come within the
purview of Act No. 3936. Consequently, a motion for
reconsideration was filed by defendant, to which the court a
quo changed its view.
ISSUE:
Whether or not demand drafts and telegraphic orders come
within the meaning of the term “credits” or “deposits”
HELD:
Under Sec. 1 of Act No. 3936, “unclaimed balances” that
are subject to escheat include credits or deposits of money,
bullion, security, 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 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.
Since it is admitted that the demand drafts herein involved
have not been presented either for acceptance or for
payment, the inevitable consequence is that the 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.
A ‘cashier’s check’, being merely a bill of exchange drawn
by a bank on itself, and accepted in advance by the act of
its issuance, is not subject to countermand by the payee
after indorsement, and has the same legal effects as a
certificate of deposit or a certified check.
A telegraphic payment, on the other hand, being a
transaction 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
transactions (9 CJS. 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.
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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.
FRANCISCO HERRERA vs. PETROPHIL
CORPORATION
G.R. No. L-48349 December 29, 1986
FACTS:
On December 5, 1969, the Herrera 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 to the conditions
that “The LESSEE shall pay the LESSOR a total of
P2,930.20 per month, payable yearly in advance within the
1st twenty days of each year and there should be an
advance payment of rentals for the first eight (8) years of the
contract based on P2,930.70 per month discounted at 12%
interest per annum before registration of lease.
Petrophil paid the advance rentals for the first 8 years,
subtracting the amount of P101,010.73, the amount it
computed as constituting the interest or discount for the
first 8 years, in the total sum of P180,288.47.
On August 20, 1970, Petrophil informed Herrera that there
had been a mistake in the computation of the interest, and
thereby reduced the amount to P98,828.03.
Herrera sued Petrophil for the sum of P98,828.03, with
interest, claiming this had been illegally deducted from him
in violation of the Usury Law.
Petrophil argued that the amount deducted was not
usurious interest but was given for paying the rentals in
advance for 8 years.
The trial court ruled in favor of Petrophil. On appeal,
Herrera insisted that such interest is violative of the Usury
Law, and that he had neither agreed to nor accepted
Petrophil’s computation of the total amount to be deducted
for the 8 years advance rentals.
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.
ISSUE:
Whether or not the contract between the parties of one of
loan or lease.
HELD: 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
3
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.
Moreover, 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. 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.
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."
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.
SAURA IMPORT and EXPORT CO., INC vs. DBP
G.R. No. L-24968 April 27, 1972
FACTS: In July 1953, Saura Inc. applied for an industrial
loan in the amount of P500,000.00 from the Rehabilitation
Finance Corp. (DBP) to finance for the construction of a
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jute mill factory and to pay the balance of the purchase
price of the machineries and equipments to be used therein
and as additional working capital.
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.
However, despite the formal execution of the loan
agreement and upon re-examination, RFC decided to
reduce the loan from P500,000.00 to P300,000.00.
On December 17, 1954, RFC passed another resolution
restoring the loan to the original amount of P500,000.00,
however subject to a certification from the Dept. of
Agriculture and Natural Resources as to the availability of
local raw materials to provide adequately for the
requirements of the factory.
Without having received the amount being loaned, and
sensing that it could not, in any way obtain the full amount
of loan, Saura then asked for the cancellation of the
mortgage which RFC also approved.
Nine years after the cancellation of the mortgage, Saura
sued RFC for damages alleging failure of RFC to comply
with its obligations 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 ruled in favor of the petitioner holding that
there was a perfected contract between the parties and that
the defendant was guilty of breach thereof.
ISSUE:
Whether or not there was a perfected contract between the
parties?
HELD:
There was indeed a perfected consensual contract, as
recognized in Article 1934 of the Civil Code, which
provides, “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 perfected until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case:
the application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But
this fact alone falls short of resolving the second issue and
the basic claim that the defendant failed to fulfill its
obligation and the plaintiff is therefore entitled to recover
damages.
4

The action thus taken by both parties—Saura's request for
cancellation and RFC's subsequent approval of such
cancellation—was in the nature of mutual desistance —
what Manresa terms "mutuo disenso"— which is a mode of
extinguishing obligations. It is a concept derived from the
principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its
extinguishment. In view of such extinguishment, said
perfected consensual contract to deliver did not constitute a
real contract of loan.
BONNEVIE vs. CA
GR No. L-49101 OCTOBER 24, 1983
FACTS:
On Dec. 6, 1966, the spouses Lozano secured their loan of
75k from PBC by mortgaging their property. 2 days after,
they executed a Deed of Sale with Mortgage to Honesto
Bonnevie where 75k is payable to PBC and 25k is payable
to them. For 4 months (April-July 1968), Bonnevie paid a
total of 18,944 to PBC; although on May 4, 1968 he
assigned all his rights under the Deed of Sale with
Mortgage to his brother, intervenor Raoul Bonnevie. PBC,
then, applied for the foreclosure of the mortgage, and
notice of sale was published in the Luzon Weekly Courier.
An auction was conducted and the property was sold to the
bank; and the offers to repurchase the property failed.
On 1971, Honesto Bonnevie filed in the CFI of Rizal
against Philippine Bank of Commerce for the annulment of
the Deed of Mortgage dated December 6, 1966 as well as
the extrajudicial foreclosure made on September 4, 1968.
The CFI dismissed the complaint with costs against the
Bonnevies which was affirmed by the CA.
ISSUE:
Whether or not there was a perfected contract of loan
HELD:
Yes. 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 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
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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 hound 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 mortgage 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.
CENTRAL BANK vs. CA
GR No. L-45710 OCTOBER 3, 1985
DOCTRINE:
The bank’s asking for advance interest for the loan is
improper considering that the total loan hasn’t been
released. A person can’t be charged interest for non-existing
debt. The alleged discovery by the bank of overvaluation of
the loan collateral is not an issue. Since Island Savings Bank
failed to furnish the P63,000.00 balance of the P80,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino
became unenforceable to such extent.
FACTS:
The 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. The loan called for a lump sum of P80,000,
repayable in semi-annual installments for 3 yrs, with 12%
annual interest. After the agreement, a mere P17K partial
release of the loan was made by the bank and Tolentino
and his wife signed a promissory note for the P17,000 at
12% annual interest payable w/in 3 yrs. An advance
interest was deducted fr the partial release but this
prededucted interest was refunded to Tolentino after being
informed that there was no fund yet for the release of the
P63K balance.
The Monetary Board of Central Bank, after finding that
bank was suffering liquidity problems, prohibited the bank
fr making new loans and investments. And after the bank
failed to restore its solvency, the Central Bank prohibited
Island Savings Bank from doing business in the Philippines.
The Island Savings Bank in view of the non-payment of the
P17K filed an application for foreclosure of the real estate
mortgage. Tolentino filed petition for specific performance
or rescission and damages with preliminary injunction,
5
alleging that since the bank failed to deliver P63K, he is
entitled to specific performance and if not, to rescind the
real estate mortgage.
ISSUES:
1) Whether or not Tolentino’s can collect from the bank for
damages
2) Whether or not the mortgagor is liable to pay the
amount covered by the promissory note
3) Whether or not the real estate mortgage can be
foreclosed
HELD:
1) Whether or not Tolentino’s can collect from the bank for
damages
The loan agreement implied reciprocal obligations. When
one party is willing and ready to perform, the other party
not ready nor willing incurs in delay. When Tolentino
executed real estate mortgage, he signified willingness to
pay. That time, the bank’s obligation to furnish the P80K
loan accrued. Now, the Central Bank resolution made it
impossible for the bank to furnish the P63K balance. The
prohibition on the bank to make new loans is irrelevant bec
it did not prohibit the bank fr releasing the balance of loans
previously contracted. Insolvency of debtor is not an excuse
for non-fulfillment of obligation but is a breach of contract.
The bank’s asking for advance interest for the loan is
improper considering that the total loan hasn’t been
released. A person can’t be charged interest for non-existing
debt. The alleged discovery by the bank of overvaluation of
the loan collateral is not an issue. The bank officials should
have been more responsible and the bank bears risk in case
the collateral turned out to be overvalued. Furthermore,
this was not raised in the pleadings so this issue can’t be
raised. The bank was in default and Tolentino may choose
bet specific performance or rescission w/ damages in either
case. But considering that the bank is now prohibited from
doing business, specific performance cannot be granted.
Rescission is the only remedy left, but the rescission shld
only be for the P63K balance.
2) Whether or not the mortgagor is liable to pay the
amount covered by the promissory note
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
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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.
3) Whether or not the real estate mortgage can be
foreclosed
Since Island Savings Bank failed to furnish the P63,000.00
balance of the P80,000.00 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.
REPUBLIC VS BAGTAS
G.R. No. L-17474 October 25, 1962
FACTS
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 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
6
P199.62, both with interests, and costs; and that other just
and equitable relief be granted in (civil No. 12818).
ISSUE
W/O the respondent is liable for the lost bull
HELD
And even if the 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.
MINA VS PASCUAL
G.R. No. L-8321 October 14, 1913
FACTS
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, 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
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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.
ISSUE
W/O the agreement was a commodatum
HELD
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).
7
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.
SPOUSES ABELLA V. SPOUSES ABELLA
GR No. 195166, July 8, 2015
FACTS: On July 31, 2002, petitioners Spouses Salvador
and Alma Abella filed a Complaint 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.
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.
In their Answer (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.
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 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
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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.
ISSUE: Whether or not the contract entered into was one
of mutuum (simple loan) or commodatum.
HELD: Respondents entered into a simple loan or
mutuum, rather than a joint venture, with petitioners.
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.
On March 22, 1999, respondents executed an
acknowledgment receipt to petitioners, which states:
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of Five
Hundred Thousand (P500,000.00) Pesos from Mrs. Alma
R. Abella, payable within one (1) year from date hereof
with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33
8
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.
CATHOLIC VICAR APOSTOLIC v. CA
GR No. 80294-95, September 21, 1988
FACTS: The documents and records presented reveal that
the whole controversy started when the defendant Catholic
Vicar Apostolic of the Mountain Province (VICAR for
brevity) filed with the Court of First Instance of Baguio
Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357,
situated at Poblacion Central, La Trinidad, Benguet,
docketed as LRC N-91, said Lots being the sites of the
Catholic Church building, convents, high school building,
school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan
Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively,
asserting ownership and title thereto. After trial on the
merits, the land registration court promulgated its Decision,
dated November 17, 1965, confirming the registrable title
of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case
No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in
the herein Civil Case No. 3607) appealed the decision of
the land registration court to the then Court of Appeals,
docketed as CA-G.R. No. 38830-R. The Court of Appeals
rendered its decision, dated May 9, 1977, reversing the
decision of the land registration court and dismissing the
VICAR's application as to Lots 2 and 3, the lots claimed by
the two sets of oppositors in the land registration case (and
two sets of plaintiffs in the two cases now at bar), the first lot
being presently occupied by the convent and the second by
the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for
reconsideration praying the Court of Appeals to order the
registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez
and Pacita Valdez filed their motion for reconsideration
praying that both Lots 2 and 3 be ordered registered in the
names of the Heirs of Juan Valdez and Pacita Valdez. On
August 12,1977, the Court of Appeals denied the motion
for reconsideration filed by the Heirs of Juan Valdez on the
ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise
denied that of the Heirs of Egmidio Octaviano.
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Thereupon, the VICAR filed with the Supreme Court a
petition for review on certiorari of the decision of the Court
of Appeals dismissing his (its) application for registration of
Lots 2 and 3, docketed as G.R. No. L-46832, entitled
'Catholic Vicar Apostolic of the Mountain Province vs.
Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for
reconsideration the Heirs of Juan Valdez and Pacita
Valdez, on September 8, 1977, filed with the Supreme
Court a petition for review, docketed as G.R. No. L-46872,
entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court
of Appeals, Vicar, Heirs of Egmidio Octaviano and
Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a
minute resolution both petitions (of VICAR on the one
hand and the Heirs of Juan Valdez and Pacita Valdez on
the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and G.R.
No. L- 46872, the Heirs of Octaviano filed with the then
Court of First Instance of Baguio, Branch II, a Motion For
Execution of Judgment praying that the Heirs of Octaviano
be placed in possession of Lot 3. The Court, presided over
by Hon. Salvador J. Valdez, on December 7, 1978, denied
the motion on the ground that the Court of Appeals
decision in CA-G.R. No. 38870 did not grant the Heirs of
Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the
Court of Appeals a petitioner for certiorari and mandamus,
docketed as CA-G.R. No. 08890-R, entitled Heirs of
Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and
Vicar. In its decision dated May 16, 1979, the Court of
Appeals dismissed the petition.
ISSUE : WON the petitioner acquired the property in
question through prescription.
HELD : NO. The bailees' failure to return the subject
matter of commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee held in
trust the property subject matter of commodatum. The
adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into
title by way of ordinary acquisitive prescription because of
the absence of just title.
The Court of Appeals found that the predecessors-in-
interest and private respondents were possessors under
claim of ownership in good faith from 1906; that petitioner
Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.
9
Ordinary acquisitive prescription requires possession for ten
years, but always with just title. Extraordinary acquisitive
prescription requires 30 years.
QUINTOS VS BECK
G.R. No. L-46240, November 3, 1939
IMPERIAL, J:
Facts:
The case stems from the judgement of the Court of first
instance which ordered the defendant to return the three
gas heaters and four eclectic lamps found in the possession
of the sheriff, that she call for the return of the other
furniture from the said sheriff at her own expense, and that
the fees which the sheriff may charge for the deposit of the
furniture be paid pro rate by both parties, without
pronouncements as to costs.
The defendant was a tenant of the plaintiff and occupied
the latter’s house in M.H. del Pilar street, No. 1175. After
the novation of the contract of lease between the plaintiff
and the defendant, the former gratuitously granted to the
defendant the use of the furniture, subject to the condition
that the defendant would return them to the plaintiff upon
his demands. The property was later sold to Maria and
Rosario Lopez, and the defendant was notified of the
conveyance giving him 60 days to vacate the property. The
plaintiff required the return of the furniture to the house
they were found. The defendant, through another person,
on November 5, 1936, wrote that she may call for the
furniture in the ground floor of the house, and two days
later sent another letter informing her that the defendant
could not give up the three gas heaters and four electric
lamps because he would need them until the 15th of the
same month when the lease was due to expire. The plaintiff
refused to get the furniture in view of the fact that the
defendant declined to make delivery of all of them. All the
furniture were later deposited by the defendant to the
custody of the sheriff.
Issue:
1. Whether or not the defendant complied with his
obligation to return the furniture upon the plaintiff’s
demands
2. Whether or not the plaintiff is bound to bear the deposit
fees thereof.
Held:
1. No. The contract entered into is one of commadatum, as
the plaintiff gratuitously granted the use of the furniture to
the defendant and reserving for herself the ownership
thereof, and binding the defendant to return the furniture
to her upon her demands. 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
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defendant did not comply when he merely placed them at
the disposal of the plaintiff, retaining for his benefit the
three gas heaters and the four electric lamps.
2. No. As the defendant had voluntarily undertaken to the
return all the furniture to the plaintiff upon her demand,
the court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture. The defendant
was not entitled to place the furniture in deposit, nor was
the plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain some of
the subject furniture deposited her demand.
The costs should be borne by the defendant as he was the
one who breached the contract of commadatum, and
without any reason he refused to return and deliver all the
furniture upon the plaintiff’s demand.
CEBU INTERNATIONAL FINANCE
CORPORATION VS COURT OF APPEALS
G.R. No. 123031, October 12, 1999
QUISUMBING, J:
Facts:
The petitioner is a quasi-banking institution. The private
respondents invested with the petitioner 500,000.00 In
cash. The petitioner issued a promissory note to mature on
May 27, 1991. The note for 516, 238.67 pesos covered
private respondents’ placement plus twenty and a half
percent (20.5 %) for 32 days. On the day of maturity the
CIFC issued a check for 514,390.94 in favor of the private
respondents as proceeds of his matured investment plus
interest. The check was drawn from the petitioner’s
account, maintained with BPI main branch in Makati. On
June of the same year, the private respondents’ wife
deposited the check with RCBC, in Palawan but BPI
dishonored the check with annotation that it was subject of
an investigation. BPI took custody of the check pending an
investigation of several counterfeit checks drawn against
CIFC. The private respondents immediately notified CIFC
of the dishonored check and demanded on several
occasions for payment. CIFC refused and instructed for
them to wait for the bank’s ongoing reconciliation with
BPI. The private respondent through counsel made a
formal demand for the payment, but the CICF made an
impossible demand that the original check must be first
surrendered.
The private respondents filed an action for recovery of a
sum of money against the petitioner with the RTC of
Makati. CIFC on the other hand sought to recover its lost
funds and formally filed against BPI an action for recovery
of sum of money. Allegedly, BPI unlawfully deducted from
CICF’s checking account, counterfeit checks amounting to
1,7724,364.58 pesos. The action included the prayer to
collect the amount of the subject check.
10
In reply to the action filed by the private respondents, the
petitioner filed a motion for leave to file a third-party
complaint against BPI to enforce a right for contribution
and indemnity with respect to the private respondent’s
claim. They maintain that the subject check was genuine
and valid. However, BPI moved for the dismissal of the
third party complaint on the pendency of the action for
recovery of sum of money filed by CICF which was
granted. BPI testified that the bank indeed dishonoured the
subject check and encashed and deducted the amount from
the account of CIFC but the proceeds remained in their
custody. The bank moved in accordance with its
compromise agreement with CIFC which provided among
others that, the defendant shall debit the sum of 514,390.94
from the aforementioned current account representing
payment of BPI check no 513397 payable to Vincent
Alegre. Also, in case the plaintiff is adjudge liable to
Vicente Alegre in Civil case no 92-515 arising from the
dishonour of the check, the plaintiff cannot go after the
defendant: otherwise the defendant shall not be liable to the
plaintiff.
BPI later filed a separate collection suit against Vicente
Alegre, alleging that Alegre connived with Lina A. Pena
and Lita A. Anda and forged several checks of BPI’s client
CIFC. The total amount of the counterfeit checks was
1,724,364.58 pesos. BPI admitted that the check payable to
Alegre was deducted from BPI’s claim, hence the balance
of the loss incurred by BPI was 914,198.57, plus costs of
suit for 20,000.00.
In the case for collection of sum of money against CIFC
was rendered in favour of Vicente Algre. CIFC appealed
the decision but the respondent court merely affirmed the
decision.
Issue:
Whether or not the subjects check (BPI check no. 513397)
was validly discharged.
Held:
No. Article 1249 deals with a mode of extinction of an
obligation, which provides that: “The payment of debt 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 to
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.”
The aforementioned provision applies in this case, as held
by the court in Perez vs CA a money market is a market
dealing in standardized short-term credit instruments were
lenders and borrowers do not deal directly with each other
but through a middleman or dealer in the open market. In
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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
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
Philippine Airlines Inc. vs Court of Appeals, the court held
that, since a negotiable instrument is only a substituted for
money and not money, the delivery of such an instrument
does not, by itself, operate as payment. A 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 judgement. The obligation
is not extinguished and remains suspended until the
payment by commercial document is actually realized.
Thus, when the bank deducted the amount of the check
from CIFC’s current account, this did not ipso facto
operate as a discharge or payment of the instrument.
Although the check was deducted from the funds of CIFC it
was not delivered to the payee but instead BPI offset the
amount against losses it incurred from forgeries of CIFC
checks allegedly committed by Alegre. The confiscation of
the value was agreed by the petitioner and BPI by virtue of
a compromise agreement. However, a compromise
agreement is not binding to the party who did not sign the
agreement nor avail of its benefits. Therefore, the
compromise agreement in unenforceable against the
private respondent who is not a party thereto. His money
could not be the subject of the agreement between BPI and
CIFC. BPI’s confiscation of Alegre’s money constitutes
garnishment without the parties going through a valid
proceeding in court. In effected CIFC has yet tendered a
valid payment of its obligation to the private respondent.
SEVERINO TOLENTINO and POTENCIANA
MANIO v. BENITO GONZALES
G.R. No. 26085
August 12, 1927
Facts:
Sometime prior to the november 28, 1922, the appellants
purchased of the Luzon Rice Mills, Inc., a piece or parcel
of land situated in Tarlac for the price of P25,000,
promising to pay therefor in three installments. The first
installment of P2,000 was due on or before may 2, 1921;
the second installment of P8,000 was due on or before May
31, 1921; the balance of P15,000 at 12 per cent interest was
due and payable on or about the 30th day of November,
1922.
One of the conditions of that contract of purchase was that
on failure of the purchaser (plaintiffs and appellants) to pay
11
the balance of said purchase price or any of the installments
on the date agreed upon, the property bought would revert
to the original owner.
The payments due on the 2nd and 31st of May, 1921,
amounting to P10,000 were paid. On the date when the
balance of P15,000 with interest was paid, the vendor
issued to the purchasers transfer certificate of title to said
property, No. 528.
Sometime in November, 1922 the representative of the
vendor of the property in question wrote a letter to the
appellant Potenciana Manio 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.
Upon said contract of purchase on the 30th day of
November, 1922, the sum P16,965.09 was due.
Upon receiving the letter of the vendor of said property of
November 7, 1922, the purchasers, realizing that they
would be unable to pay the balance due, began to make an
effort to borrow money with which to pay the same.
So an application was made to the defendant for a loan for
the purpose of satisfying their indebtedness to the vendor of
said property. The defendants agreed to loan to the
plaintiffs the sum of P17,500 upon condition that the
plaintiffs execute and deliver to him a pacto de retro of said
property.
ISSUE:
1) is the contract in question a pacto de retro or a
mortgage?
2)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?
HELD: It is a pacto de retro and not a mortgage. Language
cannot be clearer. The purpose of the contract is for the
plaintiff to sell the property in question with a right to
repurchase.
In the case, the contract of pacto de retro is an absolute sale
of the property with the right to repurchase and not a
mortgage; and that by virtue of the said contract the vendor
became the tenant of the purchaser, under the conditions
mentioned in the contract.
It has been the uniform theory of this court that to declare
a contract of pacto de retro to be a mortgage and not a sale
there must be something, in the language of the contract or
in the conduct of the parties which shows clearly and
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beyond doubt that they intended the contract to be a
"mortgage" and not a pacto de retro.
Indeed, pacto de retro are not favored and courts will not
construe an instrument to one of sale with pacto de retro.
however, plaintiffs have shown no circumstance whatever
which would justify us in construing said contract to be a
mere "loan" with guaranty.
Thus, Gonzalez is the owner of the land and Tolentino is
only holding it as a tenant by virtue of a contract of lease.
2)No. Usury, 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 collection of a rate of interest higher than that allowed
by law is condemned by the Philippine Legislature. Act No.
2655 is "An Act fixing rates of interest upon 'loans' and
declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a
"loan" or forbearance of any money, goods, chattels or
credits, etc. The central idea of said statute is to prohibit a
rate of interest on "loans."
A contract of "loan," is very different contract from that of
"rent". A "loan," as that term is used in the statute, signifies
the giving of a sum of money, goods or credits to another,
with a promise to repay, but not a promise to return the
same thing. To "loan," in general parlance, is to deliver to
another for temporary use, on condition that the thing or
its equivalent be returned.
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.
On the other hand, in acontract 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. The thing still remains the property of the lessor.
In the case of a contract of "rent," under the civil law, it is
called a "commodatum."
The contract was not a loan as used in Act No. 2655.
12

COLINARES V. CA
Gr no: 90828, September 5, 2000
Facts:
In 1979 Melvin Colinares and Lordino Veloso, petitioners,
were contracted for a consideration of P40,000 by the
Carmelite Sisters of Cagayan de Oro City to renovate the
latters convent at Camaman-an, Cagayan de Oro City.
Petitioners obtained materials from CM Builders Centre for
the construction of the project. Petitioners applied for a
commercial letter of credit with the Philippine Banking
Corporation, Cagayan de Oro City branch (hereafter PBC)
in favor of CM Builders Centre. PBC approved the letter of
credit for P22,389.80 to cover the full invoice value of the
goods. Petitioners signed a pro-forma trust receipt as
security. The loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners
marginal deposit as partial payment of the loan. PBC
repeatedly demanded from petitioners that the amount be
paid but petitioners only requested for grace period and
modification of the terms of the loan.
Petitioners were charged with the violation of P.D. No. 115
(Trust Receipts Law) in relation to Article 315 of the
Revised Penal Code in an Information with Regional Trial
Court of Cagayan de Oro City.
Petitioners assert that it was an ordinary loan, not a trust
receipt agreement under the Trust Receipts Law.
Issue: won there was a simple loan.
Held: yes. A thorough examination of the facts obtaining
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.
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
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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.
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.
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.
REPUBLIC VS. GRIJALDO
G.R. No. L-20240. December 31, 1965
FACTS:
Grijaldo obtained 5 loans from Bank of Taiwan in Bacolod
City which are evidenced by five promissory notes. To
secure the payment of the loans the appellant executed a
chattel mortgage on the standing crops on his land in
Negros Occidental. The assets in the Philippines of the
Bank of Taiwan, Ltd. were vested in the Government of the
United States by virtue of enemy act, and were
subsequently transferred to the Republic of the Philippines.
Petitioner made a written extra-judicial demand upon the
appellant for the payment of the account in question, but
the latter failed. Grijaldo died, his heirs contends that
Republic has no cause of action, and if there is any, it has
prescribed.
ISSUE:
A. Whether or not Republic has cause of action to demand
payment of credit of Grijaldo.
B. Is the obligation of B to pay the loan extinguished? (nasa
book ni De Leon)
RULING:
A.
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,
the successive transfers 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 interests in said loans,
thereby creating a privity of contract between the appellee
and the appellant.
B.
The appellant contention that because the loans were
secured by a chattel mortgage on the standing crops on a
13
land owned by him and those crops were lost or destroyed
through enemy action his obligation to pay the loans was
thereby extinguished, is untenable. 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."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.
SONCUYA vs. AZARRAGA
GR No. 43579 JUNE 14, 1938
FACTS:
Plaintiff has four causes of action. First, 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, 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.
Second, 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.Third, 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. And fourth, 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 codefendants
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 to their personal circumstances. They, in
turn, alleged 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
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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 ling 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.
ISSUE:
Whether or not 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.
RULING:
When plaintiff extended the time within which defendants
A, in general, and J. A., in particular, could pay his credits
against them, subject to the condition that they pay him
interest at 12 per cent per annum, and thereafter granting
them another extension of time under the same conditions
as to interest, what perhaps could have been considered as
an antichresis or p a c t o c o mis o rio as to the former (not
an assignment in payment of a debt, or a sale with a right of
repurchase, because there is nothing in the document to
indicate that such was the intention of the defendants A, or,
at least, that they bound themselves to deliver the land in
question to the plaintiff, the latter to pay them the value
thereof, and because there was what may be considered as
the resolutory condition of five years), and what may be
considered as a sale with the right of repurchase in the case
of J. A., were converted into simple loans by the decisive
circumstance that the plaintiff chose to collect thereafter,
and the defendants 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
14
and M, and plaintiff desired to have it novated for the third
time by means of Exhibit 2. It does not appear of record,
however, that the defendants A ever assented to the latter
novation. Perhaps their refusal to agree ,to the same was
due to the fact that plaintiff wanted to raise their old
obligation (P3,000 or P2,700 of all the brothers, plus
P4,000 which J. A. alone owed, which two accounts both
plaintiff and defendants considered as amounting to
P7,000, exclusive of the annual interest of 12 per cent) to a
round sum of P12,000. From all this it may easily be
inferred that the obligation which defendants had imposed
upon themselves by means of 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 by
reason of the failure to inscribe in the registry of property
either Exhibit A or the deed of assignment Exhibit C,
executed by L. A. in favor of the plaintiff.
STATE INVESTMENT v. CA
G.R. No. 90676; June 19, 1991
FACTS:
Respondent spouses Rafael and Refugio Aquino pledged
certain shares of stock to Petitioner State Investment in
order to secure a loan of P120,000 (Account 2). Prior to
such pledge, as an accommodation to and together with
spouses Jose and Marcelina Aquino, respondent spouses
signed an agreement (Account 1) with petitioner State for
the former's purchase of receivables. When Account 2
became due, respondent spouses paid the same partly with
their own funds and partly from the proceeds of another
loan (Account 3) obtained also from the petitioner which
was secured by the same pledge agreement in Account 2.
When Account 3 matured, respondents expressed
willingness to pay but requested that the shares of stock
pledged be released. Petitioner denied on the ground that
the loan it had extended in Account 1 had remained
unpaid.
A foreclosure sale of the shares of stock pledged to the State
was to be conducted. Respondents filed a case alleging that
the intended foreclosure sale was illegal because from the
time Account 3 became due, they had been able and willing
to pay the same but petitioner had insisted that they pay
Account 1 which had not been secured by their pledge.
And that their failure to pay Account 3 was excused
because the petitioner State itself had prevented the
satisfaction of the obligation.
RTC Judge Fortun ordered judgment ordering State to
immediately release the pledge. CA affirmed holding that
the loan Account 1, having been executing prior to the
pledge was not covered by the pledge which secured only
loans executed subsequently. Thus, upon payment of the
loan under Account 3, the shares of stock should be
released.
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During execution of the judgment, petitioner State
investment contends that respondents should also pay
interest while respondents argue that they should not. Judge
Fortun's decision was clarified by Judge Tirona in that the
shares of stock be released upon payment of the loan under
Account 3 without interest, penalties and other charges.
ISSUE:
WON respondents are liable for payment of interest even if
not in default?
HELD:
The promissory note in Account 3 had three components:
(1) the principal loan P110,000
(2) regular interest of 17% per annum
(3) additional or penalty interest in case of non-payment at
maturity of 24% per annum
Judge Fortun did not specify which of these components of
the loan he was ordering respondent spouses to pay.
The Court held that respondent spouses Aquino were held
not to have been in delay, and that they were properly
liable only for: (a) the principal loan and (b) the regular or
monetary interest.
The fact that the respondent spouses Aquino 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 24% per annum but
also of regular or monetary interest of 17% per annum.
The regular or monetary interest continued to accrue
under the terms of the relevant promissory note until
actualy 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. Tender of
payment must be accompanied or followed by consignation
in order that the effects of payment may be produced.
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 maturity. It follows that their
obligation to pay principal-cum-regular or monetary
interest under the terms and conditions was not
extinguished by such tender of payment alone.
OSMENA-JALANDONI v. ENCOMIENDA
G.R. No. 205578; March 1, 2017
FACTS:
Jalandoni and Encomienda became close friends after their
encounter in Cebu buying real property. Jalandoni asked if
she could borrow money from Encomienda for the search
15
and rescue operation of her children in Manila who were
allegedly taken by their father. While in Manila, Jalandoni
borrowed again money for several errands as well as in
other occasions. In total, Encomienda spent around P3.2M
and $6.6k for Jalandoni.
When Jalandoni returned to Cebu, she never informed
Encomienda. Encomienda gave Jalandoni 6 weeks to settle
her debts but despite several demands, no payment was
made. Jalandoni insisted that the amounts given were not
in the form of loans. Even appearing before the Barangay
for concilation, no settlement was reached but a member of
the Lupong Tagapamayapa attested that Jalanoni admitted
having borrowed the money and that she would return it.
However, Jalandoni did not.
Jalandoni claimed that there was never a discussion or even
just an allusion about a loan; that when asked about when
Encomienda deposits money to Jalandoni's bank account,
Encomienda would tell her that she just wanted to extend
some help and that it was not a loan.
RTC dismissed Encomienda's complaint but the CA
reversed the RTC decision, ordering Jalandoni to pay.
ISSUE:
WON Encomienda is entitled to be reimbursed for the
amounts she defrayed for Jalandoni
HELD:
The RTC harped on the fact that if Encomienda really
intended the amounts to be a loan, normal human behavior
would have prompted at least a handwritten
acknowledgement or a promissory note the moment she
parted with her money for the purpose of granting a loan.
This would be particularly true if the loan obtained was
part of a business dealing and not one extended to a close
friend who suddenly needed and not one extended to a
close friend who suddenly needed monetary aid. In fact, in
case of loans between friends and relatives, the absence of
acknowledgement receipts or promissory notes is more
natural and real. Contracts are binding between the parties,
whether oral or written. The law is explicit that contracts
shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their
validity are present. A simple loan or mutuum exists when a
person receives a loan of money or any other fungible thing
and acquires its ownership. He is bound to pay to the
creditor the equal amount of the same kind and quality.
Jalandoni posits that Encomienda's acts were "unselfish
display of Christian help" which is not inconsistent with the
existence of a loan. Encomienda immediatly offered a
helping hand when her friend asked for it. But this does not
mean that she had already waived her right to collect in the
future. Inded, when Encomienda felt that Jalandoni was
beginning to avoid her, that was when she realized that she
had to protect her right to demand payment. The fact that
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Encomienda kept the receipts even for the smallest amounts
she had advanced, repeatedly sent demand letters, and
immediatlely filed the instant case when Jalandoni
stubbornly refused to heed her demands sufficiently
disaproves the latter's belief that all the sums of money she
received were merely given out of charity.
The CA is then correct when it ruled that allowing
Jalandoni to keep the amounts from Encomienda will
certainly cause an unjust enrichment on Jalandoni's part
and to Encomienda's damage and prejudice.
SPOUSES SY v. WESTMONT BANK (Now: United
Overseas Bank Philippines)
G.R. No. 201074 — October 19, 2016
FACTS: Respondent bank alleged that herein petitioner
spouses, doing business under the trade name of
Moondrops, obtained a loan evidenced by a promissory
note. Barely a month after, petitoners obtained another
loan from respondent bank. Disclosure Statements of
Loan/Credit Transactions were signed by the parties.
Earlier, a Continuinh Suretyship Agreement was executed
between Westmont and petitioners for the purpose of
securing amy future indebtedness of Moondrops. Westmont
averred that petitioners defaulted in the payment of their
loan obligations. It sent a Demand Letter to petitioners but
it was unheaded. Hence, Westmont filed the subject
complaint.
In their answer, petitioners argue that Lao, the bank
manager, after requiring them to sign blank forms of
promissory notes and disclosure staements, informed them
that their application for the loan waa disapproved. But
Lao, nevertheless, offered to help them secure a loan
through one Amado Chua. The petitoners accepted the
offer and was successful in securing a loan from Chua.
They claimed that they paid Chua the total amount of their
loans. Petitoners insisted that their loan applications from
Westmont were denied and it was Chia who lent them the
money. Thus, they contend that Westmont could not
demand the payment of the said loans.
During the 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. Westmont, however,
never offered such loan manifold in evidence. On the other
hand, petitioners presented a Cashier’s Check purchased
from Chua to prove that the said loan was obtained from
Chua, and no from Westmont.
ISSUE: WON the petitioners were able to obtain loans
from Westmont.
HELD: NO.
16
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. A
simple loan is a real contract and it shall not be perfected
until the delivery of the object of the contract.
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. 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. Due to the doubtful
circumstances surrounding the loan transactions, Westmont
cannot rely on the disputable presumptions that private
transactions have been fair and regular and that the
ordinary course of business has been followed. The
aforestated presumptions are disputable, meaning, they are
satisfactory if uncontradicted, but may be contradicted and
overcome by other evidence.
CASTELO V. COURT OF APPEALS
G.R. NO. 96372 MAY 22, 1995
FACTS: Herein petitioners entered into a contract
denominated as a “Deed of Conditional Sale” with private
respondent Dela Rosa involving a parcel of land located in
España Street, Sampaloc, Manila. The agreed price was at
P269,408.00. Upon signing the contract, Dela Rosa paid
petitioners P106,000.00, leaving a balance of P163,408.00.
The Conditional Sale also stipulated that: (1) The balance
of P163,408.00 to be paid on or before December 31, 1982
without interest and penalty charges; and (2) Should the
said balance [remain unpaid] by the VENDEE, the
VENDORS hereby agree to give the VENDEE a grace
period of SIX (6) months or up to June 30, 1983 to pay said
balance provided that interest at the rate of 12% per annum shall be
charged and 1% penalty charge a month shall be imposed on the
remaining diminishing balance. Dela Rosa, failed to pay the
remaining balance on or before June 30, 1983. Thus,
prompted petitioners to file an action for specific
performance with damages in the RTC of Manila against
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him.
The RTC, ordered the rescission of the Deed of
Conditional Sale. But the same was annulled and set aside
by the CA, which ordered the defendant “to comply with her
obligation under the conditional sale to pay the balance of the
conditional sale in the amount of P163,408.00, to pay interest and in
default thereof, the rescission thereof is the alternative.”
A writ of execution was issued upon motion of petitioners.
Accordingle, a Sheriff’s Notice to Pay Judgment was served
on private respondent Dela Rosa requiring her to pay
petitioner P197,723.68. Petitioners filed a motion for
reconsideration and a separate motion for alias writ of
execution contending that the sum of P197,723.68, based
on the Sheriff's own computation, was erroneous. They
argued that the obligation of private respondent was to pay
(a) interest at the rate of twelve percent (12%) per annum
plus ( b ) one percent (1%) penalty charge per month, from
default, i.e, from 1 January 1983.
ISSUE: WON the computation made by the Sheriff, as to
the application of interest, was erroneous.
HELD: YES. There is no question that private respondent
dela Rosa had failed to pay the balance of P163,408.00 on
or before 31 December 1982. The applicable law is to be
found in Article 2209 of the Civil Code. Under Article
2209, the appropriate measure for damages in case of delay
in discharging an obligation consisting of the payment of a
sum of money is the payment of penalty interest at the rate
agreed upon in the contract of the parties. In the absence of
a stipulation of a particular rate of penalty interest,
payment of additional interest at a rate equal to the regular
or monetary interest, becomes due and payable. Finally, if
no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist of
payment of legal interest which is six percent (6%) or, in the
case of loans or forbearances of money, twelve percent
(12%) per annum. Applying Article 2209 to the instant
case, we must refer to the "Deed of Conditional Sale"
which, as already noted, had specifically provided for
"interest at the rate of 12% per annum" and a "1% penalty
charge a month [to] be imposed on their remaining
diminishing balance."
It was observed by the SC that residual ambiguity infects
this particular potion of the stipulation on payment of
interest. The question is whether, during the period of 1
January 1983 up to 30 June 1983, 12% interest per annum
plus 1% penalty charge a month was payable "on the
remaining diminishing balance;" or whether during the
period from 1 January 1983 to 30 June 1983, only 12% per
annum interest was payable while the 1% per month
penalty charge would in addition begin to accrue on any
balance remaining unpaid as of 1 July 1983. It [SC]
believes that the contracting parties intended the latter view
17
of their stipulation on interest; for if the parties had
intended that during the grace period from 1 January 1983
to 30 June 1983, interest consisting of 12% per annum plus
another 12% per annum (equivalent to 1% per month), or
a total of 24% per annum, was payable, then they could
have simply said so. Instead, the parties distinguished
between interest at the rate of 12% per annum and the 1%
a month penalty charge.
NOTE: In case of ambiguity in contract language, that
interpretation which establishes a less onerous transmission
of rights or imposition of lesser burdens which permits
greater reciprocity is adopted. Furthermore, the phrase
“obligation consisting in the payment of a sum of money”
in Article 2209 is not confined to a loan or forbearance of
money. It may also refer to those under a contract of sale
(as in this case), action for damages for injury to persons
and loss of property, actions for damages arising from
unpaid insurance claims, etc.
LAW V. OLYMPIC SAWMILL CO., LEE CHI
G.R. NO. L-30771 MAY 28, 1984
FACTS: On or about September 7, 1957, plaintiff Liam
Law loaned P10,000.00, without interest, to defendants,
which became ultimately due on January 31, 1960, but was
not paid on that date, with debtors asking for an extension
of three months, or up to April 30, 1960. On March 17,
1960, the parties executed another loan document –
payment of the P10,000.00 extended to April 30, 1960, but
the obligation was increased by P6,000.00. The latter
amount was said to form part of the principal obligation to
answer for attorney’s fees, legal interest and other cost
incident thereto to be paid unto the creditor and his
successors in interest upon the termination of the
agreement.
Defendants again failed to pay their obligation by April 30,
1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00
principal obligation, but claimed that the additional
P6,000.00 constituted usurious interest. Considering both
parties’ Motion for Summary Judgment, the trial court
rendered a decision ordering defendants to pay plaintiff
“the amount of P10,000.00 plus the further sum of
P6,000.00 by way of liquidated damages, with legal rate of
interest on both amounts from April 30, 1960.
ISSUE: WON the P6,000.00 amount constituted usurious
interest.
HELD: NO. Defendants claim that the claim of usury
should have been deemed admitted by plaintiff as it was not
denied specifically and under oath. Section 9 of the Usury
Law (Act 2655) provides that: “The person or corporation
sued shall file its answer in writing under oath to any
complaint brought or filed against said person or
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corporation before a competent court to recover the money
or other personal or real property, seeds or agricultural
products, charged or received in violation of the provisions
of this Act. The lack of taking an oath to an answer to a
complaint will mean the admission of the facts contained in
the latter.”
The foregoing provision envisages a complaint filed against
an entity which has committed usury, for the recovery of
the usurious interest paid. In that case, if the entity sued
shall not file its answer under oath denying the allegation of
usury, the defendant shall be deemed to have admitted the
usury. The provision does not apply to a case, as in the
present, where it is the defendant, not the plaintiff, who is
alleging usury.
Moreover, for sometime now, usury has been legally non-
existent. Interest can now be charged as lender and
borrower may agree upon. The Rules of Court in regards
to allegation of usury, procedural in nature, should be
considered repealed with retroactive effect.
NACAR VS. GALLERY FRAMES
GR NO. 189871, 13 AUGUST 2013
FACTS: Dario Nacar filed a labor case against Gallery
Frames and its owner Felipe Bordey, Jr. Nacar alleged that
he was dismissed without cause by Gallery Frames on
January 24, 1997. On October 15, 1998, the Labor Arbiter
(LA) found Gallery Frames guilty of illegal dismissal hence
the Arbiter awarded Nacar P158,919.92 in damages
consisting of backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court
(SC). The Supreme Court affirmed the decision of the
Labor Arbiter and the decision became final on May 27,
2002.
After the finality of the SC decision, Nacar filed a motion
before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal
dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the
motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of
the LA (October 15, 1998). The LA reasoned that the said
date should be the reckoning point because Nacar did not
appeal hence as to him, that decision became final and
executory.
ISSUE: WON the Labor Arbiter is correct (in the award of
interest in the form of actual compensatory damages).
HELD: NO. There are two parts of a decision when it
comes to illegal dismissal cases (referring to cases where the
18
dismissed employee wins, or loses but wins on appeal). The – Final and executory judgments awarding damages prior
first part is the ruling that the employee was illegally to July 1, 2013 shall apply the 12% rate;
dismissed. This is immediately final even if the employer – Final and executory judgments awarding damages on or
appeals – but will be reversed if employer wins on appeal. after July 1, 2013 shall apply the 12% rate for unpaid
The second part is the ruling on the award of backwages obligations until June 30, 2013; unpaid obligations with
and/or separation pay. For backwages, it will be computed respect to said judgments on or after July 1, 2013 shall still
from the date of illegal dismissal until the date of the incur the 6% rate.
decision of the Labor Arbiter. But if the employer appeals,
Thus, the SC ordered the re-computation awarded and due
then the end date shall be extended until the day when the
to the petitioner in accordance with this Decision.
appellate court’s decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on
appeal, will increase – this is just but a risk that the
SPOUSES ANDAL VS. PNB
employer cannot avoid when it continued to seek recourses
GR NO. 194201, 27 NOVEMBER 2013
against the Labor Arbiter’s decision. This is also in
accordance with Article 279 of the Labor Code.
FACTS: On Sept. 7 1995, petitioners obtained a loan from
Anent the issue of award of interest in the form of
respondent bank in the amount of 21.8M, for which 12
actual or compensatory damages, the Supreme Court
promissory notes were executed, with varying interest rates
ruled that the old case of Eastern Shipping Lines vs
(17.5-27%). It was agreed that the rate of interest may be
CA which was used as basis for the computation of interest
increased or decreased with prior notice to the petitioners
in the form of damages, is already modified by the
in the event of changes in interest rates prescribed by law or
promulgation of the Bangko Sentral ng Pilipinas Monetary
the Monetary Board.
Board Resolution No. 796 which lowered the legal rate of
interest from 12% to 6%. Specifically, the rules on interest
Petitioners also executed a real estate mortgage in favor of
are now as follows:
the respondent bank over 5 parcels of land, including all
improvements thereon, covered by TCT of the Registry
1. Monetary Obligations ex. Loans:
Deeds.
a. If stipulated in writing:
a.1. Shall run from date of judicial demand (filing of the
Respondent bank advised petitioners to pay their loan,
case)
otherwise, they would declare it due and demandable.
a.2. Rate of interest shall be that amount stipulated
Petitioners paid 14.8M to avoid foreclosure. Respondent
b. If not stipulated in writing
bank executed a release of real estate mortgage over 2
b.1. Shall run from date of default (either failure to pay
parcels of land. Despite payment, respondent foreclosed the
upon extra-judicial demand or upon judicial demand
remaining real estate mortgage over the other 3 parcels of
whichever is appropriate and subject to the provisions of
land.
Article 1169 of the Civil Code)
b.2. Rate of interest shall be 6% per annum
A public auction sale resulted in respondent bank as the
2. Non-Monetary Obligations (such as the case at
winning bidder. A certificate of sale of the properties was
bar)
issued. Petitioners filed a complaint for annulment of
a. If already liquidated, rate of interest shall be
mortgage, contending that the interest rates imposed were
6% per annum, demandable from date of judicial
exorbitant, resulting to a form of unjust enrichment in favor
or extra-judicial demand (Art. 1169, Civil Code)
of the respondents, and that the bank had no right to
b. If unliquidated, no interest
foreclose the mortgage.
Except: When later on established with certainty.
Interest shall still be 6% per annum demandable
The RTC ruled in favor of petitioners, ordering that the
from the date of judgment because such on such
rate of interest be reduced to 6%. CA affirmed the decision,
date, it is already deemed that the amount of
with a modification that the interest rate should be 12% per
damages is already ascertained.
annum instead of 6%.
3. Compounded Interest
– This is applicable to both monetary and non-monetary Petitioners now insist that applying the case of Caraig vs.
obligations Alday, interest in the instant case would be computed only
– 6% per annum computed against award of damages from the finality of the judgement declaring the foreclosure
(interest) granted by the court. To be computed from the sale null and void. Stating also Mercado vs. China Banking
date when the court’s decision becomes final and Corp., not interest shall be due when the potestative interest
executory until the award is fully satisfied by the losing rate stipulation is declared null and void, as should be in the
party. instant case.
4. The 6% per annum rate of legal interest shall be applied
prospectively:

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ISSUE: Whether or not interest should be imposed on the
loan.
HELD: YES. Petitioners had agreed to payment of interest
on their loan obligation. The subsequent declaration that
the rate of interest was illegal does not entitle them to stop
payment of interest. Only the interest rate was declared
void, but the stipulation requiring them to pay interest
remains valid and binding. They are liable to pay interest
rates from the time they defaulted, until the obligation is
fulfilled.
Thus, the present petition is denied.
FIRST UNITED CONSTRUCTOR’S CORP. VS.
BAYANIHAN
GR NO. 164985, 15 JANUARY 2014
FACTS: Petitioner FUCC and petitioner Blue Star were
associate construction firms sharing financial resources,
equipment and technical personnel on a case-to-case basis.
From May 27, 1992 to July 8, 1992, they ordered six units
of dump trucks from respondent Bayanihan.
On September 19, 1992, FUCC ordered from the
respondent one unit of Hino Prime Mover that the
respondent delivered on the same date. On September 29,
1992, FUCC again ordered from the respondent one unit
of Isuzu Transit Mixer that was also delivered to the
petitioners. For the two purchases, FUCC partially paid in
cash, and the balance through post-dated checks.
Upon presentment of the checks for payment, the
respondent learned that FUCC had ordered the payment
stopped. The respondent immediately demanded the full
settlement of their obligation from the petitioners, but to no
avail. Instead, the petitioners informed the respondent that
they were withholding payment of the checks due to the
breakdown of one of the dump trucks they had earlier
purchased from respondent, specifically the second dump
truck delivered on May 27, 1992.
Due to the refusal to pay, the respondent commenced this
action for collection on April 29, 1993, seeking payment of
the unpaid balance in the amount of P735,000.00
represented by the two checks.
Petitioners averred that they had stopped the payment on
the two checks worth P735,000.00 because of the
respondent’s refusal to repair the second dump truck; and
that they had informed the respondent of the defects in that
unit but the respondent had refused to comply with its
warranty, compelling them to incur expenses for the repair
and spare parts. They prayed that the respondent return
the price of the defective dump truck worth P830,000.00
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minus the amounts of their two checks worth P735,000.00,
with 12% per annum interest on the difference of
P90,000.00 from May 1993 until the same is fully paid; that
the respondent should also reimburse them the sum of
P247,950.00 as their expenses for the repair of the dump
truck, with 12% per annum interest from December 16,
1992, the date of demand, until fully paid
ISSUE: Whether or not petitioners could avail themselves
of legal compensation.
HELD: NO. The Court held that petitioners could not
avail of legal compensation because the claims of
petitioners against respondent were not liquidated and
demandable.
A debt is liquidated when its existence and amount are
determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the
plaintiff’s claim from the moment it is liquidated by
judgment. Article 1290 of the Civil Code provides that
when all the requisites mentioned in Article 1279 of the
Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to
the concurrent amount. With petitioners’ expenses for the
repair of the dump truck being already established and
determined with certainty by the lower courts, it follows
that legal compensation could take place because all
the requirements were present. Hence, the amount of
P71,350.00 should be set off against petitioners’ unpaid
obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to
respondent.
FLORANTE VITUG VS. EVANGELINE A. ABUDA
G.R. NO. 201264. JANUARY 11, 2016
FACTS: On March 17, 1997, Abuda loaned P250,000.00
to Vitug and his wife, Narcisa Vitug. As security for the
loan, Vitug mortgaged to Abuda his property in Tondo
Foreshore Tondo, Manila. The property was then subject of
a conditional Contract to Sell between the National Housing
Authority and Vitug. Portions of the mortgage deed reads:
That, with the full consent of wife Narcisa Vitug, hereby
mortgage to Evangeline A. Abuda, with full consent of
husband Paulino Abuda, said property for
(P250,000.00), in hand paid by Mortgagee and in hand
received to full satisfaction by Mortgagor, for SIX
MONTHS (6) within which to pay back the full amount
plus TEN PERCENT (10%) agreed interest per month
counted from the date stated hereon;
That, upon consummation and completion of the sale by the
NHA of said property, the title-award thereof, shall be
received by the Mortgagee by virtue of a SPA, executed by
Mortgagor in her favor, authorizing Mortgagee to expedite,
follow-up, cause the release and to received and take
possession of the title award of the said property from the
20
 NHA, until the mortgage amount is fully paid for and
settled.
On November 17, 1997, the parties executed a
"restructured” mortgage contract on the property to
secure the amount of P600,000.00 representing the
original P250,000.00 loan, additional loans, and
subsequent credit accommodation given by Abuda to
Vitug with an interest of five (5) percent per month. By
then, the property was covered by TCT under Vitug's
name. Spouses Vitug failed to pay their loans
despite Abuda's demands.
On November 21, 2003, Abuda filed a Complaint for
Foreclosure of Property before the RTC Manila which
rendered a decision in favor of Abuda. The court held:
1. Ordering the defendant to pay within the
reglementary period of (90) days the principal
sum of P600,000.00 with interest at 5% per
month from May 31, 2002 to actual date of
payment plus P20,000.00 as and for attorney's
fees;
2. Upon default of the defendant to fully pay
the aforesaid sums, the subject mortgaged
property shall be sold at public auction to pay
off the mortgage debt and its accumulated
interest plus attorney's fees, expenses and costs;
and
3. After the confirmation of the sale, ordering
the defendant and all persons claiming rights
under her to immediately vacate the subject
premises.
Vitug appealed before the CA contending that the real
estate mortgage contract he and Abuda entered into was
void on the grounds of fraud and lack of consent under
Articles 1318, 1319, and 1332 of the Civil Code. He
alleged that he was only tricked into signing the mortgage
contract, whose terms he did not really understand.
Hence, his consent to the mortgage contract was vitiated.
On October 26, 2011, the Court of Appeals promulgated
a Decision, which PARTIALLY GRANTED. The
Decision of the RTC is AFFIRMED with
MODIFICATION.
The Court of Appeals found that Vitug failed to pay his
obligation within the stipulated 6-month period under the
March 17, 1997 mortgage contract. As a result of this
failure, the parties entered into a restructured mortgage
contract on November 17, 1997. The new mortgage
contract was signed before a notary public by Vitug, his
wife Narcisa, and witnesses Rolando Vitug, Ferdinand
Vitug, and Emily Vitug.
The Court of Appeals also found that all the elements of a
valid mortgage contract were present in the parties'
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mortgage contract. The mortgage contract was also clear
in its terms. No evidence on record showed that Vitug was
defrauded when he entered into the agreement with
Abuda.
However, the Court of Appeals found that the interest
rates imposed on Vitug's loan were "iniquitous,
unconscionable[,] and exorbitant." It instead ruled that a
legal interest of 1% per month or 12% per annum should
apply from the judicial demand on November 21, 2003.
On November 23, 2011, Vitug moved for
reconsideration. However, the Court of Appeals denied
Vitug's Motion for Reconsideration.
ISSUES: Whether or not the CA is correct in ruling that
interest rates, in this case, be reduced to 1% per month or
12% per annum.
HELD: The Court of Appeals correctly found that the
interest rates of 5% or 10% per month imposed on
petitioner's loan were unconscionable.
Parties are free to stipulate interest rates in their loan
contracts in view of the suspension of the implementation
of the Usury Law ceiling on interest effective January 1,
1983.
The freedom to stipulate interest rates is granted under the
assumption that we have a perfectly competitive market for
loans where a borrower has many options from whom to
borrow. It assumes that parties are on equal footing during
bargaining and that neither of the parties has a relatively
greater bargaining power to command a higher or lower
interest rate. It assumes that the parties are equally in
control of the interest rate and equally have options to
accept or deny the other party's proposals. In other words,
the freedom is granted based on the premise that parties
arrive at interest rates that they are willing but are not
compelled to take either by force of another person or by
force of circumstances.
However, the premise is not always true. There are
imperfections in the loan market. One party may have
more bargaining power than the other. A borrower may
be in need of funds more than a lender is in need of
lending them. In that case, the lender has more
commanding power to set the price of borrowing than the
borrower has the freedom to negotiate for a lower interest
rate.
Hence, there are instances when the state must step in to
correct market imperfections resulting from unequal
bargaining positions of the parties.
Article 1306 of the Civil Code limits the freedom to
contract to promote public morals, safety, and welfare. In
21
stipulating interest rates, parties must ensure that the rates
are neither iniquitous nor unconscionable. Iniquitous or
unconscionable interest rates are illegal and, therefore,
void for being against public morals.The lifting of the
ceiling on interest rates may not be read as "grant[ing]
lenders carte blanche [authority] to raise interest rates to
levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."
Voluntariness of stipulations on interest rates is not
sufficient to make the interest rates valid. Thus, even if
the parties voluntarily agree to an interest rate, courts are
given the discretionary power to equitably reduce it if it is
later found to be iniquitous or unconscionable. Courts
approximate what the prevailing market rate would have
been under the circumstances had the parties had equal
bargaining power.
An interest rate is not inherently conscionable or
unconscionable. Interest rates become unconscionable in
light of the context in which they were imposed or
applied.
Under the circumstances of this case, we find no reason
to uphold the stipulated interest rates of 5% to 10% per
month on petitioner's loan. Petitioner obtained the loan
out of extreme necessity. As pointed out by respondent,
the property would have been earlier foreclosed by the
National Housing Authority if not for the loan.
Moreover, it would be unjust to impose a heavier burden
upon petitioner, who would already be losing his and his
family's home. Respondent would not be unjustly
deprived if the interest rate is reduced. After all,
respondent still has the right to foreclose the property.
Thus, we affirm the Court of Appeals Decision to reduce
the interest rate to 1% per month or 12% per annum.
However, we modify the rates in accordance with the
guidelines set forth in Nacar v. Gallery Frames:
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be
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.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
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discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until
the demand can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the interest
shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 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.
And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.
Thus, the interest rate for petitioner's loan should be
further reduced to 6% per annum from July 1, 2013 until
full satisfaction.
WHEREFORE, the Petition is DENIED. The Court of
Appeals Decision dated October 26, 2011 and its
Resolution dated March 8, 2012 are AFFIRMED. The
interest rate for the loan of P600,000.00 is further reduced
to 6% per annum from July 1, 2013 until fully paid.
SO ORDERED.
SPOUSES SALVADOR ABELLA AND ALMA
ABELLA VS. SPOUSES ROMEO ABELLA AND
ANNIE ABELLA
G.R. NO. 195166. JULY 8, 2015
FACTS: On July 31, 2002, petitioners Spouses
Salvador and Alma Abella filed a Complaint for sum
of money and damages with prayer for preliminary
attachment against respondents Spouses Romeo
and Annie Abella before the RTC Kalibo, Aklan.
Petitioners alleged that respondents obtained a loan from
them in the amount of P500,000.00 evidenced by an
acknowledgment receipt dated March 22, 1999 and was
payable within (1) year. Petitioners added that
22
respondents were able to pay a total of P200,000.00
leaving an unpaid balance of P300,000.00.
In their Answer, 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. They
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 month with a 2.5%
service fee to [respondents]." 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.
RTC 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.
The Regional Trial Court adjudged respondents
solidarily 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.
In the Order dated March 13, 2006, 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.
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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. The
Court of Appeals noted that while the acknowledgement
receipt showed that interest was to be charged, no
particular interest rate was specified. 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, 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.
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.
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. 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 interest as the rate of 12% per
annum, instead of 6%, shall be imposed on the
amount due, until full payment thereof.
In the Resolution, dated January 4, 2011, the Court of
Appeals denied petitioners' Motion for Reconsideration.
23
Aggrieved, petitioners filed the present appeal 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, 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.
In their Comment, 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.
In their Reply, 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.
ISSUES:
I. Whether interest accrued on respondents' loan from
petitioners. If so, at what rate?
II. Whether petitioners are liable to reimburse
respondents for the latter's supposed excess payments
and for interest.
HELD:
I. Articles 1933 and 1953 of the Civil Code provide the
guideposts that determine if a contractual relation is one of
simple loan or mutuum. Commodatum is essentially
gratuitous. On the other hand, 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.
On March 22, 1999, respondents executed
acknowledgment receipt to petitioners, which states:
This is to acknowledge receipt of the Amount
of Five Hundred Thousand (P500,000.00)
Pesos from Mrs. Alma R. Abella, payable
within one (1) year from date hereof with
interest.
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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 back 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 that
respondents shall pay the same amount to petitioners
within one (1) year.
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, 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."
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of
Appeals, which, in turn, stated:
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.(Emphasis supplied)
The rule is not only definite; it is cast in mandatory
language. From Eastern Shipping to Security Bank to Spouses
Toring, jurisprudence has repeatedly used the word
an "shall," a term that has long been settled to denote
something imperative or operating to impose a duty.
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 recognized
that the legal rate of interest has been reduced to 6% per annum:
24
 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.
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.
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.
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, 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 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 amount loaned
by respondents from petitioners is held to be 12% per
annum.
II. As respondents made an overpayment, the principle of
solutio indebiti as provided by Article 2154 of the Civil Code
applies. As respondents had already fully paid the principal
and all conventional interest that had accrued, they were no
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
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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.
Further, Article 2159 of the Civil Code provides, 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 arising
from their quasi-contractual obligation.
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.
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.
SPOUSES IGNACIO F. JUICO AND ALICE P.
JUICO VS. CHINA BANKING CORPORATION,
G.R. NO. 187678. APRIL 10, 2013
FACTS: 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 for the sums
of P6,216,000 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 covered by Transfer Certificate of
Title (TCT) No. RT-103568 (167394) PR-41208 of the
Register of Deeds of Quezon City.
25
When petitioners failed to pay the monthly amortizations
due, respondent demanded the full payment of the
outstanding balance with accrued monthly interests. On
September 5, 2000, petitioners received respondent's last
demand letter dated August 29, 2000.
As of February 23, 2001, the amount due on the two
promissory notes totaled P19,201,776.63 representing the
principal, interests, penalties and attorney's fees. On the
same day, the mortgaged property was sold at
public auction, with respondent as highest bidder
for the amount of P10,300,000.
On May 8, 2001, petitioners received a demand letter
dated May 2, 2001 from respondent for the payment of
P8,901,776.63, the amount of deficiency after applying the
proceeds of the foreclosure sale to the mortgage debt. As its
demand remained unheeded, respondent filed a
collection suit in the trial court. In its Complaint,
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.
In their Answer, petitioners admitted the existence
of the debt but interposed, by way of special and
affirmative defense, that the complaint states no
cause of action considering that the principal of the loan
was already paid when the mortgaged property was
extrajudicially foreclosed and sold for P10,300,000.
Petitioners contended that should they be held liable for
any deficiency, it should be only for P55,000 representing
the difference between the total outstanding obligation of
P10,355,000 and the bid price of P10,300,000. Petitioners
also argued that even assuming there is a cause of action,
such deficiency cannot be enforced by respondent because
it consists only of the penalty and/or compounded interest
on the accrued interest which is generally not favored
under the Civil Code. By way of counterclaim, petitioners
prayed that respondent be ordered to pay P100,000 in
attorney's fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu,
its Senior Loans Assistant, as witness. She testified that she
handled the account of petitioners and assisted them in
processing their loan application. She called them monthly
to inform them of the prevailing rates to be used in
computing interest due on their loan. As of the date of the
public auction, petitioners' outstanding balance was
P19,201,776.63 based on the following statement of
account which she prepared.
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Petitioners thereafter received a demand letter dated May
2, 2001 from respondent's counsel for the deficiency
amount of P8,901,776.63. Ms. Yu further testified that
based on the Statement of Account dated March 15,
2002 which she prepared, the outstanding balance of
petitioners was P15,190,961.48.
On cross-examination, Ms. Yu reiterated that the interest
rate changes every month based on the prevailing market
rate and she notified petitioners of the prevailing rate by
calling them 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, she answered that
petitioners signed a promissory note indicating
that they agreed to pay interest at the prevailing
rate.
Petitioner Ignacio F. Juico testified that prior to
the release of the loan, he was required to sign a
blank promissory note and was informed that the
interest rate on the loan will be based on
prevailing market rates. Every month, respondent
informs him by telephone of the prevailing interest rate. At
first, he was able to pay his monthly amortizations but
when he started to incur delay in his payments due to the
financial crisis, respondent pressured him to pay in full,
including charges and interests for the delay. His property
was eventually foreclosed and was sold at public auction.
On cross-examination, petitioner testified that he is a
Doctor of Medicine and also engaged in the business of
distributing medical supplies. He admitted having read the
promissory notes and that he is aware of his obligation
under them before he signed the same.
In its decision, the RTC ruled in favor of respondent. The
trial court agreed with respondent that when the mortgaged
property was sold at public auction on February 23, 2001
for P10,300,000 there remained a balance of P8,901,776.63
since before foreclosure, the total amount due on the two
promissory notes aggregated to P19,201,776.63 inclusive of
principal, interests, penalties and attorney's fees. It ruled
that the amount realized at the auction sale was applied to
the interest, conformably with Article 1253 of the Civil
Code which provides that if the debt produces interest,
payment of the principal shall not be deemed to have been
made until the interests have been covered. This being the
case, petitioners' principal obligation subsists but at a
reduced amount of P8,901,776.63.
The trial court further held that Ignacio's claim that he
signed the promissory notes in blank cannot negate or
mitigate his liability since he admitted reading the
promissory notes before signing them.
When the case was elevated to the CA, the latter affirmed
the trial court's decision. The CA recognized respondent's
right to claim the deficiency from the debtor where the
26
proceeds of the sale in an extrajudicial foreclosure of
mortgage are insufficient to cover the amount of the debt.
Also, it found as valid the stipulation in the promissory
notes that interest will be based on the prevailing rate. It
noted that the parties agreed on the interest rate which was
not unilaterally imposed by the bank but was the rate
offered daily by all commercial banks as approved by the
Monetary Board. Having signed the promissory notes, the
CA ruled that petitioners are bound by the stipulations
contained therein.
ISSUE: Whether the interest rates imposed upon them by
respondent are valid.
HELD: Petitioners contend that the interest rates imposed
by respondent are not valid as they were not by virtue of
any law or Bangko Sentral ng Pilipinas (BSP) regulation or
any regulation that was passed by an appropriate
government entity. They insist that the interest rates were
unilaterally imposed by the bank and thus violate the
principle of mutuality of contracts. They argue that the
escalation clause in the promissory notes does not give
respondent the unbridled authority to increase the interest
rate unilaterally. Any change must be mutually agreed
upon.
Respondent, for its part, points out that petitioners failed to
show that their case falls under any of the exceptions
wherein findings of fact of the CA may be reviewed by this
Court. It contends that an inquiry as to whether the interest
rates imposed on the loans of petitioners were supported by
appropriate regulations from a government agency or the
Central Bank requires a reevaluation of the evidence on
records. Thus, the Court would in effect, be confronted
with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in
Article 1308 of the Civil Code, which provides: The
contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
Article 1956 of the Civil Code likewise ordains that "[n]o
interest shall be due unless it has been expressly stipulated
in writing."
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result
is void. Any stipulation regarding the validity or compliance
of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
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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.
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.
The two promissory notes signed by petitioners provide:
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.
Here, the escalation clause in the promissory notes
authorizing the respondent to adjust the rate of interest on
the basis of a law or regulation issued by the Central Bank
of the Philippines, should be read together with the
statement after the first paragraph where no rate of interest
was fixed as it would be based on prevailing market rates.
While the latter is not strictly an escalation clause, its clear
import was that interest rates would vary as determined by
prevailing market rates. Evidently, the parties intended the
interest on petitioners' loan, including any upward or
downward adjustment, to be determined by the prevailing
market rates and not dictated by respondent's policy. It
may also be mentioned that since the deregulation of bank
rates in 1983, the Central Bank has shifted to a market-
oriented interest rate policy.
There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory
notes. In fact, petitioner Ignacio, a physician engaged in the
medical supply business, admitted having understood his
obligations before signing them. 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
27
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.
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. Hence, we consider as
invalid the interest rates in excess of 15%, the rate charged
for the first year.
Based on the August 29, 2000 demand letter of China
Bank, petitioners' total principal obligation under the two
promissory notes which they failed to settle is P10,355,000.
However, due to China Bank's unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty
charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners'
balance ballooned to P19,201,776.63. Note that the
original amount of principal loan almost doubled in only 16
months. The Court also finds the penalty charges imposed
excessive and arbitrary, hence the same is hereby reduced
to 1% per month or 12% per annum.
Petitioners' Statement of Account, as of February 23, 2001,
the date of the foreclosure proceedings, should thus be
modified.
WHEREFORE, the petition for review on certiorari is
PARTLY GRANTED. The February 20, 2009 Decision
and April 27, 2009 Resolution of the Court of Appeals in
CA G.R. CV No. 80338 are hereby MODIFIED.
Petitioners Spouses Ignacio F. Juico and Alice P. Juico are
hereby ORDERED to pay jointly and severally respondent
China Banking Corporation P4,761,865.79 representing
the amount of deficiency inclusive of interest, penalty
charge and attorney's fees. Said amount shall bear interest
at 12% per annum, reckoned from the time of the filing of the
complaint until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.
SPOUSES LIMSO vs. PNB
G.R. NO. 158622 January 27, 2016
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FACTS:
• Sps. Limso and Davao Sunrise Investment Corp. took out
a loan (700M) secured by real estate mortgages from PNB
– divided into 2 kinds of loan accommodations: (1)
revolving credit line of 300M; (2) 7-yr long-term of 400M
• As a security, real estate mortgages were constituted on
four (4) parcels of land registered with the Registry of
Deeds of Davao City – 3 from Davao Sunrise and 1 from
Sps. Limso
• Spouses Limso and Davao Sunrise had difficulty in
paying their loan. In 1999, they requested that their loan
be restructured. After negotiations, Spouses Limso, Davao
Sunrise, and Philippine National Bank executed a
Conversion, Restructuring and Extension Agreement
• Restructured loan was divided into two (2) parts. Loan I
was for the principal amount of P583.18 million, while
Loan II was for the principal amount of P483.78 million.
The restructured loan was secured by the same real estate
mortgage over four (4) parcels of land in the original loan
agreement. Spouses Limso and Davao Sunrise
encountered financial difficulties. Despite the
restructuring of their loan, they were still unable to pay.
Philippine National Bank sent demand letters. Still,
Spouses Limso and Davao Sunrise failed to pay.
• An auction sale was held, PNB being the highest bidder.
After the foreclosure sale, but before the Sheriff could
issue the Provisional Certificate of Sale, Spouses Limso
and Davao Sunrise filed a Complaint for Reformation or
Annulment of contract against Philippine National Bank
• PNB’s lawyers went to the Register of Deeds of Davao
City to inquire on the status of the registration of the
Sheriff's Provisional Certificate of Sale. They were
informed that the documents they needed could not be
found
CA
• Court of Appeals granted the temporary restraining order
prayed for by PNB
• Sps. Limso filed for MR; they also question the which
ordered the Register of Deeds to register the Sheriff's
Provisional Certificate of Sale
• Favored the sps. It found the interest rate provisions in
the loan agreement to be unreasonable and unjust
because the imposable interest rates were to be solely
determined by Philippine National Bank. The arbitrary
imposition of interest rates also had the effect of
increasing the total loan obligation of Spouses Limso and
Davao Sunrise to an amount that would be beyond their
capacity to pay
• There has been no mutuality between the parties
• PNB moved for reconsinderation arguing that the interest
rates were mutually agreed upon and that Spouses Limso
and Davao Sunrise never questioned the interest rates
and that they acknowledged the total amount of their
debt (inclusive of loan principal and accrued interest) to
PNB in the Conversion, Restructuring and Extension
28
 Agreement which restructured their obligation to in the
amount of P1.067 Billion
• Sps. Limso and Davao Sunrise argued that the letters sent
by Philippine National Bank to Davao Sunrise were not
agreements but mere notices that the interest rates were
increased by Philippine National Bank. Moreover, the
letters were received by Davao Sunrise's employees who
were not authorized to receive such letters. Some of the
letters did not even appear to have been received by
anyone at all.
ISSUE:
• W/n the Court of Appeals erred in ruling that the interest
rates imposed by Philippine National Bank were usurious
and unconscionable
• W/n the Conversion, Restructuring and Extension
Agreement executed in 1999 novated the original Loan
and Credit Agreement executed in 1993
HELD:
• There is no mutuality of contracts when the
determination or imposition of interest rates is at the sole
discretion of a party to the contract. Further, escalation
clauses in contracts are void when they allow the creditor
to unilaterally adjust the interest rates without the consent
of the debtor.
• Article 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
• The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result
is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.
• While the Usury Law was suspended by Central Bank
Circular No. 905, Series of 1982, unconscionable interest
rates may be declared illegal. The suspension of the Usury
Law did not give creditors an unbridled right to impose
arbitrary interest rates
• From the terms of the loan agreements, there was no way
for Spouses Limso and Davao Sunrise to determine the
interest rate imposed on their loan because it was always
at the discretion of Philippine National Bank. Nor could
Spouses Limso and Davao Sunrise determine the exact
amount of their obligation because of the frequent
changes in the interest rates imposed.
• However, only the interest rate imposed is nullified;
hence, it is deemed not written in the contract. The
agreement on payment of interest on the principal loan
obligation remains. It is a basic rule that a contract is the
law between contracting parties. In the original loan
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agreement and the Conversion, Restructuring and
Extension Agreement, Spouses Limso and Davao Sunrise
agreed to pay interest on the loan they obtained from
Philippine National Bank. Such obligation was not
nullified by this court. Thus, their obligation to pay
interest in their loan obligation subsists.
• The Conversion, Restructuring and Extension Agreement
novated the original agreement executed in 1993.
However, the nullified interest rate provisions in the
original loan agreement cannot be deemed as having
been legitimized, ratified, or set aside.
• Since the Conversion, Restructuring and Extension
Agreement novated the original credit agreement, we
modify the Court of Appeals Decision in that the
outstanding obligation of Spouses Limso and Davao
Sunrise should be computed on the basis of the
Conversion, Restructuring and Extension Agreement.
• To avoid confusion, we also rule that the interest rate
provisions and the escalation clauses in the Conversion,
Restructuring and Extension Agreement are nullified
insofar as they allow Philippine National Bank to
unilaterally determine and increase the imposable interest
rates.
MABULAO LUMBER CO. VS PNB
G.R. NO. L-22973 JANUARY 30, 1968
FACTS:
• Plaintiff applied for an industrial loan of P155,000 with
PNB Naga. The application, however, was approved for a
loan of P100,000 only. As security for the loan, plaintiff
mortgaged a parcel of land (located in Jose Panganiban,
Camarines Norte; with the building and improvements).
• The plaintiff failed to pay the amortizations on the
amounts released to and received by it. Repeated
demands were made upon the plaintiff to pay its
obligation but it failed or otherwise refused to do so.
Upon inspection and verification made by employees of
the PNB, it was found that the plaintiff had already
stopped operation
• PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the parcel of
land, together with the improvements existing thereon,
covered by Transfer Certificate of Title No. 381 of the
land records of Camarines Norte, and to sell it at public
auction
• PNB sent a second letter to the Provincial Sheriff of
Camarines Norte requesting him to take possession of the
chattels mortgaged to it by the plaintiff and sell them at
public auction also
• Plaintiff sent separate letters, posted as registered air mail
matter, one to the Naga Branch of the PNB and another
to the Provincial Sheriff of Camarines Norte, protesting
against the foreclosure of the real estate and chattel
29
 mortgages on the grounds that they could not be effected
unless a Court's order was issued against it
• The foreclosure sale of the parcel of land, together with
the buildings and improvements thereon, covered by
Transfer Certificate of Title No. 381, was, held and the
said property was sold to the PNB for the sum of
P56,908.00, subject to the right of the plaintiff to redeem
the same within a period of one year
• Plaintiff sent a bank draft for P738.59 to the Naga Branch
of the PNB, allegedly in full settlement of the balance of
the obligation of the plaintiff after the application thereto
of the sum of P56,908.00 representing the proceeds of the
foreclosure sale of parcel of land and that according to
their agreement it could not be legally effected at a place
other than City of Manila
• PNB’s counsel wrote to plaintiff that the remitted amount
was not enough for its liability to which should be added
the expenses for guarding the mortgaged of chattels,
attorney’s fees and expenses of the sale. The Manager of
the Naga Branch of the PNB advised the plaintiff giving it
priority to repurchase the chattels acquired by the former
at public auction. This offer was reiterated in a letter
dated January 3, 1962, of the Attorney of the Naga
Branch of the PNB to the plaintiff, with the suggestion
that it exercise its right of redemption and that it apply for
the condonation of the attorney's fees. The plaintiff did
not follow the advice but on the contrary it made known
of its intention to file appropriate action or actions for the
protection of its interests.
• PNB sold the land to Mariano Bundok
TRIAL COURT
• Ordered Mambulao Lumber Co. to pay PNB the sum
of P3,582 with interest of 6% per annum
• The proceeds of the foreclosure sale of its real property
alone it remitted to the PNB was more than sufficient to
liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattel unlawful
• Plaintiff appealed
ISSUE: W/N the amount of its indebtness to the PNB
arising out of the principal loans and the accrued interest
(P56,485 instead of P58,213)
HELD
• There is merit to the claim
• It appears that in arriving at the total indebtedness of
P57,646.59 as of that date, the PNB had compounded
the principal of the loan and the accrued 6% interest
thereon each time the yearly amortizations became due,
and on the basis of these compounded amounts charged
additional delinquency interest on them up to
September 22, 1961; and to this erroneously computed
total of P57,646.59, the trial court added 6% interest
per annum from September 23, 1961 to November 21
of the same year. In effect, the PNB has claimed, and
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
the trial court has adjudicated to it, interest on accrued
interests from the time the various amortizations of the
loan became due until the real estate mortgage executed
to secure the loan was extrajudicially foreclosed on
November 21, 1961. This is an error
• This is also the clear mandate of Article 2212 of the new
Civil Code which provides that interest due shall earn
legal interest only from the time it is judicially
demanded, and of Article 1959 of the same code which
ordains that interest due and unpaid shall not earn
interest.
• In computing the interest on any obligation, promissory
note or other instrument or contract, compound interest
shall not be reckoned, except by agreement, or in
default thereof, whenever the debt is judicially claimed.
Interest due shall earn legal interest only from the time
it is judicially demanded. Interest due and unpaid shall
not earn interest. The parties may, by stipulation,
capitalize the interest due and unpaid, which as added
principal, shall earn new interest; but such stipulation is
nowhere to be found in terms of the promissory note
involved in this case. Clearly, therefore, the trial court
fell into error when it awarded interest on accrued
interests, without any agreement to that effect and
before they had been judicially demanded.
• There is really no evidence of record to support the
conclusion that the PNB is entitled to the amount
awarded as expenses of the extra- judicial foreclosure
sale. The court below committed error in applying the
provisions of the Rules of Court for purposes of arriving
at the amount awarded. It is to be borne in mind that
the fees enumerated under paragraphs k and n, Section
7, of Rule 130 (now Rule 141) are demandable only by
a sheriff serving processes of the court in connection
with judicial foreclosure of mortgages under Rule 68 of
the new Rules, and not in cases of extra-judicial
foreclosure of mortgages under Act 3135. Obviously,
therefore, the award of P298.54 as expenses of the sale
should be set aside.
• The mortgagee is guilty of conversion when he sells
under the mortgage but not in accordance with its
terms, or where the proceedings as to the sale or
foreclosure do not comply with the statute. This rule
applies squarely to the facts of this case where, as earlier
shown, herein appellee bank insisted, and the appellee
deputy sheriff of Camarines Norte proceeds with the
sale of the mortgaged chattels at Jose Panganiban,
Camarines Norte, in utter disregard of the valid
objection of the mortgagor thereto for the reason that it
is not the place of sale agreed upon in the mortgage
contract; and the said deputy sheriff sold all the chattels
as a single lot in violation of the requirement of the law
to sell the same article by article. As a consequence of
the said wrongful acts of the PNB and the Deputy
Sheriff of Camarines Norte, therefore, We have to
declare that herein appellant is entitled to collect from
30
 them jointly and severally, the full value of the chattels
in question at the time they were illegally sold by them.
PHILIPPINE NATIONAL BANK v. THE HON.
COURT OF APPEALS and AMBROSIO PADILLA
G.R. No. 88880. April 30, 1991
FACTS: In July 1982, the private respondent applied for,
and was granted by petitioner PNB, a credit line of 321.8
million, secured by a real estate mortgage, for a term of two
(2) years, with 18% interest per annum. Private respondent
executed in favor of the PNB a Credit Agreement, two (2)
promissory notes in the amount of P900,000.00 each, and a
Real Estate Mortgage Contract.
On June 20, 1984, PNB informed the private respondent
that (1) his credit line of P1.8 million "will expire on July 4,
1984," (2)" [i]f renewal of the line for another year is
intended, please submit soonest possible your request," and
(3) the "present policy of the Bank requires at least 30%
reduction of principal before your line can be renewed."
(pp. 86-87, Rollo.) Complying, private respondent on June
25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and
requested that "the balance of P1,260,000.00 be renewed
for another period of two (2) years under the same
arrangement" and that "the increase of the interest rate of
my mortgage loan be from 18% to 21%" (p. 87, Rollo.).
On July 4, 1984, private respondent paid PNB
P360,000.00.On July 18, 1984, private respondent
reiterated in writing his request that "the increase in the
rate of interest from 18% be fixed at 21% of 24%. (p. 87,
Rollo.)
On July 26, 1984, private respondent made an additional
payment of P100,000.
On August 10, 1984, PNB informed private respondent
that "we can not give due course to your request for
preferential interest rate in view of the following reasons:
Existing Loan Policies of the bank requires 32% for loan of
more than one year; our present cost of funds has
substantially increased." (pp. 8788, Rollo.)
On August 17, 1984, private respondent further paid PNB
P150,000.00.
In a letter dated August 24, 1984 to PNB, private
respondent announced that he would "continue making
further payments, and instead of a ‘loan of more than one
year,’ I shall pay the said loan before the lapse of one year
or before July 4, 1985. . . . I reiterate my request that the
increase of my rate of interest from 18% ‘be fixed at 21%
or 24%.’" (p. 88, Rollo.)
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
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On September 12, 1984, private respondent paid PNB
P160,000.00.
In letters dated September 12, 1984 and September 13,
1984, PNB informed private respondent that "the interest
rate on your outstanding line/loan is hereby adjusted from
32% p.a. to 41% p.a. (35% prime rate + 6%) effective
September 6, 1984;" and further explained "why we can
not grant your request for a lower rate of 21% or 24%."
(pp. 88-89, Rollo.)
In a letter dated September 24, 1984 to PNB, private
respondent registered his protest against the increase of
interest rate from 18% to 32% on July 4, 1984 and from
32% to 41% on September 6, 1984.
On October 15, 1984, private respondent reiterated his
request that the interest rate should not be increased from
18% to 32% and from 32% to 41%. He also attached (as
payment) a check for P140,000.00.
Like rubbing salt on the private respondent’s wound, the
petitioner informed private respondent on October 29,
1984, that "the interest rate on your outstanding line/loan
is hereby adjusted from 41% p.a. to 48% p.a. (42% prime
rate plus 6% spread) effective 25 October 1984." (p. 89,
Rollo.)
In November 1984, private respondent paid PNB
P50,000.00 thus reducing his principal loan obligation to
P300,000.00.
On December 18, 1984, private respondent filed in the
Regional Trial Court of Manila a complaint against PNB
entitled, "AMBROSIO PADILLA v. PHILIPPINE
NATIONAL BANK" (Civil Case No. 84-28391).
On March 31, 1985, the private respondent paid the
P300,000 balance of his obligation to PNBN (Exh. 5).
The trial court rendered judgment on April 14, 1986,
dismissing the complaint because the increases of interest
were properly made.
The private respondent appealed to the Court of Appeals.
On June 27, 1989, the Court of Appeals reversed the trial
court, hence, NB’s recourse to this Court by a petition for
review under Rule 45 of the Rules of Court.
ISSUE: W/O the increases of the interest rate were valid
and binding.
HELD: PNB’S successive increases of the interest rate on
the private respondent’s loan, over the latter’s protest, were
arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms "may be
amended only by an instrument in writing signed by the
party to be bound as burdened by such amendment." The
increases imposed by PNB also contravene Art. 1956 of the
Civil Code which provides that "no interest shall be due
unless it has been expressly stipulated in writing."
31

The debtor herein never agreed in writing to pay the
interest increases fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay a higher rate than
that.
That an increase in the interest rate from 18% to 48%
within a period of four (4) months is excessive, as found by
the Court of Appeals, is indisputable.
EULALIO M. RUIZ and ILUMINADA RUIZ vs.
HON. DOROTEO N. CANEBA, THE CITY
SHERIFF OF MANILA AND/OR HIS DEPUTIES,
ZENAIDA SANGALANG and ADOLFO CRUZ
G.R. No. 84884 : December 3, 1990
FACTS: Private respondents Zenaida Sangalang and
Adolfo Cruz are common-law spouses and owners in
common of a 2-storey house and lots described in Transfer
Certificate of Title (TCT) No. 56053 of the Registry of
Deeds of Caloocan City but registered only in the name of
Zenaida Sangalang.
Petitioners, the spouses Eulalio M. Ruiz and Iluminada M.
Ruiz are the lessees of Door No. 1 of the aforesaid two
storey house divided into 2 doors, for a monthly rental of
P650.00.
Sometime on November 19, 1982, Eulalio Ruiz and
Zenaida Sangalang executed an agreement where it was
provided that Ruiz will buy the house and lot for the sum of
P175,000.00. It was also stipulated that the Ruiz spouses
will continue paying the monthly rental of P650.00 until the
amount of P175,000.00 shall have been fully satisfied.
There is no dispute that the following payments were made
by Ruiz: P65,000.00 to Sangalang as down payment and
P21,119.62 to the Bank on the assumed mortgage. There is
disagreement however as to the amount paid to Sangalang
on the balance of P78,500.00. Sangalang maintains that she
received only P33,793.00 while Ruiz insists that they paid
P53,073.00.
Thus, the Ruiz spouses filed a complaint on April 24, 1984
for specific performance with damages against Zenaida
Sangalang and Adolfo Cruz. (Ibid, p. 14)
In any event, the trial court found that the Ruiz spouses
failed to pay in full the balance of P78,500.00 on or before
December 31, 1983 as stipulated and even on the extended
period of March 22, 1984. Hence, the Ruiz spouses are not
entitled to their prayer for specific performance with
damages. In the same breath, the trial court decided that it
is only fair that Zenaida Sangalang return/refund to the
Ruiz spouses the payment made by the latter. Further, it
ruled that the Ruiz spouses shall continue to pay the agreed
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
amount of rental in the amount of P650.00 until the
property is surrendered to Sangalang (RTC decision, May
15, 1986, p. 7; Rollo, p. 48).
The Ruiz spouses appealed the decision to the Court of
Appeals but the same was dismissed for failure to pay the
docket fee. (Rollo, p. 162) On May 29, 1987, an entry of
judgment was made by the Court of Appeals.
On motion of the private respondents, respondent Judge
issued an order for the issuance of a writ of execution.
(Ibid., p. 59) The Clerk of Court, in his capacity as ex-oficio
city sheriff, caused the execution of the 1st and 2nd
paragraphs of the dispositive portion of the May 15, 1986
decision without including in the writ, the execution of the
3rd par. thereof in favor of the Ruizes. A notice of levy as
well as a notice of garnishment were both issued to the
petitioners. (Rollo, p. 51)
On September 2, 1987, the Ruiz spouses filed an "Ex-parte
Motion for Execution of Decision Now Partly Executed,"
praying that a writ of execution be issued for par. 3 of the
said dispositive portion and that the sheriff be ordered to
make full execution of the decision by "off-setting" and/or
setting-off par. 3 as against pars. 1 and 2 thereof. (Ibid, p.
92)
An order was issued by the respondent judge on September
8, 1987 the dispositive portion of which reads as follows:
"WHEREFORE, in view of the fact that a writ of
execution has already been issued and the same was
enforced only with respect to paragraphs 1 and 2 of the
dispositive portion of the decision dated May 15, 1986,
let a writ of execution be issued with respect to
paragraph 3 of the said dispositive portion of the
decision.
"SO ORDERED" (Rollo, p. 59)
The aforequoted order was reiterated by the respondent
judge in his order dated December 11, 1987 (Ibid., p. 60)
after an omnibus motion was filed by the petitioners on
September 8, 1987. (Ibid., p. 53)
As expected, the parties could not agree on the execution of
the decision, as regards par. 3 thereof; that is the amount to
be returned by Sangalang to the Ruiz spouses. Sangalang
and Adolfo Cruz on May 7, 1988 moved to amend said
decision of May 15, 1986 which they alleged to have clear
disparities and evident ambiguities between the body of
said decision and the dispositive portion.
Thus, while the trial court is fully aware that a decision
once final and executory can no longer be amended or
corrected, it opted, for the purpose of finally settling the
claims of the parties and thereby avoid multiplicity of suits,
to amend the decision in question, on July 27, 1988, the
dispositive portion of which reads:
32
 "WHEREFORE, Order is hereby issued directing:
"1. the cancellation of lis pendens annotated at the
back of the title of the subject property by the Register
of Deeds of Caloocan City;
"2. the plaintiffs to pay the defendant the sum of
P1,500.00 monthly from May 15, 1986, the effective
date of the decision up to the date they vacate door
No. 2;
"3. the return of payments made by the plaintiffs to
defendant Zenaida Sangalang which shall be without
prejudice to off-setting of rental payments from
November 1982; and
"4. the writ of possession be issued on the property,
subject matter of the rescission of the contract.
"SO ORDERED" (Rollo, p. 64)
Sangalang and Cruz filed a Motion for Execution on the
above-quoted order on September 1, 1988 (Ibid., p. 65) but
before the day of the hearing of said motion, the Ruiz
spouses filed an "Urgent Motion to Cancel Hearing of
Motion." (Ibid., p. 127) On September 15, 1988, the Ruizes
filed the present petition.
ISSUE: W/O payment of interest can be ordered by the
court.
HELD: Anent the Ruizes' claim of interest as
aforementioned, it has been held in the case of Santulan v.
Fule, 133 SCRA 762 (1984) that where the court judgment
which did not provide for interest is already final, there is
no reason to add interest in the judgment. Interest was not
demanded by the Ruizes when the case was pending before
the lower court, hence, there is no reason for this Court to
grant such claim. As ruled by this Court, such claim is
groundless since the decision and orders sought to be
enforced do not direct the payment of interest and have
long become final (Canonizado v. Ordoñez-Benitez, 149
SCRA 555 [1987]).
DE CORTES V. VENTURANZA
GR NO. L-26058, OCT. 28, 1977
FACTS: Plaintiff Felix Cortes y Ochoa and Noel J. Cortes
filed the instant action for foreclosure of real estate against
the defendants Gregorio Venturanza, Mary E. Venturanza,
Jose Oledan and Erlinda M. Oledan. The complaint alleges
that plaintiff Felix Cortez y Ochoa was the original owner
of nine (9) parcels of land covered by Transfer Certificates
of Title Nos. 21334 to 21342, inclusive, while plaintiff Noel
J. Cortes was likewise the original owner of twenty-four (24)
parcels of land covered by Transfer Certificates off Title
Nos. 21343, 21345, 21347 to 21367, inclusive, all of the
land records of Bulacan; that on October 24, 1958 said
plaintiffs sold and delivered to the defendants all the above-
mentioned thirty-three (33) parcels of land with all the
improvements thereon for the total sum of P716,573.90 of
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
which defendants agreed to pay jointly and severally the
plaintiffs the sum of P100,000.00 upon the signing and
execution of a deed of sale and P40,000.00 on January 1,
1959 thereby leaving a balance of P576,573.90 which the
defendants agreed and bound themselves to pay plaintiffs
jointly and severally within three (3) years from January 1,
1959 with interest thereon at the rate of 6% per annum;
that defendants further agreed and bound themselves to
secure the payment of the said balance of P576,573.90 with
a first mortgage upon the said 33 parcels of land with
improvements; that the defendants have already paid the
plaintiffs the total sum of P140,000.00; that of the unpaid
balance owing to plaintiffs, P169,484.24 pertaining to
plaintiff Felix Cortes and P407,089.66 pertains to plaintiff
Noel J. Cortes; that upon the registration of the deed of sale
and mortgage with the office of the register of deeds of
Bulacan new certificates of title for the 33 parcels of land
were issued in the names of the defendants and the
mortgage obligation was noted thereon; that the mortgage
obligation fell due on January 1, 1962, but despite repeated
demands for payment, defendants failed and refused to pay
the said balance of P576,573.90 to plaintiffs; that from the
time the mortgage obligation fell due and demandable up
to December 1, 1962 the total interest due from the
defendants on the balance of their obligation is
P103,783.32 computer led at the stipulated interest of 6%
per annum; that it is stipulated in the deed of sale with
purchase money mortgage that in the event or default by
defendants to pay the obligation secured by the mortgage
and a suit is brought for the foreclosure of the mortgage or
any other legal proceedings is instituted for the enforcement
of plaintiffs' right, defendants would be obligated and
hound to pay the plaintiffs reasonable compensation for
attorney's fees which plaintiffs fixed at P50,000.00.
ISSUE: Whether or not legal interest should be awarded to
petitioners in addition to the accrued interest on the
indebtedness.
HELD: YES. Article 2212 of the Civil Code provides that
“Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point.”
The dispositive portion reads as follows:
WHEREFORE, THE APPEALED JUDGMENT IS
MODIFIED AND ANOTHER ONE IS RENDERED,
DIRECTING:
I. ALL THE DEFENDANTS APPELLANTS
VENTURANZAS AND OLEDANS TO PAY
JOINTLY AND SEVERALLY THE
PLAINTIFFS-APPELLEES:
A. THE SUM OF FIVE HUNDRED SEVENTY
SIX THOUSAND FIVE HUNDRED SEVENTY
THREE PESOS AND NINETY CENTAVOS
(P576,573.90), PLUS ONE HUNDRED THIRTY
SIX THOUSAND FOUR HUNDRED EIGHTY
TWO PESOS AND THIRTEEN CENTAVOS
33
 (P136,482.13) INTEREST AT THE RATE OF itself to insure the mortgaged property with an insurance
SIX PER CENTUM (6%) PER ANNUM FROM company approved by RCBC, and subsequently, to
JANUARY 1, 1959 TO DECEMBER 12, 1962, endorse and deliver the insurance policies to RCBC.
PLUS INTEREST AT THE SAME RATE ON
THE PRINCIPAL AMOUNT OF P576, 573.90 GOYU obtained in its name a total of ten insurance
ADDED TO THE ACCRUED INTEREST FOR policies from MICO. In February 1992, Alchester
THE PERIOD FROM DECEMBER 13,1962 Insurance Agency, Inc., the insurance agent where GOYU
UNTIL THE WHOLE OBLIGATION IS FULLY obtained the Malayan insurance policies, issued nine
PAID, WITHIN NINETY (90) DAYS FROM endorsements in favor of RCBC seemingly upon
NOTICE HEREOF. IN DEFAULT OF SUCH instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
PAYMENT, THE MORTGAGED PROPERTIES
SHALL BE SOLD AT PUBLIC AUCTION TO On April 27, 1992, one of GOYUs factory buildings in
REALIZE THE MORTGAGE INDEBTEDNESS Valenzuela was gutted by fire. Consequently, GOYU
AND COSTS IN ACCORDANCE WITH LAW; submitted its claim for indemnity on account of the loss
AND insured against. MICO denied the claim on the ground
B. THE SUM OF FIFTY THOUSAND PESOS that the insurance policies were either attached pursuant to
(P50,000.00) AS ATTORNEY'S FEES: writs of attachments/garnishments issued by various courts
II. THE CROSS-DEFENDANT'S or that the insurance proceeds were also claimed by other
VENTURANZAS TO PAY AND/OR creditors of GOYU alleging better rights to the proceeds
REIMBURSE THE CROSS-CLAIMANTS than the insured. GOYU filed a complaint for specific
OLEDANS: performance and damages which was docketed at the
A. THE SUM OF TWENTY TWO THOUSAND Regional Trial Court of the National Capital Judicial
TWO HUNDRED AND EIGHTY FIVE PESOS Region (Manila, Branch 3) as Civil Case No. 93-65442,
AND EIGHTY THREE CENTAVOS now subject of the present G.R. No. 128833 and 128866.
(P22,285.83), PLUS INTEREST AT THE RATE
OF SIX PERCENT (6%) PER ANNUM RCBC, one of GOYUs creditors, also filed with MICO its
COUNTED FROM THE FINALITY OF THIS formal claim over the proceeds of the insurance policies,
DECISION, UNTIL THE SAW IS FULLY PAID; but said claims were also denied for the same reasons that
B. THE AMOUNT WHICH SAID CROSS- MICO denied GOYUs claims.
CLAIMANT'S MAY PAY TO PLAINTIFFS-
APPELLEES UNDER THIS JUDGMENT;AND ISSUE: Whether or not GOYU is still liable for interest to
III. THE DEFENDANTS-APPELLANTS RCBC.
VENTURANZAS TO PAY TREBLE COSTS.
HELD: YES. The need for the payment of interest due
upon the principal amount of the obligation, which is the
RIZAL COMMERCIAL BANKING cost of money to RCBC, the primary end and the ultimate
CORPORATION, UY CHUN BING AND ELI D. reason for RCBCs existence and being, was duly
LAO, VS. COURT OF APPEALS AND GOYU & recognized by the trial court when it ruled favorably on
SONS, INC. RCBCs counterclaim, ordering GOYU to pay its loan
G.R. NO. 128833. APRIL 20, 1998 obligation with RCBC in the amount of P68,785,069.04, as
of April 27,1992, with interest thereon at the rate stipulated
FACTS: GOYU applied for credit facilities and in the respective promissory notes (without surcharges and
accommodations with RCBC at its Binondo Branch. After penalties) per computation, pp. 14-A, 14-B, 14-C (Record,
due evaluation, RCBC Binondo Branch, through its key p. 479). Inexplicably, the Court of Appeals, without even
officers, petitioners Uy Chun Bing and Eli D. Lao, laying down the factual or legal justification for its ruling,
recommended GOYUs application for approval by RCBCs modified the trial courts ruling and ordered GOYU to pay
executive committee. A credit facility in the amount of P30 the principal amount of P68,785,069.04 without any
million was initially granted. Upon GOYUs application interest, surcharges and penalties (Rollo, p. 200).
and Uys and Laos recommendation, RCBCs executive
committee increased GOYUs credit facility to P50 million, It is to be noted in this regard that even the trial court
then to P90 million, and finally to P117 million. hedgingly and with much uncertainty deleted the payment
of additional interest, penalties, and charges, in this
As security for its credit facilities with RCBC, GOYU manner:
executed two real estate mortgages and two chattel
mortgages in favor of RCBC, which were registered with Regarding defendant RCBCs commitment not to charge
the Registry of Deeds at Valenzuela, Metro Manila. Under additional interest, penalties and surcharges, the same does
each of these four mortgage contracts, GOYU committed not require that it be embodied in a document or some

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34
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form of writing to be binding and enforceable. The
principle is well known that generally a verbal agreement or
contract is no less binding and effective than a written one.
And the existence of such a verbal agreement has been
amply established by the evidence in this case. In any event,
regardless of the existence of such verbal agreement, it
would still be unjust and inequitable for defendant RCBC
to charge the plaintiff with surcharges and penalties
considering the latters pitiful situation.
The essence or rationale for the payment of interest or cost
of money is separate and distinct from that of surcharges
and penalties. What may justify a court in not allowing the
creditor to charge surcharges and penalties despite express
stipulation therefor in a valid agreement, may not equally
justify non-payment of interest. The charging of interest for
loans forms a very essential and fundamental element of the
banking business, which may truly be considered to be at
the very core of its existence or being. It is inconceivable for
a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of
Appeals outright deletion of the payment of interest as
agreed upon in the respective promissory notes. This
constitutes gross error.
For the computation of the interest due to be paid to
RCBC, the following rules of thumb laid down by this
Court in Eastern Shipping Lines, Inc. vs. Court of Appeals
(234 SCRA 78 [1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
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certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made,
the interest shall begin to run only from the date of the
judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
There being written stipulations as to the rate of interest
owing on each specific promissory note as summarized and
tabulated by the trial court in its decision (pp.470 and 471,
Record) such agreed interest rates must be followed.
CA AGRO-INDSUTRIAL DEVELOPMENT CORP
VS CA
G.R. NO. 90027, MARCH 3, 1993
FACTS: The petitioner thrpough it’s president Sergio
Aguirre and the spouses Pugao, enetered into an agreement
where the former purchased from the spouses two parcels
of land for a consideration of P 350,625.00. The
downpament of P75,725.00 was paid while the remaining
balance was covered by 3 postdated checks. Among the
terms and conditions was that the titles to the lots shall be
transferred to the petitioner upon full payment of the
purchase price and that the tramnsfer certificates of title
shall be deposited in a safetty deposit box of any bank.
They renteda safety deposit box No. 1448 from the private
respondent Security Bank and Trust company. Both signed
a contract of lease, which contains the following conditions:
“13. The bank is not a depository of the contents
of the safe and it has neither the possession npor
control of the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided and it
assu mes absolutely no liability in connection
therewith.”
The two renter ‘s keys were given to the renetrs – one to
Aguirre and othe other to the Pugaos. A guard key was in
the possession of the respondent bank. The safety deposit
box has two keys, one for the remnter’s key and the other
for the guard key, and can only be opended with the use of
both keys. The certificates of title were said to be placed
inside the box.
Thereafter, a Mrs. Margarita Ramos offered to purchase
the said property from the petitioners, offering as price of
35
P225.00 per square meter (/sqm) which translates to a
profit of P100.00/sqm or a total of P280, 500.00 for the
entire property. Mrs. Ramos demanded the execution of
the dead of sale which necessarili entailed the prodiction of
the certificates of title. Aguirre, accompanied by the
Purgaos proceeded to the repondent bank to open the
safety deposit box, however when opened the box yielded
no certificates. Because of the delay, Mrs. Ramos withdrew
her offer. Aggrieved, as the petitioner failed to realize the
expected profit, they filed a complaint for damages against
the repondent bank.
In its answer with counter claim, the respondent bank
alleged that petitioner has no cause of action because
paragraphs 13 and 14 of the contract of lease absolves them
from liability for the loss of any items or articles contain in
the box. They inetposed the counter claim for examplary
damages and attorney’s fees of P20,000.00.
The trial court rules in favor pf the respondent bank, and
granted them the attoeney’s fees of P5,00.00. this is bgased
on the conclusion that under paragraphs 13 and 14 of the
contract of lease, the Bank has no liability for the loss of the
Certificates of title, and is binding between the parties.
Their motion for reconsideration was denied, and thus they
appealed the decision with the Court of Appelas. They
argued among others that the said stipuatioon or
paragraphs 13 and 14 is null and void for being contrary to
law, public order, and public policy.
However, the Court of Appeals affirmed the decision
appealed from, on the theory that the contract executed
was a contract of lease and thus governed by the provisions
of Article 1643 which provides that “In the lease of things,
pone for the parties binds himself to give to another the
enjoyment or use of a thing for a price certain and for a
period which may be definite of indefinite. However, no
lease for more than ninety-nine years shall be valid.” Thus
it concludes that the defendant-appellant is not under any
duty to maintain the contents of the box. The stipulation
absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and
cannot be regarded as contrary to law, public order, and
public policy. Their motion for reconsideration has been
denied.
ISSUE: Whether or not the contractual relation between a
commercial bank and another party in a contract of rent of
a safety deposit box with respect to its contents placed by
the latter one of lessor and lessee?
HELD: NO. The Supreme Court held that the contract
for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil
code. However, it does not fully subscribe to the view that it
is a contract of deposit to be strictly governed by the
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provisions of the civil code; it is a special kind of deposit. It
is not a contract of lease contemplated in Article 1643 as
the full and absolute possession and control of the safety
deposit box was not given to the renters. The guard key of
the box remained with the bank which without this key the
safety deposit box could not be opened. Likewise the bank
could not open the box without the renter’s key.
Furthermore, in the renting of depository boxes it is clear
that the American Jurisprudence has been adopted. Section
72 of the General Banking act provides:
“In addition to the operations specifically
authorized elsewhere in this act, banking institutions
other than building and loan associations may
perform the following cervices:
(a) Receive in custody funds, documents,
and valuable objects, and rent safety
deposit boxes for the safeguarding of such
effects. “
xxx
The bank shall perform the services
permitted under subsections (a), (b), and (c)
of this section as depositories or as agents.
In the issue of paragraphs 13 and 14, it is ruled to be void
as they are contrary to law and public policy. They are
inconsistent with the Banks responsibility as a depository
under section 72(a) of the General Banking Act.
However, similarly the case should be dismissed. Not
because of the conclusion of the Court of Appeals. In this
case, although the contract was not that of a contract of
lease but because there was no proof that respondent bank
was aware of the agreement between the petitioner and the
Purgaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both
parties’ joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title
was due to the fraud or negoligence of the respondent bank.
Either the petitioner or the Purgaos could ask the Bank to
access the safetydeposit box without the other renter
present. Howveer, as there is no bad faith on the filing of
the complaint the trial court erred in condemning the
petitioner to pay the respondent bank attorney’s fees hence
it was deleted.
The petition is GRANTED by deleting the attorney’s fees.
DURBAN APARTMENTS CORPORATION VS
PIONEER INSURANCE AND SAFETY
CORPORATION
G.R. NO. 179419, JANUARY 12, 2011
FACTS: For review of the decision of the court of appeals
in CA-G.R. CV No. 86869 which affirmed the decision of
the RTC holding the petitioner solely liable to the
respondent for the loss of See’s jeep.
The facts as found by the CA are simple: The respondent
by right of subrogation files with the RTC a complaint for
36
recovery of Damages against the petitioner operating under
the name and style of City Garden Hotel and defendant
Vicente Justimbaste. It is the insurer for the loss and
damage of Jeffrey S. See’s 2001 Suzuki Grant Vitara in the
amount of P1,175,000.00. On April 30, 2002 See arrived
and checked in at the City Garden Hotel before midnight
and it’s parking attendant Justumbaste got the key to the
said vehicle from See to park it. However at about 1 am
See was awakened by a telephone call from the Hotel Chief
Security Officer who informed him that his car was
carnapped while it was parked unattended at the parking
area of Equitable PCI bank. The incident was subsequently
filed by See to the Operations division of the Makati City
Police Anti-carnapping Unit, and a flash alarm was issued.
However, even after the investigation the car has not yet
been recovered since July 23, 2002 as evidenced by the
Non-Recovery report issued by the PNP TMG. The
respondent paid the 1,163,250 money claim of See and
mortgagee ABN AMRO Savings Bank, Inc as indemnity
for the loss of the car. It averred that the loss of the car was
due to the negligence of the petitioner and Justimbaste
because it was discovered during the investigation that this
was the second time that a similar incident of carnapping
happened in the valet parking services of the petitioner and
no necessary precautions were taken to prevent its
repetition. Both refused to pay its valid, just, and lawful
claim despite written demands.
Upon service of summons, the petitioner and Justimbaste
filed their answer with compulsory counter claim alleging
that: See did not check in at its hotel but was a guest of a
certain Ching Montero. Justimbaste did not get the ignition
keys from See but it was See who requested a parking
attendant to park the Vitara at any available parking spot.
The said parking spot at Equitable PCI bank was within
See’s view while he and Montero were waiting in front of
the hotel. They also claim that valet parking services are
provided by the hotel for the convenience of its customers
looking for a parking space near the hotel premises; it is a
special privilege and does not include responsibility for any
losses or damages to motor vehicles and its accessories in
the parking area. It also alleged that the carnapper was able
to op-en the vitara without using the key which was
subsequently turned over to See.
During the pre trial the counsel for the respondent was
present, the counsel on record for the petitioner and
Justimbaste was absent but instead Atty. Nestor Mejia
appeared for the petitioners but did not file their pre-trial
brief.
The lower court granted the motion of the respondent
despite the opposition of the petitioner. See testified and
verified the facts averred by the respondent. Ricardo F.
Red testified that he is a claim evaluator of Pioneer
Insurance. The case was assigned to Vesper Insurance
Adjusters-appraisers, which recommended for its settlement
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at the sum of P1,163,250.00 which was accepted by See.
The matter was referred and forwarded to the respondents
counsel R.B. Sarajan and Associated who prepared and
sent the demand letters to the petitioner who did not pay
notwithstanding the receipt of the demand letters. The
services of R.B. Sarajan & Associates were engaged for
P100,000.00 as attorney’s fees plus P3,000.00 per count
appearance, to prosecute the claims before the lower court.
Ferdiand Cacnio, an adjuster at Vesper testified that the
respondent assigned the case to him, and he investigated
the matter. He interviewed See and verified the standard
procedure of the hotel in regards to valet parking services.
It is a standard procedure for the valet parking services to
assist their guest as soon as they got to the lobby entrance
and park the cars for their guests, and place the ignition
keys in their safety key box. As the hotel has only 12
available parking slots, it has an agreement with Equitable
PCI Bank permitting the hotel to use the parking space of
the name at night. He also learned that A Starex Van was
carnapped at the said place barely a month before the said
incident as the same case was assigned to vespers by Liberty
Insurance. Vesper recommended the sum of 1,045,750.00
for the settlement. However, See contested the
recommendation by reasoning out that 10% depreciation
should not be appreciated as the Vitara was used for barely
8 months prior to its loss, which Pioneer Insurance acceded
and tendered the sum of 1,163,250.00 as settlement.
The RTC granted the claim of the respondent and ordered
the petitioner to pay the sum of 1,163,250.00 with legal
interest thereon from July 22, 2003 and attorney’s fees and
litigation expenses amounting 20 p 120,000.00.
The appellate court affirmed the decision and held the
petitioner solely liable to the petitioner.
ISSUE: Whether the petitioner is liable to respondent for
the loss of See’s vehicle.
HELD: YES. The Supreme Court states that Article 1962
in relation to Article 1988 of the civil code defines a
contract of deposit and a necessary deposit made by
persons in hotels and inns:
Article 1962: A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the
contract, there is no deposit but some other
contract.
Article 1998: The deposit of effects made by
travelers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be
responsible for them as depositories, provided that
notice was given to them, or to their employees, of
then effects brought by the guests and that, on the
37
 part of the latter, they take the precaution which
said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
The facts show that the insured See deposited his vehicle
for safekeeping with the petitioner, through their employee
Justimbaste. In turn Justimbaste issued a claim stub to see.
Thus the contract of deposit was perfected from See’s
delivery when he handed over the keys to his vehicle which
Justimbaste received with obligation of safely keeping and
returning it.
Furthermore, the award of Attorney’s fees the SC finds
that the respondent is entitled to the award of Attorney’s
fees as such is awarded when a party is compelled to
litigate or incur expenses to protect its interest or where the
court deems it just and equitable As the petitioner refused
to answer for the loss of See’s vehicle which was deposited
with it for safekeeping. This refusal constrained
respondent, the insurer of See, and subrogated to the
latter’s right, to litigate and incur expenses.
However, the award was reduced from
P120,000.00 to P60,000.00
The petition is DENIED with MODIFICATIONS
DELOS SANTOS V TAN KHEY
58 OG NO. 45-53
FACTS:
• Tan Khey was the owner of International Hotel in Ilo-ilo
City. Romeo Delos Santos lodged in the respondent’s
hotel. When Plaintiff arrived in the hotel, he left shortly
thereafter, depositing his revolverand bag with a certain
Abutanatin. The latter was in charge of the hotel. The
bag contained a birthstone ring, an eyeglass, and a
pocketbook. He returned that evening and took his things
from Abutanatin. When he got into his room, he locked
the door and went to sleep.
• When he woke up, he found that the door to his room
was open and that his pants and bag containing the
revolver was missing.
• He reported the matter to the authorities. A secret service
agent investigated the matter and found that a wall of the
room of the Plaintiff was only 7 feet high and had an
opening from which one could enter from the outside.
• Tan Khey disclaims liability for the loss, saying that the
things were not deposited by Delos Santos with the
manager at the time they were lost, despite notice to that
effect posted in the hotel. He contended that to be liable
under Art. 1998 of the Civil Code, the following must
concur:
Ø Deposit of effects made by travelers in hotels or
inns
Ø Notice was given to the hotel keeper or employee
of the effects brought by guests
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Ø Guests/travelers take the precautions advised by
the hotel keepers/employees relative to the
vigilance of their effect
ISSUE: Whether or not Tan Khey is liable for the loss
despite their being lost of the effects of Delos Santos.
HELD: YES. Tan Khey is liable for the loss.
Under Art. 1998, when the law speaks of “depositing of
effects by travelers in hotels or inns,” it does not mean that
there is a personal receipt by the innkeeper of such effects.
The reason therefore is that it is the nature of the business
of an innkeeper is not only to provide lodgings, but also to
provide security to their persons and effects. The security is
not only confined to the effects actually delivered to the
innkeeper for safekeeping, but also to all effects placed in
the premises in the hotel. This is because innkeepers by the
nature of their business, have supervision and control of
their inns and the premises thereof.
It is not necessary that the effect was actually delivered, but
it is enough that they are within the inn. If a guest and
goods are within the inn, that is sufficient to charge him.
The owner of the hotel may exonerate himself from liability
by showing that the guest has taken exclusive control of his
own goods, but this must be exclusive custody and control
of a guest, and must not be held under the supervision and
care of the innkeeper, they are kept in a room assigned to a
guest or the other proper depository in the house.
In this case, the guest deposited his effects in the hotel
because they are in his room and within the premises of the
hotel, and therefore, within the supervision and control of
the hotel owner.
YHT REALTY CORPORATION, LAINEZ and
PAYAM v. COURT OF APPEALS
G.R. No. 126780. February 17, 2005
FACTS:
• Respondent Maurice Peaches McLoughlin is an
Australian businessman-philanthropist, who would always
stay at Tropicana Hotel every time he visits the
Philippines, and would rent a safety deposit box.
• The safety deposit box could only be opened through the
use of 2 keys, one of which is given to the registered guest,
and the other remaining in the possession of the
management of the hotel. McLoughlin allegedly placed
the following in his safety deposit box – 2 envelopes
containing US Dollars, one envelope containing
Australian Dollars, Letters, credit cards, bankbooks and a
checkbook.
• On 12 December 1987, before leaving for a brief trip,
McLoughlin took some items from the safety box which
includes the ff: envelope containing Five Thousand US
38
 Dollars (US$5,000.00), the other envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00), his
passports and his credit cards. The other items were left in
the deposit box.
• Upon arrival, he found out that a few dollars were missing
and the jewelry he bought was likewise missing.
Eventually, he confronted Lainez and Paiyam who
admitted that Tan opened the safety deposit box with the
key assigned to him.
• McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen
McLouglin’s key and was able to open the safety deposit
box with the assistance of Lopez, Paiyam and Lainez.
Lopez also told McLoughlin that Tan stole the key
assigned to McLouglin while the latter was asleep.
• McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered. He then
made Lopez and Tan sign a promissory note for him for
the loss. However, Lopez refused liability on behalf of the
hotel, reasoning that McLoughlin signed an "Undertaking
for the Use of Safety Deposit Box" which disclaims any
liability of the hotel for things put inside the box.
• On 17 May 1988 McLoughlin went back to AU and
consulted his lawyers. They wrote a letter addressed to
Pres. Cory Aquino which was pushed back to the DOJ
and the Western Police District. He went back from the
PH to AU several times more to attend business and
follow up but the matter was only filed on 3 Dec 1990
since he was not there to personally follow up.
• The RTC rendered judgment in favor of McLoughlin.
The CA modified only the amount of damages awarded.
ISSUE: May a hotel evade liability for the loss of items left
with it for safekeeping by its guests, by having these guests
execute written waivers holding the establishment or its
employees free from blame for such loss in light of Article
2003 of the Civil Code which voids such waivers.
HELD: NO. Petitioners were directed, jointly and
severally, to pay private respondent.
Article 2003 provides that the hotelkeeper cannot free hims
elf from responsibility by posting notices to the effect that
he is not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest whereby
the reasonability of the former as set for the in articles1998
to 2001 is suppressed or diminished shall be void. The hotel
businesslike the common carrier's business is imbued
with public interest. Catering to the public, hotel keepers
are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty
constitutes the essence of the business. The law in turn does
not allow such duty to the public to be negated or diluted
by any contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel
keepers on guests for their signature.
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In an early case, to hold hotel-keepers or innkeepers liable
for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is
enough that such effects are within the hotel or inn. With
greater reason should the liability of the hotel keeper be
enforced when the missing items are taken without the
guest’s knowledge and consent from a safety deposit box
provided by the hotel itself. The undertaking manifestly
contravened Article 2003 of the Civil Code it allowed
Tropicana to be released from liability arising from any loss
in the contents of the safety deposit box for any cause
whatsoever. Evidently, the undertaking was intended to bar
any claim against Tropicana for any loss of the contents of
the safety deposit box whether or not negligence was
incurred by Tropicana or its employees. The New Civil
Code is explicit that the responsibility of the hotel-keeper
shall extend to loss of, or injury to, the personal property of
the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as it
may proceed from any force majeure. It is the loss through
force majeure that may spare the hotel-keeper from liability.
In the case at bar, there is no showing that the act of the
thief or robber was done with the use of arms or through an
irresistible force to qualify the same as force majeure.
MAKATI SHANGRI-LA HOTEL AND RESORT,
INC., v. HARPER
GR No. 189998 Aug 29, 2012
FACTS: In the first week of November 1999, Christian
Harper, a Norwegian national, came to Manila on a
business trip as the Business Development Manager for
Asia of ALSTOM Power Norway AS, an engineering firm
with worldwide operations. He checked in at the Shangri-
La Hotel (Room 1428). He was to check out on November
6, however, on that early morning, he was found murdered
inside his hotel room by still unidentified malefactors.
The crime was discovered in which a routine verification
call from the American Express Card Company to
cardholder Harper's residence in Oslo, Norway; Harper's
family tried to connect to Harper about the attempt to use
his American Express Card Company; failing to do so, the
family requested Alarcon, the Duty Manager of Shangri-La
Hotel to check on Harper's room; Alarcon and a security
personnel went to Harper's room and were shocked to
discover Harper's lifeless body on the bed.
Before that, it appeared that on 11am of November 6, a
Caucasian male entered the Alexis Jewelry Store in
Glorietta, Ayala Center, Makati City and expressed interest
in purchasing a Cartier lady's watch valued at P320,000
with the use of two Mastercard credit cards and an
American Express credit card issued in the name of
39
Harper. The customer's difficulty in answering the queries
phoned in by a credit card representative sufficiently
aroused the suspicion of saleslady Lumba who asked for the
customer's passport upon suggestion of the credit card
representative to put the credit cards on hold. After that,
the customer hurriedly left the store, and left the three
credit cards and the passport behind.
Based on the investigation, Harper had visitors and they
had drunk and smoked many cigarettes the night before.
Viewing the CCTV's, Harper entered his room at
12:14am, followed by a woman at 12:17am, and then a
Caucasian male at 2:48am. The woman left the room at
around 5:33am, and the Caucasian male at 5:46am.
Respondents (heirs of Harper) commenced a suit in the
RTC to recover various damages from petitioner alleging
that, among others, the murder succeeded to trespass into
the area of the hotel's private rooms area and into the room
of the said deceased on account of the hotel's gross
negligence in providing the most basic security system of its
guests, the lack of which owing to the acts or omissions of
its employees was the immediate cause of the tragic death
of the deceased. RTC ruled that defendant hotel was remiss
in its duties and thus liable for the death of Christian
Harper.
CA affirmed judgment of RTC with modification as to
award of damages.
ISSUES:
(1) WON Petitioner was liable due to its own negligence
(2) WON Col. De Guzman's initial recommendation had
been rebuffed due to the hotel being only half-booked; that
there had been no urgency to adopt a one-guard-per-floor
policy because security had been adequate at that time; and
that he actually meant by his statement that "the hotel was
not doing well" that the hotel was only half-booked
HELD:
(1) As pointed out by its Chief Security Officer, Col. De
Guzman, recommended that one roving guard be assigned
on each floor of the hotel considering the length and shape
of the corridors, pointing out the security lapses of the
hotel.
The Court held that defendant-appellant was remiss in its
duty of exercising the required reasonable care under the
circumstances. Based on the records, Col. De Guzman,
upon taking over the job as the chief of the security force of
the hotel, made an assessment of the security situation; he
was not satisfied with the security set-up and told the hotel
management of his desire to improve it. The existing
security scheme then was one guard for 3 or 4 floors so he
recommended the one-guard-per-floor policy.
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On cross-examination, Col. De Guzman testified that the
security of the hotel was adequate at the time the crime
occurred because the hotel was not fully booked; that the
one-guard-per-floor policy is the "ideal" set-up when the
hotel is fully booked. He made his recommendation in the
early part of 1999 but was disapproved as the hotel was not
doing well and it was not fully booked so the existing
security was adequate enough. His advice was observed
only in the late November 1999 or the early part of
December 1999 because of the Centennial Celebration.
It could be inferred that the hotel was negligent in
providing adequate security due its guests. Unfortunately,
the record failed to show that at the time of the death of
Christian Harper, it was exercising reasonable care to
protect its guests from harm and danger by providing
sufficient security to commensurate to it being on the finest
hotels in the country. Hotel business like the common
carrier's business is imbued with public interest. Catering to
the public, hotelkeepers are bound to provide not only
lodging for hotel guests but also security to their persons
and belongings. The twin duty constitutes the essence of the
business. Such negligence is the proximate cause which set
the chain of events that led to the eventual demise of its
guest.
(2) The hotel business is imbued with public interest.
Catering to the public, hotelkeepers are bound to provide
not only lodging for their guests but also security to the
persons and belongings or their guests. The twin duty
constitutes the essence of the business. Applying by analogy
Article 2000, 2001, and 2002 of the Civil Code (all of which
concerned the hotelkeepers' degree of care and
responsibility as to the personal effects of their guests), we
hold that there is much greater reason to apply the same if
not greater degree of care and responsibility when the lives
and personal safety of their guests are involved. Otherwise,
the hotelkeepers would simply stand idly by as strangers
have unrestricted access to all the hotel rooms on the
pretense of being visitors of the guests, without being held
liable should anything untoward befall the unwary guests.
That would be absurd, something that no good law would
ever envision.
In fine, the Court sees no reversible error on the part of the
CA.
SULPICIO LINES, INC. v. SESANTE
GR No. 172682 July 27, 2016
FACTS: September 18, 1998, M/V Princess of the Orient,
a passenger vessel owned and operated by the petitioner,
sank near Fortune Island in Batangas. 150/388 were lost.
Napoleon Sesante, then a member of PNP and a lawyer,
was one of the passengers who survived the sinking. He
sued the petitioner for breach of contract and damages.
40

Sesante alleged in his complaint that the M/V Princess of
the Orient left the Port of Manila while Metro Manila was
experiencing stormy weather. *P.S. kailangan pa ba
malaman kung paano? Like may big waves rocking the
boat kasi masama nga panahon, panic, naipit siya ng steel
bar nung natumba siya, lumutang pa din naman siya kahit
na lumubog na yung barko kasi marunong siya magfloat,
tapos nadala siya sa coastline ng Cavite and Batangas until
marescue and that nagsuffer siya serious anxiety and
mental anguish + injuries ALSO HAD LOST MONEY,
JEWELRY, IMPORTANT DOUCMENTS, POLICE
UNIFORMS, .45 CALIBER PISTOL...
Petitioner insisted on the seaworthiness of the M/V
Princess of the Orient due to its having been cleared to sail
from the Port of Manila by the proper authorities; that the
sinking had been due to force majeure; that it had not been
negligent; and that its officers and crew had also not been
negligent because they had made preparations to abandon
the vessel because they had launched life rafts and had
provided the passengers assistance in that regard.
RTC in favor of Sesante. Petitioner was negligent and
liable to Sesante pursuant to Articles 1739 and 1759 of the
Civil Code.
Pending appeal in the CA, Sesante passed away; substituted
by his heirs. CA held petitioner civilly liable because its
officers and crew had been negligent in performing their
duties and also lowered the award of damages from
500,000 to 120,000 which approximated the cost of
Sesante’s lost personal belongings.
The petitioner contends that its liability for the loss of
Sesante’s personal belongings should conform with Article
1754, in relation to Articles 1998, 2000 to 2003 of the Civil
Code. Petitioner denies liability because Sesante’s
belongings had remained in his custody all throughout the
voyage until the sinking, and he had not notified the
petitioner or its employees about such belongings. Hence,
absent such notice, liability did not attach to the petitioner.
ISSUE: Is notification required before the common carrier
becomes liable for lost belongings that remained in the
custody of the passenger?
HELD: NO. The rule that the common carrier is always
responsible for the passenger’s baggage during the voyage
needs to be emphasized. Article 1754 of the Civil Code
does not exempt the common carrier from liability in case
of loss, but only highlights the degree of care required of it
depending on who has the custody of the belongings.
Hence, the law requires the common carrier to observe the
same diligence as the hotel keepers in case the baggage
remains with the passenger; otherwise, extraordinary
diligence must be exercised. Furthermore, the liability of
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the common carrier attaches even if the loss or damage to
the belongings resulted from the acts of the common
carrier’s employees, the only exception being where such
loss or damages is due to force majeure.
In YHT Realty Corporation v. Court of Appeals, the court
declared that the actual delivery of the goods to the
innkeepers or their employees as unnecessary before
liability could attach to the hotelkeepers in the event of loss
of personal belongings of their guests considering that the
personal effects were inside the hotel or inn because the
hotelkeeper shall remain accountable. Accordingly, actual
notification was not necessary to render the petitioner as
the common carrier liable for the lost personal belongings
of Sesante. By allowing him to board the vessel with his
belongings without any protest, the petitioner became
sufficiently notified of such belongings. So long as the
belongings were brought inside the premises of the vessel,
the petitioner was thereby effectively notified and
consequently duty-bound to observe the required diligence
in ensuring the safety of the belongings during the voyage.
Applying Article 2000 of the Civil Code, the petitioner
assumed the liability for loss of the belongings caused by the
negligence of its officers or crew. In view of our finding that
the negligence of the officers and crew of the petitioner was
the immediate and proximate cause of the sinking of the
M/V Princess of the Orient, its liability for Sesante’s lost
personal belongings was beyond question.
PNB VS. SE
GR NO. 119231, 18 APRIL 1996
FACTS:
In accordance with the Warehouse Receipts Law, Noah’s
Ark Sugar Refinery issued on several dates, 5 Warehouse
Receipts (Quedans).
Receipt No. 18062 – Rosa Sy
Receipt No. 18080 – RNS Merchandising
Receipt No. 18081 – St. Therese’s Merchandising
Receipt No. 18082 – STM
Receipt No. 18083 – RNS
They were endorsed to Luis Ramos (#2 and #3) and
Cresencia Zoleta (other 3). They endorsed the quedans to
PNB as security for 2 loans: 1) 15.6M and 2) 23.5M. They
failed to pay their loans upon maturity. So, PNB (as
endorsee) wrote to Noah’s Ark Sugar Refinery demanding
delivery of the sugar stocks covered by the quedans
endorsed to it by Ramos and Zoleta. Noah’s Ark Sugar
Refinery refused to comply, alleging that the original
purchasers of the stocks never acquired ownership because
of failure to pay. PNB filed for “specific performance with
damages and application for writ of attachment”. PNB
41
obtained favourable judgment, but the defendants asserted
their warehouseman’s lien. Respondent Judge Benito C. Se,
Jr., in whose sala the case was raffled, denied the
application for writ of attachment. Sugar Refinery and co-
defendants filed an answer with counterclaim and third
party complaint. They claimed to own the quedans and the
sugar represented therein. Allegedly, RNS and STM
purchased the sugar covered by the quedans but the checks
they gave as payment were dishonoured. Considering that
the buyers never acquired ownership, their subsequent
endorsers and PNB could not acquire a better right.
RTC: Denied
CA: Reversed. Ordered RTC to render summary
judgment in favour of PNB. Defendants were not owners
but were only warehousemen with respect to the sugar
stocks.
ISSUE:
Whether or not the PNB should pay storage fees for sugar
stocks covered by 5 Warehouse Receipts stored in the
warehouse of private respondents
Whether or not the warehouseman can enforce his
warehouseman’s lien before delivering delivering the sugar
stocks as ordered by the Court of Appeals or need he file a
separate action to enforce payment of storage fees|||
HELD:
Petitioner is in estoppel in disclaiming liability for the
payment of storage fees due the private respondents as
warehouseman while claiming to be entitled to the sugar
stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery
of the sugar stocks. The unconditional presentment of the
receipts by the petitioner for payments against private
respondents on the strength of the provisions of the
Warehouse Receipts Law (R.A. 2137) carried with it the
admission of the existence and validity of the terms,
conditions and stipulations written on the face of the
Warehouse Receipts, including the unqualified recognition
of the payment of warehouseman's lien for storage fees and
preservation expenses. Petitioner may not now retrieve the
sugar stocks without paying the lien due private
respondents as warehouseman.|||
While the PNB is entitled to the stocks of sugar as the
endorse of the quedans, delivery to it shall be effected only
upon payment of the storage fees. Imperative is the right of
the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the
Warehouse Receipts Law, the warehouseman loses his lien
upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman
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surrenders the possession of the goods without requiring
payment of his lien, because a warehouseman's lien is
possessory in nature.|||
We, therefore, uphold and sustain the validity of the
assailed orders of public respondent, dated December 20,
1994 and March 1, 1995.|||
WHEREFORE, the petition should be, as it is, hereby
dismissed for lack of merit. The questioned orders issued by
public respondent judge are affirmed.
PNB VS. SAYO JR.
G.R. No. 129918. July 9, 1998
FACTS:
In accordance with Act No. 2137, the Warehouse Receipts
Law, Noahs Ark Sugar Refinery issued on several dates, the
following Warehouse Receipts (Quedans): (a) March 1,
1989, Receipt No. 18062, covering sugar deposited by
Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering
sugar deposited by RNS Merchandising (Rosa Ng Sy); (c)
March 21, 1989, Receipt No. 18081, covering sugar
deposited by St. Therese Merchandising; (d) March 31,
1989, Receipt No.
18086, covering sugar deposited by St. Therese
Merchandising; and (e) April 1, 1989, Receipt No. 18087,
covering sugar deposited by RNS Merchandising. The
receipts are substantially in the form, and contains the
terms, prescribed for negotiable warehouse receipts by
Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081
were negotiated and endorsed to Luis T. Ramos, and
Receipts Nos. 18086, 18087 and 18062 were negotiated
and endorsed to Cresencia K. Zoleta. Ramos and Zoleta
then used the quedans as security for two loan agreements
one for P15.6 million and the other for P23.5 million
obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the
Philippine National Bank. Luis T. Ramos and Cresencia K.
Zoleta failed to pay their loans upon maturity on January 9,
1990. Consequently, on March 16, 1990, the Philippine
National Bank wrote to Noahs Ark Sugar Refinery
demanding delivery of the sugar stocks covered by the
quedans endorsed to it by Zoleta and Ramos. Noahs Ark
Sugar Refinery refused to comply with the demand alleging
ownership thereof, for which reason the Philippine
National Bank filed with the Regional Trial Court of
Manila a verified complaint for Specific Performance with
Damages and Application for Writ of Attachment against
Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T.
Go and Wilson T. Go, the last three being identified as the
sole proprietor, managing partner, and Executive Vice
President of Noahs Ark, respectively.
42
Respondent Judge Benito C. Se, Jr., [to] whose sala the
case was raffled, denied the Application for Preliminary
Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with
Counterclaim and Third-Party Complaint in which they
claimed that they [were] the owners of the subject quedans
and the sugar represented therein. The Answer
incorporated a Third-Party Complaint by Alberto T.
Looyuko, Jimmy T. Go and Wilson T. Go, doing business
under the trade name and style Noahs Ark Sugar Refinery
against Rosa Ng Sy and Teresita Ng, praying that the latter
be ordered to deliver or return to them the quedans
(previously endorsed to PNB and the subject of the suit) and
pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated
September 6, 1990, one of avoidance, is essentially to the
effect that the transaction between them, on the
one hand, and Jimmy T. Go, on the other, concerning the
quedans and the sugar stocks covered by them was merely a
simulated one being part of the latters complex banking
schemes and financial maneuvers, and thus, they are not
answerable in damages to him. On January 31, 1991, the
Philippine National Bank filed a Motion for Summary
Judgment in favor of the plaintiff as against the defendants
for the reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order
denying the Motion for Summary Judgment. Thereupon,
the Philippine National Bank filed a Petition for Certiorari
with the Court of Appeals, docketed as CA-G.R. SP No.
25938 on December 13, 1991. On December 13, 1991, the
Court of Appeals nullified and set aside the orders of May 2
and July 4, 1990 of the Regional Trial Court and ordered
the trial court to render summary judgment in favor of the
PNB. On June 18, 1992, the trial court rendered judgment
dismissing plaintiffs complaint against private respondents
for lack of cause of action and likewise dismissed private
respondents counterclaim against PNB and of the Third-
Party Complaint and the Third-Party Defendants
Counterclaim. On September 4, 1992, the trial court
denied PNBs Motion for Reconsideration. On June 9,
1992, the PNB filed an appeal from the RTC decision with
the Supreme Court, G.R. No. 107243, by way of a Petition
for Review on Certiorari under Rule 45 of the Rules of
Court. This Court rendered judgment on September 1,
1993, the dispositive portion of which reads:
WHEREFORE, the trial judges decision in Civil Case No.
90-53023, dated June 18, 1992, is reversed and set aside
and a new one rendered conformably with the final and
executory decision of the Court of Appeals in CA-G.R. SP
No. 25938, ordering the private respondents Noahs Ark
Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and
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Wilson T. Go, jointly and severally:
to deliver to the petitioner Philippine National Bank, the
sugar stocks covered by the Warehouse Receipts/Quedans
which are now in the latters possession as holder for value
and in due course; or alternatively, to pay (said) plaintiff
actual damages in the amount of P39.1 million, with legal
interest thereon from the filing of the complaint until full
payment; and
to pay plaintiff Philippine National Bank attorneys fees,
litigation expenses and judicial costs hereby fixed at the
amount of One Hundred Fifty Thousand Pesos
(P150,000.00) as well as the costs.
SO ORDERED.
On September 29, 1993, private respondents moved for
reconsideration of this decision. A Supplemental/Second
Motion for Reconsideration with leave of court was filed by
private respondents on November 8, 1993. We denied
private respondents
motion on January 10, 1994. Private respondents filed a
Motion Seeking Clarification of the Decision, dated
September 1, 1993. We denied
this motion in this manner: It bears stressing that the relief
granted in this Courts decision of September 1, 1993 is
precisely that set out in the final and executory decision of
the Court of Appeals in CA-G.R. SP No. 25938, dated
December 13, 1991, which was affirmed in toto by this
Court and which became unalterable upon becoming final
and executory.
Private respondents thereupon filed before the trial court
an Omnibus Motion seeking among others the deferment
of the proceedings until private respondents [were] heard
on their claim for warehousemans lien. On the other hand,
on August 22, 1994, the Philippine National Bank filed a
Motion for the Issuance of a Writ of Execution and an
Opposition to the Omnibus Motion filed by private
respondents.
The trial court granted private respondents Omnibus
Motion on December 20, 1994 and set reception of
evidence on their claim for warehousemans lien. The
resolution of the PNBs Motion for Execution was ordered
deferred until the determination of private respondents
claim.
On February 21, 1995, private respondents claim for lien
was heard and evidence was received in support thereof.
The trial court thereafter gave both parties five
43

(5) days to file respective memoranda. On February 28,
1995, the Philippine National Bank filed a Manifestation
with Urgent Motion to Nullify Court Proceedings. In
adjudication thereof, the trial court issued the following
order on March 1, 1995: WHEREFORE, this court hereby
finds that there exists in favor of the defendants a valid
warehousemans lien under Section 27 of Republic Act
2137 and accordingly, execution of the judgment is hereby
ordered stayed and/or precluded until the full amount of
defendants lien on the sugar stocks covered by the five (5)
quedans subject of this action shall have been satisfied
conformably with the provisions of Section 31 of Republic
Act 2137.
Unsatisfied with the trial courts order of 1 March 1995,
herein petitioner filed with us G.R. No. 119231.
ISSUE:
W/O the private respondents may enforce
warehouseman’s lien.
HELD:
B. Under the Special Circumstances in This Case, Private
Respondents May Enforce Their Warehousemans Lien
in Civil Case No. 90-53023. The remedies available to a
warehouseman, such as private respondents, to enforce his
warehousemans lien are:
(1)To refuse to deliver the goods until his lien is satisfied,
pursuant to Section 31 of the Warehouse
Receipt Law;
To sell the goods and apply the proceeds thereof to the
value of the lien pursuant to Sections 33 and 34 of
the Warehouse ReceiptsLaw; and
By other means allowed by law to a creditor against his
debtor, for the collection from the depositor of all charges
and advances which the depositor expressly or impliedly
contracted with the warehouseman to pay under Section 32
of the Warehouse Receipt Law; or such other remedies
allowed by law for the enforcement of a lien against
personal property under Section 35 of said law. The third
remedy is sought judicially by suing for the unpaid charges.
Initially, private respondents availed of the first remedy.
However, when petitioner moved to execute the judgment
in G.R. No. 107243 before the trial court, private
respondents, in turn, moved to have the warehouse charges
and fees due them determined and thereafter sought to
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collect these from petitioners. While the most appropriate
remedy for private respondents was an action for collection,
in G.R. No. 119231, we already recognized their right to
have such charges and fees determined in Civil Case No.
90-53023. The import of our holding in G.R. No. 119231
was that private respondents were likewise entitled to a
judgment on their warehouse charges and fees, and the
eventual satisfaction thereof, thereby avoiding having to file
another action to recover these charges and fees, which
would only have further delayed the resolution of the
respective claims of the parties, and as a corollary thereto,
the indefinite deferment of the execution of the judgment in
G.R. No. 107243.Thus we note that petitioner, in fact,
already acquiesced to the scheduled dates previously set for
the hearing on private
respondents warehousemans charges. However, as will be
shown below, it would be premature to execute the order
fixing the warehousemans charges and fees.
ADDITIONAL INFORMATION (PART OF THE
HELD) TO SHOW THAT PETITIONER DOES NOT
their HAVE
WAREHOUSEMAN’S LIEN
The next issue to resolve is the duration of time the right of
petitioner over the goods may be held subject
to the warehousemans lien. Sections 8, 29 and 31 of the
Warehouse Receipts Law now come to fore. They provide,
as follows: SECTION 8. Obligation of warehousemen to
deliver. A warehouseman, in the absence of some lawful
excuse provided by this Act, is bound to deliver the goods
upon a demand made either by the holder of a receipt for
the goods or by the depositor, if such demand is
accompanied with:
(a) An offer to satisfy warehousemans
lien;
An offer to surrender the receipt, if negotiable, with such
indorsements as would be necessary for the
negotiation of the receipt; and
A readiness and willingness to sign, when the goods are
delivered, an acknowledgment that they have been
delivered, if such signature is requested by the
warehouseman.
In case the warehouseman refuses or fails to deliver the
goods in compliance with a demand by the holder or
depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a
lawful excuse for such refusal.
44
SECTION 29. How the lien may be lost.
warehouseman loses his lien upon
(a) By surrendering possession
or
By refusing to deliver the goods when a demand is made
with which he is bound to comply under the provisions of
this Act.
SECTION 31. Warehouseman need not deliver until lien is
satisfied. A warehouseman having a lien valid against the
person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied. Simply put, where a
valid demand by the lawful holder of the quedans for the
delivery of the goods is refused by the warehouseman,
despite the absence of a lawful excuse provided by the
statute itself, the warehousemans lien is thereafter
concomitantly lost. As to what the law deems a valid
demand, Section 8 enumerates what must accompany a
demand; while as regards the reasons which a
warehouseman may invoke to legally refuse to effect
delivery of the goods covered by the quedans, these are:
That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act. (See Sec. 8,
Act No. 2137)
That the warehouseman has legal title in himself on the
goods, such title or right being derived directly or indirectly
from a transfer made by the depositor at the time of or
subsequent to the deposit for storage, or from the
warehousemans lien. (Sec. 16, Act No. 2137)
That the warehouseman has legally set up the title or right
of third persons as lawful defense for non-delivery of the
goods as follows:
Where the warehouseman has been requested, by or on
behalf of the person lawfully entitled to a right of property
of or possession in the goods, not to make such delivery
(Sec. 10, Act No. 2137), in which case, the warehouseman
may, either as a defense to an action brought against him
for nondelivery of the goods, or as an original suit,
whichever is appropriate, require all known claimants to
interplead (Sec. 17, Act No. 2137);
Where the warehouseman had information that the
delivery about to be made was to one not lawfully entitled
to the possession of the goods (Sec. 10, Act No. 2137), in
which case, the warehouseman shall be excused from
liability for refusing to deliver the goods, either to the
depositor or person claiming under him or to the adverse
claimant, until the warehouseman has had a reasonable
time to ascertain the validity of the adverse claims or to
bring legal proceedings to compel all claimants to
interplead (Sec. 18, Act No. 2137); and
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A
goods; Where the goods have already been lawfully sold to third
thereof, persons to satisfy a warehousemans lien, or have been
lawfully sold or disposed of because of their perishable or
hazardous nature. (Sec. 36, Act No. 2137).
That the warehouseman having a lien valid against the
person demanding the goods refuses to deliver the goods to
him until the lien is satisfied. (Sec. 31, Act No. 2137)
That the failure was not due to any fault on the part of the
warehouseman, as by showing that, prior to demand for
delivery and refusal, the goods were stolen or destroyed by
fire, flood, etc., without any negligence on his part, unless
he has contracted so as to be liable in such case, or that the
goods have been taken by the mistake of a third person
without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-
delivery. (67 C.J. 532)[45] Regrettably, the factual settings
do not sufficiently indicate whether the demand to obtain
possession of the goods complied with Section 8 of the law.
The
presumption, nevertheless, would be that the law was
complied with, rather than breached, by petitioner. Upon
the other hand, it would appear that the refusal of private
respondents to deliver the goods was not anchored on a
valid excuse, i.e., non-satisfaction of the warehousemans
lien over the goods, but on an adverse claim of ownership.
Private respondents justified their refusal to deliver the
goods, as stated in their Answer with Counterclaim and
Third-Party Complaint in Civil Case No. 90-53023, by
claiming that they are still the legal owners of the subject
quedans and the quantity of sugar represented therein.
Under the circumstances, this hardly qualified as a valid,
legal excuse. The loss of the warehousemans lien, however,
does not necessarily mean the extinguishment of the
obligation to pay the warehousing fees and charges which
continues to be a personal liability of the owners, i.e., the
pledgors, not the pledgee, in this case. But even as to the
owners-pledgors, the warehouseman fees and charges have
ceased to accrue from the date of the rejection by Noahs
Ark to heed the lawful demand by petitioner for the release
of the goods.
The finality of our denial in G.R. No. 119231 of petitioners
petition to nullify the trial courts order of 01 March 1995
confirms the warehousemans lien; however, such lien,
nevertheless, should be confined to the fees and charges as
of the date in March 1990 when Noahs Ark refused to heed
PNBs demand for delivery of the sugar stocks and in no
event beyond the value of the credit in favor of the pledgee
(since it is basic that, in foreclosures, the buyer does not
assume the obligations of the pledgor to his other creditors
even while such buyer acquires title over the goods lessany
existing preferred lien thereover). The foreclosure of the
thing pledged, it might incidentally be mentioned, results in
45
the full satisfaction of the loan liabilities to the pledgee of
the pledgors.
ATOK FINANCE CORP. v COURT OF APPEALS
GR No. 80078, May 18, 1993
FACTS:
On 27 July 1979, private respondents Sanyu Chemical
corporation ("Sanyu Chemical") as principal and Sanyu
Trading Corporation ("Sanyu Trading") along with
individual private stockholders of Sanyu Chemical, namely,
private respondent spouses Danilo E. Halili and Pablico
Bermundo as sureties, executed in the continuing
Suretyship Agreement in favor of Atok Finance as creditor.
Under this Agreement, Sanyu
Trading and the individual private respondents who were
officers and stockholders of Sanyu Chemical did:
For valuable and/or other consideration . . ., jointly and
severally unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called Creditor), the full,
faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . .
(hereinafter called Principal) to the Creditor. The word
"indebtedness" is used herein in its most comprehensive
sense and includes any and all advances, debts, obligations
and liabilities of Principal or any one or more of them,
here[to]fore, now or hereafter made, incurred or created,
whether voluntary or involuntary and however arising,
whether direct or acquired by the Creditor by assignment
or succession, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or
undetermined and whether the Principal may be may be
liable individually of jointly with others, or whether
recovery upon such indebtedness may be or hereafter
become barred by any statute of limitations, or whether
such indebtedness may be or otherwise become
unenforceable.
Other relevant provisions of the Continuing Suretyship
Agreement follow:
This is a continuing suretyship relating to any indebtedness,
including that arising under successive transactions which
shall either continue the indebtedness from time to time or
renew it after it has been satisfied. This suretyship is
binding upon the heirs, successors, executors,
administrators and assigns of the surety, and the benefits
hereof shall extend to and include the successors and
assigns of the Creditor.
The obligations hereunder are joint and several and
independent of the obligations of the Principal. A separate
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
action or actions may be prosecuted against the Principal
and whether or not the Principal be joined in any such
action or actions.
In addition to liens upon, and rights of set-off against the
moneys, securities or other property of the Surety given to
the Creditor by law, the Creditor shall have the lien upon
and a right of self-off against all moneys, securities, and
other property of the Surety now and hereafter in the
possession of the Creditor; and every such lien or right of
self-off may be exercised without need of demands upon or
notice to the Surety. No lien or right of set-off shall be
deemed to have been waived by any act, omission or
conduct on the part of the Creditor, or by any neglect to
exercise such right of set-
off or to enforce such lien, or by any delay in so doing, and
every right of set-off or lien shall continue in full force and
effect until such right of set-off of lien is specifically waived
or released by an instrument in writing executed by the
Creditor.
Any indebtedness of the Principal now or hereafter held by
the Surety is hereby subordinated to the indebtedness of the
Principal to the Creditor; and if the Creditor so requests,
such indebtedness of the Principal of the Surety shall be
collected, enforced and shall be paid over to the Creditor
and shall be paid over to the Creditor and shall be paid
over to the Creditor on account of the indebtedness of the
Principal to the Creditor but without reducing or affecting
in any manner the liability of the Surety under the
provisions of this suretyship.
On 27 November 1981, Sanyu Chemical assigned its trade
receivables outstanding as of 27 November 1981 with a
total face value of P125,871.00, to Atok Finance in
consideration of receipt fromAtok Finance of the amount of
P105,000.00. The assigned receivables carried a standard
term of thirty (30) days; it appeared, however, that the
standard commercial practice was to grant an extension up
to one hundred twenty (120) days without penalties. The
relevant portions of this Deed of Assignment read as
follows:
FOR VALUE RECEIVED, the ASSIGNOR does hereby
SELL, TRANSFER and ASSIGN all his/its rights, title
and interest in the contracts, receivables, accounts, notes,
leases, deeds of sale with reservation of title, invoices,
mortgages, checks, negotiable instruments and evidences of
indebtedness listed in the schedule forming part hereinafter
called "Contract" or "Contracts."
To induce the ASSIGNEE to purchase the above
Contracts, the ASSIGNOR does hereby certify, warrant
and represent that :
46
(a). He/It is the sole owner of the assigned Contracts free
and clear of claims of any other party except the herein
ASSIGNEE and has the right to transfer absolute title
thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount
owing and to become due on each contract is correctly
stated upon the schedule or other evidences of the Contract
delivered pursuant thereto;
(c). Each assigned Contract arises out of the sale of
merchandise/s which had been delivered and/or services
which have been rendered and none of the Contract is
now, nor will at any time become, contingent upon the
fulfillment of any contract or condition whatsoever, or
subject to any defense, offset or counterclaim;
(d). No assigned Contract is represented by any note or
other evidence of indebtness or other security document
except such as may have been endorsed, assigned and
delivered by the ASSIGNOR to the ASSIGNEE
simultaneously with the assignment of such Contract;
(e). No agreement has been made, or will be made, with
any debtor for any deduction discount or return of
merchandise, except as may be specifically noted at the
time of the assignment of the Contract;
(f). None of the terms or provisions of the assigned
Contracts have been amended, modified or waived;
(g). The debtor/s under the assigned Contract/s are solvent
and his/its/their failure to pay the assigned Contracts
and/or any installment thereon upon maturity thereof shall
be conclusively considered as a violation of this warranty;
and
(h). Each assigned Contract is a valid obligation of the
buyer of the merchandise and/or service rendered under
the Contract And that no Contract is overdue.
The foregoing warranties and representations are in
addition to those provided for in the Negotiable
Instruments Law and other applicable laws. Any violation
thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and
severally with the debtors under the assigned contracts, the
amounts due thereon.
The ASSIGNOR shall without compensation or cost,
collect and receive in trust for the ASSIGNEE all payments
made upon the assigned contracts and shall remit to the
ASSIGNEE all collections on the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semi-
monthly) until November 1, 1982.
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
P110,550.00 balloon payment after 12 months.3 (Emphasis
supplied)
Later, additional trade receivables were assigned by Sanyu
Chemical to Atok Finance with a total face value of
P100,378.45.
On 13 January 1984, Atok Finance commenced action
against Sanyu Chemical, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili before the Regional Trial
Court of Manila to collect the sum of P120,240.00 plus
penalty charges amounting to P0.03 for every peso due and
payable for each month starting from 1 September 1983.
Atok Finance alleged that Sanyu Chemical had failed to
collect and remit the amount due under the trade
receivables.
Sanyu Chemical and the individual private respondents
sought dismissal of Atok's claim upon the ground that such
claim had prescribed under Article 1629 of the Civil Code
and for lack of cause of action. The private respondents
contended that the Continuing Suretyship Agreement,
being an accessory contract, was null and void since, at the
time of its execution, Sanyu Chemical had no pre-existing
obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private
respondents failed to present any evidence on their behalf,
although the individual private respondents submitted a
memorandum in support of their argument.
ISSUE/S:
1.Whether the individual private respondents may be held
solidarily liable with Sanyu Chemical under the provisions
of the Continuing Suretyship Agreement, or whether that
Agreement must be held null and void as having been
executed without consideration and without a pre-existing
principal obligation to sustain it. 2.Whether private
respondents are liable under the Deed of Assignment which
they, along with the principal debtor Sanyu Chemical,
executed in favor of petitioner, on the receivables thereby
assigned.
HELD:
1.It is true that a serious guaranty or a suretyship
agreement is an accessory contract in the sense that it is
entered into for the purpose of securing the performance of
another obligation which is denominated as the principal
obligation. It is also true that Article 2052 of the Civil Code
states that "a guarantee cannot exist without a valid
obligation." This legal proposition is not, however, like
most legal principles, to be read in an absolute and literal
manner and carried to the limit of its logic. This is clear
from Article 2052 of the Civil Code itself:
47

Art. 2052. A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable
contract. It may also guaranty a natural obligation."
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.
The Court of Appeals apparently overlooked our caselaw
interpreting Articles 2052 and 2053 of the Civil Code. In
National Rice and Corn Corporation (NARIC) v. Jose A.
Fojas and Alto Surety Co., Inc.,11 the private respondents
assailed the decision of the trial court holding them liable
under certain surety bonds filed by private respondent
Fojas and issued by private respondent Alto Surety Co. in
favor of petitioner NARIC, upon the ground that those
surety bonds were null and void "there being no principal
obligation to be secured by said bonds." In affirming the
decision of the trial court, this Court, speaking through Mr.
Justice J.B.L. Reyes, made short shrift of the private
respondents' doctrinaire argument:
Under his third assignment of error, appellant Fojas
questions the validity of the additional bonds (Exhs. D and
D-1) on the theory that when they were executed, the
principal obligation referred to in said bonds had not yet
been entered into, as no copy thereof was attached to the
deeds of suretyship. This defense is untenable, because in its
complaint the NARIC averred, and the appellant did not
deny that these bonds were posted to secure the additional
credit that Fojas has applied for, and the credit increase
over his original contract was sufficient consideration for
the bonds. That the latter were signed and filed before the
additional credit was extended by the NARIC is no ground
for complaint. Article 1825 of the Civil Code of 1889, in
force in 1948, expressly recognized that "a guaranty may
also be given as security for future debts the amount of
which is not yet known."
In Rizal Commercial Banking Corporation v. Arro,12 the
Court was confronted again with the same issue, that is,
whether private respondent was liable to pay a promissory
note dated 29 April 1977 executed by the principal debtor
in the light of the provisions of a comprehensive surety
agreement which petitioner bank and the private
respondent had earlier entered into on 19 October 1976.
Under the comprehensive surety
agreement, the private respondents had bound themselves
as solidary debtors of the Diacor Corporation not only in
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
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respect of existing obligations but also in respect of future
ones. In holding private respondent surety (Residoro Chua)
liable under the comprehensive surety agreement, the
Court said:
The surety agreement which was earlier signed by Enrique
Go, Sr. and private respondent, is an accessory obligation,
it being dependent upon a principal one, which, in this case
is the loan obtained by Daicor as evidenced by a
promissory note. What obviously induced petitioner bank
to grant the loan was the surety agreement whereby Go
and Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms that are
unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which
Daicor may incur with petitioner, as is legally allowable
under the Civil Code. Thus —
Article 2053. — A guarantee may also be given as security
for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.
It is clear to us that the Rizal Commercial Banking
Corporation and the NARIC cases rejected the distinction
which the Court of Appeals in the case at bar sought to
make with respect to Article 2053, that is, that the "future
debts" referred to in that Article relate to "debts already
existing at the time of the constitution of the agreement but
the amount [of which] is unknown," and not to debts not
yet incurred and existing at that time. Of course, a surety is
not bound under any particular principal obligation until
that principal obligation is born. But there is no theoretical
or doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is born,
any more that there would be in saying that obligations
which are subject to a condition precedent are valid and
binding before the occurrence of the condition
precedent.14
Comprehensive or continuing surety agreements are in fact
quite common place in present day financial and
commercial practice. A bank or a financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly requires
the projected principal debtor to execute a continuing
surety agreement along with its sureties. By executing such
an agreement, the principal places itself
in a position to enter into the projected series of
transactions with its creditor; with such surety agreement,
there would be no need to execute a separate surety
contract or bond for each financing or credit
accommodation extended to the principal debtor. As we
understand it, this is precisely what happened in the case at
bar.
48
It may be stressed as a preliminary matter that the Deed of
Assignment was valid and binding upon Sanyu Chemical.
Assignment of receivables is a commonplace commercial
transaction today. It is an activity or operation that permits
the assignee to monetize or realize the value of the
receivables before the maturity thereof. In other words,
Sanyu Chemical received from Atok Finance the value of
its trade receivables it had assigned; Sanyu Chemical
obviously benefitted from the assignment. The payments
due in the first instance from the trade debtors of Sanyu
Chemical would represent the return of the investment
which Atok Finance had made when it paid Sanyu
Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private
respondents and accepted by the Court of Appeals is not, in
the case at bar, material. The liability of Sanyu Chemical to
Atok Finance rests not on the breach of the warranty of
solvency; the liability of Sanyu Chemical was not ex lege (ex
Article 1629) but rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the original trade
debtors was breach of warranty of solvency by Sanyu
Chemical, resulting in turn in the assumption of solidary
liability by the assignor under the receivables assigned. In
other words, the assignor Sanyu Chemical becomes a
solidary debtor under the terms of the receivables covered
and transferred by virtue of the Deed of Assignment. And
because assignor Sanyu Chemical became, under the terms
of the Deed of Assignment, solidary obligor under each of
the assigned receivables, the other private respondents (the
Arrieta spouses, Pablito Bermundo and Leopoldo Halili),
became solidarily liable for that obligation of Sanyu
Chemical, by virtue of the operation of the Continuing
Suretyship Agreement. Put a little differently, the
obligations of individual private respondent officers and
stockholders of Sanyu Chemical under the Continuing
Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under
each of the assigned receivables by virtue of the operation
of the Deed of Assignment. That solidary liability of Sanyu
Chemical is not subject to the limiting period set out in
Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed
by Atok Finance in the trial court, it had a valid and
enforceable cause of action against Sanyu Chemical and
the other private respondents. We also agree with the Court
of Appeals that the original obligors under the receivables
assigned to Atok Finance remain liable under the terms of
such receivables.
ONGSIAKO vs THE WORLD WIDE INSURANCE
AND SURETY CO.
G.R. no. L-12077, June 27, 1958
BAUTISTA-ANGELO, J.:
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
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FACTS: On Nov. 10, 1951, Catalina de Leon executed in
favor of Augusto V. Ongsiako a promissory note in the
amount of P 1,200.00 payable in 90 days, after date with
interest of 1% per month. A surety bond was also executed
by de Leon as principal and the defendant as surety,
whereby they bound to pay the amount jointly and
severally to Augusto V. Ongsiako. At the date of maturity,
neither the principal nor the surety paid the obligation not
withstanding the demands made upon them. Ongsiako
brought this action on March 6, 1953, to recover the sum
from both parties. The judgment was in favor of the
plaintiff, and the defendants appealed. de Leon failed to file
her answer and was declared in default. The surety filed
their answer and counter-claim.
After the hearing, the court ordered for de Leon to pay the
plaintiff the sum of P 1,200.00 with interest of 1% per
month from the date of Feb. 10, 1952 plus attorney's fees of
300 and the costs. The defendant surety was also ordered to
pay the same with the proviso that "execution should not
issue against defendant The World Wide Insurance and
Surety Co until a return is made by the sheriff upon
execution against defendant de Leon showing that the
judgement against her remains unsatisfied, and provided
further that defendant de Leon shall reimburse to
defendant surety such expenses that may be necessary to
effectuate said reimbursement." From this judgement the
surety appeals. Augusto Ongsiako, having died was
substituted by his special administrator Emmanuel
Ongsiako and Severino Santiangco.
The Surety Bond executed on Nov 10, 1951 contains the
provisions that the surety is firmly bound to Dr. Augusto V.
Ongsiako in the sum of one thousand two hundred pesos
and that the liability of the surety under the bond will
expire on Feb 10, 1952. Evidence shows
that no payment has been made by either the principal or
the surety. As early as Feb 12, 1952 the creditor wrote to
the surety company a letter notifying it of the failure of its
principal and requesting that it make good of its guaranty
under the bond.
ISSUE: Whether or not the defendant surety should be
released from liability as the same has expired on Feb 10,
1952.
HELD: No. The appellant has no justification to resist the
claim as it precisely provided that the execution of
judgement should not issue against it until after it is shown
that the execution against the principal has remained
unsatisfied. Their defense that their liability has expired on
Feb 10, 1953 is considered by the court as unjust and
unreasonable for it nullifies the nature of the undertaking
assumed by the appellant. If the debtor should fail to pay
and resort is made to the surety for payment on the next
49
day, it would be unfair for the latter to allege that it's
liability has already expired. As the terms of the bond
should be given a reasonable interpretation it is logical to
hold that the liability of the surety attaches as soon as the
liability of the principal debtor defaults and notice thereby
is given to the surety within reasonable time to enable it to
make steps to protect its interest. This is dobe by the
appellee in the present case. After all the surety has the
remedy under law to foreclose the counter bond put up by
the principal debtor.
CITIZENS SURETY and INSURANCE COMPANY,
INC.,
petitioner,
vs.
COURT OF APPEALS and PASCUAL M. PEREZ,
respondents.
FACTS: On December 4, 1959, the petitioner issued two
(2) surety bonds CSIC Nos. 2631 and 2632 to guarantee
compliance by the principal Pascual M. Perez Enterprises
of its obligation under a "Contract of Sale of Goods"
entered into with the Singer Sewing Machine Co. In
consideration of the issuance of the aforesaid bonds,
Pascual M. Perez, in his personal capacity and as attorney-
in-fact of his wife, Nicasia Sarmiento and in behalf of the
Pascual M. Perez Enterprises executed on the same date
two (2) indemnity agreements wherein he obligated himself
and the Enterprises to indemnify the petitioner jointly and
severally, whatever payments advances and damage it may
suffer or pay as a result of
the issuance of the surety bonds. In addition to the two
indemnity agreements, Pascual M. Perez Enterprises was
also required to put up a collateral security to further insure
reimbursement to the petitioner of whatever losses or
liabilities it may be made to pay under the surety bonds.
Pascual M. Perez therefore executed a deed of assignment
on the same day, December 4,1959, of his stock of lumber
with a total value of P400,000.00. On April 12, 1960, a
second real estate mortgage was further executed in favor
of the petitioner to guarantee the fulfillment of said
obligation.
Pascual M. Perez Enterprises failed to comply with its
obligation under the contract of sale of goods with Singer
Sewing Machine Co., Ltd. Consequently, the petitioner
was compelled to pay, as it did pay, the fair value of the two
surety bonds in the total amount of P144,000.00. Except
for partial payments in the total sum of P55,600.00 and
notwithstanding several demands, Pascual M. Perez
Enterprises failed to reimburse the petitioner for the losses
it sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the
estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez. In opposing the money
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
2L | BACARRO | BONGABONG | CARRASCO | GUNTAN | JAZMIN | LISING | MALLORCA | SANCHEZ | SANTOS | SANTOTOME | VALENCIA | YDULZURA |
claim, Pascual M. Perez asserts that the surety bonds and
the indemnity agreements had been extinguished by the
execution of the deed of assignment. After the trial on the
merits, the Court of First Instance of Batangas ordered the
administrator, Pascual M. Perez to pay the claimant the
sum of P144,000.00, with interest at the rate of ten (10%)
per cent per annum from the date this claim was filed, until
fully paid, minus the payments already made in the amount
of P55,600.00.
The Ca reversed and set aside CFI ruling and entered
another one dismissing the claim of the Citizens' Surety and
Insurance Co., Inc., against the estate of the late Nicasia
Sarmiento.
ISSUE: Whether or not the administrator's obligation
under the surety bonds and indemnity agreements had
been extinguished by reason of the execution of the deed of
assignment.
HELD: No. Pascual M. Perez executed an instrument
denominated as "Deed of Assignment." The respondent
court stated that "by virtue of the
execution of the deed of assignment ownership of
administrator-appellant's lumber materials had been
transferred to the claimant-appellant and this amounted to
dation in payment whereby the former is considered to
have alienated his property in favor of the latter in
satisfaction of a monetary debt (Artide 1245). As a
consequence thereof, administrator-appellant's obligation
under the surety bonds is thereby extinguished upon the
execution of the deed of assignment." This statement is not
sustained by the records.
The transaction could not be dation in payment. As
pointed out in the concurring and dissenting opinion of
Justice Edgardo L. Paras and the dissenting opinion of
Justice Mariano Serrano when the deed of assignment was
executed on December 4, 1959, the obligation of the
assignor to refund the assignee had not yet arisen. In other
words, there was no obligation yet on the part of the
petitioner, Citizens' Surety and Insurance Company, to pay
Singer Sewing Machine Co. There was nothing to be
extinguished on that date, hence, there could not have been
a dation in payment.
The deed of assignment cannot be regarded as an absolute
conveyance whereby the obligation under the surety bonds
was automatically extinguished. The subsequent acts of the
private respondent bolster the fact that the deed of
assignment was intended merely as a security for the
issuance of the two bonds. Partial payments amounting to
P55,600.00 were made after the execution of the deed of
assignment to satisfy the obligation under the two surety
bonds. Since later payments were made to pay the
indebtedness, it follows that no debt was extinguished upon
50
the execution of the deed of assignment. Moreover, a
second real estate mortgage was executed on April 12, 1960
and eventually cancelled only on May 15, 1962. If indeed
the deed of assignment extinguished the obligation, there
was no reason for a second mortgage to still have to be
executed. The deed of assignment was therefore intended
merely as another collateral security for the issuance of the
two surety bonds.
VII. Real Mortgage
1) LAO V. CA [G.R. No. 115307. July 8, 1997.]
FACTS:
On June 24, 1992, Better Homes Realty and Housing
Corporation owned by Teofilo Manalo (private respondent)
filed a complaint for unlawful detainer on the ground that it
is the owner of the premises situated at Unit 1, No. 21 N.
Domingo Street, Quezon City with the MTC-QC. He
further alleged that Manuel Lao (petitioner) occupied the
property without rent but on pure liberality with the
understanding that he would vacate the property upon
demand. Manuel Lao refuses to vacate and answered the
petition claiming that he is the true owner of the property,
and that private respondent purchased the same from N.
Domingo Realty and Development Corporation
(respondent), but the agreement was actually a loan secured
by a mortgage.
MTC ordered Lao to vacate the subject premises. On
appeal, RTC-QC reversed the decision and held that the
property was acquired by the respondent by way of a deed
of sale and the Teofilo Manalo is the registered owner
thereof, but in truth the petitioner is the beneficial owner
because the real transaction was not a sale but a loan
secured by a mortgage. On appeal, CA reversed the
decision of RTC and affirmed the decision of MTC.
Lao filed a Motion for Reconsideration, however, was
denied. Hence this petition.
ISSUE:
Whether or not the subject deed is one of sale or of
equitable mortgage.
RULING:
It was equitable mortgage.
In determining the nature of a contract, the Court looks at
the intent of the parties and not at the nomenclature used
to describe it. Pivotal to deciding this issue is the true aim
and purpose of the contracting parties as shown by the
terminology used in the covenant, as well as "by their
conduct, words, actions and deeds prior to, during and
immediately after executing the agreement." 16 16 In this
regard, parol evidence becomes admissible to prove the
true intent and agreement of the parties which the Court
Credit Transactions | Atty. Ilagan | San Beda - Mendiola
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will enforce even if the title of the property in question has
already been registered and a new transfer certificate of title
issued in the name of the transferee.
Any conveyance intended as security for a debt will be held
in effect to be a mortgage, whether so actually expressed in
the instrument or not, operates regardless of the form of the
agreement chosen by the contracting parties as the
repository of their will.
The law enumerates when a contract may be presumed to
be an equitable mortgage:
"(1) when the price of a sale with right to repurchase is
unusually inadequate;
(2)When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) when the vendor binds himself to pay the taxes on the
thing sold;
(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any
other obligation.
First, possession of the property in the controversy,
remained with Petitioner Manuel Lao who was the
beneficial owner of the property, before, during and after
the alleged sale. It is settled that a "pacto de retro sale
should be treated as a mortgage where the (property) sold
never left the possession of the vendors." Second, the option
given to Manuel Lao to purchase the property in
controversy had been extended twice through documents
executed by Mr. Tan Bun Uy, President and Chairman of
the Board of Better Homes Realty & Housing Corporation.
The wording of the first extension is a refreshing revelation
that indeed the parties really intended to be bound by a
loan with mortgage, not by a pacto de retro. It reads, "On
June 10, 88, this option is extended for another sixty days to
expired on Aug. 11, 1988. The purchase price is increased
to P137,000.00. Since Mr. Lao borrow P20,000.00 from
me." These extensions clearly represent the extension of
time to pay the loan given to Manuel Lao upon his failure
to pay said loan on its maturity. Mr. Lao was even granted
an additional loan of P20,000.00 as evidenced of the above
quoted document. Third, unquestionably, Manuel Lao and
his brother were in such "dire need of money" that they
mortgaged their townhouse units registered under the name
of N. Domingo Realty Corporation, the family corporation
put up by their parents, to Private Respondent Better
Homes Realty & Housing Corporation. In retrospect, it is
easy to blame Petitioner Manuel Lao for not demanding a
reformation of the contract to reflect the true intent of the
parties. But this seeming inaction is sufficiently explained by
51
the Lao brother's desperate need for money, compelling
them to sign the document purporting to be a sale after
they were told that the same was just for "formality."
Moreover, since the borrower's urgent need for money
places the latter at a disadvantage vis - a- vis the lender who
can thus dictate the terms of their contract, the Court, in
case of ambiguity, deems the contract to be one which
involves the lesser transmission of rights and interest over
the property in controversy.
2) STATE INVESTMENT HOUSE V. CA [G.R. No.
115548. March 5, 1996.]
FACTS:
On October 15, 1969, Spouses Canuto and Ma. Aranzazu
Oreta, and the Solid Homes, Inc. (SOLID), executed a
CONTRACT TO SELL involving a parcel of land
identified as Block No. 8, Lot No. 1, Phase I of the Capitol
Park Homes Subdivision, Quezon City, containing 511
square meters for a consideration of P39,347.00. Upon
signing of the contract, the spouses Oreta paid P7,869.40,
with the agreement that the balance shall be payable in
monthly installments of P451.70, at 12% interest per
annum.
'On November 4, 1976, SOLID executed several real estate
mortgage contracts in favor of State Investment Homes,
(sic) Inc. (STATE) over its subdivided parcels of land.
SOLID failed to comply with its mortgage obligations
contract, STATE then extrajudicially foreclosed the
mortgaged properties including the subject lot on April 6,
1983, with the corresponding certificate of sale issued
therefor to STATE annotated at the back of the titles
covering the said properties on October 13, 1983.
On June 23, 1984, SOLID executed MOA for the
deferment of consolidation of ownership over the foreclosed
properties by committing to redeem the properties from
STATE.
On August 15, 1988, the spouses filed a complaint before
the Housing and Land Use Regulatory Board, HLURB,
against SOLID and STATE for failure on the part of
SOLID to execute the necessary absolute deed of sale as
well as to deliver title to said property which is in violation
of the contract to sell, despite full payment of the purchase
price as of January 7, 1981.
Solid answered that the obligations under the Contract to
Sell has become so difficult and that the herein respondents
be partially released from said obligation by substituting
subject lot with another suitable residential lot from another
subdivision which respondents own/operates. On the other
hand, STATE, to which the subject lot was mortgaged,
averred that unless SOLID pays the redemption price of
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P125,1955.00, it has "a right to hold on and not release the
foreclosed properties."
Office of Appeals, Adjudication and Legal Affairs (OAALA)
rendered a decision in favor of the spouses to which both
SOLID and STATE appealed to, denied. Hence, this
petition.
ISSUE:
Whether or not spouses Oreta's unregistered rights over the
subject property are superior to the registered mortgage
rights of petitioner (STATE).
RULING:
STATE's registered mortgage right over the property is
inferior to that of respondents-spouses' unregistered right.
In fact, petitioner admits the superior rights of respondents-
spouses Oreta over the subject property as it did not pray
for the nullification of the contract between respondents-
spouses and SOLID, but instead asked for the payment of
the release value of the property in question, plus interest,
attorney's fees and costs of suit against SOLID or, in case of
the latter's inability to pay, against respondents spouses
before it can be required to release the title of the subject
property in favor of the respondent spouses.
STATE's registered mortgage right over the property is
inferior to that of respondents-spouses' unregistered right.
The unrecorded sale between respondents-spouses and
SOLID is preferred for the reason that if the original owner
(SOLID) had parted with his ownership of the thing sold
then he no longer had ownership and free disposal of that
thing so as to be able to mortgage it again. Registration of
the mortgage is of no moment since it is understood to be
without prejudice to the better right of third parties.
3) SPS. FLANCIA v. CA and WILLIAM GENATO
[GR 146997; April 26, 2005]
FACTS
This is an action to declare null and void the mortgage
executed by defendant Oakland Development Resources
Corp...in favor of defendant William Ong Genato over the
house and lot plaintiffs spouses Godofredo and Dominica
Flancia purchased from defendant corporation.
In the complaint, plaintiffs allege that they purchased form
defendant corporation a parcel of land; by virtue of the
contract of sale, defendant corporation authorized plaintiffs
to transport all their personal belongings to their house at
aforesaid parcel of land; that on December 24, 1992,
plaintiffs received a copy of the execution foreclosing [the]
mortgage issued by the RTC (that defendant Sheriff Sula to
sell at public auction several lots formerly owned by
defendant corporation including subject lot of plaintiffs);
that the alleged mortgage of subject lot is null and void as it
52
is not authorized by plaintiffs pursuant to Art. 2085 of CC
which requires that the mortgagor must be the absolute
owner of the mortgaged property; hence, foreclosure is also
null and void.
In defendant Genato’s answer, co-defendant Oakland
Development Resources Corporation mortgaged to Genato
two parcels of land as security and guaranty for the
payment of a loan in the sum of P2,000,000.00; that said
real estate mortgage has been duly annotated at the back of
the title; that for non-payment of loan of P2M, defendant
Genato filed an action for foreclosure of real estate
mortgage against co-defendant corporation; that the alleged
plaintiff’s Contract to Sell does not appear to have been
registered with the Register of Deeds to affect defendant
Genato and the latter is thus not bound by the plaintiff’s
Contract to Sell; that the registered mortgage is superior to
plaintiff’s alleged Contract to Sell and it is sufficient for
defendant Genato as mortgagee to know that the subject
land was clean at the time of the execution of the mortgage
contract with defendant corporation and defendant Genato
is not bound to go beyond the title to look for flaws in the
mortgagor’s title...
The trial court rendered a decision ordering defendant
Oakland to pay several sums and dismissed their
(Oakland/Genato) counterclaim, however, the motion for
reconsideration was granted and a new decision was
entered in favor of plaintiffs, declaring the subject mortgage
and the foreclosure proceedings held null and void as they
affect the superior right of the plaintiffs over the subject lot.
CA granted appeal and set aside and reversed the decision.
ISSUE:
(1) WON the registered mortgage constituted over the
property was valid
(2) WON the registered mortgage was superior to the
contract to sell
HELD:
(1) Art 2085 states the essential requisites of a contract of
mortgage. All these requirements are present in this case.
a) That it be constituted to secure the
fulfillment of a principal obligation
b) That the mortgagor be the absolute owner
of the thing mortgaged, and
c) That the persons constituting the
mortgage have the free disposal of their
property, and in the absence thereof, that
they be legally authorized for the purpose.
As to the first essential requisite of a mortgage, it is
undisputed that the mortgage was executed as security for a
loan obtained by Oakland from Genato.
As to the second and third requisites, contract of sale and
contract of sell should be differentiated. In a contract of
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sale, title to the property passes to the vendee upon the
delivery of the thing sold – the vendor loses ownership over
the property and cannot recover unless and until the
contract is resolved or rescinded; in a contract to sell,
ownership is, by agreement, reserved by the vendor and is
not to pass to the vendee until full payment of the purchase
price – title is retained by the vendor until full payment of
the price.
In the contract between petitioners and Oakland, aside
from being denominated as a contract to sell, the intention
of Oakland not to transfer ownership to petitioners until full
payment of the purchase price was very clear. Acts of
ownership over the property were expressly withheld by
Oakland from petitioner. All that was granted to them by
the “occupancy permit” was the right to possess it.
Clearly, when the property was mortgaged to Genato, what
was in effect between Oakland and petitioners was a
contract to sell, not a contract of sale. Oakland retained
absolute ownership over the property. Because Oakland
retained all the foregoing rights as owner of the property, it
was entitled absolutely to mortgage it to Genato. Hence,
the mortgage was valid.
(2) Petitioners cite State Investment House, Inc. v. CA ruling to
the effect that an unregistered sale is preferred over a
registered mortgage over the same property. The rationale
behind the rule being: “The unrecorded sale between
respondents-spouses and SOLID is preferred for the reason
that if the original owner...had parted with his ownership of
the thing sold then he no longer had ownership and free
disposal of that thing as to be able to mortgage it again.
State Investment House is completely inapplicable to the
case at bar. It clearly pertained to a contract of sale, not to
a contract to sell which was what Oakland and petitioners
had. In State Investment House, ownership had passed
completely to the buyers and therefore, the former owner
no longer had any legal right to mortgage the property,
notwithstanding the fact that the new owner-buyers had not
registered the sale. In the case before us, Oakland retained
absolute ownership over the property under the contract to
sell and therefore had every right to mortgage it.
4) PREMIERE DEVELOPMENT BANK VS CA [GR
128122; March 18, 2005]
FACTS
The subject land is a 2,660sqm parcel of land, denominated
as Lot 23 registered under TCT No. 9780 of the Manila
Registry, located as it were in Matandang Balara, which
used to be a part of the then district of Caloocan, City of
Manila. The Creation of Quezon City which found Lot 23
within its borders saw the transfer of the corresponding
property records to the new political unit and the
53
generation of new certificates of title to reflect territorial
changes. TCT No. 9780 was assigned number TCT No.
9780 (693).
Two (2) different persons with exactly the same name, i.e.
Vicente T. Garaygay, each claimed exclusive ownership of
Lot 23 by virtue of an owner’s duplicate certificate each
had possession of during the period material covering said
lot. One held TCT No. 9780 and the other held TCT No.
9780 (693). The date “June 14, 1944” appears on the face
of both copies as common date of entry. However, one
contained certain features, markings, and/or entries not
found in the other and vice versa.
April 17, 1979, one of the two Garaygays, Garaygay of
Cebu, executed a deed of sale over the subject lot in favor
of his nephew, Joselito. The sale notwithstanding, the
owner’s duplicate certificate remained for some time in the
seller’s possession.
In another transaction, the other, Garaygay of Rizal, sold
to Yambao and Rodriguez the same property, which the
latter would later sell a portion of their undivided interest
on the land to Morales.
But on June 11, 1988, a fire gutted a portion of the Quezon
City hall and destroyed in the process the original copy of
TCT No. 9780 (693) on file with the Registry of Deeds of
Quezon City. Barely a month later, a certain Eng. Hobre
filed an application, signed by Garaygay of Cebu, for the
reconstitution of the burned original on the basis of the
latter’s owner’s duplicate certificate. After due process,
Garaygay of Cebu acquired reconstituted title.
Meanwhile, May 26, 1989, the deed of sale executed by
Garaygay of Cebu in favor of his nephew Joselito was
registered, paving the issuance in the latter’s name.
Thereafter, Lot23 was subdivided into 3 lots. Joselito
posthaste sold the first lot to Toundjis, who pursuant to a
contract to sell, undertook to pay Joselito P5-Million
balance of the P2.5-Million purchase price one she is
placed in possession of a fenced-off property. And, for
shares of stock, Joselito assigned the other 2 lots to Century
Realty, which after securing the TCTs, mortgaged the
same to Premiere Development bank to secure a P2.5-
Million loan.
Clashing of claims of ownership first came to a head,
sometime in May 1990, when Yambao and his agents
forcibly prevented Joselito’s hired hands from concrete-
fencing the subject property. The police and eventually
NBI entered into the picture.
In the meantime, Yambao, Rodriguez, and Morales as pro
indiviso buyers caused the annotation of their respective
adverse claims on Joselito’s TCTs. Then filed with RTC a
suit against Joselity, Century Realty and Premiere Bank for
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quieting of title and annulment of said defendant’s fake
titles.
Trial court rendered judgment in favor of plaintiffs,
declaring Joselito’s TCT and all subsequent titles traceable
to it and transactions involving its derivatives as null and
void.
CA affirmed in toto.
ISSUE
WON Toundjis and Premier Bank are buyers/mortgagee
in good faith
HELD:
The rule that a subsequent declaration of a title as null and
void is not a ground for nullifying the contractual right of a
purchaser, mortgagee or other transferees in good faith,
with the exceptions thereto, is well-settled.
Where innocent third persons, relying on the correctness of
the certificate, acquire rights over the property as buyer or
mortgagee, the subsequent declaration of nullity of title is
not a ground for nullifying the right of such buyer or
mortgagee.
CA rejected the claim of Toundjis, the court agrees.
Toundjis contracted to buy from Joselito an
administratively reconstituted TCT and knew that Joselito
did not have possession of the lot, which should have placed
Toundjis on guard respecting Joselito’s title, her claim of
being a bona fide purchaser for value must fail.
Premiere Bank cannot be accorded status of an innocent
mortgagee for value vis-a-vis the mortgage of the lots
covered by the TCTs constituted in its favor by Century
Reality.
Premiere inspected the property to be mortgaged and was
aware of the existence of Rodriguez’ adverse claim; also
aware of the existence that there were buildings of strong
material on the land in dispute; and still proceeded with the
mortgage contract. ... If the land mortgaged is in possession
of a person other than the mortgagor, the mortgagee is
required to go beyond the certificate of title and make
inquiries as to the rights of the actual possessors. Failure to
do so would make him a mortgagee in bad faith.
It cannot be overemphasized, that Premier Bank, being in
the business of extending loans secured by real estate
mortgage, is familiar with rules on land registration. As
such, it was, as here, expected to exercise more care and
prudence than private individuals in their dealing with
registered lands. Accordingly, given inter alia the suspicion-
provoking presence of occupants other than the owner on
the land to be mortgaged, it behooved Premiere Bank to
54
conduct a more exhaustive investigation on the history of
the mortgagor’s title. That Premier Bank accepted in
mortgage the property in question notwithstanding the
existence of structures on the property and which were in
actual, visible and public possession of a person other than
the mortgagor, constitutes gross negligence amounting to
bad faith. Premier Bank is thus not entitled to have its lien
annotated on the genuine title.
5) DELA MERCED VS GSIS (G.R. NO. 140398
SEPTEMBER 11, 2001)
FACTS:
Governor Zulueta and his wife were the owners of parcels
of land known as the Antonio Village Subdivision –
registered in their names under several TCTs of the
Registry of Deeds of the Province of Rizal. On September
25, 1956, the Zuluetas obtained a loan of PhP520,000.00
from GSIS, as security for which they mortgage the land
covered by TCT No. 26105 which contains a stipulation
that certain lots within TCT No. 26195 shall be excluded
from the mortgage because they have been either
previously sold to third parties or donated to the
government. The spouses subsequently obtained additional
loans from the GSIS in the amount of PhP190,000.00 and
PhP1,000,000.00, both secured by mortgaging parcels of
land they owned.
On September 3, 1957, the Zuluetas executed a contract to
sell whereby they undertook to sell to Francisco dela
Merced and Evarista Mendoza lots 6-8 and 10, ock 2,
covered by TCT No. 26105. On October 26, 1972, after
full payment by dela Merced of the purchase price, a Deed
of Absolute Sale was executed by the Zuluetas in his favor.
On October 15, 1957, another loan was extended by GSIS
to the Zulueta spouses in the amount of P1,398,000.00,
secured by a mortgage on the properties included in TCT
Nos. 26105 and 50256. The Zuluetas defaulted in the
payment of their loans. Thus, GSIS extrajudicially
foreclosed the mortgages and, at the foreclosure sale held
on August 16, 1974, GSIS was awarded the mortgaged
properties as the highest bidder. Since the Zuluetas did not
redeem the properties within the reglementary period, title
to the properties was consolidated to GSIS. Later, on
March 25, 1982, GSIS held a sale at public auction of its
acquired assets. Elizabeth D. Manlongat and Ma. Therese
D. Manlongat, the children of Victor and Milagros
Manlongat, purchased Lot 6, Block 2 of Antonio Village.
(A case was previously filed by the squatters. They also
claimed ownership of the houses in various lots in Antonio
Village)
On September 7, 1984, dela Merced instituted a civil
action against GSIS and the spouses Zulueta, praying,
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among others, that the foreclosure sale, insofar as his lots
were concerned, be declared null and void.
RTC RULING:
In favor of the dela Merced. It declared:
a. The foreclosure proceedings conducted by GSIS,
insofar as they affected the lots in question, as null and void;
and
b. The certificates of title issued to GSIS covering
aforesaid lots, as well as those issued to Manlongat spouses
by virtue of the sale executed by the former in favor of the
latter, as null and void.
c. The issuance of a new one in favor of dela Merced.
During appeal, dela Merced passed away and was
substituted by his heirs.
As per the finding of the RTC, lot number 1-11, Block 2
were excluded from the mortgage. In fact, in a letter dated
October 1, 1956, defendant GSIS confirmed that portions
of the subdivision such as lots Nos. 1-11, Block 2 have
already been sold.
Petitioners aver that when the Zuluetas mortgaged their
properties to GSIS on October 15, 1957, they were no
longer the owners of the lots subject of this litigation, the
same having been sold to dela Merced by virtue of the
contract to sell executed on September 3, 1957.
ISSUE:
WON the foreclosure sale was null and void.
HELD:
YES. Petitioners' rights of ownership over the properties in
dispute, albeit unregistered, are superior to the registered
mortgage rights of GSIS over the same. The execution and
validity of the contract to sell dated September 3, 1957
executed by the Zulueta spouses, as the former subdivision
owner, in favor of Francisco dela Merced, are beyond cavil.
There is also no dispute that the contract to sell was entered
into by the parties before the third mortgage was
constituted on October 15, 1957 by the Zuluetas in favor of
GSIS on the property covered by TCT No. 26105, which
included the subject lots. Francisco dela Merced was able to
fully pay the purchase price to the vendor, who later
executed a deed of absolute sale in his favor. However, the
Zuluetas defaulted on their loans; hence, the mortgage was
foreclosed and the properties were sold at public auction to
GSIS as the highest bidder.
In the case of State Investment House, Inc. v. Court of
Appeals, it was held that:
“STATE's registered mortgage right over the property is
inferior to that of respondents-spouses' unregistered right.
The unrecorded sale between respondents-spouses and
SOLID is preferred for the reason that if the original owner
(SOLID, in this case) had parted with his ownership of the
55
thing sold then he no longer had ownership and free
disposal of that thing so as to be able to mortgage it again.
Registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of
third parties.”
In the same vein, therefore, the registered right of GSIS as
mortgagee of the property is inferior to the unregistered
right of Francisco dela Merced. The unrecorded sale
between Francisco dela Merced as the vendee of the
property and the Zuluetas, the original owners, is preferred
for the same reason stated above.
Respondents cannot even assert that as mortgagee of land
registered under the Torrens system, GSIS was not
required to do more than rely upon the certificate of title.
As a general rule, where there is nothing on the certificate
of title to indicate any cloud or vice in the ownership of the
property, or any encumbrance thereon, the purchaser is not
required to explore further than what the Torrens Title
upon its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right
thereto. It must be noted that in the case at bar, GSIS is
admittedly a financing institution. Based on jurisprudence,
when the purchaser or mortgagee is a financing institution,
the general rule that a purchaser or mortgagee of land is
not required to look further than what appears on the face
of the title, does not apply. There is nothing in the records
of this case to indicate that an ocular inspection report was
conducted by GSIS, or whether it investigated, examined
and assessed the subdivision lots when they were offered as
security for the loans by the original owners.
On the issue on WON Manlongat, as purchaser at an
auction sale conducted by GSIS, had a better right than
petitioners, the court rules in the negative. It should be
borne in mind that the title of Manlongat was derived
thtough sale or transfer from GSIS, whose acquisition over
the property proceeded from a foreclosure sale that was
null and void. Nemo potest plus juris ad alium transferre
quam ipse habet - No one can transfer a greater right to
another that he himself has. In other words, the subsequent
certificates of title of GSIS and of Manlongat over the
property are bot void, because of the legal truism that the
spring cannot rise higher than the source.
6). BENJAMIN NAVARRO & ROSITA FORTEA vs.
SECOND LAGUNA DEVELOPMENT BANK,
SPOUSES ISAAC GUZMAN & VILMA ESPORLAS
(G.R. No. 129428 February 27, 2003)
FACTS: Petitioners spouses Benjamin and Rosita Navarro,
together with Leticia, Esther, Luciana and Leoniza, all
surnamed Navarro, were co-owners of a parcel of land
covered by TCT No. 244200. On March 18, 1978, spouses
Donalito Velasco and Esther Navarro, conspiring with the
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latter's sister Luciana Navarro, executed a falsified Deed of
Absolute Sale wherein they made it appear that the entire
lot was sold to said spouses Velasco. TCT No. 114526 in
the names of spouses Velasco covering the property was
accordingly issued. Subsequently, spouses Velasco
mortgaged the property to respondent Bank to secure
payment of a loan. On June 30, 1987, the respondent Bank,
foreclosed the mortgage when spouses Velasco failed to pay
their loan. On August 8, 1988 and January 5, 1990,
petitioners, introducing themselves as attorneys-in-fact of
Esther Navarro-Velasco, wrote the respondent Bank,
offering to redeem the property. However, they failed to do
so. Hence, ownership thereof was consolidated in the name
of respondent Bank and a new TCT was thereafter issued
in its favor. On March 26, 1990, petitioners filed with the
Regional Trial Court a complaint for the annulment of the
mortgage and the consolidation of ownership with
damages. They alleged that the sale of the lot with respect
to their 1/6 share was void ab initio considering that their
signatures appearing in the Deed of Absolute Sale were
falsified. While the case was pending, the respondent Bank
sold the property to respondent Isaac Guzman and Vilma
Esporlas. Petitioners, therefore, impleaded spouses Guzman
as additional defendants in the case alleging that the said
spouses were purchasers in bad faith. The Regional Trial of
Makati City ruled against the petitioners – upholding the
validity of the foreclosure of mortgage and declaring private
respondents the lawful owners of the property. On appeal,
the Court of Appeals affirmed the decision of the trial court
with modification as to award of damages.
ISSUE: WON the mortgage and its foreclosure was valid.
HELD: YES. In Rural Bank of Compostela vs. Court of
Appeals, the Court held that the rule that persons dealing
with registered lands can rely solely on the certificate of title
does not apply to banks because their business is one
affected with public interest, keeping in trust money
belonging to their depositors, which they should guard
against loss by not committing any act of negligence which
amounts to lack of good faith. Thus, in Cruz vs. Bancom
Finance Corporation, the Court stressed that a mortgagee-
bank is expected to exercise greater care and prudence
before entering into a mortgage contract, even those
involving registered lands. The ascertainment of the status
or condition of a property offered to it as security for a loan
must be a standard and indispensable part of its operations.
In entering into the mortgage contract with spouses
Velasco, there was no indication that respondent bank
acted in bad faith. Spouses Velasco presented to the bank
their TCT No. 114256 showing they were then the
absolute owners thereof. Indeed, there were no
circumstances or indications that aroused respondent
bank's suspicion that the title was defective.
As to the validity of the sale of the property to respondent
spouses Guzman, this Court agrees with the finding of the
56
Court of Appeals that petitioners are estopped from
assailing the same.
Article 1431 of the Civil Code states that "through estoppel
an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as
against the person relying thereon."
A person, who by his deed or conduct has induced another
to act in a particular manner, is barred from adopting an
inconsistent position, attitude or course of conduct that
thereby causes loss or injury to another.
It bears reiterating that in their two letters to respondent
bank earlier mentioned, petitioners did not state that
spouses Velasco falsified their signatures appearing in the
Deed of Absolute Sale. Nor did they question the validity of
the mortgage and its foreclosure. Indeed, those letters could
have led respondent bank to believe that petitioners
recognized the validity of the Deed of Absolute Sale and
the mortgage as well as its subsequent foreclosure.
7) URSAL VS CA (473 SCRA 52 (2005)
FACTS:
In January 1985, Winifreda Ursal and spouses Jesus and
Cristita Moneset entered into a “Contract to Sell Lot &
House”. The amount agreed upon was P130,000.00. Ursal
is to pay P50k as down payment and will continue to pay
P3k monthly starting the next month until the balance is
paid off. After 6 months, Ursal stopped paying the
Monesets for the latter failed to give her the transfer of
certificate title.
In November 1985, the Monesets executed an absolute
deed of sale with one Dr. Canora. In September 1986, the
Monesets mortgaged the same property to the Rural Bank
of Larena for P100k. The Monesets failed to pay the P100k
hence the bank filed for foreclosure.
Trial ensued and the RTC ruled in favor of Ursal. The trial
court ruled that there was fraud on the part of the Monesets
for executing multiple sales contracts, and that the bank is
not liable for fraud but preference to redeem should be
given to Ursal. The Monesets are ordered to reimburse
Ursal plus to pay damages and fees. Ursal was not satisfied
as she believed that the bank was also at fault.
ISSUE:
Whether or not the foreclosure instituted by the bank was
valid.
HELD:
Yes. There should be no special preference granted to
Ursal in redeeming the property. What she had with the
Monesets was contract to sell in which case ownership was
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not transferred to her due the suspensive condition of full
payment. Further, the property was sold to other properties
already.
A contract to sell is a bilateral contract whereby the
prospective seller, while expressly reserving the ownership
of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, that is, full payment of the purchase
price.
In such contract, the prospective seller expressly reserves
the transfer of title to the prospective buyer, until the
happening of an event, which in this case is the full
payment of the purchase price.
Since the contract in this case is a contract to sell, the
ownership of the property remained with the Monesets
even after petitioner has paid the down payment and took
possession of the property, thus, the mortgage, and also the
subsequent foreclosure, was valid.
8) RIZAL BANKING CORPORATION VS. CA (289
SCRA 292, 20 APRIL 1998)
FACTS:
GOYU & SONS INC. applied for credit facilities and
accommodations with RCBC. After due evaluation, a
credit facility in the amount of P30 million was initially
granted. Upon GOYU's application increased GOYU's
credit facility to P50 million, then to P90 million, and
finally to P117 million.
As security for its credit facilities with RCBC, GOYU
executed two Real Estate Mortgages and two Chattel
Mortgages in favor of RCBC, which were registered with
the Registry of Deeds. Under each of these four mortgage
contracts, GOYU committed itself to insure the mortgaged
property with an insurance company approved by RCBC,
and subsequently, to endorse and deliver the insurance
policies to RCBC.
GOYU obtained in its name a total of 10 insurance policies
from Malayan Insurance Company Inc. (MICO). In
February 1992, Alchester Insurance Agency, Inc., the
insurance agent where GOYU obtained the Malayan
insurance policies, issued nine endorsements in favor of
RCBC seemingly upon instructions of GOYU
On April 27, 1992, one of GOYU's factory buildings in
Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity.
MICO denied the claim on the ground that the insurance
policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that
57
the insurance proceeds were also claimed by other creditors
of GOYU alleging better rights to the proceeds than the
insured.
GOYU filed a complaint for specific performance and
damages. RCBC, one of GOYU's creditors, also filed with
MICO its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the same
reasons that AGCO denied GOYU's claims.
However, because the endorsements do not bear the
signature of any officer of GOYU, the trial court, as well as
the Court of Appeals, concluded that the endorsements are
defective and held that RCBC has no right over the
insurance proceeds.
Issue:
Whether or not RCBC has a right over the insurance
proceeds, being a mortgagee.
Held:
RCBC has a right over the insurance proceeds.
It is settled that a mortgagor and a mortgagee have
separate and distinct insurable interests in the same
mortgaged property, such that each one of them may
insure the same property for his own sole benefit. There is
no question that GOYU could insure the mortgaged
property for its own exclusive benefit. In the present case,
although it appears that GOYU obtained the subject
insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their
contemporaneous acts, must be given due consideration in
order to better serve the interest of justice and equity.
It is to be noted that 9 endorsement documents were
prepared by Alchester in favor of RCBC. Alchester would
not have found out that the subject pieces of property were
mortgaged to RCBC had not such information been
voluntarily disclosed by GOYU itself. Had it not been for
GOYU, Alchester would not have known of GOYU's
intention of obtaining insurance coverage in compliance
with its undertaking in the mortgage contracts with RCBC,
and verify, Alchester would not have endorsed the policies
to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of
estoppel, the Court is constrained to rule in favor of
mortgagor RCBC. RCBC, in good faith, relied upon the
endorsement documents sent to it as this was only pursuant
to the stipulation in the mortgage contracts. We find such
reliance to be justified under the circumstances of the case.
GOYU failed to seasonably repudiate the authority of the
person or persons who prepared such endorsements. Over
and above this, GOYU continued, in the meantime, to
enjoy the benefits of the credit facilities extended to it by
RCBC. After the occurrence of the loss insured against, it
was too late for GOYU to disown the endorsements for any
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imagined or contrived lack of authority of Alchester to
prepare and issue said endorsements. If there had not been
actually an implied ratification of said endorsements by
virtue of GOYU's inaction in this case, GOYU is at the
very least estopped from assailing their operative effects.
The petition of Rizal Commercial Banking Corporation
against the respondent Court in is DISMISSED for being
moot and academic in view of the results herein arrived
at.Respondent Sebastians right as attaching creditor must
yield to the preferential rights of Rizal Commercial
Banking Corporation over the Malayan insurance policies
as first mortgagee.
9) RAMIREZ V. COURT OF APPEALS
G.R. No. 133841, [August 15, 2003] 456 PHIL 345-
354
FACTS:
On December 29, 1965, private respondents spouses
Loreto Claravall and Victoria Claravall executed a deed of
sale in favor of the spouses Francisco Ramirez, Jr. and
Carolina Ramirez covering a parcel of land, including
improvements thereon, situated in Ilagan, Isabela. On even
date, another instrument was executed granting the spouses
Claravall an option to repurchase the property within a
period of two years from December 29, 1965 but not earlier
nor later than the month of December, 1967.
At the expiration of the two-year period, the Claravalls
failed to redeem the property, prompting them to file a
complaint against the spouses Francisco Ramirez, Jr. and
Carolina Ramirez to compel the latter to sell the property
back to them at RTC Ilagan, Isabela (CC. no. 2043)
Judgment was rendered in favor of the spouses Ramirez
which was, on appeal, affirmed by the Court of Appeals.
On review, however, this Court, finding that the Deed of
Absolute Sale with option to repurchase executed by
private respondents in favor of the spouses Ramirez was
one of equitable mortgage, reversed the decision of the
appellate court.
The decision of this Court having become final and
executory, possession of the property was turned over to
private respondents after they settled their obligation to the
spouses Ramirez.
Following the death of Francisco Ramirez, Jr. or on
November 21, 1994, private respondents filed a complaint
(CC. No. 834) before the RTC of Ilagan for accounting and
damages against herein petitioners, alleging that the
spouses Ramirez acted fraudulently and in bad faith in
refusing and obstructing the redemption of the property by
private respondents from January 1, 1968 up to December
31, 1993 during which petitioners were receiving rentals
58
from the tenants of the property which must be accounted
for and returned to private respondents; before the
possession of the property was turned over to private
respondents, petitioners "vandalized, destroyed and carried
away many portion[s]/parts" of the improvements on the
property, causing damages amounting to Five Hundred
Thousand (P500,000.00) Pesos which petitioners must pay
and be liable for; and private respondents were forced to
litigate in order to protect their rights and interests over the
property, hence, petitioners must be held liable for actual
damages and expenses of litigation.
Petitioners filed a motion to dismiss private respondents'
complaint, alleging that the latter are barred from raising
anew the same issue in another litigation." Further,
petitioners alleged that the complaint does not state a cause
of action since prior to the date when redemption was to be
effected, the registered owners of the property were the
spouses Ramirez who were entitled to the rentals and fruits
thereof, and "under our law on succession, debt or liability
is not passed to the heirs of a decedent."
RTC deferred the resolution of petitioners' Motion to
Dismiss upon a finding that the grounds raised therein did
not appear indubitable. Petitioners' motion for
reconsideration of said order having been denied they filed
a petition for certiorari before this Court, which referred it
to the Court of Appeals, imputing grave abuse of discretion
amounting to lack of jurisdiction on the part of the trial
court in not dismissing private respondents' complaint.
Petitioners filed the present Petition 20 for Review on
Certiorari under Rule 45 faulting the appellate court with
ISSUE:
WHETHER OR NOT CA IS GUILTY OF GRAVE
ABUSE OF DISCRETION IN NOT DISMISSING THE
COMPLAINT FOR LACK OF CAUSE OF ACTION.
CONSIDERING (1) THAT PRIOR TO REDEMPTION
THE REGISTERED OWNERS OF THE PROPERTY
WAS THE LATE FRANCISCO RAMIREZ JR. AND
PETITIONER CAROLINA RAMIREZ WHO WERE
ENTITLED TO THE FRUITS AND
HELD:
The declaration by this Court in the first case that the deed
of sale with option to repurchase entered into by the
spouses Ramirez and private respondents was an equitable
mortgage necessarily takes the deed out of the ambit of the
law on sales and puts into operation the law on mortgage.
It is a well-established doctrine that the mortgagor's default
does not operate to vest the mortgagee the ownership of the
encumbered property and the act of the mortgagee in
registering the mortgaged property in his own name upon
the mortgagor's failure to redeem the property amounts to
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pactum commissorium, a forfeiture clause declared by this
Court as contrary to good morals and public policy and,
therefore, void. Before perfect title over a mortgaged
property may thus be secured by the mortgagee, he must,
in case of non-payment of the debt, foreclose the mortgage
first and thereafter purchase the mortgaged property at the
foreclosure sale.
In fine, the ownership of the property was not vested to the
spouses Ramirez upon private respondents' failure to pay
their indebtedness, the registration of the property in the
former's names notwithstanding, absent any showing that
they foreclosed the mortgage and purchased the property at
a foreclosure sale.
Petitioners furthermore allege that since the action in Civil
Case No. 834 was for "recover[y of] damages and for
rent[als, t]he action does not survive Francisco Ramirez,
Jr.," hence, the claims of private respondents should have
been filed in the special proceedings for the settlement of
his estate, and not in an ordinary civil action for damages
against his heirs, liability for damages not being passed on
to the heirs by inheritance.
Private respondents' complaint, however, is not only for the
recovery of rentals. As priorly discussed, the complaint
alleges a second cause of action, i.e., for the recovery of
damages as a result of alleged destruction and vandalism to
the improvements on the property.
The complaint clearly alleges that the destruction of and
vandalism to the property were caused by the "defendants,"
herein petitioners, and not by Francisco Ramirez, Jr. alone.
Assuming that this allegation is true, 35 private respondents
have a cause of action against Francisco's widow Carolina
and their children Ferdinand, Francis and Frederic
Ramirez in their personal capacities. On this score alone,
the complaint stands.
WHEREFORE, the instant petition is hereby DENIED.
SO ORDERED.
10) PRUDENTIAL BANK V. SPOUSES DON A.
ALVIAR and GEORGIA B. ALVAR
G.R. No. 150197, [July 28, 2005], 502 PHIL 595-611
FACTS:
Respondents, spouses Don A. Alviar and Georgia B. Alviar,
are the registered owners of a parcel of land in San Juan,
Metro Manila, covered by TCT No. 438157 of the Register
of Deeds of Rizal. On 10 July 1975, they executed a deed
of real estate mortgage in favor of petitioner Prudential
Bank to secure the payment of a loan worth P250,000.00.
This mortgage was annotated at the back of TCT No.
438157. On 4 August 1975, respondents executed the
corresponding promissory note, covering the said loan,
59
which provides that the loan matured on 4 August 1976 at
an interest rate of 12% per annum with a 2% service
charge, and that the note is secured by a real estate
mortgage as aforementioned.
On 22 October 1976, Don Alviar executed another
promissory note,for P2,640,000.00, signifying that the loan
was secured by a "hold-out" on the mortgagor's foreign
currency savings account with the bank under Account No.
129, and that the mortgagor's passbook is to be surrendered
to the bank until the amount secured by the "hold-out" is
settled.
On 27 December 1976, respondent spouses executed for
Donalco Trading, Inc., of which the husband and wife were
President and Chairman of the Board and Vice President,
respectively, promissory note covering P545,000.000. As
provided in the note, the loan is secured by "Clean-Phase
out TOD CA 3923," which means that the temporary
overdraft incurred by Donalco Trading, Inc. with petitioner
is to be converted into an ordinary loan in compliance with
a Central Bank circular directing the discontinuance of
overdrafts.
On 16 March 1977, petitioner wrote Donalco Trading,
Inc., informing the latter of its approval of a straight loan of
P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 TOD. The
letter likewise mentioned that the securities for the loan
were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the
chattel mortgage on various heavy and transportation
equipment.
On 06 March 1979, respondents paid petitioner
P2,000,000.00, to be applied to the obligations of G.B.
Alviar Realty and Development, Inc. and for the release of
the real estate mortgage for the P450,000.00 loan covering
the two (2) lots located at Vam Buren and Madison Streets,
North Greenhills, San Juan, Metro Manila. The payment
was acknowledged by petitioner who accordingly released
the mortgage over the two properties.
On 15 January 1980, petitioner moved for the extrajudicial
foreclosure of the mortgage on the property covered by
TCT No. 438157 since, on petitioner's computation,
respondents had the total obligation of P1,608,256.68,
covering the three (3) promissory notes plus assessed past
due interests and penalty charges. The public auction sale
of the mortgaged property was set on 15 January 1980.
Respondents filed a complaint for damages with a prayer
for the issuance of a writ of preliminary injunction with the
RTC of Pasig, claiming that they have paid their principal
loan secured by the mortgaged property, and thus the
mortgage should not be foreclosed.
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For its part, petitioner averred that the payment of
P2,000,000.00 made on 6 March 1979 was not a payment
made by respondents, but by G.B. Alviar Realty and
Development Inc., which has a separate loan with the bank
secured by a separate mortgage.
On 15 March 1994, the trial court dismissed the complaint
and ordered the Sheriff to proceed with the extra-judicial
foreclosure. On consideration, setting aside its earlier
decision and awarded attorney's fees to respondents. It
found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157.
On the other hand, the P382,680.83 loan is secured by the
foreign currency deposit account of Don A. Alviar, while
the P545,000.00 obligation was an unsecured loan, being a
mere conversion of the temporary overdraft of Donalco
Trading, Inc. in compliance with a Central Bank circular.
According to the trial court, the "blanket mortgage clause"
relied upon by petitioner applies only to future loans
obtained by the mortgagors, and not by parties other than
the said mortgagors, such as Donalco Trading, Inc., for
which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, it affirmed the Order of
the trial court but deleted the award of attorney's fees. It
ruled that while a continuing loan or credit accommodation
based on only one security or mortgage is a common
practice in financial and commercial institutions, such
agreement must be clear and unequivocal.
In the instant case, the parties executed different
promissory notes agreeing to a particular security for each
loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is
improper.
The Court of Appeals, however, found that respondents
have not yet paid the P250,000.00 covered by PN
BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of
G.B. Alviar Realty and Development, Inc.
Aggrieved, petitioner filed the instant petition, reiterating
the assignment of errors raised in the Court of Appeals as
grounds herein.
ISSUE:
WHETHER OR NOT THE "BLANKET
MORTGAGE" CLAUSE APPLIES EVEN TO
SUBSEQUENT ADVANCEMENTS FOR WHICH
OTHER SECURITIES WERE INTENDED, OR
PARTICULARLY, TO PN BD#76/C-345.
HELD:
A "blanket mortgage clause," also known as a "dragnet
clause" in American jurisprudence, is one which is
60
specifically phrased to subsume all debts of past or future
origins. Such clauses are "carefully scrutinized and strictly
construed." Mortgages of this character enable the parties
to provide continuous dealings, the nature or extent of
which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a
new security on each new transaction. A "dragnet clause"
operates as a convenience and accommodation to the
borrowers as it makes available additional funds without
their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera. Indeed, it has been
settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts,
and the amounts named as consideration in said contracts
do not limit the amount for which the mortgage may stand
as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be
gathered.
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft
and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________
hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or all of
which is hereby fixed at Two Hundred Fifty Thousand
(P250,000.00) Pesos, Philippine Currency, as well as those
that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts,
books and records of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the
buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free
from all liens and incumbrances. . . . (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals,
petitioner and respondents intended the real estate
mortgage to secure not only the P250,000.00 loan from the
petitioner, but also future credit facilities and advancements
that may be obtained by the respondents. The terms of the
above provision being clear and unambiguous, there is
neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of
"dragnet clauses" or "blanket mortgage clauses," are of a
different factual milieu from the instant case. There, the
subsequent loans were not covered by any security other
than that for the mortgage deeds which uniformly
contained the "dragnet clause."
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In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a
"hold-out" on his foreign currency savings account, while
PN BD#76/C-430, executed by respondents for Donalco
Trading, Inc., was secured by "Clean-Phase out TOD CA
3923" and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation
with Deed of Guarantee in favor of A.U. Valencia and Co.,
and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-
430 has already been discussed.
Under American jurisprudence, two schools of thought
have emerged on this question. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover
all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such
other debt is secured by another mortgage. The contrary
thinking maintains that a mortgage with such a clause will
not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything
other than a deficiency after exhausting the security
specified therein, such deficiency being an indebtedness
within the meaning of the mortgage, in the absence of a
special contract excluding it from the arrangement.
The latter school represents the better position. The parties
having conformed to the "blanket mortgage clause" or
"dragnet clause," it is reasonable to conclude that they also
agreed to an implied understanding that subsequent loans
need not be secured by other securities, as the subsequent
loans will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary component
of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against
contractually requiring other securities for the subsequent
loans.
Thus, when the mortgagor takes another loan for which
another security was given it could not be inferred that such
loan was made in reliance solely on the original security
with the "dragnet clause," but rather, on the new security
given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the
California court in the cited case made an inquiry whether
the second loan was made in reliance on the original
security containing a "dragnet clause." Accordingly, finding
a different security was taken for the second loan no intent
that the parties relied on the security of the first loan could
be inferred, so it was held. The rationale involved, the court
said, was that the "dragnet clause" in the first security
instrument constituted a continuing offer by the borrower
to secure further loans under the security of the first
security instrument, and that when the lender accepted a
different security he did not accept the offer.
61
In another case, it was held that a mortgage with a "dragnet
clause" is an "offer" by the mortgagor to the bank to
provide the security of the mortgage for advances of and
when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent
advance was made because (1) the second note was secured
by a chattel mortgage on certain vehicles, and the clause
therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or
chattel mortgage indicating a connection between the real
estate mortgage and the advance; (3) the mortgagor signed
the real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4)
there was no allegation by the bank, and apparently no
proof, that it relied on the security of the real estate
mortgage in making the advance.
Indeed, in some instances, it has been held that in the
absence of clear, supportive evidence of a contrary
intention, a mortgage containing a "dragnet clause" will not
be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage
as providing security therefor.
It was therefore improper for petitioner in this case to seek
foreclosure of the mortgaged property because of non-
payment of all the three promissory notes. While the
existence and validity of the "dragnet clause" cannot be
denied, there is a need to respect the existence of the other
security given for PN BD#76/C-345. The foreclosure of
the mortgaged property should only be for the P250,000.00
loan covered by PN BD#75/C-252, and for any amount
not covered by the security for the second promissory note.
As held in one case, where deeds absolute in form were
executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment
of such note, was in the absence of a special agreement to
the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. This is
recognition that while the "dragnet clause" subsists, the
security specifically executed for subsequent loans must first
be exhausted before the mortgaged property can be
resorted to.
One other crucial point. The mortgage contract, as well as
the promissory notes subject of this case, is a contract of
adhesion, to which respondents' only participation was the
affixing of their signatures or "adhesion" thereto. A contract
of adhesion is one in which a party imposes a ready-made
form of contract which the other party may accept or
reject, but which the latter cannot modify.
The real estate mortgage in issue appears in a standard
form, drafted and prepared solely by petitioner, and which,
according to jurisprudence must be strictly construed
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against the party responsible for its preparation. If the
parties intended that the "blanket mortgage clause" shall
cover subsequent advancement secured by separate
securities, then the same should have been indicated in the
mortgage contract. Consequently, any ambiguity is to be
taken contra proferentum, that is, construed against the
party who caused the ambiguity which could have avoided
it by the exercise of a little more care. To be more
emphatic, any ambiguity in a contract whose terms are
susceptible of different interpretations must be read against
the party who drafted it, which is the petitioner in this case.
Even the promissory notes in issue were made on standard
forms prepared by petitioner, and as such are likewise
contracts of adhesion. Being of such nature, the same
should be interpreted strictly against petitioner and with
even more reason since having been accomplished by
respondents in the presence of petitioner's personnel and
approved by its manager, they could not have been
unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the
Court of Appeals and the trial court found that respondents
have not yet paid the P250,000.00, and gave no credence
to their claim that they paid the said amount when they
paid petitioner P2,000,000.00. Thus, the mortgaged
property could still be properly subjected to foreclosure
proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A
SFDX#129, security for PN BD#76/C-345, has been
exhausted, subject of course to defenses which are available
to respondents.
WHEREFORE, the petition is DENIED. The Decision of
the Court of Appeals in CA-G.R. CV No. 59543 is
AFFIRMED.
SO ORDERED.
11) UNION BANK OF THE PHILIPPINES vs HON.
COURT OF APPEALS & D’ ROSSA, INC. (G.R.
NO. 164910 SEPTEMBER 30, 2005)
FACTS:
D’ Rossa Incorporated (DRI) agreed to mortgage its parcels
of land covered by TCT Nos. S-24740 and S-24747 in
favor of Union Bank of the Phils. as security for the credit
facility of Josephine Marine Trading Corp. (JMTC). JMTC
availed 3 million from the credit line.
Union Bank increased the credit facility of JMTC to 27
million from 18 million. Upon JMTC’s failure to pay its
obligation, Union Bank instituted foreclosure proceedings
on DRI’s properties.
The properties were auctioned where Union Bank was
declared the highest bidder for 15 million. DRI,
62
subsequently filed a complaint seeking to declare the public
sale as null. It claimed that its liability is only 3 million
which was the liability incurred by JMTC under its first
agreement with Union Bank. However, Union Bank
alleged that DRI was liable to JMTC’s total outstanding
obligations, regardless of whether it was incurred during or
subsequent to the first agreement.
Both the trial court and the CA upheld Union Bank’s right
to foreclose. However, the CA held that DRI’s mortgage
liability is pegged at 8.6 million and which was later
amended and increased. It ruled that DRI could not be
held liable for more than 8.6 million even if JMTC availed
more than this amount. It also noted that the date of the
public sale as contained in the notice varies with the actual
date of sale. As such, it declared as null the foreclosure sale
carried out on a day different from the published notice is a
total nullity.
ISSUES:
1. Whether or not the CA erred in holding that the
liability of DRI is limited only to 8.6 million
2. Whether or not the CA erred in finding the
foreclosure sale of DRI’s mortgaged properties as null for
lack of republication of the notice of sale
HELD:
The foregoing provisions clearly show the parties’ intent to
constitute DRI’s real estate properties as continuing
securities, liable for the current as well as the future
obligations of JMTC. Indeed, a mortgage liability is usually
limited to the amount mentioned in the contract, but where
the intent of the contracting parties is manifest that the
mortgage property shall also answer for future loans or
advancements, the same is valid and binding between the
parties. In this case, DRI expressly agreed to secure all the
obligations of JMTC, whether presently owing or
subsequently incurred. Thus, its liability is not limited to 8.6
million only. This is also referred to as the “blanket
mortgage clause” or “dragnet clause”.
Likewise, the evidence presented during the proceedings in
the trial court reveal that DRI acknowledged and
consented to the renewal and increase of the credit facilities
of JMTC. Thus, by agreeing to secure JMTC’s future loans
or advancements with its real properties, DRI is estopped
from questioning the foreclosure proceedings conducted
upon the failure of JMTC to pay its obligations to Union
Bank.
Concerning DRI's allegation of lack of republication, the
same is without factual or legal basis. Other than its bare
allegations, DRI did not present proof that there was no
republication of the notice of sale. On the other hand,
Union Bank presented a Certificate of Posting executed by
Sheriff Norberto Magsajo and the Affidavit of Publication
by Veronica Arguilla, the General Manager of Pilipino
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Newsline, attesting to the publication of the notice on
August 29, September 5 and 12, 1996. The original issues
of Pilipino Newsline where the notice was republished were
also attached in the records. Verily, in the face of such
overwhelming evidence, there is no reason why the
regularity and validity of the mortgage foreclosure should
not be upheld as the trial court did.
Foreclosure proceedings have in their favor the
presumption of regularity and the burden of evidence to
rebut the same is on the party that seeks to challenge the
proceedings. Likewise, the presumption of regularity in the
performance of duty applies in this case in favor of the
Sheriff. These presumptions have not been rebutted by
convincing and substantial evidence by DRI. Lastly, the
issue of republication was never raised in the trial court or
in the appellate court proceedings. It is well settled that no
issue may be raised on appeal unless it has been passed
upon by the lower court for consideration.
12) DAVID MAGLAQUE, JOSE MAGLAQUE
MAURO MAGLAQUE and PACITA MAGLAQUE
vs. PLANTERS DEVELOPMENT BANK, and
SPOUSES ANGEL S. BELTRAN AND ERLINDA C.
BELTRAN (G.R. NO. 109472 MAY 18, 1999)
FACTS
The spouses Egmidio Maglaque and Sabina Payawal were
the owners of a parcel of land, situated in the municipality
of San Miguel, province of Bulacan, with an area of Four
Hundred Sixty Four (464) square meters, more or less, and
a residential house of strong materials erected thereon,
more particularly described as follows:
A parcel of land (Lot No. 315-A of the subdivision plan
Psd-20633 being a portion of Lot 315 of the Cad. Survey of
San Miguel, G. L. R. O. Cadastral Record No. 696
situated in the Municipality of San Miguel, Province of
Bulacan, Island of Luzon, xx xx xx containing an area of
FOUR HUNDRED SIXTY FOUR (464) SQUARE
METERS, more or less and covered by Transfer
Certificate of Title No. 28303, assessed at P4,180.00 as per
Tax Declaration No 250 covered by Transfer Certificate of
Title No. 28303 of the Registry of Deeds of Bulacan.
On March 19, 1974, the spouses Maglaque obtained a loan
of two thousand (P2,000.00) pesos from the Bulacan
Development Bank evidenced by a promissory note,
payable on or before March 19, 1975, in two installments,
the first payment of P1,000.00, shall be due on September
19, 1974, and the second payment of P1,000.00, shall be
due on March 19, 1975, with interest at 12% per annum.
To secure the loan, the spouses executed a deed of real
estate mortgage on the above-described parcel of land,
including its improvements.
63
On September 15, 1976, Sabina Payawal died. On
December 22, 1977, Egmidio Maglaque paid Planters
Development Bank the amount of P2,000.00, which the
bank accepted.
On April 9, 1979, Egmidio Maglaque died.
On September 15, 1978, for non-payment in full of the
loan, the bank extra-judicially foreclosed on the real estate
mortgage, through the Provincial Sheriff of Bulacan, who
conducted a public auction sale of the mortgaged property
pursuant to the authority provided for in the deed of real
restate mortgage. The bank was the highest bidder.
On March 24, 1980, after the lapse of the redemption
period, the bank consolidated its title to the property, and
became its registered owner under Transfer Certificate of
Title No. T-259923 of the Registry of Deeds of Bulacan.
On September 4, 1980, David Maglaque, as heir of the
deceased spouses Egmidio Maglaque and Sabina Payawal,
filed with the Court of FirstInstance of Bulacan, Branch 04,
Baliuag, Bulacan, a complaint for annulment of the sale
conducted by the Provincial Sheriff of Bulacan,
reconveyance of title, with damages, and injunction.
On September 24, 1980, the bank sold the property to the
spouses Angel S. Beltran and Erlinda C. Beltran, for thirty
thousand (P30,000.00) pesos.
The plaintiff amended the complaint twice to implead the
other heirs of the spouses Maglaque, and defendant Beltran
spouses, the buyers of the property in question.
Thereafter, the parties submitted the case for decision on
the basis of their memoranda.
On February 28, 1989, the trial rendered decision
dismissing the complaint for lack of merit or insufficiency of
evidence.
On March 27, 1989, plaintiffs appealed the case to the
Court of Appeals.
After due proceedings, on March 26, 1993, the Court of
Appeals rendered decision affirming the appealed decision
in toto.
Hence, this petition for review.
ISSUE:
W/O the PDB as the creditor-mortgagee may foreclose the
real estate mortgage
HELD:
As to the first assigned error, the rule is that a secured
creditor holding a real estate mortgage has three (3) options
in case of death of the debtor. These are:
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"(l) to waive the mortgage and claim the entire debt from
the estate of the mortgagor as an ordinary claim;
"(2) to foreclose the mortgage judicially and prove any
deficiency as an ordinary claim; and
"(3) to rely on the mortgage exclusively, foreclosing the
same at anytime before it is barred by prescription, without
right to file a claim for any deficiency."
Obviously, respondent bank availed itself of the third
option.
VIII. Chattel Mortgage
1) DAVID MAGLAQUE, JOSE MAGLAQUE
MAURO MAGLAQUE and PACITA MAGLAQUE
vs. PLANTERS DEVELOPMENT BANK, and
SPOUSES ANGEL S. BELTRAN AND ERLINDA C.
BELTRAN (G.R. NO. 109472 MAY 18, 1999)
FACTS:
The spouses Egmidio Maglaque and Sabina Payawal were
the owners of a parcel of land, situated in the municipality
of San Miguel, province of Bulacan, with an area of Four
Hundred Sixty Four (464) square meters, more or less, and
a residential house of strong materials erected thereon,
more particularly described as follows:
A parcel of land (Lot No. 315-A of the subdivision plan
Psd-20633 being a portion of Lot 315 of the Cad. Survey of
San Miguel, G. L. R. O. Cadastral Record No. 696
situated in the Municipality of San Miguel, Province of
Bulacan, Island of Luzon, xx xx xx containing an area of
FOUR HUNDRED SIXTY FOUR (464) SQUARE
METERS, more or less and covered by Transfer
Certificate of Title No. 28303, assessed at P4,180.00 as per
Tax Declaration No 250 covered by Transfer Certificate of
Title No. 28303 of the Registry of Deeds of Bulacan.
On March 19, 1974, the spouses Maglaque obtained a loan
of two thousand (P2,000.00) pesos from the Bulacan
Development Bank evidenced by a promissory note,
payable on or before March 19, 1975, in two installments,
the first payment of P1,000.00, shall be due on September
19, 1974, and the second payment of P1,000.00, shall be
due on March 19, 1975, with interest at 12% per annum.
To secure the loan, the spouses executed a deed of real
estate mortgage on the above-described parcel of land,
including its improvements.
On September 15, 1976, Sabina Payawal died. On
December 22, 1977, Egmidio Maglaque paid Planters
Development Bank the amount of P2,000.00, which the
bank accepted.
On April 9, 1979, Egmidio Maglaque died.
On September 15, 1978, for non-payment in full of the
loan, the bank extra-judicially foreclosed on the real estate
mortgage, through the Provincial Sheriff of Bulacan, who
conducted a public auction sale of the mortgaged property
64
pursuant to the authority provided for in the deed of real
restate mortgage. The bank was the highest bidder.
On March 24, 1980, after the lapse of the redemption
period, the bank consolidated its title to the property, and
became its registered owner under Transfer Certificate of
Title No. T-259923 of the Registry of Deeds of Bulacan.
On September 4, 1980, David Maglaque, as heir of the
deceased spouses Egmidio Maglaque and Sabina Payawal,
filed with the Court of FirstInstance of Bulacan, Branch 04,
Baliuag, Bulacan, a complaint for annulment of the sale
conducted by the Provincial Sheriff of Bulacan,
reconveyance of title, with damages, and injunction.
On September 24, 1980, the bank sold the property to the
spouses Angel S. Beltran and Erlinda C. Beltran, for thirty
thousand (P30,000.00) pesos.
The plaintiff amended the complaint twice to implead the
other heirs of the spouses Maglaque, and defendant Beltran
spouses, the buyers of the property in question.
Thereafter, the parties submitted the case for decision on
the basis of their memoranda.
On February 28, 1989, the trial rendered decision
dismissing the complaint for lack of merit or insufficiency of
evidence.
On March 27, 1989, plaintiffs appealed the case to the
Court of Appeals.
After due proceedings, on March 26, 1993, the Court of
Appeals rendered decision affirming the appealed decision
in toto.
Hence, this petition for review.
ISSUE:
W/O the PDB as the creditor-mortgagee may foreclose the
real estate mortgage
HELD:
As to the first assigned error, the rule is that a secured
creditor holding a real estate mortgage has three (3) options
in case of death of the debtor. These are:
"(l) to waive the mortgage and claim the entire debt from
the estate of the mortgagor as an ordinary claim;
"(2) to foreclose the mortgage judicially and prove any
deficiency as an ordinary claim; and
"(3) to rely on the mortgage exclusively, foreclosing the
same at anytime before it is barred by prescription, without
right to file a claim for any deficiency."
Obviously, respondent bank availed itself of the third
option.
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2) PNB vs RBL ENTERPRISES G.R. No. 149569,
May 28, 2004 PANGANIBAN J.
FACTS:
On April 28, 1994 the respondent (RBL Ent.) instituted an
action against the petitioner (PNB) and the provisional
sheriff of Negros Occidental alleging: that sometime in
1987 the respondent opened a prawn hatching in San
Enrique, Negros Occidental and leased from Nelly Bedrejo
a parcel of land. In order to increase production they
applied and was approved of a loan of P 2, 000, 000. 00 by
PNB and they executed in PNB's favor a real estate
mortgage over two parcels of land in the name of the
respondents and another real and chattel mortgage over
buildings, culture tanks, and other hatching facilities
located in the leased property. PNB partially released the
sum of P 1, 000, 000. 00 less the advanced interest, this was
used for introducing improvements to the leased property.
During mid-part of the construction PNB refused to release
the remaining balance, alleging that the respondents failed
to comply with the bank requirement that Nelly Bedrejo
should execute an undertaking or lessor conformity
provided in real estate and chattel mortgage contract (par.
9.07).
Thereafter for the alleged failure of the respondent to
comply with the additional requirements and the demand
of PNB to pay for the released amount of the loan, PNB
foreclosed the mortgaged properties to the detriment of the
respondent. The respondent filed the action for the non-
release of the remaining balance, that the production
operations of the business were disrupted causing losses,
and thereafter for the foreclosure of the mortgage. The
petitioner filed its answer with counterclaim alleging the
lessor conformity was not an additional requirement but
already part of the terms and conditions contained in the
real estate and chattel mortgage contract and that the
released of the balance of the loan was conditioned on the
compliance and submission by the respondents of the
required lessor confirmity.
The RTC ruled that the PNB had breached its obligation
under the contract of loan and therefore should be held
liable for consequential damages suffered by the
respondent.
The Court of Appeals affirms the decision holding that
Bedrejo was not a party to the mortgage contract and could
not be compelled to affix her signature thereto. Also, the
registration of the mortgage revealed PNB's intention to
give full force and effect to the instrument and give ample
security against subsequent owners of the chattel.
ISSUE:
65
Whether or not the non-release of the balance of the loan
by PNB is justified (Whether or not PNB may foreclose the
property under the real state and chattel mortgage
contract.)
HELD:
No. The tenor of the language used in the aforementioned
paragraph 9.07(lessor conformity) as well as its position
relative to the whole contract, negated the supposed
intention to make the released of the loan subject to the
fulfillment of the clause. The respondents could not
reasonably be expected to know that it was the petitioners
unilateral intention to suspend the release of the balance
until the lessor conformity to the mortgage contract would
have been obtained. Absent such condition the efficacy of
the credit agreement stood, and the petitioner was
obligated to release the balance of the loan. Its refusal is a
breach of its reciprocal obligation under the loan
agreement. The insistence of the petitioner that The lessor
should be compelled to sign the mortgage contract in
untenable. The chattel mortgage is a mere accessory to the
contract of loan executed between PNB and RBL.
Furthermore the records show that the real estate and the
chattel mortgages were registered with the register of deeds
of Bago City, Negros Occidental, and annotated at the
back of the mortgaged titles. Thus the petitioner had ample
protection over it's interest. Article 2126 of the civil code
describes the nature of a Real Mortgage: it is a real right
following the property, such that in subsequent transfers by
the mortgagor, the transferee must respect the mortgage. A
registered mortgage lien is considered inseparable from the
property insasmuch as it is a right in rem. The mortgage
creates a real right or a lien which after recorded, follows
the chattel wherever it goes. Under Article 2129 of the
same code, the mortgage on the property may still be
foreclosed despite the transfer. PNB violated the loan
agreement when it refused to release the balance. As
regards to the partial release of the amount, over which the
respondents executed three Promissory Notes, the bank is
deemed to have complied with its reciprocal obligation.
The promissory note compelled them to pay the initial
amount when it fell due. Since PNB failed to release the
balance of the loan, the Real Estate and Chattel Mortgage
contract became unenforceable to that extent.
3) PAMECA WOOD TREATMENT PLANT vs.
HON. COURT OF APPEALS and DEVELOPMENT
BANK OF THE PHILIPPINES
Facts: On April 17, 1980, petitioner PAMECA Wood
Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from
respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C.
Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for the
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said loan, a chattel mortgage was also executed over
PAMECAs properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the whole
value of the loan.
On January 18, 1984, and upon petitioner PAMECAs
failure to pay, respondent bank extrajudicially foreclosed
the chattel mortgage, and, as sole bidder in the public
auction, purchased the foreclosed properties for a sum of
P322,350.00. On June 29, 1984, respondent bank filed a
complaint for the collection of the balance of
P4,366,332.46. with Branch 132 of the Regional Trial
Court of Makati City against petitioner PAMECA and
private petitioners herein, as solidary debtors with
PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a
decision on the case, ordering the Pameca, teves and pulido
to pay jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the deficiency claim of the
latter as of March 31, 1984, plus 21% interest per annum
and other charges from April 1, 1984 until the whole
amount is fully paid and (2) the costs of the suit.
The Court of Appeals affirmed the RTC decision. Hence,
this petition.
One of the grounds raised in the petition is that the
Respondent appellate court gravely erred in not applying
by analogy Article 1484 and Article 2115 of the Civil Code
by reading the spirit of the law, and taking into
consideration the fact that the contract of loan was a
contract of adhesion.
Issue: won Articles 1484 and 2115 of the Civil Code be
applied in analogy to the instant case to preclude the
recovery of a deficiency claim.
HELD: No. The Court cited the leading case of Ablaza vs.
Ignacio that article 2115 in relation to article 2141, may
not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel
Mortgage Law, states:
xxx
The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then
to the payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to persons
holding subsequent mortgages in their order, and the
balance, after paying the mortgage, shall be paid to the
mortgagor or persons holding under him on demand.
It is clear from the above provision that the effects of
foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115.
Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the
pledgor may no longer recover proceeds of the sale in
66
excess of the amount of the principal obligation, Section 14
of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction
of the principal obligation and costs.

Since the Chattel Mortgage Law bars the creditor-

mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-
mortgagee to pay the deficiency in case of a reduction in
the price at public auction.

The Court find no reason to disturb the ruling in Ablaza vs.

Ignacio, and the cases reiterating it.

Neither did the Court find tenable the application by

analogy of Article 1484 of the Civil Code to the instant
case. As correctly pointed out by the trial court, the said
article applies clearly and solely to the sale of personal
property the price of which is payable in installments.
Although Article 1484, paragraph (3) expressly bars any
further action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to foreclose the
chattel mortgage on the thing sold, should the vendees
failure to pay cover two or more installments, this provision
is specifically applicable to a sale on installments.

To accommodate petitioners prayer even on the basis of

equity would be to expand the application of the provisions
of Article 1484 to situations beyond its specific purview,
and ignore the language and intent of the Chattel Mortgage
Law.

The petition is denied.

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