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TITLE IX LOAN

CHAPTER1 - COMMODATUM

EN BANC
[G.R. No. L-17474. October 25, 1962.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE
V.
BAGTAS, defendant. FELICIDAD
M.
BAGTAS,
Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Luison & Associates for petitioner-appellant.


Solicitor General for plaintiff-appellee.

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 P499.62, both with
interests, and costs; and that other just and equitable relief be granted it (civil No.
12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to deduct from the book value of
the bulls corresponding yearly depreciation of 8% from the date of acquisition, to
which depreciation the Auditor General did not object, he could not return the animals
nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court rendered judgment

DECISION

PADILLA, J p:
The Court of Appeals certified this case to this Court because only questions of law
are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through
the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of
P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government
charge of breeding fee of 10% of 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

. . . sentencing the latter (defendant) to pay the sum of P3,625.09


the total value of the three bulls plus the breeding fees in the
amount of P626.17 with interest on both sums of (at) the legal
rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the
court granted on 18 October and issued on 11 November 1958. On 2 December
1958 it granted an ex-parte motion filed by the plaintiff on 28 November 1958 for
the appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas, the
surviving spouse of the defendant Jose V. Bagtas who died on 23 October 1951
and as administratrix of his estate, was notified. On 7 January 1959 she filed a
motion alleging that on 26 June 1952 the two bulls, Sindhi and Bhagnari, were
returned to the Bureau of Animal Industry and that sometime in November 1953
the third bull, the Sahiniwal, died from gunshot wounds inflicted during a Huks
raid on Hacienda Felicidad Intal, and praying that the writ of execution be
quashed and that a writ of preliminary injunction be issued. On 31 January 1959
the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto.
On the same day, 6 February, the Court denied her motion. Hence, this appeal
Page 1 of 505

certified by the Court of Appeals to this Court, as stated at the beginning of this
opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late
defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent
of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as
evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its
objection of 31 January 1959 to the appellant's motion to quash the writ of execution
the appellee prays "that another writ of execution in the sum of P859.5.3 be issued
against the estate of defendant deceased Jos V. Bagtas." She cannot be held liable
for the two bulls which already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by
the Huks in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal,
Baggao, Cagayan, where the animal was kept, and that as such death was due
to force majeure she is relieved from the duty of the returning the bull or paying its
value to the appellee. The contention is without merit. The loan by the appellee to the
late defendant Jos V. Bagtas of the three bulls for breeding purposes for a period of
one year from 8 May 1948 to 7 May 1949, later on renewed for another year as
regards one bull, was subject to the payment by the borrower of breeding fee of 10%
of the book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained ownership or title
to the bull it should suffer its loss due to force majeure A contract of commodatum is
essentially gratuitous.1 If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee
would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the
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 thing, 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 wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at
P744.46. It was not stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of
the bull or the payment of its value being a money claim should be presented or filed
in the intestate proceedings of the defendant who died on 23 October 1951, is not
altogether without merit. However, the claim that his civil personality having ceased to
exist the trial court lost jurisdiction over the case against him, is untenable, because
section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of
the deceased to appear and to be substituted for the deceased,
within a period of thirty (30) days, or within such time as may be
granted . . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply
with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty
of his attorney to inform the court promptly of such death . . . and
to give the name and residence of the executor or administrator,
guardian, or other legal representative of the deceased . . .
The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issued letters of administration of the estate of the
late Jos V. Bagtas and that "all persons having claims for money against the
deceased Jos V. Bagtas, arising from contract, express or implied, whether the
same be due, not due, or contingent, for funeral expenses and expenses of the
last sickness of the said decedent, and judgment for money against him, to file
said claims with the Clerk of this Court at the City Hall Bldg., Highway 54,
Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said deceased," is not a notice to the
court and the appellee who were to be notified of the defendant's death in
accordance with the abovequoted rule, and there was no reason for such failure
to notify, because the attorney who appeared for the defendant was the same
who represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or
Page 2 of 505

representative could not be expected to know of the death of the defendant or of


the administration proceedings of his estate instituted in another court, if the
attorney for the deceased defendant did not notify the plaintiff or its attorney of
such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the
late defendant is only liable for the sum of P859.63, the value of the bull which has not
been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant
for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the
deceased Jos V. Bagtas having been instituted in the Court of First Instance of Rizal
(Q-200), the money judgment rendered in favor of the appellee cannot be enforced by
means of a writ of execution but must be presented to the probate court for payment
by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without
pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes,
Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
||| (Republic v. Bagtas, G.R. No. L-17474, [October 25, 1962], 116 PHIL 570-576)

FIRST DIVISION
[G.R. Nos. 80294-95. September 21, 1988.]

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN


PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF
EGMIDIO OCTAVIANO AND JUAN VALDEZ,respondents.

Valdez Ereso Polido & Associates for petitioner.


Claustro, Claustro Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cabato Law Office for the Heirs of Juan Valdez.

DECISION

GANCAYCO, J p:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent
Court of Appeals in the present two cases between petitioner and two private
respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the
Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case
No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for
Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T.
Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
"WHEREFORE, Judgment is hereby rendered ordering the
defendant, Catholic Vicar Apostolic of the Mountain Province to
return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set
of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et
al.). For lack or insufficiency of evidence, the plaintiffs' claim or
damages is hereby denied. Said defendant is ordered to pay
costs." (p 36, Rollo)

Page 3 of 505

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4, 1977 in
CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on
the ownership of lots 2 and 3 in question; that the two lots were possessed by the
predecessors-in-interest of private respondents under claim of ownership in good faith
from 1906 to 1951; that petitioner had been in possession of the same lots as bailee
in commodatum up to 1951, when petitioner repudiated the trust and when it applied
for registration in 1962; that petitioner had just been in possession as owner for
eleven years, hence there is no possibility of acquisitive prescription which requires 10
years possession with just title and 30 years of possession without; that the principle
of res judicata on these findings by the Court of Appeals will bar a reopening of these
questions of fact; and that those facts may no longer be altered.cdll
Petitioner's motion for reconsideration of the respondent appellate court's Decision in
the two aforementioned cases (CA-G.R. No. CV-05418 and 05419) was denied.
The facts and background of the cases as narrated by the trial court are as follows
". . . The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic
of the Mountain Province (VICAR for brevity) filed with the Court
of First Instance of Baguio-Benguet, on September 5, 1962 an
application for registration of title over Lots 1, 2, 3, and 4 in Psu194357, 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 CAG.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 sisters' convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for
reconsideration praying the Court of Appeals to order the
registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and
Pacita Valdez filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names of the Heirs
of Juan Valdez and Pacita Valdez. On August 12, 1977, the Court
of Appeals denied the motion for reconsideration filed by the
Heirs of Juan Valdez on the ground that there was "no sufficient
merit to justify reconsideration one way or the other . . .," and
likewise denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of Appeals
dismissing his (its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled, 'Catholic Vicar Apostolic
of the Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for
reconsideration, the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, 'Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of
Egmidio Octaviano and Amable 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. L46832 and G.R. No. L-46872, the Heirs of Octaviano filed with the
then Court of First Instance of Baguio, Branch 11, 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
Page 4 of 505

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 petition for certiorari and mandamus, docketed as
CA-G.R. No. 08890-R, entitled 'Heirs of Egmidio Octaviano vs.
Hon. Salvador J. Valdez, Jr. and Vicar.' In its decision dated May
16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of
Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24,
1979, for recovery of possession of Lot 3; and the Heirs of Juan
Valdez filed Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision, pp. 199201, Orig. Rec.).
"In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez,
who testified on the alleged ownership of the land in question (Lot
3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C);
his written demand (Exh. B - B-4) to defendant Vicar for the
return of the land to them; and the reasonable rentals for the use
of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province
of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio
Octaviano or any of the plaintiffs (Exh. 8). The defendant
dispensed with the testimony of Mons. William Brasseur when the
plaintiffs admitted that the witness if called to the witness stand,
would testify that defendant Vicar has been in possession of Lot
3, for seventy-five (75) years continuously and peacefully and has
constructed permanent structures thereon.
"In Civil Case No. 3655, the parties admitting that the material
facts are not in dispute, submitted the case on the sole issue of
whether or not the decisions of the Court of Appeals and the
Supreme Court touching on the ownership of Lot 2, which in
effect declared the plaintiffs the owners of the land constitute res
judicata.

"In these two cases, the plaintiffs argue that the defendant Vicar
is barred from setting up the defense of ownership and or long
and continuous possession of the two lots in question since this
is barred by prior judgment of the Court of Appeals in CA-G.R.
No. 038830-R under the principle of res judicata. Plaintiffs
contend that the question of possession and ownership have
already been determined by the Court of Appeals (Exh. C,
Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
Court (Exh. 1, Minute Resolution of the Supreme Court). On his
part, defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues of long
possession and ownership. Because the dispositive portion of the
prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant
Vicar contends that only the dispositive portion of the decision,
and not its body, is the controlling pronouncement of the Court of
Appeals." 2
The alleged errors committed by respondent Court of Appeals according to petitioner
are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES


JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT
LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE
BUT
WITHOUT
DOCUMENTARY
EVIDENCE
PRESENTED;
3. ERROR IN FINDING THAT PETITIONER'S CLAIM IT
PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT
THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF
PRIVATE
RESPONDENTS
WHO
WERE
IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM
1906, AND NOT PETITIONER;
Page 5 of 505

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD


FREE
PATENT
APPLICATIONS
AND
THE
PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2
AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME
NECESSITY UNDER ARTICLE 1134 IN RELATION TO
ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT
OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO.
038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND
3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS
2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD
FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN
POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
(BORROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR
AND BUILDER IN GOOD FAITH WITHOUT RIGHTS
OF RETENTION AND REIMBURSEMENT AND IS
BARRED BY THE FINALITY AND CONCLUSIVENESS
OF THE DECISION IN CA G.R. NO. 033830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148
and 05149, when it clearly held that it was in agreement with the findings of the trial
court that the Decision of the Court of Appeals dated May 4, 1977 in CA-G.R. No.
38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of
Appeals Decision (CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners

of the land, but it held that the predecessors of private respondents were possessors
of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When petitioner
applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept
of owner only for eleven years. Ordinary acquisitive prescription requires possession
for ten years, but always with just title. Extraordinary acquisitive prescription requires
30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in
respondent appellate court's ruling that said findings are res judicata between the
parties. They can no longer be altered by presentation of evidence because those
issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination
of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question under its
ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of
the absence of just title. The appellate court did not believe the findings of the trial
court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots
since 1906. The predecessors of private respondents, not petitioner Vicar, were in
possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in
question, but not Lots 2 and 3, because the buildings standing thereon were only
constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for
taxation purposes in 1951. The improvements on Lots 1, 2, 3, 4 were paid for by the

Page 6 of 505

Bishop but said Bishop was appointed only in 1947, the church was constructed only
in 1951 and the new convent only 2 years before the trial in 1963. prLL
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered
to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of
petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed
by petitioner Vicar after the church and the convent were destroyed. They never asked
for the return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject
matter of commodatum to the bailor did not mean adverse possession on the part of
the borrower. The bailee held in trust the property subject matter ofcommodatum. 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.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CAG.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined
to review said decision, thereby in effect, affirming it. It has become final and
executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave
abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R.
No. 38830-R is governing, under the principle of res judicata, hence the rule, in the
present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported
by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for
lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
respondent Court of Appeals is AFFIRMED, with costs against petitioner. LibLex

SECOND DIVISION
[G.R. No. L-46145. November 26, 1986.]
REPUBLIC
OF
THE
PHILIPPINES
(BUREAU
OF
LANDS), petitioner, vs. THE HON. COURT OF APPEALS,
HEIRS OF DOMINGO P. BALOY, represented by RICARDO
BALOY, ET AL., respondents.

Pelaez, Jalandoni, Adriano, and Associates for respondents.

SO ORDERED.

DECISION

Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.


||| (Catholic Vicar Apostolic of the Mountain Province v. Court of Appeals, G.R. Nos.
80294-95, [September 21, 1988], 262 PHIL 698-702)

PARAS, J p:
Page 7 of 505

This case originally emanated from a decision of the then Court of First Instance of
Zambales in LRC Case No. 11-0, LRC Record No. N-29355, denying respondents'
application for registration. From said order of denial the applicants, heirs of Domingo
Baloy, represented by Ricardo P. Baloy, (herein private respondents) interposed on
appeal to the Court of Appeals which was docketed as CA-G.R. No. 52039-R. The
appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as
ponente, rendered a decision dated February 3, 1977 reversing the decision appealed
from and thus approving the application for registration. Oppositors (petitioners
herein) filed their Motion for Reconsideration alleging among other things that
applicants' possessory information title can no longer be invoked and that they were
not able to prove a registerable title over the land. Said Motion for Reconsideration
was denied, hence this petition for review on certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which
had been translated in Exhibit F-1) coupled with their continuous, adverse and public
possession over the land in question. An examination of the possessory information
title shows that the description and the area of the land stated therein substantially
coincides with the land applied for and that said possessory information title had been
regularly issued having been acquired by applicants' predecessor, Domingo Baloy,
under the provisions of the Spanish Mortgage Law. Applicants presented their tax
declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become
public land thru the operation of Act 627 of the Philippine Commission. On November
26, 1902 pursuant to the executive order of the President of the U.S., the area was
declared within the U.S. Naval Reservation. Under Act 627 as amended by Act 1138,
a period was fixed within which persons affected thereby could file their application,
(that is within 6 months from July 8, 1905) otherwise "the said lands or interests
therein will be conclusively adjudged to be public lands and all claims on the part of
private individuals for such lands or interests therein not to presented will be forever
barred." Petitioner argues that since Domingo Baloy failed to file his claim within the
prescribed period, the land had become irrevocably public and could not be the
subject of a valid registration for private ownership.
Considering the foregoing facts respondent Court of Appeals ruled as follows:
". . . perhaps, the consequence was that upon failure of Domingo
Baloy to have filed his application within that period the land had
become irrevocably public; but perhaps also, for the reason that
warning was from the Clerk of the Court of Land Registration,
named J.R. Wilson and there has not been presented a formal

order or decision of the said Court of Land Registration so


declaring the land public because of that failure, it can with
plausibility be said that after all, there was no judicial declaration
to that effect, it is true that the U.S. Navy did occupy it apparentlyfor some time, as a recreation area, as this Court understands
from the communication of the Department of Foreign Affairs to
the U.S. Embassy exhibited in the record, but the very tenor of
the communication apparently seeks to justify the title of herein
applicants, in other words, what this Court has taken from the
occupation by the U.S. Navy is that during the interim, the title of
applicants was in a state of suspended animation so to speak but
it had not died either; and the fact being that this land was really
originally private from and after the issuance and inscription of
the possessory information Exh. F during the Spanish times, it
would be most difficult to sustain position of Director of Lands that
it was land of no private owner; open to public imposition, and
over which he has control; and since immediately after U.S. Navy
had abandoned the area, applicant came in and asserted title
once again, only to be troubled by first Crispiniano Blanco who
however in due time, quitclaimed in favor of applicants, and then
by private oppositors now, apparently originally tenants of Blanco,
but that entry of private oppositors sought to be given color of
ownership when they sought to and did file tax declaration in
1965, should not prejudice the original rights of applicants thru
their possessory information secured regularly so long ago, the
conclusion must have to be that after all, applicants had
succeeded in bringing themselves within the provisions of Sec.
19 of Act 496, the land should be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it
now reverses, judgment appealed from the application is
approved, and once this decision shall have become final, if ever
it would be, let decree issue in favor of applicants with the
personal circumstances outlined in the application, costs against
private oppositors."
Petitioner now comes to Us with the following:
"ASSIGNMENT OF ERRORS"

Page 8 of 505

1 Respondent court erred in holding that to bar private


respondents from asserting any right under their possessory
information title there is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents'
rights by virtue of their possessory information title was lost by
prescription.
3. Respondent court erred in concluding that applicants have
registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed
before any affected land can "be conclusively adjudged to be public land." Sec. 3, Act
627 reads as follows:
"SEC. 3. Immediately upon receipt of the notice from the Civil
Governor in the preceeding section mentioned it shall be the duty
of the judge of the Court of Land Registration to issue a notice,
stating that the lands within the limits aforesaid have been
reserved for military purposes, and announced and declared to
be military reservations, and that claims for all private lands,
buildings, and interests therein, within the limits aforesaid, must
be presented for registration under the Land Registration Act
within six calendar months from the date of issuing the notice,
and that all lands, buildings, and interests therein within the limits
aforesaid not so presented within the time therein limited will be
conclusively adjudged to be public lands, and all claims on the
part of private individuals for such lands, buildings, or an interest
therein not so presented will be forever barred. The clerk of the
Court of Land Registration shall immediately upon the issuing of
such notice by the judge cause the same to be published once a
week for three successive weeks in two newspapers, one of
which newspapers shall be in the English language, and one in
the Spanish language in the city or province where the land lies,
if there be no such Spanish or English newspapers having a
general circulation in the city or province wherein the land lies,
then it shall be a sufficient compliance with this section if the
notice be published as herein provided, in a daily newspaper in
the Spanish language and one in the English language, in the
City of Manila, having a general circulation. The clerk shall also
cause a duly attested copy of the notice in the Spanish language

to be posted in conspicuous place at each angle formed by the


lines of the limits of the land reserved. The clerk shall also issue
and cause to be personally served the notice in the Spanish
language upon every person living upon or in visible possession
of any part of the military reservation. If the person in possession
is the head of the family bring upon the land, it shall be sufficient
to serve the notice upon him, and if he is absent it shall be
sufficient to leave a copy at his usual place of residence. The
clerk shall certify the manner in which the notices have been
published, posted, and served, and his certificate shall be
conclusive proof of such publication, posting, and service, but the
court shall have power to cause such further notice to be given as
in its opinion may be necessary."
Clearly under said provision, private land could be deemed to have become
public land only by virtue of a judicial declaration after due notice and hearing. It
runs contrary therefore to the contention of petitioners that failure to present
claims set forth under Sec. 2 of Act 627 made the land ipso facto public without
any need of judicial pronouncement. Petitioner in making such declaration relied
on Sec. 4 of Act 627 alone. But in construing a statute the entire provisions of the
law must be considered in order to establish the correct interpretation as intended
by the law-making body. Act 627 by its terms is not self-executory and requires
implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be
strictly construed so as to safeguard private respondents' rights. Significantly,
petitioner does not even allege the existence of any judgment of the Land
Registration court with respect to the land in question. Without a judgment or
order declaring the land to be public, its private character and the possessory
information title over it must be respected. Since no such order has been
rendered by the Land Registration Court it necessarily follows that it never
became public land thru the operation of Act 627. To assume otherwise is to
deprive private respondents of their property without due process of law. In fact it
can be presumed that the notice required by law to be given by publication and
by personal service did not include the name of Domingo Baloy and the subject
land, and hence he and his land were never brought within the operation of Act
627 as amended. The procedure laid down in Sec. 3 is a requirement of due
process. "Due process requires that the statutes under which it is attempted to
deprive a citizen of private property without or against his consent must, as in
expropriation cases, be strictly complied with, because such statutes are in
Page 9 of 505

derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507,
508, 511).

We also find with favor private respondents' views that court judgments are not to be
presumed. It would be absurd to speak of a judgment by presumption. If it could be
contended that such a judgment may be presumed, it could equally be contended that
applicants' predecessor Domingo Baloy presumably seasonably filed a claim, in
accordance with the legal presumption that a person takes ordinary care of his
concerns, and that a judgment in his favor was rendered.

Fernan, J ., no part.
Gutierrez, Jr., J ., I concur pro hoc vice in the results.
||| (Republic v. Court of Appeals, G.R. No. L-46145, [November 26, 1986], 230 PHIL
118-125)

The finding of respondent court that during the interim of 57 years from November 26,
1902 to December 17, 1959 (when the U.S. Navy possessed the area) the
possessory rights of Baloy or heirs were merely suspended and not lost by
prescription, is supported by Exhibit "U," a communication or letter No. 1108-63,
dated June 24, 1963, which contains an official statement of the position of the
Republic of the Philippines with regard to the status of the land in question. Said letter
recognizes the fact that Domingo Baloy and/or his heirs have been in continuous
possession of said land since 1894 as attested by an "Informacion Possessoria" Title,
which was granted by the Spanish Government. Hence, the disputed property is
private land and this possession was interrupted only by the occupation of the land by
the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned
the premises. The heirs of the late Domingo P. Baloy, are now in actual possession,
and this has been so since the abandonment by the U.S. Navy. A new recreation area
is now being used by the U.S. Navy personnel and this place is remote from the land
in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes
of the character of a commodatum. It cannot therefore militate against the title of
Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost
by prescription by reason of another's possession if such possession be under claim
of ownership, not where the possession is only intended to be transient, as in the
case of the U.S. Navy's occupation of the land concerned, in which case the owner is
not divested of his title, although it cannot be exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed
decision is hereby AFFIRMED. prLL
SO ORDERED.

EN BANC
[G.R. No. 46240. November 3, 1939.]
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffsappellants, vs. BECK, defendant-appellee.

Mauricio Carlos; for appellants.


Felipe Buencamino, Jr.; for appellee.
.

Feria, Alampay and Feliciano, ** JJ ., concur.


Page 10 of 505

DECISION

IMPERIAL, J p:
The plaintiff brought this action to compel the defendant to return to her
certain furniture which she lent him for his use. She appealed from the judgment
of the Court of First Instance of Manila which ordered that the defendant return to
her the three gas heaters and the four electric lamps found in the possession of
the Sheriff of said city, that she call for the other furniture from the said Sheriff of
Manila at her own expense, and that the fees which the sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement
as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the
latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the
novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff
sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to
vacate the premises under one of the clauses of the contract of lease. There after
the plaintiff required the defendant to return all the furniture transferred to him for
his use. The defendant answered that she may call for them in the house where
they are found. On November 5, 1936, the defendant, through another person,
wrote to the plaintiff reiterating that she may call for the furniture in the ground
floor of the house. On the 7th of the same month, the defendant wrote another
letter to the plaintiff informing her that he could not give up the three gas heaters
and the four electric lamps because he would use them until the 15th of the same
month when the lease is due to expire. The plaintiff refused to get the furniture in
view of the fact that the defendant had declined to make delivers of all of them.
On November 15th, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue. in the custody of the said
sheriff.
In their seven assigned errors the plaintiffs contend that the trial court
incorrectly applied the law: in holding that they violated the contract by not calling
for all the furniture on November 5, 1936, when the defendant placed them at

their disposal; in not ordering the defendant to pay them the value of the furniture
in case they are not delivered; in holding that they should get all the furniture from
the sheriff at their expenses; in ordering them to pay one-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in denying the
motions for reconsideration and new trial. To dispose of the case, it is only
necessary to decide whether the defendant complied with his obligation to return
the furniture upon the plaintiff's demand; whether the latter is bound to bear the
deposit fees thereof, and whether she is entitled to the costs of litigation.
The contract entered into between the parties is one of commodatum,
because under it the plaintiff gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof; by this contract the
defendant bound himself to return the furniture to the plaintiff, upon the latter's
demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741
of the Civil Code) The obligation voluntarily assumed by the defendant to return
the furniture upon the plaintiff's demand, means that he should return all of them
to the plaintiff at the latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four electric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for the parties are not
squarely applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get the furniture
when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to
the plaintiff, upon the latter's demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the furniture at the defendant's
behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor
was the plaintiff under a duty to accept the offer to return the furniture, because
the defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is
entitled to the payment thereof by the defendant in case of his inability to return
some of the furniture, because under paragraph 6 of the stipulation of facts, the
defendant has neither agreed to nor admitted the correctness of the said value.
Should the defendant fail to deliver some of the furniture, the value thereof should
be later determined by the trial Court through evidence which the parties may
desire to present.
The costs in both instances should be borne by the defendant because
the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure).
Page 11 of 505

The defendant was the one who breached the contract of commodatum, and
without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay the
legal expenses and other judicial costs which the plaintiff would not have
otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to
return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture
with the Sheriff shall be for the account of the defendant. The defendant shall pay
the costs in both instances. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcionand Moran,
JJ., concur.

FIRST DIVISION
[G.R. No. 4150. February 10, 1910.]
FELIX DE LOS SANTOS, plaintiff-appellee, vs. AGUSTINA
JARRA, administratrix of the estate of Magdaleno Jimenea,
deceased, defendant-appellant.

||| (Quintos v. Beck, G.R. No. 46240, [November 3, 1939], 69 PHIL 108-112)
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.

DECISION

TORRES, J p:
On the 1st of September, 1906, Felix de los Santos brought suit against
Agustina Jarra, he administratrix of the estate of Magdaleno Jimenea, alleging
that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff
ten first-class carabaos, to be used at the animal-power mill of his hacienda
during the season of 1901-2, without recompense or remuneration whatever for
the use thereof, under the sole condition that they should be returned to the
owner as soon as the work at the mill was terminated; that Magdaleno Jimenea,
however, did not return the carabaos, notwithstanding the fact that the plaintiff
claimed their return after the work at the mill was finished; that Magdaleno
Jimenea died on the 28th of October, 1904, and the defendant herein was
appointed by the Court of First Instance of Occidental Negros administratrix of his
estate and she took over the administration of the same and is still performing her
duties as such administratrix; that the plaintiff presented his claim to the
commissioners of the estate of Jimenea, within the legal term, for the return of
Page 12 of 505

the said ten carabaos, but the said commissioners rejected his claim as appears
in their report; therefore, the plaintiff prayed that judgment be entered against the
defendant as administratrix of the estate of the deceased, ordering her to return
the ten first-class carabaos loaned to the late Jimenea or their present value, and
to pay the costs.
The defendant was duly summoned, and on the 25th of September,
1905, she demurred in writing to the complaint on the ground that it was vague
but on the 2d of October of the same year, in answer to the complaint, she said
that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him
ten carabaos, but that he only obtained three second-class animals, which were
afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied
the allegations contained in paragraph 3 of the complaint; for all of which she
asked the court to absolve her of the complaint with the costs against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix
Martinez notified the defendant and her counsel, Matias Hilado, that he had
made an agreement with the plaintiff to the effect that the latter would not
compromise the controversy without his consent, and that as fees for his
professional services he was to receive one half of the amount allowed in the
judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and
their exhibits were made of record. On the 10th of January, 1907, the court below
entered judgment sentencing Agustina Jarra, as administratrix of the estate of
Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining
six second and third class carabaos, or the value thereof at the rate of P120
each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a
writing dated January 19, moved for a new trial on the ground that the findings of
fact were openly and manifestly contrary to the weight of the evidence. The
motion was overruled, the defendant duly excepted, and in due course submitted
the corresponding bill of exceptions, which was approved and submitted to this
court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff
for the loan of ten carabaos which are now claimed by the latter, as shown by two
letters addressed by the said Jimenea to Felix de los Santos; but in her answer
the said defendant alleged that the late Jimenea only obtained three secondclass carabaos, which were subsequently sold to him by the owner, Santos;
therefore, in order to decide this litigation it is indispensable that proof be

forthcoming that Jimenea only received three carabaos from his son-in-law
Santos, and that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of
a sufficient number of witnesses that the plaintiff, Santos, sent in charge of
various persons the ten carabaos requested by his father-in-law, Magdaleno
Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea
received them in the presence of some of said persons, one being a brother of
said Jimenea, who saw the animals arrived at the hacienda where it was
proposed to employ them. Four died of rinderpest, and it is for this reason that
the judgment appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law
Santos is not evidenced by any trustworthy document such as those of transfer,
nor were the declarations of the witnesses presented by the defendant affirming it
satisfactory; for said reason it can not be considered that Jimenea only received
three carabaos on loan from his son-in-law, and that afterward kept them
definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by
means of official document issued by the local authorities; these document
constitute the title of ownership of the carabaos or horse so acquired. Further
more, not only should the purchaser be provided with a new certificate or
credential, a document which has not been produced in evidence by the
defendant, nor has the loss of the same been shown in the case, but the old
documents ought to be on file in the municipality, or they should have been
delivered to the new purchaser, and in the case at bar neither did the defendant
present the old credential on which should be stated the name of the previous
owner of each of the tree carabaos said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned
or given on commodatum to the now deceased Magdaleno Jimenea were ten in
number; that they, or at any rate the six surviving ones, have not been returned to
the owner thereof, Felix de los Santos, and that it is not true that the latter sold to
the former three carabaos that the purchaser was already using; therefore, as the
said six carabaos were not the property of the deceased nor of any of his
descendants, it is the duty of the administratrix of the estate to return them or
indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic
denomination the specific one of commodatum is derived, establishes
prescriptions in relation to the last-mentioned contract by the following articles:
Page 13 of 505

"ART. 1740. 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 a certain period and return it to the
former, in which case it is called commodatum, or money or any
other perishable thing, under the condition to return an equal
amount of the same kind and quality, in which case it is merely
called a loan.

return the thing itself to its owner, or to pay him damages if


through the fault of the bailee the thing should have been lost or
injured, it is clear that where public securities are involved, the
trial court, in deferring to the claim of the bailor that the amount
loaned be returned him by the bailee in bonds of the same class
as those which constituted the contract, thereby properly applies
law 9 of title 11 of partida 5."

"Commodatum is essentially gratuitous.


"A simple loan may be gratuitous, or made under a
stipulation to pay interest.
"ART. 1741. The bailor retains the ownership of the thing
loaned. The bailee acquires the use thereof, but not its fruits; if
any compensation is involved, to be paid by the person requiring
the use, the agreement ceases to be a commodatum.
"ART. 1742. The obligations and rights which arise from
the commodatum pass to the heirs of both contracting parties
unless the loan has been made in consideration for the person of
the bailee, in which case his heirs shall not have the right to
continue using the thing loaned."
The carabaos delivered to be used not being returned by the defendant
upon demand, there is no doubt that she is under obligation to indemnify the
owner thereof by paying him their value.
Article 1101 of said code reads:
"Those who in fulfilling their obligations are guilty of
fraud, negligence, or delay, and those who in any manner
whatsoever act in contravention of the stipulations of the same,
shall be subject to indemnify for the losses and damages caused
thereby."
The obligation of the bailee or of his successors to return either the thing
loaned or its value is sustained by the supreme tribunal of Spain. In its decision of
March 21, 1895, it sets out with precision the legal doctrine touching
commodatum as follows:
"Although it is true that in a contract of commodatum the
bailor retains the ownership of the thing loaned, and at the
expiration of the period, or after the use for which it was loaned
has been accomplished, it is the imperative duty of the bailee to

With regard to the third assignment of error, based on the fact that the
plaintiff Santos had not appealed from the decision of the commissioners
rejecting his claim for the recovery of his carabaos, it is sufficient to state that we
are not dealing with a claim for the payment of a certain sum, the collection of a
debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late
Jimenea, or from his capital, of six carabaos which did not belong to him, and
which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third
party and which did not form part of the property of the deceased, must be the
subject of a direct decision of the court in an ordinary action, wherein the right of
the third party to the property which he seeks to have excluded from the
inheritance and the right of the deceased has been discussed, and rendered in
view of the result of the evidence adduced by the administrator of the estate and
of the claimant, since it is so provided by the second part of section 699 and by
section 703 of the Code of Civil Procedure; the refusal of the commissioners
before whom the plaintiff unnecessarily appeared can not affect nor reduce the
unquestionable right of ownership of the latter, inasmuch as there is no law nor
principle of justice authorizing the successors of the late Jimenea to enrich
themselves at the cost and to prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the
judgment appealed from have been refuted, and considering that the same is in
accordance with the law and the merits of the case, it is our opinion that it is
should be affirmed and we do hereby affirm it with the costs against appellant. So
ordered.
Arellano, C. J., Johnson, Moreland, and Elliott, JJ., concur.
Carson, J., reversed his vote
||| (De Los Santos v. Jarra, G.R. No. 4150, [February 10, 1910], 15 PHIL 147-153)
Page 14 of 505

CHAPTER 2 - MUTUUM

SECOND DIVISION
[G.R. Nos. L-50550-52. October 31, 1979.]
CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM
AND RICHARD YAM, petitioners, vs. HON. NABDAR J. MALIK,
Municipal Judge of Jolo, Sulu (Branch 1), THE PEOPLE OF THE
PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO, and LT. COL.
AGOSTO SAJOR, respondents.

Tomas P. Matic, Jr. for petitioners.


Jose E. Fernandez for private respondent.
Office of the Solicitor General for respondent The People of the
Philippines.

DECISION

ABAD SANTOS, J p:
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction.
Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu,
Page 15 of 505

acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion
when:
(a) he held in the preliminary investigation of the charges of estafa filed by
respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that
there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above
determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed in
his court as Criminal Cases No. M-111, M-183 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction
and with grave abuse of discretion because the facts recited in the complaints did not
constitute the crime of estafa, and assuming they did, they were not within the
jurisdiction of the respondent judge.
In a resolution dated May 23, 1979, we required respondents to comment on the
petition and issued a temporary restraining order against the respondent judge from
further proceeding with Criminal Cases Nos. M-111, M-183 and M-208 or from
enforcing the warrants of arrest he had issued in connection with said cases.
Comments by the respondent judge and the private respondents pray for the
dismissal of the petition but the Solicitor General has manifested that the People of
the Philippines have no objection to the grant of the reliefs prayed for, except the
damages. We considered the comments as answers and gave due course to the
petition.
The position of the Solicitor General is well taken. We have to grant the petition in
order to prevent manifest injustice and the exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam
Chee Kiong and Yam Yap Kieng with estafa through misappropriation of the amount
of P50,000.00. But the complaint states on its face that said petitioners received the
amount from respondent Rosalinda M. Amin "as a loan. " Moreover, the complaint in
Civil Case No. N-5, an independent action for the collection of the same amount filed
by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on
September 11, 1975, likewise states that the P50,000.00 was a "simple business
loan" which earned interest and was originally demandable six (6) months from July
12, 1973. (Annex E of the petition.) prLL

In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee
Kiong, Jose Y.C. Yam, Ampang Mah, and Anita Yam, alias Yong Tay, with estafa
through misappropriation of the amount of P30,000.00. Likewise, the complaint states
on its face that the P30,000.00 was "a simple loan." So does the complaint in Civil
Case No. N-8 filed by respondent Tan Chu Kao on April 6, 1976 with the Court of First
Instance of Sulu for the collection of the same amount. (Annex D of the petition.)
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C.
Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa
through misappropriation of the amount of P20,000.00. Unlike the complaints in the
other two cases, the complaint in Criminal Case No. M-208 does not state that the
amount was received as loan. However, in a sworn statement dated September 29,
1976, submitted to respondent judge to support the complaint, respondent Augusto
Sajor states that the amount was a "loan." (Annex G of the petition.)
We agree with the petitioners that the facts alleged in the three criminal complaints do
not constitute estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1,
subparagraph (b), of the Revised Penal Code as follows:
"Art. 315. Swindling (Estafa). Any person who shall defraud
another by any of the means mentioned herein below shall be
punished by:
xxx xxx xxx
"1. With unfaithfulness or abuse of confidence, namely:
xxx xxx xxx
"b) By misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or
partially guaranteed by a bond; or by denying having received
such money, goods, or other property."
In order that a person can be convicted under the abovequoted provision, it must be
proven that he has the obligation to deliver or return the same money, goods or
personal property that he received. Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly stated in criminal complaints, the related civil complaints
Page 16 of 505

and the supporting sworn statements, the sums of money that petitioners received
were loans.

acquire ownership over the thing borrowed and has the duty to return the same thing
to the lender.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which
the Municipal Court of Jolo is, has jurisdiction over criminal cases where the penalty
provided by law does not exceed prision correccional or imprisonment for not more
than six (6) years, or fine not exceeding P6,000.00 or both. The amounts allegedly
misappropriated by petitioners range from P20,000.00 to P50,000.00. The penalty for
misappropriation of this magnitude exceeds prision correccional or 6-year
imprisonment. (Article 315, Revised Penal Code). Assuming then that the acts recited
in the complaints constitute the crime of estafa, the Municipal Court of Jolo has no
jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of
the Court of First Instance. cdphil

"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."
It can be readily noted from the above-quoted provisions that in simple loan (mutuum),
as contrasted to commodatum, the borrower acquires ownership of the money, goods
or personal property borrowed. Being the owner, the borrower can dispose of the
thing borrowed (Article 248, Civil Code) and his act will not be considered
misappropriation thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a
person to refuse to pay his debt or to deny its existence.
"We are of the opinion and so decide that when the relation is
purely that of debtor and creditor, the debtor can not be held
liable for the crime of estafa, under said article, by merely
refusing to pay or by denying the indebtedness."
It appears that respondent judge failed to appreciate the distinction between the two
types of loan, mutuum and commodatum, when he performed the questioned acts.
He mistook the transaction between petitioners and respondents Rosalinda Amin, Tan
Chu Kao and Augusto Sajor to be commodatum wherein the borrower does not

Respondents People of the Philippines being the sovereign authority can not be sued
for damages. They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the
consideration of the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order
previously issued is hereby made permanent; the criminal complaints against
petitioners are hereby declared null and void; respondent judge is hereby ordered to
dismiss said criminal cases and to recall the warrants of arrest he had issued in
connection therewith. Moreover, respondent judge is hereby rebuked for manifest
ignorance of elementary law. Let a copy of this decision be included in his personal
life. Costs against private respondents.
SO ORDERED.
Barredo, Antonio and Santos, JJ., concur.
Concepcion Jr, J., is on leave.
Aquino, J., concur. The claim for damages in this certiorari, mandamus and
prohibition case is not warranted under section 3, Rule 65 of the Rules of Court.
||| (Chee Kiong Yam v. Malik, G.R. Nos. L-50550-52, [October 31, 1979], 182 PHIL
414-419)

Page 17 of 505

DECISION

SECOND DIVISION
[G.R. No. 115324. February 19, 2003.]
PRODUCERS BANK OF THE PHILIPPINES (now FIRST
INTERNATIONAL BANK), petitioner, vs. HON. COURT OF
APPEALS AND FRANKLIN VIVES,respondents.

Domingo & Dizon for petitioner.


Mauricio Law Office for private respondent.

SYNOPSIS
Upon request of a friend, Franklin Vives accommodated Arturo Doronilla by opening a
savings account for Sterela Marketing, in coordination with Producer's Bank assistant
branch manager, Rufo Atienza. The purpose was for incorporation, and the
agreement was that the money would not be removed from Sterela's savings account
and returned to Vives after thirty (30) days. Later, however, part of the money had
been withdrawn by Doronilla who also opened a current account and authorized the
bank to debit the savings account to cover overdrawing in the current account. Vives
filed a case for recovery of sum of money and both the trial court and the appellate
court ruled on the solidary liability of Producers Bank to Vives. Hence, this
appeal. IDSEAH
The Court affirmed the appealed decision. Under Art. 2180 of the Civil Code,
employers shall be held liable for damages caused by their employees acting within
the scope of their assigned tasks. The Bank, through its employee Atienza, was partly
responsible for the loss of Vives' money and is liable for its restitution. That despite
limitation on the savings account passbook issued to Mrs. Vives on behalf of Sterela,
Doronilla was allowed to withdraw several times without presentation of a passbook
as required.HI

CALLEJO, SR., J p:
This is a petition for review on certiorari of the Decision 1 of the Court of Appeals
dated June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5,
1994, denying the motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and
friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity).
Specifically, Sanchez asked private respondent to deposit in a bank a certain amount
of money in the bank account of Sterela for purposes of its incorporation. She assured
private respondent that he could withdraw his money from said account within a
month's time. Private respondent asked Sanchez to bring Doronilla to their house so
that they could discuss Sanchez's request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronilla's private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account
in the name of Sterela in the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla
authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to
open an account for Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were Inocencia Vives and/or Angeles
Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs.
Vives. 4
Subsequently, private respondent learned that Sterela was no longer holding office in
the address previously given to him. Alarmed, he and his wife went to the Bank to
verify if their money was still intact. The bank manager referred them to Mr. Rufo
Atienza, the assistant manager, who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said
Page 18 of 505

remaining amount because it had to answer for some postdated checks issued by
Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and
authorized the Bank to debit Savings; Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said
current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the
Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which
were dishonored. Atienza also said that Doronilla could assign or withdraw the money
in Savings Account No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29,
1979, he received a letter from Doronilla, assuring him that his money was intact and
would be returned to him. On August 13, 1979, Doronilla issued a postdated check for
Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent.
However, upon presentment thereof by private respondent to the drawee bank, the
check was dishonored. Doronilla requested private respondent to present the same
check on September 15, 1979 but when the latter presented the check, it was again
dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his client's money. Doronilla issued another check for
P212,000.00 in private respondent's favor but the check was again dishonored for
insufficiency of funds. 7
Private respondent instituted an action for recovery of sum of money in the Regional
Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil
Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money
deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;

(b) the sum of P50,000.00 for moral damages and a similar


amount for exemplary damages;
(c) the amount of P40,000.00 for attorney's fees; and
(d) the costs of the suit.
SO ORDERED. 8
Petitioner appealed the trial court's decision to the Court of Appeals. In its Decision
dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC 9 It
likewise denied with finality petitioner's motion for reconsideration in its Resolution
dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT PETITIONER'S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS
IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE
RESPONDENT) AND AS A CONSEQUENCE,
THE
PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED
FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT
WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN
DECLARING THAT THE CITED DECISION IN SALUDARES VS.
Page 19 of 505

MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN


EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS
APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT
OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00
FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY'S
FEES AND THE COSTS OF SUIT. 11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its
Reply thereto on September 25, 1995. The Court then required private respondent to
submit a rejoinder to the reply. However, said rejoinder was filed only on April 21,
1997, due to petitioner's delay in furnishing private respondent with copy of the
reply12 and several substitutions of counsel on the part of private respondent. 13 On
January 17, 2001, the Court resolved to give due course to the petition and required
the parties to submit their respective memoranda. 14 Petitioner filed its memorandum
on April 16, 2001 while private respondent submitted his memorandum on March 22,
2001.
Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a consumable thing; and
second, the transaction was onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount of P212,000.00, or P12,000
more than what private respondent deposited in Sterela's bank account. 15 Moreover,
the fact that private respondent sued his good friend Sanchez for his failure to recover
his money from Doronilla shows that the transaction was not merely gratuitous but
"had a business angle" to it. Hence, petitioner argues that it cannot be held liable for
the return of private respondent's P200,000.00 because it is not privy to the
transaction between the latter and Doronilla. 16
It argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be
faulted for allowing Doronilla to withdraw from the savings account of Sterela since the
latter was the sole proprietor of said company. Petitioner asserts that Doronilla's May
8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a

savings account for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had
legal title to the savings account. 17 Petitioner points out that no evidence other than
the testimonies of private respondent and Mrs. Vives was presented during trial to
prove that private respondent deposited his P200,000.00 in Sterela's account for
purposes of its incorporation. 18 Hence, petitioner should not be held liable for
allowing Doronilla to withdraw from Sterela's savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial court's
decision since the findings of fact therein were not accord with the evidence presented
by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to
withdraw from Sterela's savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is
not liable for the actual damages suffered by private respondent, and neither may it be
held liable for moral and exemplary damages as well as attorney's fees. 20
Private respondent, on the other hand, argues that the transaction between him and
Doronilla is not a mutuum but an accommodation, 21 since he did not actually part
with the ownership of his P200,000.00 and in fact asked his wife to deposit said
amount in the account of Sterela so that a certification can be issued to the effect that
Sterela had sufficient funds for purposes of its incorporation but at the same time, he
retained some degree of control over his money through his wife who was made a
signatory to the savings account and in whose possession the savings account
passbook was given. 22
He likewise asserts that the trial court did not err in finding that petitioner, Atienza's
employer, is liable for the return of his money. He insists that Atienza, petitioner's
assistant manager, connived with Doronilla in defrauding private respondent since it
was Atienza who facilitated the opening of Sterela's current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for said company,
as well as the approval of the authority to debit Sterela's savings account to cover any
overdrawings in its current account. 23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a
petition for review filed with this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence presented by the parties
during trial. 24 The Court's jurisdiction is in principle limited to reviewing errors of law
Page 20 of 505

that might have been committed by the Court of Appeals. 25 Moreover, factual
findings of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on
record. 26 There is no showing of any misapprehension of facts on the part of the
Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply
supported by the evidence on record.
No error was committed by
between private respondent
circumspect examination of
was a commodatum. Article
kinds of loans in this wise:

the Court of Appeals when it ruled that the transaction


and Doronilla was a commodatum and not a mutuum. A
the records reveals that the transaction between them
1933 of the Civil Code distinguishes between the two

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.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there
are some instances where a commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not
a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. 27 In case of doubt,
the contemporaneous and subsequent acts of the parties shall be considered in such
determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence
shows that private respondent agreed to deposit his money in the savings account of
Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned
within thirty (30) days. 29 Private respondent merely "accommodated" Doronilla by
lending his money without consideration, as a favor to his good friend Sanchez. It was
however clear to the parties to the transaction that the money would not be removed
from Sterela's savings account and would be returned to private respondent after
thirty (30) days.
Doronilla's attempts to return to private respondent the amount of P200,000.00 which
the latter deposited in Sterela's account together with an additional P12,000.00,
allegedly representing interest on the mutuum, did not convert the transaction from
a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of the
P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee
incommodatum acquires the use of the thing loaned but not its fruits." Hence, it was
only proper for Doronilla to remit to private respondent the interest accruing to the
latter's money deposited with petitioner.
Neither does the Court agree with petitioner's contention that it is not solidarily liable
for the return of private respondent's money because it was not privy to the
transaction between Doronilla and private respondent. The nature of said transaction,
that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioner's liability for the return of private respondent's money because the factual
circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondent's money and is
liable for its restitution.
Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on
behalf of Sterela for Savings Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor
personally or upon his written authority duly authenticated,
and neither a deposit nor a withdrawal will be permitted except
Page 21 of 505

upon the production of the depositor savings bank book in which


will be entered by the Bank the amount deposited or
withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the
Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom
even without presenting the passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals
and the trial court found that Atienza allowed said withdrawals because he was party
to Doronilla's "scheme" of defrauding private respondent:
xxx xxx xxx
But the scheme could not have been executed successfully
without the knowledge, help and cooperation of Rufo Atienza,
assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in
such manner as to make it appear that the transaction was in
accordance with banking procedure.
To begin with, the deposit was made in defendant's Buendia
branch precisely because Atienza was a key officer therein. The
records show that plaintiff had suggested that the P200,000.00
be deposited in his bank, the Manila Banking Corporation, but
Doronilla and Dumagpi insisted that it must be in defendant's
branch Makati for "it will be easier for them to get a certification."
In fact before he was introduced to plaintiff, Doronilla had already
prepared a letter addressed to the Buendia branch manager
authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of P200,000.00, as "per
coordination with Mr. Rufo Atienza, Assistant Manager of the
Bank . . ." (Exh. 1). This is a clear manifestation that the other
defendants had been in consultation with Atienza from the
inception of the scheme. Significantly, there were testimonies and
admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of
the "coordination" between Doronilla and Atienza, the latter knew

before hand that the money deposited did not belong to Doronilla
nor to Sterela. Aside from such foreknowledge, he was explicitly
told by Inocencia Vives that the money belonged to her and her
husband and the deposit was merely to accommodate Doronilla.
Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the
bank records disclose that the only ones empowered to withdraw
the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the authorized
signatories were Inocencia Vives &/or Angeles B. Sanchez.
Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons
whose authorized signatures are in the signature cards on file
with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the
money came from Vives and did not belong to Sterela.. He was
also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that
Sterela had a deposit of so much amount to be sued in the
incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is
concerned inasmuch as he had not signed the signature card
provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the
authority to withdraw.
Moreover, the transfer of fund was done without the passbook
having been presented. It is an accepted practice that whenever
a withdrawal is made in a savings deposit, the bank requires the
presentation of the passbook. In this case, such recognized
practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was
made to appear in a certification signed by Estrella Dumagpi that
a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati Branch in view of
Page 22 of 505

a loan accommodation assigning the savings account (Exh. C).


Atienza, who undoubtedly had a hand in the execution of this
certification, was aware that the contents of the same are not
true. He knew that the passbook was in the hands of Mrs. Vives
for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings
and current accounts in question, he also was aware that the
original passbook was never surrendered. He was also cognizant
that Estrella Dumagpi was not among those authorized to
withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account
also demonstrate that Atienza's active participation in the
perpetration of the fraud and deception that caused the loss. The
records indicate that this account was opened three days later
after the P200,000.00 was deposited. In spite of his disclaimer,
the Court believes that Atienza was mindful and posted regarding
the opening of the current account considering that Doronilla was
all the while in "coordination" with him. That it was he who
facilitated the approval of the authority to debit the savings
account to cover any overdrawings in the current account (Exh. 2)
is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to
the loss subject of this case . . . . 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the scope of their
assigned tasks. To hold the employer liable under this provision, it must be shown that
an employer-employee relationship exists, and that the employee was acting within
the scope of his assigned task when the act complained of was committed. 32 Case
law in the United States of America has it that a corporation that entrusts a general
duty to its employee is responsible to the injured party for damages flowing from the
employee's wrongful act done in the course of his general authority, even though in
doing such act, the employee may have failed in its duty to the employer and
disobeyed the latter's instructions. 33

was deposited, and in transferring the money withdrawn to Sterela's Current Account
with petitioner. Atienza's acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioner's interests 34 even though in the process,
Atienza violated some of petitioner's rules such as those stipulated in its savings
account passbook. 35 It was established that the transfer of funds from Sterela's
savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which
was the cause of private respondent's loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180
of the Civil Code, petitioner is liable for private respondent's loss and is solidarily
liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear
that petitioner failed to prove that it exercised due diligence to prevent the
unauthorized withdrawals from Sterela's savings account, and that it was not negligent
in the selection and supervision of Atienza. Accordingly, no error was committed by
the appellate court in the award of actual, moral and exemplary damages, attorney's
fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution
of the Court of Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
||| (Producers Bank of the Phil. v. Court of Appeals, G.R. No. 115324, [February 19,
2003], 445 PHIL 702-717)

There is no dispute that Atienza was an employee of petitioner. Furthermore,


petitioner did not deny that Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in withdrawing funds from
Sterela's Savings Account No. 10-1567, in which account private respondent's money
Page 23 of 505

FIRST DIVISION
[G.R. No. 26085. August 12, 1927.]
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffsappellants, vs. BENITO GONZALEZ SY CHIAM, defendantappellee.

Araneta & Zaragoza for appellants.


Eusebio Orense for appellee.

DECISION

JOHNSON, J p:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage ?
(b) Under a pacto de retro, when the vendor becomes a tenant of the
purchaser and agrees to pay a certain amount per month as rent, may such rent
render such a contract usurious when the amount paid as rent, computed upon
the purchase price, amounts to a higher rate of interest upon said amount than
that allowed by law?
(c) May the contract in the present case be modified by parol evidence?
ANTECEDENT FACTS

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


purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with
the camarin located thereon, situated in the municipality of Tarlac of the Province
of 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 the 2d day of May, 1921; the
second installment of P8,000 was due on or before the 31st day of May, 1921;
the balance of P15,000 at 12 per cent interest was due and payable on or about
the 30th day of November, 1922. One of the conditions of that contract of
purchase was that on failure of the purchasers (plaintiffs and appellants) to pay
the balance of said purchase price or any of the installments on the date agreed
upon, the property bought would revert to the original owner.
The payments due on the 2d and 31st of May, 1921, amounting to
P10,000 were paid so far as the record shows upon the due dates. The balance
of P15,000 due on said contract of purchase was paid on or about the 1st day of
December, 1922, in the manner which will be explained below. On the date when
the balance of P15,000 with interest was paid, the vendor of said property had
issued to the purchasers transfer certificate of title to said property, No. 528. Said
transfer certificate of title (No. 528) was transfer certificate of title from No. 40,
which shows that said land was originally registered in the name of the vendor on
the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922, the representative of the vendor of
the property in question wrote a letter to the appellant Potenciana Manio (Exhibit
A, p. 50), notifying the latter that if the balance of said indebtedness was not paid,
an action would be brought for the purpose of recovering the property, together
with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:
"Sirvase notar que de no estar liquidada esta cuenta el
dia 30 del corriente, procederemos judicialmente contra Vd. para
reclamar la devolucion deI camarin y los danos y perjuicios
ocasionados a la compania por su incumplimiento al contrato.
"Somos de Vd. atentos y S. S.
"SMITH, BELL & CO., LTD.
"BY (Sgd.) F. I. HIGHAM
"Treasurer.
"General Managers
Page 24 of 505

"LUZON RICE MILLS INC. "


According to Exhibits B and D, which represent the account rendered by
the vendor, there was due and payable upon said contract of purchase on the
30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of
the vendor of said property of November 7, 1922, the purchasers, the appellants
herein, realizing that they would be unable to pay the balance due, began to
make an effort to borrow money with which to pay the balance of their
indebtedness on the purchase price of the property involved. Finally an
application was made to the defendant for a loan for the purpose of satisfying
their indebtedness to the vendor of said property. After some negotiations the
defendant agreed to loan the plaintiffs the sum of P17,500 upon condition that the
plaintiffs execute and deliver to him apacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by
means of a check the sum of P16,965.09. The defendant, in addition to said
amount paid by check, delivered to the plaintiffs the sum of P354.91 together with
the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract
ofpacto de retro, making a total paid by the defendant to the plaintiffs and for the
plaintiffs of P17,500 upon the execution and delivery of said contract. Said
contract was dated the 28th day of November, 1922, and is in the words and
figures following:
"Sepan todos por la presente:
"Que
nosotros,
los
conyuges Severino
Tolentino y Potenciana Manio, ambos mayores de edad,
residentes en el Municipio de Calumpit, Provincia de Bulacan,
propietarios y transeuntes en esta Ciudad de Manila, de una
parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad,
casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.
"MANIFESTAMOS Y HACEMOS CONSTAR:
"Primero. Que nosotros, Severino Tolentino y
Potenciana Manio, por y en consideracion a la cantidad de
diecisiete mil quinientos pesos (P17,500) moneda filipina, que en
este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos
a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos
y causahabientes, una finca que, segun el Certificado de
Transferencia de Titulo No. 40 expedido por el Registrador de

Titulos de la Provincia de Tarlac a favor de 'Luzon Rice Mills


Company Limited' que al incorporarse se denomino y se
denomina 'Luzon Rice Mills Inc.,' y que esta corporacion nos ha
transferido en venta absoluta, se describe como sigue:

"Un terreno (lote No. 1) con las mejoras existentes en el


mismo, situado en el Municipio de Tarlac. Linda por el O. y N.
con propiedad de Manuel Urquico; por el E. con propiedad de la
Manila Railroad Co.; y por el S. con un camino. Partiendo de un
punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds.
17' E. 859.42 m. del mojon de localizacion No. 2 de la Oficina de
Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77
m. al punto 2; desde.este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4;
desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
midiendo una extension superficial de cuatro mil doscientos diez
y seis metros cuadrados (4,216) mas o menos. Todos los puntos
nombrados se hallan marcados en el plano y sobre el terreno los
puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x
20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B.
L.; la orientacion seguida es la verdadera, siendo la declinacion
magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.
"Segundo. Que es condicion de esta venta la de que si
en el plazo de cinco (5) anos contados desde el dia l.o de
diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy
Chiam a retrovendernos la finca arriba descrita; pero si
transcurre dicho plazo de cinco aos sin ejercitar el derecho de
retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
"Tercero. Que durante el expresado termino del retracto
tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por
mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en
Page 25 of 505

su domicilio, sera de trescientos setenta y cinco pesos (P375)


moneda filipina, cada mes.
"(b) El amillaramiento de la finca arrendada sera por
cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como
tambien la prima del seguro contra incendios, si le conviniera al
referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
"(c) La falta de pago del alquiler aqui estipulado por dos
meses consecutivos dara lugar a la terminacion de este
arrendamiento y a la perdida del derecho de retracto que nos
hemos reservado, como si naturalmente hubiera expirado el
termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy
Chiam tomar posesion de la finca y desahuciarnos de la misma.
"Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez
otorgo que acepto esta escritura en los precisos terminos en que
la dejan otorgada los conyuges Severino Tolentino y Potenciana
Manio.
"En testimonio de todo lo cual, firmamos la presente de
nuestra mano en Manila, por cuadruplicado en Manila, hoy a 28
de noviemhre 1922
(Fdo.) "SEVERINO TOLENTINO
(Fda.) "POTENCIANA MANIO
(Fdo.) "BENITO GONZALEZ SY CHIAM
"Firmado en presencia de:
(Fdos.) "MOISES M. BUHAIN
"B. S. BANAAG
An examination of said contract of sale with to the first question above,
shows clearly that it is a pacto de retro and not a mortgage. There is no
pretension on the part of the appellant that said contract, standing alone, is a
mortgage. The pertinent language of the contract is:
"Segundo. Que es condicion de esta venta la de que si
en el plazo de cinco (5) aiios contados desde el dia l.o de
diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy
Chiam a retrovendernos la finca arriba descrita; pero si

transcurre dicho plazo de cinco (5) anos sin ejercitar el derecho


de retracto que nos hemos reservado, entonces quedara esta
venta absoluta e irrevocable."
Language cannot be clearer. The purpose of the contract is expressed
clearly in said quotation that there can certainly be no doubt as to the purpose of
the plaintiff to sell the property in question, reserving the right only to repurchase
the same. The intention to sell with the right to repurchase cannot be more clearly
expressed.
It will be noted from a reading of said sale of pacto de retro, that the
vendor, recognizing the absolute sale of the property, entered into a contract with
the purchaser by virtue of which she became the "tenant" of the purchaser. That
contract of rent appears in said quoted document above as follows:
"Tercero. Que durante el expresado termino del retracto
tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por
mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en
su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
"(b) El amillaramiento de la finca arrendada sera por
cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como
tambien la prima del seguro contra incendios, si le conviniera al
referido ISr. Benito Gonzalez Sy Chiam asegurar dicha finca."
From the foregoing, we are driven to the following conclusions: First, that
the contract of pacto de retro is an absolute sale of the property with the right to
repurchase and not a mortgage; and, second, that by virtue of the said contract
the vendor became the tenant of the purchaser, under the conditions mentioned
in paragraph 3 of said contract quoted above.
It has been the uniform theory of this court, due to the severity of a
contract of pacto de retro, to declare the same to be a mortgage and not a sale
whenever the interpretation of such a contract justifies that conclusion. There
must be something, however, in the language of the contract or in the conduct of
the parties which shows clearly and beyond doubt that they intended the contract
to be a "mortgage" and not a pacto de retro. (International Banking Corporation
vs. Martinez, 10 Phil. 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs.
Allingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42
Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)
Page 26 of 505

We are not unmindful of the fact that sales with pacto de retro are not
favored, and that the court will not construe an instrument to be one of sale
with pacto de retro, with the stringent and onerous effect which follows, unless
the terms of the document and the surrounding circumstances require it. (Manalo
vs. Gueco,supra.)
While it is a general rule that parol evidence is not admissible for the
purpose of varying the terms of a contract, but when an issue is squarely
presented that a contract does not express the intention of the parties, courts will,
when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties. (Manalo vs. Gueco, supra.)
In the present case the plaintiffs allege in their complaint that the
contract in, question is a pacto de retro. They admit that they signed it. They
admit that they sold the property in question with the right to repurchase it. The
terms of the contract quoted above clearly show that the transfer of the land in
question by the plaintiffs to the defendant was a "sale" with pacto de retro, and
the plaintiffs have shown no circumstance whatever which would justify us in
construing said contract to be a mere "loan" with guaranty. In every case in which
this court has construed a contract to be a mortgage or a loan instead of a sale
with pacto de retro, it has done so, either because the terms of such contract are
ambiguous or because the circumstances surrounding the execution or the
performance of the contract were incompatible or inconsistent with the theory that
said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs.
Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs.
Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to
indicate the nature of the conveyance of the land was "pledged" instead of "sold."
In the case of Manlagnit vs. Dy Puico, while the vendor used the terms "sale and
transfer with the right to repurchase," yet in said contract he described himself as
a "debtor," the purchaser as a "creditor" and the contract as a "mortgage." In the
case of Rodriguez vs. Pamintuan and De Jesus the person who executed the
instrument, purporting on its face to be a deed of sale of certain parcels of land,
had merely acted under a power of attorney from the owner of said land,
"authorizing him to 'borrow' money in such amount and upon such terms and
conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract
purporting to be a deed of sale was executed, the supposed vendor remained in
possession of the land and invested the money he had obtained from the
supposed vendee in making improvements thereon, which fact justified the court

in holding that the transaction was a mere loan and not a sale. In the case of
Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments
from the vendor, and such acceptance of partial payments "is absolutely
incompatible with the idea of irrevocability of the title of ownership of the
purchaser at the expiration of the term stipulated in the original contract for the
exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of a written
contract, we quote from the dissenting opinion of Chief Justice Cayetano S.
Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar
Estates Development Co. (30 Phil., 27, 38), which case was appealed to the
Supreme Court of the United States and the contention of the Chief Justice in his
dissenting opinion was affirmed and the decision of the Supreme Court of the
Philippine Islands was reversed. (See decision of the Supreme Court of the
United States, June 3, 1918.) 1 The Chief Justice said in discussing that
question:

"According to article 1282 of the Civil Code, in order to


judge of the intention of the contracting parties, consideration
must chiefly be paid to those acts executed by said parties which
are contemporary with and subsequent to the contract. And
according to article 1283, however general the terms of a contract
may be, they must not be held to include things and cases
different from those with regard to which the interested parties
agreed to contract." The Supreme Court of the Philippine Islands
held that parol evidence was admissible in that case to vary the
terms of the contract between the Government of the Philippine
Islands and the Philippine Sugar Estates Development Co. In the
course of the opinion of the Supreme Court of the United States
Mr. Justice Brandeis, speaking for the court, said:
"It is well settled that courts of equity will reform a written
contract where, owing to mutual mistake, the language used
therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction
of a contract presents a question of law and that, therefore, the
mistake was one of law is not a bar to granting relief. . . . This
court is always disposed to accept the construction which the
highest court of a territory or possession has placed upon a local
statute. But that disposition may not be yielded to where the
Page 27 of 505

lower court has clearly erred. Here the construction adopted was
rested upon a clearly erroneous assumption as to an established
rule of equity. . . . The burden of proof resting upon the appellant
cannot be satisfied by mere preponderance of the evidence. It is
settled that relief by way of reformation will not be granted unless
the proof of mutual mistake be 'of the clearest and most
satisfactory character."'
The evidence introduced by the appellant in the present case does not
meet with that stringent requirement. There is not a word, a phrase, a sentence
or a paragraph in the entire record, which justifies this court in holding that the
said contract of pacto de retro is a mortgage and not a sale with the right to
repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, the literal
sense of its stipulations shall be followed." Article 1282 provides: "In order to
judge as to the intention of the contracting parties, attention must be paid
principally to their conduct at the time of making the contract and subsequently
thereto."
We cannot conclude this branch of our discussion of the question
involved, without quoting from that very well reasoned decision of the late Chief
Justice Arellano, one of the greatest jurists of his time. He said, in discussing the
question whether or not the contract, in the case of Lichauco vs. Berenguer (20
Phil., 12), was a pacto de retro or a mortgage:
"The public instrument, Exhibit C, in part reads as
follows: 'Don Macario Berenguer declares and states that he is
the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his
pueblo. The first has an area of 73 quiones, 8 balitas, and
8 loanes, located in the sitio of Batasan, and its boundaries are,
etc., etc. The second is in the sitio of Panantaglay, barrio of
Calumpang, has an area of 73 hectares, 22 ares, and 6 centares,
and is bounded on the north, etc., etc.'
"In the executory part of the said instrument, it is stated:
" 'That under condition of right to repurchase (pacto de
retro) he sells the said properties to the aforementioned Dona
Cornelia Laochangco for P4,000 and upon the following
conditions: First, the sale stipulated shall be for the period of two
years, counting from this date, within which time the deponent

shall be entitled to repurchase the land sold upon payment of its


price; second, the lands sold shall, during the term of the present
contract, be held in lease by the undersigned who shall pay, as
rental therefor, the sum of 400 pesos per annum, or the
equivalent in sugar at the option of the vendor; third, all the fruits
of the said lands shall be deposited in the sugar depository of the
vendee, situated in the district of Quiapo of this city, and the value
of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the
vendor the purchase price of P4,000 already paid, and in legal
tender currency of this country . . .; fifth, all the taxes which may
be assessed against the lands surveyed by competent authority,
shall be payable by and constitute a charge against the vendor;
sixth, if, through any unusual event, such as flood, tempest, etc.,
the properties hereinbefore enumerated should be destroyed,
wholly or in part, it shall be incumbent upon the vendor to repair
the damage thereto at his own expense and to put them into a
good state of cultivation, and should he fail to do so he binds
himself to give to the vendee other lands of the same area,
quality and value.'
xxx xxx xxx
"The opponent maintained, and his theory was accepted
by the trial court, that Berenguer's contract with Laochangco was
not one of sale with right of repurchase, but merely one of loan
secured by those properties, and, consequently, that the
ownership of the lands in question could not have been conveyed
to Laochangco, inasmuch as it continued to be held by
Berenguer, as well as their possession, which he had not ceased
to enjoy.
"Such a theory is, as argued by the appellants,
erroneous. The instrument executed by Macario Berenguer, the
text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the
obligation, the exact expression of the consent of the contracting
parties contained in the instrument, Exhibit C. Not because the
lands may have continued in possession of the vendor, not
because the latter may have assumed the payment of the taxes
on such properties, nor yet because the same party may have
Page 28 of 505

bound himself to substitute by another any one of the properties


which might be destroyed, does the contract cease to be what it
is, as set forth in detail in the public instrument. The vendor
continued in the possession of the lands, not at the owner thereof
as before their sale, but as the lessee which he became after its
consummation, by virtue of a contract executed in his favor by the
vendee in the deed itself, Exhibit C. Right of ownership is not
implied by the circumstance of the lessee's assuming the
responsibility of the payment of the taxes on the property leased,
for their payment is not peculiarly incumbent upon the owner, nor
is such right implied by the obligation to substitute the thing sold
for another while in his possession under lease, since that
obligation came from him and he continues under another
character in its possession a reason why he guarantees its
integrity and obligates himself to return the thing even in a case
of force majeure. Such liability, as a general rule, is foreign to
contracts of lease and, if required, is exorbitant, but possible and
lawful, if voluntarily agreed to, and such agreement does not on
this account involve any sign of ownership, nor other meaning
than the will to impose upon oneself scrupulous diligence in the
care of a thing belonging to another.
"The purchase and sale, once consummated, is a
contract which by its nature transfers the ownership and other
rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the
vendee and the vendor, to the end that the latter may again
acquire the ownership of the thing alienated.
"'It is true, very true indeed, that the sale with right of
repurchase is employed as a method of loan; it is like wise true
that in practice many cases occur where the consummation of
a pacto de retro sale means the financial ruin of a person; it is
also, unquestionable that in pacto de retro sales very important
interests often intervene, in the form of the price of the lease of
the thing sold, which is stipulated as an additional covenant.'
(Manresa, Civil Code, p. 274.)
"But in the present case, unlike others heard by this
court, there is no proof that the sale with right of repurchase,

made by Berenguer in favor of Laochangco is rather a mortgage


to secure a loan."
We come now to a discussion of the second question presented above,
and that is, stating the same in another form: May a tenant charge his landlord
with a violation of the Usury Law upon the ground that the amount of rent he
pays, based upon the real value of the property, amounts to a usurious rate of
interest? When the vendor of property under a pacto de retro rents the property
and agrees to pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a "tenant" and in all respects stands in the
same relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, or the sum of P375 per month, based upon
the value of the property, amounted to usury. Usury, generally speaking, may be
defined as contracting for or receiving something in excess of the amount allowed
by law for the loan or forbearance of money the taking of more interest for the
use of money than the law allows. It seems that the taking of interest for the loan
of money, at least the taking of excessive interest has been regarded with
abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.)
During the middle ages the people of England, and especially the English
Church, entertained' the opinion, then current in Europe, that the taking of any
interest for the loan of money was a detestable vice, hateful to man and contrary
to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we
look back upon history, we shall find that there is scarcely any people, ancient or
modern, that have not had usury laws. . . . The Romans, through the greater part
of their history, had the deepest abhorrence of usury. . . . It will be deemed a little
singular, that the same voice against usury should have been raised in the laws
of China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps,
we may say, in the laws of all nations that we know of, whether Greek or
Barbarian."
The collection of a rate of interest higher than that allowed by law is
condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is
it unlawful for the owner of a property to enter into a contract with the tenant for
the payment of a specific amount of rent for the use and occupation of said
property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has
Page 29 of 505

never been decided in this jurisdiction. It is one of first impression. No cases have
been found in this jurisdiction answering that question. Act No. 2655 is "An Act
fixing rates of interest upon 'loans' and declaring the effect of receiving or taking
usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or
forbearance of any money, goods, chattels or credits, etc. The central idea of said
statute is to prohibit a rate of interest on "loans." A contract of "loan" is a 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; or to deliver for temporary use on condition that an
equivalent in kind shall be returned with a compensation for its use. The word
"loan," however, as used in the statute, has a technical meaning. It never means
the return of the same thing. It means the return of an equivalent only, but never
the same thing loaned. A "loan" has been properly defined as an advancement of
money, goods or credits upon a contract or stipulation to repay, not to return, the
thing loaned at some future day in accordance with the terms of the contract.
Under the contract of "loan," as used in said statute, the moment the contract is
completed the money, goods or chattels given cease to be the property of the
former owner and becomes the property of the obligor to be used according to
his own will, unless the contract itself expressly provides for a special or specific
use of the same. At all events, the money, goods or chattels, the moment the
contract is executed, cease to be the property of the former owner and becomes
the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." ln a
contract of "rent" the owner of the property does not lose his ownership. He
simply loses his control over the property rented during the period of the contract.
In a contract of "loan" the thing loaned becomes the property of the obligor. In a
contract of "rent" the thing still remains the property of the lessor. He simply loses
control of the same in a limited way during the period of the contract of "rent" or
lease. In a contract of "rent" the relation between the contractors is that of
landlord and tenant. In a contract of "loan" of money, goods, chattels or credits,
the relation between the parties is that of obligor and obligee. "Rent" may be
defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. It is defined as the
return or compensation for the possession of some corporeal inheritance, and is
a profit issuing out of lands or tenements, in return for their use. It is that, which is
to be paid for the use of land, whether in money, labor or other thing agreed

upon. A contract of "rent" is a contract by which one of the parties delivers to the
other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of "loan," as that
word is used in the statute, signifies the delivery of money or other consumable
things upon condition of returning an equivalent amount of the same kind or
quantity, in which cases it is called merely a "loan." In the case of a contract of
"rent," under the civil law, it is called a "commodatum."
From the foregoing it will be seen that there is a wide distinction
between a contract of "loan," as that word is used in the statute, and a contract of
"rent" even though those words are used in ordinary parlance as interchangeable
terms.
The value of money, goods or credits is easily ascertained while the
amount of rent to be paid for the use and occupation of the property may depend
upon a thousand different conditions; as for example, farm lands of exactly equal
productive capacity and of the same physical value may have a different rental
value, depending upon location, prices of commodities, proximity to the market,
etc. Houses may have a different rental value due to location, conditions of
business, general prosperity or depression, adaptability to particular purposes,
even though they have exactly the same original cost. A store on the Escolta, in
the center of business, constructed exactly like a store located outside of the
business center, will have a much higher rental value than the other. Two places
of business located in different sections of the city may be constructed exactly on
the same architectural plan and yet one, due to particular location or adaptability
to a particular business which the lessor desires to conduct, may have a very
much higher rental value than one not so located and not so well adapted to the
particular business. A very cheap building on the carnival ground may rent for
more money, due to the particular circumstances and surroundings, than a much
more valuable property located elsewhere. It will thus be seen that the rent to be
paid for the use and occupation of property is not necessarily fixed upon the
value of the property. The amount of rent is fixed, based upon a thousand
different conditions and may or may not have any direct reference to the value of
the property rented. To hold that "usury" can be based upon the comparative
actual rental value and the actual value of the property, is to subject every
landlord to an annoyance not contemplated by the law, and would create a very
great disturbance in every business or rural community. We cannot bring
ourselves to believe that the Legislature contemplated any such disturbance in
the equilibrium of the business of the country.

Page 30 of 505

In the present case the property in question was sold. It was an absolute
sale with the right only to repurchase. During the period of redemption the
purchaser was the absolute owner of the property. During the period of
redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee was
that of landlord and tenant. That relation can only be terminated by a repurchase
of the property by the vendor in accordance with the terms of the said contract.
The contract was one of rent. The contract was not a loan, as that word is used in
Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the
courts have no right to make contracts for parties. They made their own contract
in the present case. There is not a word, a phrase, a sentence or para- graph,
which in the slightest way indicates that the parties to the contract in question did
not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts
by parol evidence, sufficiently answers the third question presented above. The
language of the contract is explicit, clear, unambiguous and beyond question. It
expresses the exact intention of the parties at the time it was made. There is not
a word, a phrase, a sentence or paragraph found in said contract which needs
explanation. The parties thereto entered into said contract with the full
understanding of its terms and should not now be permitted to change or modify
it by parol evidence.
With reference to the improvements made upon said property by the
plaintiffs during the life of the contract, Exhibit C, there is hereby reserved to the
plaintiffs the right to exercise in a separate action the right guaranteed to them
under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of
the record, in relation with the law applicable thereto, that the judgment appealed
from should be and is hereby affirmed, with costs. So ordered.
Avancea, C. J., Street, Villamor, Romualdez, and Villa-Real.
JJ.. concur.
||| (Tolentino v. Sy Chiam, G.R. No. 26085, [August 12, 1927], 50 PHIL 558-579)

THIRD DIVISION

[G.R. No. 114398. October 24, 1997.]


CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF
APPEALS and THE PEOPLE OF THE PHILIPPINES,
represented by the Solicitor General,respondents.

Efren L. Liwanag for petitioner.


The Solicitor General for respondents.

SYNOPSIS
Petitioner was charged with the crime of Estafa before the Regional Trial Court of
Quezon City for defrauding one Isidora Rosales in the amount of P536,650.00. It
appears therein that petitioner received in trust from the private complainant the
aforesaid cash money with the express obligation involving the duty to act as
complainant's agent in purchasing local cigarettes, to resell them to several stores, to
give her commission corresponding to 40% of the profits and to return the aforesaid
amount of private complainant. Unfortunately, petitioner was remiss in her obligation.
After trial on the merits, the trial court rendered a decision finding herein petitioner
guilty as charged. On appeal to the Court of Appeals, said decision was affirmed with
modification by herein public respondent. Petitioner then filed her appeal before the
Court alleging that the appellate court erred in affirming the conviction of petitioner for
the crime of estafa, when clearly the contract that existed between them was either
that of a simple loan or that of a partnership or joint venture, hence purely civil in
nature and not criminal.
The Supreme Court ruled that the Court of Appeals acted correctly in affirming the
appealed decision. It is evident that herein petitioner could not dispose of the money
as she pleased because it was only delivered to her for a single purpose, namely, to
purchase cigarettes and if it was not possible, to return the money to private
complainant. Since there was no transfer of ownership of the money delivered,
petitioner is liable for conversion under Article 315, par. 1(b) of the Revised Penal
Code. Accordingly, the appealed decision is affirmed.

DECISION
Page 31 of 505

ROMERO, J p:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC),
Branch 93, Quezon City, in an information which reads as follows:
"That on or between the month of May 19, 1988 and August,
1988 in Quezon City, Philippines and within the jurisdiction of this
Honorable Court, the said accused, with intent of gain, with
unfaithfulness, and abuse of confidence, did then and there,
willfully, unlawfully and feloniously defraud one ISIDORA
ROSALES, in the following manner, to wit: on the date and in the
place aforementioned, said accused received in trust from the
offended party cash money amounting to P536,650.00, Philippine
Currency, with the express obligation involving the duty to act as
complainant's agent in purchasing local cigarettes (Philip Morris
and Marlboro cigarettes), to resell them to several stores, to give
her commission corresponding to 40% of the profits; and to return
the aforesaid amount of offended party, but said accused, far
from complying her aforesaid obligation, and once in possession
thereof, misapplied, misappropriated and converted the same to
her personal use and benefit, despite repeated demands made
upon her, accused failed and refused and still fails and refuses to
deliver and/or return the same to the damage and prejudice of the
said ISIDORA ROSALES, in the aforementioned amount and in
such other amount as may be awarded under the provision of the
Civil Code.
CONTRARY TO LAW."
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the
house of complainant Isidora Rosales (Rosales) and asked her to join them in the
business of buying and selling cigarettes. Convinced of the feasibility of the venture,
Rosales readily agreed. Under their agreement, Rosales would give the money
needed to buy the cigarettes while Liwanag and Tabligan would act as her agents,
with a corresponding 40% commission to her if the goods are sold; otherwise the
money would be returned to Rosales. Consequently, Rosales gave several cash
advances to Liwanag and Tabligan amounting to P633,650.00. cda

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to
report on the progress of the transactions. The visits, however, suddenly stopped, and
all efforts by Rosales to obtain information regarding their business proved futile.
Alarmed by this development and believing that the amounts she advanced were
being misappropriated, Rosales filed a case of estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, 1991,
finding Liwanag guilty as charged. The dispositive portion of the decision reads thus:
"WHEREFORE, the Court holds, that the prosecution has
established the guilt of the accused, beyond reasonable doubt,
and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS
AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL
TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF
PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse complainant the
sum of P526,650.00, without subsidiary imprisonment, in case of
insolvency.
SO ORDERED."
Said decision was affirmed with modification by the Court of Appeals in a decision
dated November 29, 1993, the decretal portion of which reads:
"WHEREFORE, in view of the foregoing, the judgment appealed
from is hereby affirmed with the correction of the nomenclature of
the penalty which should be: SIX (6) YEARS, EIGHT (8)
MONTHS and TWENTY ONE (21) DAYS of prision mayor, as
minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS
of reclusion temporal, as maximum. In all other respects, the
decision is AFFIRMED.
SO ORDERED."
Her motion for reconsideration having been denied in the resolution of March 16,
1994, Liwanag filed the instant petition, submitting the following assignment of errors:
"1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN
AFFIRMING THE CONVICTION OF THE ACCUSEDPETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY
THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSEDPage 32 of 505

PETITIONER AND COMPLAINANT IS EITHER THAT OF A


SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT
VENTURE HENCE THE NON RETURN OF THE MONEY OF
THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT
CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN
NOT
ACQUITTING
THE
ACCUSED-PETITIONER
ON
GROUNDS OF REASONABLE DOUBT BY APPLYING THE
'EQUIPOISE RULE'."

sale or the said products (shall) be returned to said Mrs. Isidora


P. Rosales the said amount of P526,650.00 or the said items on
or before August 30, 1988.

(SGD & Thumbedmarked) (sic)

CARMEN
LIWANAG

Liwanag advances the theory that the intention of the parties was to enter into a
contract of partnership, wherein Rosales would contribute the funds while she would
buy and sell the cigarettes, and later divide the profits between them. 1 She also
argues that the transaction can also be interpreted as a simple loan, with Rosales
lending to her the amount stated on an installment basis. 2

26 H. Kaliraya
St.
Quezon City
Signed in the
presence of:

The Court of Appeals correctly rejected these pretenses.


While factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court, and carry more weight when these affirm the
factual findings of the trial court, 3 we deem it more expedient to resolve the instant
petition on its merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer
damages, by means of unfaithfulness or abuse of confidence, or of false pretenses or
fraudulent acts. 4
From the foregoing, the elements of estafa are present, as follows: (1) that the
accused defrauded another by abuse of confidence or deceit; and (2) that damage or
prejudice capable of pecuniary estimation is caused to the offended party or third
party, 5 and it is essential that there be a fiduciary relation between them either in the
form of a trust, commission or administration. 6
The receipt signed by Liwanag states thus:
"May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE
HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED
FIFTY PESOS (P526,650.00) Philippine Currency, to purchase
cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the
event the said cigarrets (sic) are not sold, the proceeds of the

(Sgd) Illegible (Sgd) Doming Z. Baligad"

The language of the receipt could not be any clearer. It indicates that the
money delivered to Liwanag was for a specific purpose, that is, for the purchase
of cigarettes, and in the event the cigarettes cannot be sold, the money must be
returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and
between the parties, we have ruled that when money or property have been received
by a partner for a specific purpose (such as that obtaining in the instant case) and he
later misappropriated it, such partner is guilty of estafa. 7 cdll
Neither can the transaction be considered a loan, since in a contract of loan once the
money is received by the debtor, ownership over the same is transferred. 8 Being the
owner, the borrower can dispose of it for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose of the
money as she pleased because it was only delivered to her for a single purpose,
namely, for the purchase of cigarettes, and if this was not possible then to return the
money to Rosales. Since in this case there was no transfer of ownership of the money
delivered, Liwanag is liable for conversion under Art. 315, par. 1(b) of the Revised
Penal Code.
Page 33 of 505

WHEREFORE, in view of the foregoing, the appealed decision of the Court of


Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Francisco and Panganiban, JJ ., concur.
Narvasa, C .J ., on leave
||| (Liwanag v. Court of Appeals, G.R. No. 114398, [October 24, 1997], 346 PHIL 211217)

SAURA
IMPORT
&
EXPORT
CO.,
INC., plaintiffappellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendantappellant.

Mabanag, Eliger & Associates & Saura, Magno & Associates for plaintiff-appellee.
Jesus A. Avacea and Hilario G. Orsolino for defendant-appellant.

DECISION

MAKALINTAL, J p:
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura
Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal
rate from the date the complaint was filed and attorney's fees in the amount of
P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to
pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential
Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its
release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the
said bank.
SECOND DIVISION
[G.R. No. L-24968. April 27, 1972.]

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 buildings to be
constructed, the land site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the following:
Page 34 of 505

"1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:
For construction of factory building P250,000.00
For
payment
of
the
balance
price of machinery & equipment 240,900.00

of

purchase

For working capital 9,100.00

prepared in accordance with the terms and conditions specified in Resolution No. 145
In connection with the re-examination of the project to be financed with the loan
applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the
observation that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already entered into," referring to
its acceptance of the terms and conditions mentioned in Resolution No. 145.

T O T A L P500,000.00

On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto


Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign
the promissory notes jointly with the borrower-corporation;

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura,
Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:

5. That release shall be made at the discretion of the Rehabilitation


Finance Corporation, subject to availability of funds, and as the
construction of the factory buildings progresses, to be certified to by
an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a
letter to RFC, requesting a modification of the terms laid down by it, namely: that in
lieu of having China Engineers, Ltd. (which was willing to assume liability only to the
extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be substituted
for Inocencia Arellano as one of the other co-makers, having acquired the latter's
shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in
the resolution, "to reexamine all the aspects of this approved loan . . . with special
reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon
at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the necessary documents be

"RESOLUTION No. 3989. Reducing the Loan Granted Saura Import


& Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00
to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the
re-examination of all the various aspects of the loan granted the
Saura Import & Export Co. under Resolution No. 145, c.s., for the
purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operation of jute
mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the
Chairman, RESOLVED that the loan granted the Saura Import &
Export Co. be REDUCED from P500,000 to P300,000 and that
releases up to P100,000 may be authorized as may be necessary
from time to time to place the factory in actual operation: PROVIDED
that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other cosigners, wrote RFC that his company no longer wished to avail of the loan and
therefore considered the same cancelled as far as it was concerned. A follow-up letter
dated July 2 requested RFC that the registration of the mortgage be withdrawn.
Page 35 of 505

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00
be granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 . . . in view of a
notification . . . from the China Engineers, Ltd., expressing their desire to consider the
loan cancelled insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as
co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you."
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the
following proviso:
"That in view of observations made of the shortage and high cost of
imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry
out its operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide
adequately for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the Department
of Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of its
brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies, out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that the
venture "is the first serious attempt in this country to use 100% locally grown raw

materials notably kenaf which is presently grown commercially in the Island of


Mindanao where the proposed jutemill is located . . ."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of
local raw materials to provide adequately for the requirements of the factory. Saura,
Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry "kenaf will
not be available in sufficient quantity this year or probably even next year;" (2)
requesting "assurances (from RFC) that my company and associates will be able to
bring in sufficient jute materials as may be necessary for the full operation of the jute
mill;" and (3) asking that releases of the loan be made as follows:
a) For
the
payment
of
the
machineries with the Prudential Bank &

receipt

for

jute

mill

Trust Company P250,000.00


(For immediate release)
b) For
the
purchase
per
attached
list
mill to operate P182,413.91

of
to

materials
and
equipment
enable
the
jute

c) For raw materials and labor 67,586.09


1) P25,000.00
to
of
the
letter
for $25,000 00.
2) P25,000.00
of raw jute.

be

to

3) P17,586.09
to
be
mill is ready to operate.

of
be

released
credit

on
for

released
released

as

the
opening
raw
jute
upon
soon

arrival
as

the

On January 25, 1955 RFC sent to Saura, Inc. the following reply:
"Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in
our letter of December 22, 1954, the releases of the loan, if revived,
Page 36 of 505

are proposed to be made from time to time, subject to availability of


funds towards the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for revised
purposes and manner of releases upon re-appraisal of the securities
offered for the loan.
With respect to our requirement that the Department of Agriculture
and Natural Resources certify that the raw materials needed are
available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the requirements
of the factory, we wish to reiterate that the basis of the original
approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give you
assurance that your company will be able to bring in sufficient jute
materials as may be necessary for the operation of your factory,
would not be in line with our principle in approving the loan."
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so,
on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered
it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of
the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled
at the request of Saura, Inc., the latter commenced the present suit for damages,
alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there

was no perfected contract; and (3) that assuming there was, the plaintiff itself did not
comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code, which provides:
"ART. 1954. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be 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 basic claim that the defendant failed to fulfill its obligation and that the
plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw
materials, principally kenaf. There is no serious dispute about this. It was in line with
such assumption that when RFC, by Resolution No. 9033 approved on December 17,
1954, restored the loan to the original amount of P500,000.00, it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is
prospect of increased production thereof to provide adequately for the requirements of
the factory." The imposition of those conditions was by no means a deviation from the
terms of the agreement, but rather a step in its implementation. There was nothing in
said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely "that the proceeds of the loan shall be
utilized exclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and
equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc.
realized that it could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be available in sufficient quantity
this year or probably next year," and asking that out of the loan agreed upon the sum
of P67,586.09 be released "for raw materials and labor." This was a deviation from the
terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than
those agreed upon.

Page 37 of 505

When RFC turned down the request in its letter of January 25, 1955 the negotiations
which had been going on for the implementation of the agreement reached an
impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature of mutual desistance what
Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It
is a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's stand
was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's
noncompliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages. All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual desistance and that on
the initiative of the plaintiff-appellee itself.

SECOND DIVISION
[G.R. No. L-1927. May 31, 1949.]
CRISTOBAL ROO, petitioner, vs. JOSE L. GOMEZ ET AL., respondents.

Alfonso Farcon for petitioner.


Capistrano & Azores for respondents.

DECISION

With this view we take of the case, we find it unnecessary to consider and resolve the
other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.
Reyes,
J.B.L.,
Actg.
C.J.,
Barredo and Antonio, JJ., concur.

Zaldivar,

Castro,

Fernando,

Teehankee,

||| (Saura Import & Export Co., Inc. v. DBP, G.R. No. L-24968, [April 27, 1972], 150-A
PHIL 251-261)

BENGZON, J p:
This petition to review a decision of the Court of Appeals was admitted mainly
because it involves one phase of the vital contemporary question: the repayment of
loans given in Japanese fiat currency during the last war of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in
Japanese fiat money from Jose L. Gomez. He informed the latter that he would use
the money to purchase a jitney; and he agreed to pay that debt one year after date
in the currency then prevailing. He signed a promissory note of the following tenor:
"For value received, I promise to pay one year after date the sum of four
thousand pesos (P4,000) to Jose L. Gomez. It is agreed that this will not
earn any interest and the payment will be made in currency that will be
prevailing by the end of the stipulated period of one year."
Page 38 of 505

"In consideration of this generous loan, I renounce any right that may come
to me by reason of any postwar arrangement, of privilege that may come to
me by legislation wherein this sum may be devalued. I renounce flatly and
absolutely any condition, term, right or privilege which in any way will
prejudice the right engendered by this agreement wherein Atty. Jose L.
Gomez will receive by right his money in the amount of P4,000. I affirm that
the legal tender, currency or any medium of exchange, or money in this sum
of P4,000 will be paid by me to Jose L. Gomez one year after this date,
October 5, 1944."
On October 15, 1945, i. e, after the liberation, Roo was sued for payment in the
Laguna Court of First Instance. His main defense was that his liability should not
exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be
4,000 pesos Philippine currency, because the contract would be void as contrary to
law, public order and good morals.
After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge,
ordered the defendant Roo to pay four thousand pesos in Philippine currency with
legal interest from the presentation of the complaint plus costs. On appeal the Court
of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with
costs. It declared that Roo being a mechanic who knew English was not deceived
into signing the promissory note and that the contents of the same had not been
misrepresented to him. It pronounced the contract valid and enforceable according
to its terms and conditions.
One basic principle of the law on contracts of the Civil Code is that "the contracting
parties may establish any pacts, clauses and conditions they may deem advisable,
provided they are not contrary to law, morals or public order." (Article 1255.)
Another principle is that "obligations arising from contract shall have the force of law
between the contracting parties and must be performed in accordance with their
stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury Law,
because on the basis of calculations by Government experts he only received the
equivalent of one hundred Philippine pesos and now he is required to disgorge four
thousand pesos or interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received
"will not earn any interest." Furthermore, he received four thousand pesos; and he
is required to pay four thousand pesos exactly. The increased intrinsic value and
purchasing power of the current money is consequence of an event (change of
currency) which at the time of the contract neither party knew would certainly

happen within the period of one year. They both elected to subject their rights and
obligations to that contingency. If within one year another kind of currency became
legal tender, Gomez would probably get more for his money. If the same Japanese
currency continued, he would get less, the value of Japanese money being then on
the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes
their validity (see art. 1790 and Manresa's comment thereon) on a par with
insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of
Usury Laws. Interest is some additional money to be paid in any event,which is not
the case here, because Gomez might have gotten less it the Japanese occupation
had extended to the end of 1945 or if the liberation forces had chosen to permit the
circulation of the Japanese notes.
Moreover, Roo argues, the deal was immoral because talking advantage of his
superior knowledge of war developments Gomez imposed on him this onerous
obligation. In the first place, the Court of Appeals found that he voluntarily agreed to
sign and signed the document without having been misled as to its contents and "in
so far as knowledge of war events was concerned" both parties were on "equal
footing." In the second place although on October 5, 1944 it was possible to
surmise the impending American invasion, the date of victory or liberation was
anybody's guess. In the third place there was the possibility that upon re-occupation
the Philippine Government would not invalidate the Japanese currency, which after
all had been forced upon the people in exchange for valuable goods and property.
The odds were about even when Borio and Gomez played their bargaining game.
There was no overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four
thousand pesos in return for an investment of forty pesos (his estimate of the value
of the Japanese money he borrowed). According to his line of reasoning it would be
immoral for the homeowner to recover ten thousand pesos (P10,000), when his
house is burned, because he invested only about one hundred pesos for the
insurance policy. And when the holder of a sweepstakes ticket who paid only four
pesos luckily obtains the first prize of one hundred thousand pesos or over, the
whole business is immoral or against public order.
In this connection we should explain that this decision does not cover situations
where borrowers of Japanese fiat currency promised to repay "the same amount" or
promised to return the same number of pesos "in Philippines currency" or "in the
currency prevailing after the war." There may be room for argument when those
Page 39 of 505

litigations come up for adjudication. All we say here and now is that the contract in
question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez.
We opine with the Court of Appeals that the matter may involve a defect in
procedure which does not amount to prejudicial error.

Higinio Gopez for appellants.


Fausto, Soliman & Gotiangco for appellees.

DECISION

Wherefore the appealed judgment will be affirmed with costs. So ordered.


Moran, C. J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.
||| (Roo v. Gomez, G.R. No. L-1927, [May 31, 1949], 83 PHIL 890-901)

OZAETA, J p:
On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in
favor of the appellees on a parcel of land situated in the municipality of Angeles,
Province of Pampanga, to secure the payment within the period of seven years from
the date of the mortgage of the sum of P24,000 together with interest thereon at the
rate of 8 per cent per annum.
On September 30, 1943, that is to say, more than two years before the maturity of
said mortgage, the parties executed a notarial document entitled "Partial Novation
of Contract" whereby they modified the terms of said mortgage as follows:
"(1) From December 8, 1941, to January 1, 1944, the interest on the
mortgage shall be at 6 per cent per annum, unpaid interest also paying
interest at the same rate.
"(2) From January 1, 1944, up to the end of the war, the mortgage debt shall
likewise bear interest at 6 per cent. Unpaid interest during this period shall
however not bear any interest.
"(3) At the end of the war the interest shall again become 8 per cent in
accordance with the original contract of mortgage.

EN BANC
[G.R. No. L-1328. September 9, 1949.]
MARIANO
NEPOMUCENO
and
AGUEDA
G.
DE
NEPOMUCENO, plaintiffs-appellants, vs. EDILBERTO A. NARCISO and
MAURA SUAREZ, defendants-appellees.

"(4) While the war goes on, the mortgagor, his administrators or assigns,
cannot redeem the property mortgaged.
"(5) When the mortgage lapses on November 14, 1945, the mortgage may
continue for another ten years if the mortgagor so chooses, but during this
period he may pay only one half of the capital."
On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de
Nepomuceno filed their complaint in this case against the mortgagees, which
complaint, as amended on September 7, 1944, alleged the execution of the
contract of mortgage and its partial novation as above indicated, and
Page 40 of 505

"7. That as per Annex B, No. 4, it is provided that the mortgagor cannot
redeem the property mortgaged while the war goes on; and that
notwithstanding the said provision the herein plaintiffs-mortgagors are now
willing to pay the amount of the indebtedness together with the
corresponding interest due thereon;
"8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the
mortgagees-defendants to tender payment of the balance of the mortgage
debt with their corresponding interest, but said spouses defendants refused
and still refuse to accept payment;
"9. That because of this refusal of the defendants to accept tender of
payment on the mortgage consideration, the plaintiffs suffered and still suffer
damages in the amount of P5,000;
"10. That the plaintiffs are now and have deposited with the Clerk of Court of
First Instance of Pampanga the amount of P22,356 for the payment of the
mortgage debt and the interest due thereon;
"Wherefore, it is most respectfully prayed that this Honorable Court will issue
an order in the following tenor:
"(a) Ordering defendants to accept tender of payment from the plaintiffs;
"(b) Ordering defendants to execute the corresponding deed of release of
mortgage;
"(c) Ordering defendants to pay damages in the amount of P5,000; and
"(d) Ordering defendants to pay the amount of P3,000 as attorney's fees and
the costs of suit and any other remedy just and equitable in the premises."
After the trial the court sustained the defense that the complaint had been
prematurely presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30, 1943, that
"while the war goes on the mortgagor, his administrators or assigns cannot redeem
the property mortgaged," is against public policy and therefore null and void. They
cite and rely on article 1255 of the Civil Code, which provides:
"ART. 1255. The contracting parties may establish any pacts, clauses,
and conditions they may deem advisable, provided they are not contrary to
law, morals, or public order."

even if he wanted to by the payment of the indebtedness while the war goes on,
which was undoubtedly of a very uncertain duration."
The first two paragraphs of article 1125 of the Civil Code provide:
"ART. 1125. Obligations for the performance of which a day certain has
been fixed shall be demandable only when the day arrives.
"A day certain is understood to be one which must necessarily arrive, even
though its date be unknown."
Article 1127 says:
"ART. 1127. Whenever a term for the performance of an obligation is fixed, it
is presumed to have been established for the benefit of the creditor and that
of the debtor, unless from its tenor or from other circumstances it should
appear that the term was established for the benefit of one or the other."
It will be noted that the original contract of mortgage provided for interest at 8 per
cent per annum and that the principal together with the interest was payable within
the period of seven years from November 14, 1938. But by mutual agreement of the
parties that term was modified on September 30, 1943, by reducing the interest to 6
per cent per annum from December 8, 1941, until the end of the war and by
stipulating that the mortgagor shall not pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The
mortgagees apparently did not want to have their prewar credit paid with Japanese
military notes, and the mortgagor voluntarily agreed not to do so in consideration of
the reduction of the rate of interest.
It was a perfectly equitable and valid transaction, in conformity with the provisions
of the Civil Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated to receive
the payment before it was due. Hence the latter had reason not to accept the tender
of payment made to them by the former.
The judgment is affirmed, with costs against the appellants.
Moran, C.J., Paras, Feria, Bengzon, Padilla, Tuason, Montemayor,
Reyes and Torres, JJ., concur.
||| (Nepomuceno v. Narciso, G.R. No. L-1328, [September 9, 1949], 84 PHIL 542-545)

They argue that "it would certainly be against public policy and a restraint on the
freedom of commerce to compel a debtor not to release his property from a lien
Page 41 of 505

and signed the bank's pre-printed promissory notes on various dates beginning 1996.
They, however, were unaware that the documents contained identical escalation
clauses granting Equitable authority to increase interest rates without their consent. 8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes. 9 In fact, they continuously availed
of and benefited from Equitable's credit facilities for five years. 10

FIRST DIVISION
[G.R. No. 171545. December 19, 2007.]
EQUITABLE
PCI
BANK, * AIMEE
YU
and
BEJAN
LIONEL
**
APAS, petitioners, vs. NG SHEUNG NGOR doing business under the
name and style "KEN MARKETING," KEN APPLIANCE DIVISION, INC.
and BENJAMIN E. GO, respondents.

DECISION

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001
alone, Equitable restructured respondents' loans amounting to US$228,200 and
P1,000,000. 11 The trial court, however, invalidated the escalation clause contained
therein because it violated the principle of mutuality of contracts. 12 Nevertheless, it
took judicial notice of the steep depreciation of the peso during the intervening
period 13 and declared the existence of extraordinary deflation. 14 Consequently, the
RTC ordered the use of the 1996 dollar exchange rate in computing respondents'
dollar-denominated loans. 15 Lastly, because the business reputation of respondents
was (allegedly) severely damaged when Equitable froze their accounts, 16 the trial
court awarded moral and exemplary damages to them. 17
The dispositive portion of the February 5, 2004 RTC decision 18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents']
deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos
as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos
as exemplary damages;

CORONA, J p:
This petition for review on certiorari 1 seeks to set aside the decision 2 of the Court of
Appeals (CA) in CA-G.R. SP No. 83112 and its resolution 3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor, 4 Ken Appliance Division, Inc.
and Benjamin E. Go filed an action for annulment and/or reformation of documents
and contracts 5 against petitioner Equitable PCI Bank (Equitable) and its employees,
Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of
Cebu City. 6 They claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates 7 so they accepted Equitable's proposal

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay


[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and
severally, to pay [respondents'] attorney's fees in the sum of P300,000;
litigation expenses in the sum of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable]
the unpaid principal obligation for the peso loan as well as the unpaid
obligation for the dollar denominated loan;
Page 42 of 505

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]


interest as follows:

filed a petition for certiorari with an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004 omnibus order. 33

1) 12% per annum for the peso loans;

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued. 34

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article 1250 of the Civil Code
of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the
aforestated unpaid principal loan obligations and interest.
SO ORDERED. 19
Equitable and respondents filed their respective notices of appeal. 20
In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents "failed to submit proof that they paid their respective
appeal fees." 21
WHEREFORE, premises considered, the appeal interposed by defendants
from the Decision in the above-entitled case is DENIED due course. As of
February 27, 2004, the Decision dated February 5, 2004, is considered
final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel
Apas] are concerned. 22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on
the ground that it did in fact pay the appeal fees. Respondents, on the other hand,
prayed for the issuance of a writ of execution. 24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit 25 and ordered the issuance of a writ of execution in
favor of respondents. 26 According to the RTC, because respondents did not move for
the reconsideration of the previous order (denying due course to the parties' notices
of appeal), 27 the February 5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in order. 28
A writ of execution was thereafter issued 29 and three real properties of Equitable
were levied upon. 30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1,
2004 order. 31 It, however, withdrew that petition on March 30, 2004 32 and instead

Notwithstanding the writ of injunction, the properties of Equitable previously levied


upon were sold in a public auction on July 1, 2004. Respondents were the highest
bidders and certificates of sale were issued to them. 35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the auction
despite the injunction order of the CA. 36
On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari in
the CA several hours before withdrawing its petition for relief in the RTC. 38 Moreover,
Equitable failed to disclose, both in the statement of material dates and certificate of
non-forum shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC. 39
Equitable moved for reconsideration 40 but it was denied. 41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed. 42 It likewise
avers that its petition for certiorari was meritorious because the RTC committed grave
abuse of discretion in issuing the March 24, 2004 omnibus order which was based on
an erroneous assumption. The March 1, 2004 order denying its notice of appeal for
non payment of appeal fees was erroneous because it had in fact paid the required
fees. 43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently wrong February 5, 2004 decision. 44
This petition is meritorious.
EQUITABLE WAS NOT GUILTY
OF FORUM SHOPPING
Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues,
subject matter and causes of action. 45 The test is whether, in two or more pending
cases, there is identity of parties, rights or causes of actions and reliefs. 46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not
have identical causes of action. The petition for relief from the denial of its notice of
Page 43 of 505

appeal was based on the RTC's judgment or final order preventing it from taking an
appeal by "fraud, accident, mistake or excusable negligence." 47 On the other hand,
its petition for certiorari in the CA, a special civil action, sought to correct the grave
abuse of discretion amounting to lack of jurisdiction committed by the RTC. 48
In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when
it moved to withdraw its petition for relief in the RTC on the same day (in fact just four
hours and forty minutes after) it filed the petition for certiorari in the CA. Even if
Equitable failed to disclose that it had a pending petition for relief in the RTC, it
rectified what was doubtlessly a careless oversight by withdrawing the petition for
relief just a few hours after it filed its petition for certiorari in the CA a clear
indication that it had no intention of maintaining the two actions at the same time.
THE TRIAL COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial function has acted without or in
excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal, nor
any plain, speedy or adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court,
alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment,
order or resolution subject thereof, copies of all pleadings and documents
relevant and pertinent thereto, and a sworn certificate of non-forum shopping
as provided in the third paragraph of Section 3, Rule 46.

1. that the tribunal, board or officer exercising judicial or quasi-judicial


functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner
must show that the public respondent patently and grossly abused his discretion and
that abuse amounted to an evasion of positive duty or a virtual refusal to perform a
duty enjoined by law or to act at all in contemplation of law, as where the power was
exercised in an arbitrary and despotic manner by reason of passion or hostility. 49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable
and respondents. However, it declared that the February 5, 2004 decision wasfinal
and executory only with respect to Equitable. 50 As expected, the March 24, 2004
omnibus order denied Equitable's motion for reconsideration and granted
respondents' motion for the issuance of a writ of execution. 51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to
prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that.
The execution of the decision was undertaken with indecent haste, effectively
obviating or defeating Equitable's right to avail of possible legal remedies. No matter
how we look at it, the RTC committed grave abuse of discretion in rendering those
orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March 24,
2004 omnibus order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision. 52
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of
law. 53A petition for relief under Rule 38 is an equitable remedy allowed only in
exceptional circumstances or where there is no other available or adequate
remedy. 54
Thus, we grant Equitable's petition for certiorari and consequently give due course to
its appeal.

There are two substantial requirements in a petition for certiorari. These are:
Page 44 of 505

EQUITABLE RAISED PURE


QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW

trier of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case. 64 Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount of actual damages. 65

The jurisdiction of this Court in Rule 45 petitions is limited to questions of


law. 55 There is a question of law "when the doubt or controversy concerns the
correct application of law or jurisprudence to a certain set of facts; or when the issue
does not call for the probative value of the evidence presented, the truth or falsehood
of facts being admitted." 56

ESCALATION
VIOLATED
THE
MUTUALITY OF CONTRACTS

Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTC's February 5, 2004 decision. Equitable
points out that that decision was patently erroneous, specially the exorbitant award
of damages, as it was inconsistent with existing law and jurisprudence. 57
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite respondents' assertion
that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by
one party. 58 The participation of the other party is limited to affixing his signature or
his "adhesion" to the contract. 59 For this reason, contracts of adhesion are strictly
construed against the party who drafted it. 60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se.
They are, on the contrary, as binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void only when the dominant party
takes advantage of the weakness of the other party, completely depriving the latter of
the opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But they
did not. Instead, they continuously availed of Equitable's credit facilities for five long
years.
While the RTC categorically found that respondents had outstanding dollar- and pesodenominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not
explain how it arrived at the amounts of US$228,200 and P1,000,000. 62 InMetro
Manila Transit Corporation v. D.M. Consunji, 63 we reiterated that this Court is not a

PRINCIPLE

CLAUSE
OF

Escalation clauses are not void per se. However, one "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.
Clauses of that nature violate the principle of mutuality of contracts.66 Article
1308 67 of the Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. 68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (deescalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank. 70
Equitable dictated the interest rates if the term (or period for repayment) of the loan
was extended. Respondents had no choice but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not
contain the necessary provisions for validity, that is, it neither provided that the rate of
interest would be increased only if allowed by law or the Monetary Board, nor allowed
de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine
National Bank 71 we held that, because the escalation clause was annulled, the
principal amount of the loan was subject to the original or stipulated rate of interest.
Upon maturity, the amount due was subject to legal interest at the rate of 12% per
annum. 72
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for
their dollar-denominated loans and 20% p.a. for their peso-denominated loans from
Page 45 of 505

January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of
12% p.a. on all amounts due.
THERE
EXTRAORDINARY DEFLATION

WAS

NO

Extraordinary inflation exists when there is an unusual decrease in the purchasing


power of currency (that is, beyond the common fluctuation in the value of currency)
and such decrease could not be reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the obligation. Extraordinary deflation, on
the other hand, involves an inverse situation. 73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites
must be proven:
1. that there was an official declaration of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas (BSP); 74

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered, not to impose a penalty to the wrongdoer. 79 To be entitled
to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned
by Article 2219 80 and 2220 81 . 82
In culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations. 83 The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive. 84
The RTC found that respondents did not pay Equitable the interest due on February 9,
2001 (or any month thereafter prior to the maturity of the loan) 85 or the amount due
(principal plus interest) due on July 9, 2001. 86 Consequently, Equitable applied
respondents' deposits to their loans upon maturity.

2. that the obligation was contractual in nature; 75 and


3. that the parties expressly agreed to consider the effects of the
extraordinary inflation or deflation. 76
Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out of
a contract, the parties did not agree to recognize the effects of extraordinary inflation
(or deflation). 77 The RTC never mentioned that there was a such stipulation either in
the promissory note or loan agreement. Therefore, respondents should pay their
dollar-denominated loans at the exchange rate fixed by the BSP on the date of
maturity. 78
THE AWARD OF MORAL AND
EXEMPLARY DAMAGES LACKED
BASIS

The relationship between a bank and its depositor is that of creditor and
debtor. 87 For this reason, a bank has the right to set-off the deposits in its hands for
the payment of a depositor's indebtedness. 88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the
option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
"fraudulently or in bad faith or in wanton disregard" of its contractual obligations
despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary

Page 46 of 505

damages.89 And if respondents were not entitled to moral and exemplary damages,
neither could they be awarded attorney's fees and litigation expenses. 90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City
in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave
abuse of discretion amounting to lack or excess of jurisdiction. All proceedings
undertaken pursuant thereto are likewise declared null and void.

3. all other claims and counterclaims are dismissed.


As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute
the exact amounts due on the respective dollar-denominated and peso-denominated
loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing business under the
name and style of "Ken Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
Puno, C.J., Sandoval-Gutierrez, Azcuna and Leonardo-de Castro, JJ., concur.
||| (Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545, [December 19, 2007],
565 PHIL 520-545)

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI
Bank, Aimee Yu and Bejan Lionel Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby
entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E.
Go to pay petitioner Equitable PCI Bank the principal amount of their dollarand peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E.
Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10,
2001 to July 9, 2001; 91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals, 92 the total amount due on July 9, 2001 shall earn legal interest at
12% p.a. from the time petitioner Equitable PCI Bank demanded payment,
whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall
be 12% p.a. until full satisfaction;
Page 47 of 505

by ordering Equitable PCI Bank 5 (respondent) to pay petitioners P1,516,015.07 with


interest at the legal rate of 12% per annum starting 6 May 1994 until the amount is
fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting
mechanical works on airconditioning system. On 24 November 1989, Pan Pacific,
through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and
respondent also agreed on nine change orders for P2,622,610.30. Thus, the total
consideration for the whole project was P23,311,410.30. 6 The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of
increase in labor costs and prices of materials under paragraphs 70.1 7 and 70.2 8 of
the "General Conditions for the Construction of PCIB Tower II Extension" (the
escalation clause). 9
SECOND DIVISION
[G.R. No. 169975. March 18, 2010.]
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL
ROSARIO, petitioners, vs. EQUITABLE PCI BANK (formerly THE
PHILIPPINE COMMERCIAL INTERNATIONAL BANK), respondent.

DECISION

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project
site, the PCIB Tower II extension building in Makati City. The project was completed in
June 1992. Respondent accepted the project on 9 July 1992. 10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance
with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52.
Respondent's appointed project engineer, TCGI Engineers, asked for a reduction in
the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to
P4,858,548.67. 11
On 28 April 1992, TCGI Engineers recommended to respondent that the price
adjustment should be pegged at P3,730,957.07. TCGI Engineers based their
evaluation of the price adjustment on the following factors:
1.Labor Indices of the Department of Labor and Employment.
2.Price Index of the National Statistics Office.

CARPIO, J p:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this
Petition for Review 1 assailing the Court of Appeals' (CA) Decision 2 dated 30 June
2005 in CA-G.R. CV No. 63966 as well as the Resolution 3 dated 5 October 2005
denying the Motion for Reconsideration. In the assailed decision, the CA modified the
12 April 1999 Decision 4 of the Regional Trial Court of Makati City, Branch 59 (RTC)

3.PD 1594 and its Implementing Rules and Regulations as amended, 15


March 1991.
4.Shipping Documents submitted by PPSCI.
5.Sub-clause 70.1 of
Documents. 12 TADaCH

the

General

Conditions

of

the

Contract

Page 48 of 505

Pan Pacific contended that with this recommendation, respondent was already
estopped from disclaiming liability of at least P3,730,957.07 in accordance with the
escalation clause. 13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific's
operational capital was becoming inadequate for the project. However, respondent
withheld the payment of the price adjustment under the escalation clause despite Pan
Pacific's repeated demands. 14 Instead, respondent offered Pan Pacific a loan of P1.8
million. Against its will and on the strength of respondent's promise that the price
adjustment would be released soon, Pan Pacific, through Del Rosario, was
constrained to execute a promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was
released directly to laborers and suppliers and not a single centavo was given to Pan
Pacific. 15
Pan Pacific made several demands for payment on the price adjustment but
respondent merely kept on promising to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have
incurred the loan if respondent released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the true agreement of the parties.
Pan Pacific maintained that the P1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning. 16
Respondent stood firm that it would not release any amount of the price adjustment to
Pan Pacific but it would offset the price adjustment with Pan Pacific's outstanding
balance of P3,226,186.01, representing the loan, interests, penalties and collection
charges. 17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGI Engineers for the purpose of
extrajudicial settlement, less P1.8 million and P414,942 as advance payments. 18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the
promissory note, sum of money, and damages against the respondent with the RTC of
Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiffs and against the defendant as follows:

1.Declaring the promissory note (Exhibit "B") null and void;


2.Ordering the defendant to pay the plaintiffs the following amounts:
a.P1,389,111.10 representing unpaid balance of the adjustment price, with
interest thereon at the legal rate of twelve (12%) percent per annum starting
May 6, 1994, the date when the complaint was filed, until the amount is fully
paid;
b.P100,000.00 representing moral damages;
c.P50,000.00 representing exemplary damages; and
d.P50,000.00 as and for attorney's fees.
3.Dismissing defendant's counterclaim, for lack of merit; and
4.With costs against the defendant.
SO ORDERED. 19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26
May 1999, respondent appealed the entire RTC Decision for being contrary to law and
evidence. In sum, the appeals of the parties with the CA are as follows: ECaITc
1.With respect to the petitioners, whether the RTC erred in deductng * the
amount of P126,903.97 from the balance of the adjusted price and in
awarding only 12% annual interest on the amount due, instead of the bank
loan rate of 18% compounded annually beginning September 1992.
2.With respect to respondent, whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary damages and
attorney's fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to
the principal amount due to petitioners. The CA removed the deduction of
P126,903.97 because it represented the final payment on the basic contract price.
Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest
at the legal rate of 12% per annum starting 6 May 1994. 20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CA's Decision imposing the legal rate of 12%. Petitioners
claimed that the interest rate applicable should be the 18% bank lending rate.
Respondent likewise filed a Motion for Reconsideration of the CA's decision. In a
Resolution dated 5 October 2005, the CA denied both motions.
Page 49 of 505

Aggrieved by the CA's Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding
the unpaid balance of the price adjustment, erred in fixing the interest rate at 12%
instead of the 18% bank lending rate.
Ruling of the Court

lending rate. 24 Specifically, petitioners invoke Section 2.5 of the Agreement and
Section 60.10 of the General Conditions as follows:
Agreement
2.5If any payment is delayed, the CONTRACTOR may charge interest
thereon at the current bank lending rates, without prejudice to OWNER'S
recourse to any other remedy available under existing law. 25

We grant the petition.

General Conditions

This Court notes that respondent did not appeal the decision of the CA. Hence, there
is no longer any issue as to the principal amount of the unpaid balance on the price
adjustment, which the CA correctly computed at P1,516,015.07. The only remaining
issue is the interest rate applicable for respondent's delay in the payment of the
balance of the price adjustment.

60.10Time for payment

The CA denied petitioners' claim for the application of the bank lending rate of 18%
compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the
contract provides for an interest at the current bank lending rate in case of
delay in payment by the Owner, and the promissory note charged an interest
of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the
interest rate without the other party's consent. Unlike their request for price
adjustment on the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest on the adjusted
price. To unilaterally increase the interest rate of the adjusted price would be
violative of the principle of mutuality of contracts. Thus, the Court maintains
the legal rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the
recommendation of the TCGI Engineers as to the price adjustment would be
binding on the parties, it was established, however, that part of the adjusted
price demanded by plaintiffs was already disbursed as early as 28 February
1992 by defendant bank to their suppliers and laborers for their account. 21
In this appeal, petitioners allege that the contract between the parties consists of two
parts, the Agreement 22 and the General Conditions, 23 both of which provide for
interest at the bank lending rate on any unpaid amount due under the contract.
Petitioners further claim that there is nothing in the contract which requires the
consent of the respondent to be given in order that petitioners can charge the bank

The amount due to the Contractor under any interim certificate issued by the
Engineer pursuant to this Clause, or to any term of the Contract, shall,
subject to clause 47, be paid by the Owner to the Contractor within 28 days
after such interim certificate has been delivered to the Owner, or, in the case
of the Final Certificate referred to in Sub-Clause 60.8, within 56 days, after
such Final Certificate has been delivered to the Owner. In the event of the
failure of the Owner to make payment within the times stated, the Owner
shall pay to the Contractor interest at the rate based on banking loan rates
prevailing at the time of the signing of the contract upon all sums unpaid from
the date by which the same should have been paid. The provisions of this
Sub-Clause are without prejudice to the Contractor's entitlement under
Clause 69. 26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of
interest from the time an amount is determined to be due thereto, which respondent
should have paid. Therefore, as petitioners have already proven their entitlement to
the price adjustment, it necessarily follows that the bank lending interest rate of 18%
shall be applied. 27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of
the General Conditions, it is stipulated that any additional cost shall be determined by
the Engineer and shall be added to the contract price after due consultation with the
Owner, herein respondent. Hence, there being no prior consultation with the
respondent regarding the additional cost to the basic contract price, it naturally follows
that respondent was never consulted or informed of the imposition of 18% interest
rate compounded annually on the adjusted price. 28
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments, and
the consent for the imposition of the bank lending rate. Thus, while the CA held that
Page 50 of 505

petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of 18% interest on the
adjusted price, as petitioners never informed or sought the approval of respondent for
such imposition. 29
We disagree.
It is settled that the agreement or the contract between the parties is the formal
expression of the parties' rights, duties, and obligations. It is the best evidence of the
intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement. 30 cSICHD
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in
respect of rise or fall in the cost of labor and/or materials or any other
matters affecting the cost of the execution of the Works as may be
determined.
70.2Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for
the Contract there occur in the country in which the Works are being or are
to be executed changes to any National or State Statute, Ordinance, Decree
or other Law or any regulation or bye-law (sic) of any local or other duly
constituted authority, or the introduction of any such State Statute,
Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional
or reduced cost to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall, after due
consultation with the Owner and Contractor, be determined by the Engineer
and shall be added to or deducted from the Contract Price and the Engineer
shall notify the Contractor accordingly, with a copy to the Owner. 31
In this case, the CA already settled that petitioners consulted respondent on the
imposition of the price adjustment, and held respondent liable for the balance of
P1,516,015.07. Respondent did not appeal from the decision of the CA; hence,
respondent is estopped from contesting such fact.

However, the CA went beyond the intent of the parties by requiring respondent to give
its consent to the imposition of interest before petitioners can hold respondent liable
for interest at the current bank lending rate. This is erroneous. A review of Section 2.6
of the Agreement and Section 60.10 of the General Conditions shows that the
consent of the respondent is not needed for the imposition of interest at the current
bank lending rate, which occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases,
courts have no authority to alter a contract by construction or to make a new contract
for the parties. The Court's duty is confined to the interpretation of the contract which
the parties have made for themselves without regard to its wisdom or folly as the court
cannot supply material stipulations or read into the contract words which it does not
contain. It is only when the contract is vague and ambiguous that courts are permitted
to resort to construction of its terms and determine the intention of the parties. 32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement
and Section 60.10 of the General Conditions which pertain to the time of payment.
Once the parties agree on the price adjustment after due consultation in compliance
with the provisions of the escalation clause, the agreement is in effect an amendment
to the original contract, and gives rise to the liability of respondent to pay the adjusted
costs. Under Section 60.10 of the General Conditions, the respondent shall pay such
liability to the petitioner within 28 days from issuance of the interim certificate. Upon
respondent's failure to pay within the time provided (28 days), then it shall be liable to
pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of
interest. To provide a contrary interpretation, as one requiring a separate consent for
the imposition of the stipulated interest, would render the intentions of the parties
nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing.
Therefore, payment of monetary interest is allowed only if:
(1)there was an express stipulation for the payment of interest; and
(2)the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary
interest. 33

Page 51 of 505

We agree with petitioners' interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, 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 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
6%, or in the case of loans or forbearances of money, 12% per annum. 34 It is only
when the parties to a contract have failed to fix the rate of interest or when such
amount is unwarranted that the Court will apply the 12% interest per annum on a loan
or forbearance of money. 35
The written agreement entered into between petitioners and respondent provides for
an interest at the current bank lending rate in case of delay in payment and the
promissory note charged an interest of 18%.
To prove petitioners' entitlement to the 18% bank lending rate of interest, petitioners
presented the promissory note 36 prepared by respondent bank itself. This
promissory note, although declared void by the lower courts because it did not
express the real intention of the parties, is substantial proof that the bank lending rate
at the time of default was 18% per annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by petitioners against the respondent, the
interest rate agreed upon is binding on them. 37 aSEHDA
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay
petitioners P1,516,015.07 with interest at the bank lending rate of 18% per annum
starting 6 May 1994 until the amount is fully paid.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
||| (Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank, G.R. No. 169975,
[March 18, 2010], 630 PHIL 94-107)

THIRD DIVISION
[G.R. No. 169617. April 3, 2007.]
Page 52 of 505

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, petitioners, vs.


SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by
ZOILO LANDRITO, as their Attorney-in-Fact, respondents.

DECISION

CHICO-NAZARIO, J p:
This is a petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals, 1 dated 31 August 2005, reversing the
Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in
its assailed Decision, fixed the interest rate of the loan between the parties at 12% per
annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to
reconvey the subject property to the Spouses Landrito conditioned upon the payment
of the loan.
Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all
surnamed ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and
Primitiva Espiritu, who both died during the pendency of the case before the
Honorable Court of Appeals. 2
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein
represented by their son and attorney-in-fact, Zoilo Landrito. 3 SACEca
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the
amount of P350,000.00 payable in three months. To secure the loan, the Spouses
Landrito executed a real estate mortgage over a five hundred forty (540) square meter
lot located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were
supposed to receive, P17,500.00 was deducted as interest for the first month which
was equivalent to five percent of the principal debt, and P7,500.00 was further
deducted as service fee. Thus, they actually received a net amount of P325,000.00.
The agreement, however, provided that the principal indebtedness earns "interest at
the legal rate." 4
After three months, when the debt became due and demandable, the Spouses
Landrito were unable to pay the principal, and had not been able to make any interest
payments other than the amount initially deducted from the proceeds of the loan. On

29 December 1986, the loan agreement was extended to 4 January 1987 through an
Amendment of Real Estate Mortgage. The loan was restructured in such a way that
the unpaid interest became part of the principal, thus increasing the principal to
P385,000. The new loan agreement adopted all other terms and conditions contained
in first agreement. 5
Due to the continued inability of the Spouses Landrito to settle their obligations with
the Spouses Espiritu, the loan agreement was renewed three more times. In all these
subsequent renewals, the same terms and conditions found in the first agreement
were retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive
of running interest. On 11 March 1988, it was increased to P647,000.00. And on 21
October 1988, the principal was increased to P874,125.00. 6 At the hearing before
the trial court, Zoilo Espiritu testified that the increase in the principal in each
amendment of the loan agreement did not correspond to the amount delivered to the
Spouses Landrito. Rather, the increase in the principal had been due to unpaid
interest and other charges. 7 HSATIC
The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the
mortgaged property on 31 October 1990. During the auction sale, the property was
sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriff's
Certificate of Sale was annotated on the title of the mortgaged property, giving the
Spouses Landrito until 8 January 1992 to redeem the property. 8
The Spouses Landrito failed to redeem the subject property although they alleged that
they negotiated for the redemption of the property as early as 30 October 1991. While
the negotiated price for the land started at P1,595,392.79, it was allegedly increased
by the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two
manager's checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on
13 January 1992, but the latter refused to accept the same. They also alleged that the
Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until
July 1992 to pay the said amount. However, upon inquiry, they found out that on 24
June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of
Ownership and registered the mortgaged property in their name, and that the Register
of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the
name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented
by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with
damages against the Spouses Espiritu before Branch 146 of the Regional Trial Court
of Makati. 9 Among the allegations in their Complaint, they stated that the Spouses
Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to
one's moral senses." 10
Page 53 of 505

The trial court dismissed the complaint and upheld the validity of the foreclosure sale.
The trial court ordered in its Decision, dated 13 December 1995: 11
WHEREFORE, all the foregoing premises considered, the herein complaint
is hereby dismissed forthwith. ECaHSI
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the
1997 Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals
reversed the trial court's decision, decreeing that the five percent (5%) interest
imposed by the Spouses Espiritu on the first month and the varying interest rates
imposed for the succeeding months contravened the provisions of the Real Estate
Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum,
would be imposed. It also ruled that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling
rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the
courts may render void any stipulation of interest rates which are found iniquitous or
unconscionable. As a result, the Court of Appeals set the interest rate of the loan at
the legal rate, or 12% per annum. 12
Furthermore, the Court of Appeals held that the action for reconveyance, filed by the
Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to
redeem the property within the one-year redemption period provided by law, the
action for reconveyance remained as a remedy available to a landowner whose
property was wrongfully registered in another's name since the subject property has
not yet passed to an innocent purchaser for value. 13
In the decretal portion of its Decision, the Court of Appeals ruled: 14
WHEREFORE, the instant appeal is hereby GRANTED. The assailed
Decision dated December 13, 1995 of the Regional Trial Court of Makati,
Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET
ASIDE, and a new one is hereby entered as follows: (1) The legal rate of
12% per annum is hereby FIXED to be applied as the interest of the loan;
and (2) Conditioned upon the payment of the loan, defendants-appellees
spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer
Certificate of Title No. S-48948 to appellant spouses Maximo and Paz
Landrito. IESAac
The case is REMANDED to the Trial Court for the above determination.
Hence, the present petition. The following issues were raised: 15

I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND
SETTING ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING
HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF
TITLE NO. 18918 TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL
OR LEGAL BASIS THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT
HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN
RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON
THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING
THAT HEREIN RESPONDENTS' ATTORNEY-IN-FACT IS NOT ARMED
WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE. SDHCac
The petition is without merit.
The Real Estate Mortgage executed between the parties specified that "the principal
indebtedness shall earn interest at the legal rate." The agreement contained no other
provision on interest or any fees or charges incident to the debt. In at least three
contracts, all designated as Amendment of Real Estate Mortgage, the interest rate
imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that
the increase in the principal in each of the Amendments of the Real Estate Mortgage
consists of interest and charges. The Spouses Espiritu alleged that the parties had
agreed on the interest and charges imposed in connection with the loan, hereunder
enumerated:
1. P17,500.00 was the interest charged for the first month and P7,500.00
was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between the
P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986
and the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986. DCAEcS
3. P132,000.00 interest and charges, or the difference between the
P385,000.00 principal in the Amendment of the Real Estate Mortgage dated
Page 54 of 505

29 December 1986 and the P507,000.00 principal in the Amendment of the


Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between the
P507,000.00 principal in the Amendment of the Real Estate Mortgage dated
29 July 1987 and the P647,000.00 principal in the Amendment of the Real
Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between the
P647,000.00 principal in the Amendment of the Real Estate Mortgage dated
11 March 1988 and the P874,125 principal in the Amendment of the Real
Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of
P350,000 was accumulated over only two years and one month. These charges are
not found in any written agreement between the parties. The records fail to show any
computation on how much interest was charged and what other fees were imposed.
Not only did lack of transparency characterize the aforementioned agreements, the
interest rates and the service charge imposed, at an average of 6.39% per month, are
excessive. IHaECA
In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State
seeks to protect its citizens from a lack of awareness of the true cost of credit by
assuring the full disclosure of such costs. Section 4, in connection with Section
3(3) 16 of the said law, gives a detailed enumeration of the specific information
required to be disclosed, among which are the interest and other charges incident to
the extension of credit. Section 6 17 of the same law imposes on anyone who willfully
violates these provisions, sanctions which include civil liability, and a fine and/or
imprisonment.
Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which the Spouses
Espiritu imposed interest and charges, in connection with the loan. This is aggravated
by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to
plead ignorance of the requirements of the law in connection with the transparency of
credit transactions. In addition, the Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in writing.
The omission of the Spouses Espiritu in specifying in the contract the interest rate
which was actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on
interest and charges that were found excessive, iniquitous, and unconscionable. In
the case of Medel v. Court of Appeals, 18 the Court declared an interest rate of 5.5%
per month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and
exorbitant. Even if the parties themselves agreed on the interest rate and stipulated
the same in a written agreement, it nevertheless declared such stipulation as void and
ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v.
Salazar, 19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced
to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals, 20 the Court
found a 3% monthly interest imposed on four separate loans with a total of
P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or
12% per annum. IETCAS
In declaring void the stipulations authorizing excessive interest and charges, the Court
declared that although the Usury Law was suspended by Central Bank Circular No.
905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide
latitude to agree on any interest rate, nothing in the said Circular grants lenderscarte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. 21
Stipulations authorizing iniquitous or unconscionable interests are contrary to morals,
if not against the law. Under Article 1409 of the Civil Code, these contracts are
inexistent and void from the beginning. They cannot be ratified nor the right to set up
their illegality as a defense be waived. 22 The nullity of the stipulation on the usurious
interest does not, however, affect the lender's right to recover the principal of the
loan. 23 Nor would it affect the terms of the real estate mortgage. The right to
foreclose the mortgage remains with the creditors, and said right can be exercised
upon the failure of the debtors to pay the debt due. The debt due is to be considered
without the stipulation of the excessive interest. A legal interest of 12% per annum will
be added in place of the excessive interest formerly imposed.
While the terms of the Real Estate Mortgage remain effective, the foreclosure
proceedings held on 31 October 1990 cannot be given effect. In the Notice of Sheriff's
Sale24 dated 5 October 1990, and in the Certificate of Sale 25 dated 31 October
1990, the amount designated as mortgage indebtedness amounted to P874,125.00.
Likewise, in the demand letter 26 dated 12 December 1989, Zoilo Espiritu demanded
from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the
debt due is limited to the principal of P350,000.00 with 12% per annum as legal
interest, the previous demand for payment of the amount of P874,125.00 cannot be
considered as a valid demand for payment. For an obligation to become due, there
Page 55 of 505

must be a valid demand. 27 Nor can the foreclosure proceedings be considered valid
since the total amount of the indebtedness during the foreclosure proceedings was
pegged at P874,125.00 which included interest and which this Court now nullifies for
being excessive, iniquitous and exorbitant. If the foreclosure proceedings were
considered valid, this would result in an inequitable situation wherein the Spouses
Landrito will have their land foreclosed for failure to pay an over-inflated loan only a
small part of which they were obligated to pay. acSECT
Moreover, it is evident from the facts of the case that despite considerable effort on
their part, the Spouses Landrito failed to redeem the mortgaged property because
they were unable to raise the total amount, which was grossly inflated by the
excessive interest imposed. Their attempt to redeem the mortgaged property at the
inflated amount of P1,595,392.79, as early as 30 October 1991, is reflected in a letter,
which creditor-mortgagee Zoilo Landrito acknowledged to have received by affixing
his signature herein. 28 They also attached in their Complaint copies of two checks in
the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which
were allegedly refused by the Spouses Espiritu. 29 Lastly, the Spouses Espiritu even
attached in their exhibits a copy of a handwritten letter, dated 27 January 1994,
written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former
offered to pay the latter the sum of P2,000,000.00. 30 In all these instances, the
Spouses Landrito had tried, but failed, to pay an amount way over the indebtedness
they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it
is only proper that the Spouses Landrito be given the opportunity to repay the real
amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to
settle their debt, at the correct amount and without the iniquitous interest imposed, no
foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid obligation and the
failure of the debtor to pay the said amount. 31 In this case, it has not yet been shown
that the Spouses Landrito had already failed to pay the correct amount of the debt
and, therefore, a foreclosure sale cannot be conducted in order to answer for the
unpaid debt. The foreclosure sale conducted upon their failure to pay P874,125 in
1990 should be nullified since the amount demanded as the outstanding loan was
overstated; consequently it has not been shown that the mortgagors the Spouses
Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of
the sale together with its reasonable rates of interest were applied to the obligation,
only a small part of its original loans would actually remain outstanding, but because
of the unconscionable interest rates, the larger part corresponded to said excessive
and iniquitous interest. aESICD

As a result, the subsequent registration of the foreclosure sale cannot transfer any
rights over the mortgaged property to the Spouses Espiritu. The registration of the
foreclosure sale, herein declared invalid, cannot vest title over the mortgaged
property. The Torrens system does not create or vest title where one does not have a
rightful claim over a real property. It only confirms and records title already existing
and vested. It does not permit one to enrich oneself at the expense of
another. 32Thus, the decree of registration, even after the lapse of one (1) year,
cannot attain the status of indefeasibility.
Significantly, the records show that the property mortgaged was purchased by the
Spouses Espiritu and had not been transferred to an innocent purchaser for value.
This means that an action for reconveyance may still be availed of in this case. 33
Registration of property by one person in his or her name, whether by mistake or
fraud, the real owner being another person, impresses upon the title so acquired the
character of a constructive trust for the real owner, which would justify an action for
reconveyance. 34 This is based on Article 1465 of the Civil Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for
benefit of the person from whom the property comes. DTSIEc
The action for reconveyance does not prescribe until after a period of ten years from
the date of the registration of the certificate of sale since the action would be based on
implied trust. 35 Thus, the action for reconveyance filed on 31 October 1992, more
than one year after the Sheriff's Certificate of Sale was registered on 9 January 1991,
was filed within the prescription period.
It should, however, be reiterated that the provisions of the Real Estate Mortgage are
not annulled and the principal obligation stands. In addition, the interest is not
completely removed; rather, it is set by this Court at 12% per annum. Should the
Spouses Landrito fail to pay the principal, with its recomputed interest which runs from
the time the loan agreement was entered into on 5 September 1986 until the present,
there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing
the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized
to file the action for reconveyance filed before the trial court or even to file the appeal
from the judgment of the trial court, by virtue of the Special Power of Attorney dated
Page 56 of 505

30 September 1992. They further noted that the trial court and the Court of Appeals
failed to rule on this issue. 36
The Special Power of Attorney 37 dated 30 September 1992 was executed by Maximo
Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged
property. It authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent contracts,
documents, agreements and other writings of whatever nature or kind and to
sue or file legal action in any court of the Philippines, to collect, ask
demands, encash checks, and recover any and all sum of monies, proceeds,
interest and other due accruing, owning, payable or belonging to me as such
owner of the afore-mentioned property. (Emphasis provided.) AEIHaS
Zoilo Landrito's authority to file the case is clearly set forth in the Special Power of
Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito
filed the reconveyance case with the full authority of his mother, Paz Landrito, who
attended the hearings of the case, filed in her behalf, without making any
protest. 38She even testified in the same case on 30 August 1995. From the acts of
Paz Landrito, there is no doubt that she had authorized her son to file the action for
reconveyance, in her behalf, before the trial court.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS
the assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing
the interest rate of the loan between the parties at 12% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the Spouses Landrito
conditioned upon the payment of the loan together with herein fixed rate of interest.
Costs against the petitioners. EDATSC

EN BANC
[G.R. No. 189871. August 13, 2013.]

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr. and Nachura, JJ., concur.
||| (Heirs of Espiritu v. Spouses Landrito, G.R. No. 169617, [April 3, 2007], 549 PHIL
180-197)

DARIO NACAR, petitioner, vs.


BORDEY, JR., respondents.

GALLERY

FRAMES

and/or

FELIPE

DECISION

PERALTA, J p:

Page 57 of 505

This is a petition for review on certiorari assailing the Decision 1 dated September 23,
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the
Resolution 2dated October 9, 2009 denying petitioner's motion for reconsideration.

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

a)

P196.00/day x 12.36 mos.

The factual antecedents are undisputed.


Petitioner Dario Nacar filed a complaint for constructive dismissal before the
Arbitration Branch of the National Labor Relations Commission (NLRC) against
respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR
Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner
and found that he was dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement
in the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge
the burden of showing that complainant was dismissed from employment for
a just or valid cause. All the more, it is clear from the records that
complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant's prayer for the
payments of separation pay in lieu of reinstatement to his former position,
considering the strained relationship between the parties, and his apparent
reluctance to be reinstated, computed only up to promulgation of this
decision as follows: CcSTHI

b)

P62,986.56

Prevailing Rate per day

P62,986.00

P198.00 x 26 days x 6.4 mos.

P32,947.20

TOTAL

2/6/98 to 8/18/98 = 6.4 months

P95,933.76
========

xxx xxx xxx


WHEREFORE, premises considered, judgment is hereby rendered finding
respondents guilty of constructive dismissal and are therefore, ordered:
1.To pay jointly and severally the complainant the amount of sixty-two
thousand nine hundred eighty-six pesos and 56/100 (P62,986.56) Pesos
representing his separation pay;
2.To pay jointly and severally the complainant the amount of nine (sic) five
thousand nine hundred thirty-three and 36/100 (P95,933.36) representing his
backwages; and
3.All other claims are hereby dismissed for lack of merit.

SEPARATION PAY

SO ORDERED. 4

Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

P198.00 x 26 days x 8 months

P41,184.00

January 24, 1997

BACKWAGES
Date Dismissed

1/24/97 to 2/5/98 = 12.36 mos.

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution 5 dated February 29, 2000. Accordingly, the NLRC sustained the decision
of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was
denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On
August 24, 2000, the CA issued a Resolution dismissing the petition. Respondents
filed a Motion for Reconsideration, but it was likewise denied in a Resolution dated
May 8, 2001. 7

Page 58 of 505

Respondents then sought relief before the Supreme Court, docketed as G.R. No.
151332. Finding no reversible error on the part of the CA, this Court denied the
petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002. 9 The case was, thereafter, referred back to the Labor
Arbiter. A pre-execution conference was consequently scheduled, but respondents
failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that
his backwages be computed from the date of his dismissal on January 24, 1997 up to
the finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon
recomputation, the Computation and Examination Unit of the NLRC arrived at an
updated amount in the sum of P471,320.31. 12 DSCIEa
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter
ordering the Sheriff to collect from respondents the total amount of P471,320.31.
Respondents filed a Motion to Quash Writ of Execution, arguing, among other things,
that since the Labor Arbiter awarded separation pay of P62,986.56 and limited
backwages of P95,933.36, no more recomputation is required to be made of the said
awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore. 14 On January 13, 2003, the Labor Arbiter
issued an Order 15 denying the motion. Thus, an Alias Writ of Execution 16 was
issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution 17 granting the appeal in favor of the respondents and ordered the
recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the
NLRC to be final and executory. Consequently, another pre-execution conference was
held, but respondents failed to appear on time. Meanwhile, petitioner moved that an
Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in
the sum of P471,320.31. 18
The records of the case were again forwarded to the Computation and Examination
Unit for recomputation, where the judgment award of petitioner was reassessed to be
in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay
him the original amount as determined by the Labor Arbiter in his Decision dated

October 15, 1998, pending the final computation of his backwages and separation
pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
judgment award that was due to petitioner in the amount of P147,560.19, which
petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests. 19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only
up to the amount of P11,459.73. The Labor Arbiter reasoned that it is the October 15,
1998 Decision that should be enforced considering that it was the one that became
final and executory. However, the Labor Arbiter reasoned that since the decision
states that the separation pay and backwages are computed only up to the
promulgation of the said decision, it is the amount of P158,919.92 that should be
executed. Thus, since petitioner already received P147,560.19, he is only entitled to
the balance of P11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC
in its Resolution 22 dated September 27, 2006. Petitioner filed a Motion for
Reconsideration, but it was likewise denied in the Resolution 23 dated January 31,
2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP
No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA
opined that since petitioner no longer appealed the October 15, 1998 Decision of the
Labor Arbiter, which already became final and executory, a belated correction thereof
is no longer allowed. The CA stated that there is nothing left to be done except to
enforce the said judgment. Consequently, it can no longer be modified in any respect,
except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error: ScaATD
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION
Page 59 of 505

AND DECIDED CONTRARY TO LAW IN UPHOLDING THE


QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT
MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION. 26
Petitioner argues that notwithstanding the fact that there was a computation of
backwages in the Labor Arbiter's decision, the same is not final until reinstatement is
made or until finality of the decision, in case of an award of separation pay. Petitioner
maintains that considering that the October 15, 1998 decision of the Labor Arbiter did
not become final and executory until the April 17, 2002 Resolution of the Supreme
Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and separation pay should be
on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on
October 15, 1998. Further, petitioner posits that he is also entitled to the payment of
interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited
backwages were awarded to petitioner by the October 15, 1998 decision of the Labor
Arbiter, no more recomputation is required to be made of said awards. Respondents
insist that since the decision clearly stated that the separation pay and backwages are
"computed only up to [the] promulgation of this decision," and considering that
petitioner no longer appealed the decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of P158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner questioned
the award, long after the decision had become final and executory. Respondents
contend that to allow the further recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods
v. Court of Appeals (Sixth Division), 27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the awards made, and whether this
violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the
decision already provided for the computation of the payable separation pay and
backwages due and did not further order the computation of the monetary awards up

to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of
execution of the labor arbiter's original computation of the awards made,
pegged as of the time the decision was rendered and confirmed with
modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the
original labor arbiter's decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case
proceeds from the way the original labor arbiter framed his decision. The
decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it
has been confirmed with finality. This is the finding of the illegality of the
dismissal and the awards of separation pay in lieu of reinstatement,
backwages, attorney's fees, and legal interests. TaISEH
The second part is the computation of the awards made. On its face, the
computation the labor arbiter made shows that it was time-bound as can be
seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner
now posits should no longer be re-computed because the computation is
already in the labor arbiter's decision that the CA had affirmed. The public
and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way
up to reinstatement if reinstatement is to be made, or up to the finality of the
decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal
dismissal had taken place, also made a computation of the award, is
understandable in light of Section 3, Rule VIII of the then NLRC Rules of
Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all
events, as far as practicable, shall embody in any such decision or order the
detailed and full amount awarded.
Page 60 of 505

Clearly implied from this original computation is its currency up to the finality
of the labor arbiter's decision. As we noted above, this implication is
apparent from the terms of the computation itself, and no question would
have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all
counts i.e., on the finding of illegality as well as on all the consequent
awards made. Hence, the petitioner appealed the case to the NLRC which,
in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is
final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on
jurisdictional grounds through a timely filed Rule 65 petition for certiorari. The
CA decision, finding that NLRC exceeded its authority in affirming the
payment of 13th month pay and indemnity, lapsed to finality and was
subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal
dismissal portion of the original labor arbiter's decision, the implementing
labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been
terminated and implemented at the labor arbiter's level. Thus, the labor
arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the
case on the merits. Unfortunately, the labor arbiter's approved computation
went beyond the finality of the CA decision (July 29, 2003) and included as
well the payment for awards the final CA decision had deleted specifically,
the proportionate 13th month pay and the indemnity awards. Hence, the CA
issued the decision now questioned in the present petition.

recomputation as this step is a necessary consequence that flows from the nature of
the illegality of dismissal declared by the Labor Arbiter in that decision. 29 A
recomputation (or an original computation, if no previous computation has been
made) is a part of the law specifically, Article 279 of the Labor Code and the
established jurisprudence on this provision that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction,
as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute
an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this
dismissal is affected, and this is not a violation of the principle of immutability of final
judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence
that it cannot avoid as it is the risk that it ran when it continued to seek recourses
against the Labor Arbiter's decision. Article 279 provides for the consequences of
illegal dismissal in no uncertain terms, qualified only by jurisprudence in its
interpretation of when separation pay in lieu of reinstatement is allowed. When that
happens, the finality of the illegal dismissal decision becomes the reckoning point
instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that
separation pay and backwages are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping
Lines, Inc. v. Court of Appeals, 32 the Court laid down the guidelines regarding the
manner of computing legal interest, to wit:
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:

We see no error in the CA decision confirming that a re-computation is


necessary as it essentially considered the labor arbiter's original decision in
accordance with its basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of
the labor arbiter's original decision. 28 ESaITA

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.

Consequently, from the above disquisitions, under the terms of the decision which is
sought to be executed by the petitioner, no essential change is made by a

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
Page 61 of 505

at thediscretion of the court at the rate of 6% per annum. No interest,


however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3.When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 34 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series
of 2013, effective July 1, 2013, the pertinent portion of which reads: AHcaDC
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved
the following revisions governing the rate of interest in the absence of
stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1.The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2.In view of the above, Subsection X305.1 36 of the Manual of
Regulations for Banks and Sections 4305Q.1, 37 4305S.3 38 and
4303P.1 39 of the Manual of Regulations for Non-Bank Financial Institutions
are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or

forbearance of any money, goods or credits and the rate allowed in judgments shall
no longer be twelve percent (12%) per annum as reflected in the case of Eastern
Shipping Lines 40 and Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 but will
now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent
(6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board, 41 this Court affirmed the authority of the
BSP-MB to set interest rates and to issue and enforce Circulars when it ruled that "the
BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits, including those for loans of
low priority such as consumer loans, as well as such loans made by pawnshops,
finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory
prior to July 1, 2013, said judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines 42 are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I.When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, 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: HcSaTI
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
Page 62 of 505

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.

(3)interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from
July 1, 2013 until their full satisfaction.

2.When an obligation, not constituting a loan or forbearance of money, is


breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total
monetary benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED. TSIaAc
Sereno, C.J., Carpio, Velasco, Jr., Leonardo-de Castro, Brion, Bersamin, Del Castillo,
Abad, Villarama, Jr., Perez, Mendoza, Reyes, Perlas-Bernabe and Leonen,
JJ., concur.
||| (Nacar v. Gallery Frames, G.R. No. 189871, [August 13, 2013])

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.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the
Court of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9,
2009
are REVERSED and SET
ASIDE. Respondents
are ORDERED
to
PAY petitioner:
(1)backwages computed from the time petitioner was illegally dismissed on January
24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332
became final and executory;
(2)separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and

EN BANC
[G.R. No. 47878. July 24, 1942.]
GIL JARDENIL, plaintiff-appellant, vs. HEFTI SOLAS (alias HEPTI SOLAS,
JEPTI SOLAS), defendant-appellee.

Page 63 of 505

Eleuterio J. Gustilo, for appellant.


Jose C. Robles, for appellee.

DECISION

MORAN, J. p.
This is an action for foreclosure of mortgage. The only question raised in this
appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the
date of maturity as fixed in the promissory note, or up to the date payment is
effected? This question is, in our opinion, controlled by the express stipulation of the
parties.
Paragraph 4 of the mortgage deed recites:
"Que en consideracion a dicha suma aun por pagar de DOS MIL
CUATROCIENTOS PESOS (P2,400.00), moneda filipina, que el Sr. Hepti
Solas se compromete a pagar al Sr. Jardenil en o antes del da treintaiuno
(31) de marzo de mil novecientos treintaicuatro (1934), con los intereses de
dicha suma al tipo de doce por ciento (12%) anual a partir desde esta fecha
hasta el da de su vencimiento, o sea el treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y
traspasa, por va de primera hipoteca, a favor del Sr. Jardenil, sus
herederos y causahabientes, la parcela de terreno descrita en el prrafo
primero (1.) de esta escritura."
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date
of maturity, or until March 31, 1934. As the contract is silent as to whether after that
date, in the event of non- payment, the debtor would continue to pay interest, we
cannot, in law, indulge in any presumption as to such interest; otherwise, we would
be imposing upon the debtor an obligation that the parties have not chosen to agree
upon. Article 1755 of the Civil Code provides that "interest shall be due only when it
has been expressly stipulated." (Italic supplied.).

mortgage deed to show that the terms employed by the parties thereto are at war
with their evident intent. On the contrary, the act of the mortgagee of granting to the
mortgagor, on the same date of the execution of the deed of mortgage, an
extension of one year from the date of maturity within which to make
payment,without making any mention of any interest which the mortgagor should
pay during the additional period (see Exhibit B attached to the complaint), indicates
that the true intention of the parties was that no interest should be paid during the
period of grace. What reasons the parties may have therefor, we need not here
seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of
mortgage fails to express their true agreement, for if such mistake existed, plaintiff
would have undoubtedly adduced evidence to establish it and asked that the deed
be reformed accordingly, under the parcel-evidence rule.
We hold, therefore, that as the contract is clear and unmistakable and the terms
employed therein have not been shown to belie or otherwise fail to express the true
intention of the parties, and that the deed has not been assailed on the ground of
mutual mistake which would require its reformation, same should be given its full
force and effect. When a party sues on a written contract and no attempt is made to
show any vice therein, he cannot be allowed to lay any claim more than what its
clear stipulations accord. His omission, to which the law attaches a definite
meaning as in the instant case, cannot by the courts be arbitrarily supplied by what
their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the
loan of P2,400 from November 8, 1932 to March 31, 1934. And it being a fact that
extrajudicial demands have been made which we may assume to have been so
made on the expiration of the year of grace, he shall be entitled to legal interest
upon the principal and the accrued interest from April 1, 1935, until full payment.
Thus modified, judgment is affirmed, with costs against appellant.
Yulo, C.J., Ozaeta and Bocobo, JJ., concur.
||| (Jardenil v. Solas, G.R. No. 47878, [July 24, 1942], 73 PHIL 626-627)

A writing must be interpreted according to the legal meaning of its language


(section 286, Act No. 190, now section 58, Rule 123), and only when the wording of
the written instrument appears to be contrary to the evident intention of the parties
that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the
Page 64 of 505

On December 8, 1993, Pantaleon, the President and Chairman of the Board of


PRISMA, obtained a P1,000,000.00 4 loan from the respondent, with a monthly
interest of P40,000.00 payable for six months, or a total obligation of
P1,240,000.00 to be paid within six (6) months, 5 under the following schedule of
payments:

SECOND DIVISION
[G.R. No. 160545. March 9, 2010.]
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and
ROGELIO
S.
PANTALEON, petitioners, vs.
ARTHUR
F.
MENCHAVEZ, respondent.

DECISION

BRION, J p:
We resolve in this Decision the petition for review on certiorari 1 filed by petitioners
Prisma Construction & Development Corporation (PRISMA) and Rogelio S.
Pantaleon(Pantaleon) (collectively, petitioners) who seek to reverse and set aside the
Decision 2 dated May 5, 2003 and the Resolution 3 dated October 22, 2003 of the
Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The
assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch
73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment
of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to 12% per annum, computed from the filing of the
complaint to full payment. The assailed CA Resolution denied the petitioners' Motion
for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.

January 8, 1994
February 8, 1994
March 8, 1994
April 8, 1994
May 8, 1994
June 8, 1994

P40,000.00
P40,000.00
P40,000.00
P40,000.00
P40,000.00
P1,040,000.00 6

Total
P1,240.000.00
=============
To secure the payment of the loan, Pantaleon issued a promissory note 7 that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION
TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine
Currency, from Mr. Arthur F. Menchavez, representing a six-month loan
payable according to the following schedule: cACEHI
January 8, 1994
February 8, 1994
March 8, 1994
April 8, 1994
May 8, 1994
June 8, 1994
The checks corresponding
acknowledged. 8

P40,000.00
P40,000.00
P40,000.00
P40,000.00
P40,000.00
P1,040,000.00
to the above

amounts

are

hereby

and six (6) postdated checks corresponding to the schedule of payments.


Pantaleon signed the promissory note in his personal capacity, 9 and as duly
authorized by the Board of Directors of PRISMA. 10 The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following
amounts to the respondent:
September 8, 1994
October 8, 1995
November 8, 1995

P320,000.00
P600,000.00
P158,772.00
Page 65 of 505

January 4, 1997

P30,000.00 11

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00.


However, the respondent found that the petitioners still had an outstanding balance
of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly
interest. 12 Thus, on August 28, 1997, the respondent filed a complaint for sum of
money with the RTC to enforce the unpaid balance, plus 4% monthly interest,
P30,000.00 in attorney's fees, P1,000.00 per court appearance and costs of suit. 13
In their Answer dated October 6, 1998, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the
interest was not provided in the promissory note. Pantaleon also denied that he made
himself personally liable and that he made representations that the loan would be
repaid within six (6) months. 14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued
a check for P1,000,000.00 in favor of the petitioners for a loan that would earn an
interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month
period. It noted that the petitioners made several payments amounting to
P1,228,772.00, but they were still indebted to the respondent for P3,526,117.00 as of
February 11, 15 1999 after considering the 4% monthly interest. The RTC observed
that PRISMA was a one-man corporation of Pantaleon and used this circumstance to
justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
petitioners to jointly and severally pay the respondent the amount of P3,526,117.00
plus 4% per month interest from February 11, 1999 until fully paid. 16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of
the Rules of Court, insisting that there was no express stipulation on the 4% monthly
interest. AEHTIC

After the CA's denial 18 of their motion for reconsideration, 19 the petitioners filed the
present petition for review on certiorari under Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to
conclude that the parties agreed to a 4% monthly interest because the board
resolution was not an evidence of a loan or forbearance of money, but merely an
authorization for Pantaleon to perform certain acts, including the power to enter into a
contract of loan. The expressed mandate of Article 1956 of the Civil Code is that
interest due should be stipulated in writing, and no such stipulation exists. Even
assuming that the loan is subject to 4% monthly interest, the interest covers the six
(6)-month period only and cannot be interpreted to apply beyond it. The petitioners
also point out the glaring inconsistency in the CA Decision, which reduced the interest
from 4% per month or 48% per annum to 12% per annum, but failed to consider that
the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4%
monthly interest because the board resolution is attached to, and an integral part of,
the promissory note based on which the petitioners obtained the loan. The
respondent further contends that the petitioners are estopped from assailing the 4%
monthly interest, since they agreed to pay the 4% monthly interest on the principal
amount under the promissory note and the board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on
the loan. If so, does the rate of interest apply to the 6-month payment period only or
until full payment of the loan?

THE CA RULING
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to
a 4% monthly interest principally based on the board resolution that authorized
Pantaleon to transact a loan with an approved interest of not more than 4% per
month. The appellate court, however, noted that the interest of 4% per month, or 48%
per annum, was unreasonable and should be reduced to 12% per annum. The CA
affirmed the RTC's finding that PRISMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC
Decision by imposing a 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17

OUR RULING
We find the petition meritorious.
Interest
due
stipulated
otherwise, 12% per annum

should
in

be
writing;

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. 20 When the terms of a contract
are clear and leave no doubt as to the intention of the contracting parties, the literal
Page 66 of 505

meaning of its stipulations governs. 21 In such cases, courts have no authority to alter
the contract by construction or to make a new contract for the parties; a court's duty is
confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read
into the contract words the contract does not contain. 22 It is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its
terms to determine the parties' intent. DISEaC
In the present case, the respondent issued a check for P1,000,000.00. 23 In turn,
Pantaleon, in his personal capacity and as authorized by the Board, executed the
promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable within
six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the
loan shall earn an interest of P40,000.00 per month, for a total obligation of
P1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of interest was stipulated
in the promissory note; rather a fixed sum equivalent to this rate was agreed
upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due
unless it has been expressly stipulated in writing." Under this provision, the payment
of interest in loans or forbearance of money is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the payment
of interest was reduced in writing. The concurrence of the two conditions is required
for the payment of interest at a stipulated rate. Thus, we held in Tan v.
Valdehueza 24and Ching v. Nicdao 25 that collection of interest without any
stipulation in writing is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per month corresponds
only to the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994,
as agreed upon by the parties in the promissory note. Thereafter, the interest on the
loan should be at the legal interest rate of 12% per annum, consistent with our ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals: 26 HcSaTI
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)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61, 27 Sulit
v. Court of Appeals, 28 Crismina Garments, Inc. v. Court of Appeals, 29 Eastern
Assurance and Surety Corporation v. Court of Appeals, 30 Sps. Catungal v.
Hao, 31 Yong v. Tiu, 32 and Sps. Barrera v. Sps. Lorenzo. 33 Thus, the RTC and the
CA misappreciated the facts of the case; they erred in finding that the parties agreed
to a 4% interest, compounded by the application of this interest beyond the
promissory note's six (6)-month period. The facts show that the parties agreed to the
payment of a specific sum of money of P40,000.00 per month for six months, not to
a 4% rate of interest payable within a six (6)-month period.
Medel
applicable

v.

Court

of

Appeals

not

The CA misapplied Medel v. Court of Appeals 34 in finding that a 4% interest per


month was unconscionable. cDaEAS
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5%
per month, a service charge of 2% per annum, and a penalty charge of 1% per
month, plus attorney's fee equivalent to 25% of the amount due, until the loan is fully
paid. Taken in conjunction with the stipulated service charge and penalty, we found
the interest rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and
hence, contrary to morals, thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses
Solangon v. Salazar 35 of 6% per month or 72% per annum interest on a P60,000.00
loan; in Ruiz v. Court of Appeals, 36 of 3% per month or 36% per annum interest on a
P3,000,000.00 loan; in Imperial v. Jaucian, 37 of 16% per month or 192% per annum
interest on a P320,000.00 loan; in Arrofo v. Quio, 38 of 7% interest per month or
84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v. Yasuma, 39 of 4% per
month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan, 40 of 7% and 5% per month for loans totalling P964,000.00. We note that in all
these cases, the terms of the loans were open-ended; the stipulated interest rates
were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per monthon the
principal of a loan payable within six months. Additionally, no issue on the
excessiveness of the stipulated amount of P40,000.00 per month was ever put in
issue by the petitioners; 41 they only assailed the application of a 4% interest rate,
since it was not agreed upon.

Page 67 of 505

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law
between them, the only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy. 42 The
payment of the specific sum of money of P40,000.00 per month was voluntarily
agreed upon by the petitioners and the respondent. There is nothing from the records
and, in fact, there is no allegation showing that petitioners were victims of fraud when
they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00
per month for a period of six (6) months, or from December 8, 1993 to June 8, 1994,
for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the
rate of 12% per annum shall apply. The amounts already paid by the petitioners
during the pendency of the suit, amounting to P1,228,772.00 as of February 12,
1999, 43 should be deducted from the total amount due, computed as indicated
above. We remand the case to the trial court for the actual computation of the total
amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4%
monthly interest beyond the six-month stipulated period, since they agreed to pay this
interest on the principal amount under the promissory note and the board
resolution. CacEIS
We disagree with the respondent's contention.
We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the
promissory note, 44 what the petitioners agreed to was the payment of a specific
sum of P40,000.00 per month for six months not a 4% rate of interest per
month for six (6) months on a loan whose principal is P1,000,000.00, for the
total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in
estoppel, barring them from raising their present defenses against a 4% per month
interest after the six-month period of the agreement. The board resolution, 45 on the
other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest
of not more than 4%. This resolution merely embodies the extent of Pantaleon's
authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil
of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where
a corporation is essentially a farce, since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. 46 In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. 47
In the present case, we see no competent and convincing evidence of any wrongful,
fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil.
While Pantaleon denied personal liability in his Answer, he made himself accountable
in the promissory note "in his personal capacity and as authorized by the Board
Resolution" of PRISMA. 48 With this statement of personal liability and in the absence
of any representation on the part of PRISMA that the obligation is all its own because
of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the
Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The
petitioners' loan of P1,000,000.00 shall bear interest of P40,000.00 per month for six
(6) months from December 8, 1993 as indicated in the promissory note. Any portion of
this loan, unpaid as of the end of the six-month payment period, shall thereafter bear
interest at 12% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at 12% per annum from the finality of this Decision. Let
this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the
proper computation of the amount due as herein directed, with due regard to the
payments the petitioners have already remitted. Costs against the
respondent. HEcTAI
SO ORDERED.
Nachura, * Del Castillo, Abad and Perez, JJ., concur.
||| (Prisma Construction & Development Corporation v. Menchavez, G.R. No. 160545,
[March 9, 2010], 628 PHIL 495-508)
Page 68 of 505

CHICO-NAZARIO, J p:
Before Us is a Petition 1 for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision, 2 dated 16 December 2005, and
Resolution, 3dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814,
which affirmed in toto the Decision, 4 dated 26 January 2001, of the Las Pias City
Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money
against petitioner Sebastian Siga-an before the Las Pias City Regional Trial Court
(RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to
the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while
petitioner was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the
PNO and offered to loan her the amount of P540,000.00. Since she needed capital for
her business transactions with the PNO, she accepted petitioner's proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan. 6 IaDTES

THIRD DIVISION
[G.R. No. 173227. January 20, 2009.]
SEBASTIAN SIGA-AN, petitioner, vs. ALICIA VILLANUEVA, respondent.

DECISION

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as


partial payment of the loan. On 31 October 1993, she issued another check in the
amount of P200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of P700,000.00 for the
P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. As all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO, and fearing that petitioner might block or unduly influence the payment of
her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt for the payments
but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00. 7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest
on the loan despite absence of agreement to that effect. Her lawyer told her that
Page 69 of 505

petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she sent
a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement. 8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorney's fees. 9
In his answer 10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with the
PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full. 11 jur2005
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan. Later,
respondent requested him to restructure the payment of the loan because she could
not give full payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a promissory note wherein
she would acknowledge her obligation to him, inclusive of interest, and that she would
issue several postdated checks to guarantee the payment of her obligation. Upon his
approval of respondent's request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an
amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay
said amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do
so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC). 12

Petitioner insisted that there was no overpayment because respondent admitted in the
latter's promissory note that her monetary obligation as of 12 September 1994
amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the loan
was given interest-free. Based on the foregoing averments, he asked the RTC to
dismiss respondent's complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should
refund the excess amount to the former. It ratiocinated that respondent's obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondent's total monetary debt
because there was no agreement between them regarding payment of interest. It
concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti. 13 HEIcDT
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus
attorney's fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is
paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as
exemplary damages; CcAESI
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
P660,000.00 as attorney's fees; and
Page 70 of 505

(5) Ordering defendant to pay the costs of suit. 14


Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate
court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby
DENIED and the assailed decision [is] AFFIRMED in toto. 15
Petitioner filed a motion for reconsideration of the appellate court's decision but this
was denied. 16 Hence, petitioner lodged the instant petition before us assigning the
following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER; aHcDEC
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI. 17
Interest is a compensation fixed by the parties for the use or forbearance of money.
This is referred to as monetary interest. Interest may also be imposed by law or by
courts as penalty or indemnity for damages. This is called compensatory
interest. 18 The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded. 19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary interest
is allowed only if: (1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence
of the two conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is prohibited by
law. 21
It appears that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that although she accepted
petitioner's offer of loan amounting to P540,000.00, there was, nonetheless, no verbal
or written agreement for her to pay interest on the loan. 22

Petitioner presented a handwritten promissory note dated 12 September


1994 23 wherein respondent purportedly admitted owing petitioner "capital and
interest". Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO; that petitioner threatened to disapprove her transactions with the PNO if she
would not pay interest; that being unaware of the law on interest and fearing that
petitioner would make good of his threats if she would not obey his instruction to copy
the promissory note, she copied the promissory note in her own handwriting; and that
such was the same promissory note presented by petitioner as alleged proof of their
written agreement on interest. 24 Petitioner did not rebut the foregoing testimony. It is
evident that respondent did not really consent to the payment of interest for the loan
and that she was merely tricked and coerced by petitioner to pay interest. Hence, it
cannot be gainfully said that such promissory note pertains to an express stipulation
of interest or written agreement of interest on the loan between petitioner and
respondent. cCTAIE
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that
he and respondent agreed on the payment of 7% rate of interest on the loan; that the
agreed 7% rate of interest was duly admitted by respondent in her testimony in
the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such
judicial admission by respondent, the RTC and the Court of Appeals, citing Article
1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed
upon as in the present case; and that it would be unfair to allow respondent to pay
only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not make a
ruling therein that petitioner and respondent agreed on the payment of interest at the
rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest thereon. 26 While the Court of
Appeals mentioned in its Decision that it concurred in the RTC's ruling that petitioner
and respondent agreed on a certain rate of interest as regards the loan, we consider
this as merely an inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of interest on the
Page 71 of 505

loan. The rule is that factual findings of the trial court deserve great weight and
respect especially when affirmed by the appellate court. 27 We found no compelling
reason to disturb the ruling of both courts.
Petitioner's reliance on respondent's alleged admission in the Batas Pambansa Blg.
22 cases that they had agreed on the payment of interest at the rate of 7% deserves
scant consideration. In the said case, respondent merely testified that after paying the
total amount of loan, petitioner ordered her to pay interest. 28 Respondent did not
categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at the rate of 7%. As
earlier discussed, monetary interest is due only if there was an express stipulation in
writing for the payment of interest. cSTCDA
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article 2209 of the
Civil Code states that if the obligation consists in the payment of a sum of money, and
the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, 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
on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest. 29 The case at bar
involves petitioner's claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan. Also, as earlier
found, no interest was due on the loan because there was no written agreement as
regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerningsolutio
indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it

arises. In such a case, a creditor-debtor relationship is created under a quasi-contract


whereby the payor becomes the creditor who then has the right to demand the return
of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
the expense of another. 31 The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the payor, who has
no duty to pay, and the person who received the payment; and (2) the payment is
made through mistake, and not through liberality or some other cause. 32 We have
held that the principle of solutio indebiti applies in case of erroneous payment of
undue interest. 33 IcCATD
It was duly established that respondent paid interest to petitioner. Respondent was
under no duty to make such payment because there was no express stipulation in
writing to that effect. There was no binding relation between petitioner and respondent
as regards the payment of interest. The payment was clearly a mistake. Since
petitioner received something when there was no right to demand it, he has an
obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed
by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner. 34 Respondent issued two checks with a total worth of P700,000.00 in
favor of petitioner as payment of the loan. 35 These checks were subsequently
encashed by petitioner. 36 Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two checks,
respondent also paid cash in the total amount of P175,000.00 to petitioner as
interest. 37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his
Reply-Affidavit 38 in the Batas Pambansa Blg. 22 cases that respondent paid him a
total amount of P175,000.00 cash in addition to the two checks. Section 26, Rule 130
of the Rules of Evidence provides that the declaration of a party as to a relevant fact
may be given in evidence against him. Aside from the amounts of P160,000.00 and
P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled
to payment of interest and that the principle of solutio indebiti applies to the instant
case, petitioner should return to respondent the excess amount of P160,000.00 and
P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable
Page 72 of 505

amount to respondent fixed by the RTC and the Court of Appeals should be reduced
from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found respondent
guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to
petitioner. Nonetheless, respondent's conviction therein does not affect our ruling in
the instant case. The two checks, subject matter of this case, totaling P700,000.00
which respondent claimed as payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason
of the interest which the latter paid to petitioner. 39
Article 2217 of the Civil Code provides that moral damages may be recovered if the
party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. Respondent testified that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals,
is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate that it was the result of
prejudice or corruption on the part of the trial court. 40 To our mind, the amount of
P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent. SACHcD

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an oppressive
manner. Petitioner acted oppressively when he pestered respondent to pay interest
and threatened to block her transactions with the PNO if she would not pay interest.
This forced respondent to pay interest despite lack of agreement thereto. Thus, the
award of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and
other lenders from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney's fees, the trial court must state the
factual, legal or equitable justification for awarding the same. 42 In the case under

consideration, the RTC stated in its Decision that the award of attorney's fees
equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondent's
lawyer in the instant case and the fact that it dragged on for several years. 43 Further,
respondent testified that she agreed to compensate her lawyer handling the instant
case such amount. 44 The award, therefore, of attorney's fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment.
This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that 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 rate of 6% per annum. We
further declared that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of
credit. aCTcDS
In the present case, petitioner's obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the damages
awarded and on the attorney's fees, to be computed from the time of the extra-judicial
demand on 3 March 1998, 46 up to the finality of this Decision. In addition, the interest
shall become 12% per annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated
16 December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the
amount of P660,000.00 as refundable amount of interest is reduced to THREE
HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of
P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorney's fees to be computed
from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of
this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Leonardo-de Castro, * JJ., concur.
Page 73 of 505

||| (Siga-an v. Villanueva, G.R. No. 173227, [January 20, 2009], 596 PHIL 760-777)

deficiency expanded withholding tax in the amount of P4,897.79, inclusive of


surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR's disallowance of ICC's claimed expense deductions
for professional and security services billed to and paid by ICC in
1986, to wit:
(a) Expenses for the auditing services of SGV &
Co., 3 for the year ending December 31, 1985; 4

THIRD DIVISION
[G.R. No. 172231. February 12, 2007.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
ISABELA CULTURAL CORPORATION, respondent.

(b) Expenses for the legal services [inclusive of retainer


fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and
1985. 5
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May
1986. 6
(2) The alleged understatement of ICC's interest income on the
three promissory notes due from Realty Investment, Inc.

DECISION

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and


surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services. 7

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision 1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February
26, 2003 Decision 2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On


February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to the
CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was
reversed by the Court of Appeals holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210. 8 The case was thus
remanded to the CTA for further proceedings. aEHASI

YNARES-SANTIAGO, J p:

The facts show that on February 23, 1990, ICC, a domestic corporation, received from
the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the
amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for

On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC. Hence,
Page 74 of 505

even if some of these professional services were rendered to ICC in 1984 or 1985, it
could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation in
the contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded
interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTA's
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice
No. FAS-1-86-90-000680 for deficiency income tax in the amount
of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of
P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED. 9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision, 10 holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said services. It further ruled that
ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for
the professional services that accrued in 1984 and 1985, should have been declared
as deductions from income during the said years and the failure of ICC to do so bars it
from claiming said expenses as deduction for the taxable year 1986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax

assessment, petitioner invoked the presumption that the assessment notices issued
by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICC's gross
income; and (2) held that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services. DICSaH
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers. 11
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: "[t]he deduction provided for in this Title shall be taken for the taxable year
in which 'paid or accrued' or 'paid or incurred', dependent upon the method of
accounting upon the basis of which the net income is computed . . .".
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions. 12 In the instant case, the accounting
method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year. 13
The accrual method relies upon the taxpayer's right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
Page 75 of 505

or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the taxable year. The amount
of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount. 15
The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year. 16 Accrual method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of proof of establishing the
accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. And since a deduction for
income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed. 18

In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection
with ICC's tax problems for the year 1984. As testified by the Treasurer of ICC, the
firm has been its counsel since the 1960's. 19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm as well as
the compensation for its legal services. The failure to determine the exact amount of
the expense during the taxable year when they could have been claimed as

deductions cannot thus be attributed solely to the delayed billing of these liabilities by
the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method
of accounting. For another, it could have reasonably determined the amount of legal
and retainer fees owing to its familiarity with the rates charged by their long time legal
consultant. aASEcH
As previously stated, the accrual method presents largely a question of fact and that
the taxpayer bears the burden of establishing the accrual of an expense or income.
However, ICC failed to discharge this burden. As to when the firm's performance of its
services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established.
It simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions
in 1986. This is so because ICC failed to present evidence showing that even with
only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in
the year 1985, it cannot determine the professional fees which said company would
charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 1986 20 and could therefore be properly claimed as deductions for
the said year.
Anent the purported understatement of interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not
a compounded one should have been applied by the BIR. There is indeed no
stipulation between the latter and ICC on the application of compounded

Page 76 of 505

interest. 21 Under Article 1959 of the Civil Code, unless there is a stipulation to the
contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the
required withholding tax from its claimed deductions for security services and remitted
the same to the BIR is supported by payment order and confirmation
receipts. 22 Hence, the Assessment Notice for deficiency expanded withholding tax
was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86
for deficiency income tax should be cancelled and set aside but only insofar as the
claimed deductions of ICC for security services. Said Assessment is valid as to the
BIR's disallowance of ICC's expenses for professional services. The Court of Appeal's
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of
P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of
SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation's
liability under Assessment Notice No. FAS-1-86-90-000680. SAHIDc
SO ORDERED.

SECOND DIVISION

Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

[G.R. Nos. 150773 & 153599. September 30, 2005.]

Nachura, J., is on leave.


||| (Commissioner of Internal Revenue v. Isabela Cultural Corp., G.R. No. 172231,
[February 12, 2007], 544 PHIL 488-499)

SPOUSES DAVID B. CARPO and RECHILDA S.


CARPO, petitioners, vs. ELEANOR CHUA and ELMA DY
NG, respondents.

DECISION

TINGA, J p:
Page 77 of 505

Before this Court are two consolidated petitions for review. The first, docketed as G.R.
No. 150773, assails the Decision 1 of the Regional Trial Court (RTC), Branch 26 of
Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint 2 for annulment of real estate mortgage and
consequent foreclosure proceedings filed by the spouses David B. Carpo and
Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals' Decision 3 dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of
Appeals Third Division annulled and set aside the orders of Judge Corazon A. Tordilla
to suspend the sheriff's enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT)
No. 23180. Petitioners failed to pay the loan upon demand. Consequently, the real
estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to respondents, who
were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four
Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale
was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was
cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and
lot, prompting respondents to file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order 4 for the issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage
and the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of
the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand
One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the
RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion
on 3 August 1999, enjoining the enforcement of the writ of possession. In
anOrder 5 dated 6 January 2000, the RTC suspended the enforcement of the writ of

possession pending the final disposition of Civil Case No. 99-4376. Against
this Order, respondents filed a petition for certiorari and mandamus before the Court
of Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it
was filed out of time and barred by laches. The RTC proceeded from the premise that
the complaint was one for annulment of a voidable contract and thus barred by the
four-year prescriptive period. Hence, the first petition for review now under
consideration was filed with this Court, assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on
30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the
ground that it was the ministerial duty of the lower court to issue the writ of possession
when title over the mortgaged property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Court's ruling in Medel v.
Court of Appeals 6 the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while petitioners
were silent in their petition on the issues of prescription and laches on which the RTC
grounded the dismissal of the complaint, they belatedly raised the matters in
theirMemorandum. Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit
any grave abuse of discretion when it issued the orders dated 3 August 1999 and 6
January 2000, and that these orders could not have been "the proper subjects of a
petition for certiorari and mandamus". More accurately, the justiciable issues before
us are whether the Court of Appeals could properly entertain the petition
for certiorari from the timeliness aspect, and whether the appellate court correctly
concluded that the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should have
been declared null and void. Instead of dismissing their complaint, they aver that the
lower court should have declared them liable to respondents for the original amount of
the loan plus 12% interest per annum and 1% monthly penalty charge as liquidated
damages, 7 in view of the ruling in Medel v. Court of Appeals. 8
Page 78 of 505

In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note
iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law. The stipulation is
void. The Court shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable. 9
In a long line of cases, this Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar, 10 we annulled the stipulation of 6% per month or 72% per annum interest
on a P60,000.00 loan. In Imperial v. Jaucian, 11 we reduced the interest rate from
16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals, 12 we
equitably reduced the agreed 3% per month or 36% per annum interest to 1% per
month or 12% per annum interest. The 10% and 8% interest rates per month on a
P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud. 13 Recently,
this Court, in Arrofo v. Quino, 14 reduced the 7% interest per month on a P15,000.00
loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy. In the ordinary course, the codal provision may be invoked to annul the
excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid.
However, the RTC refused to apply the principle cited and employed in Medel on the
ground that Medel did not pertain to the annulment of a real estate mortgage, 15 as it
was a case for annulment of the loan contract itself. The question thus sensibly arises
whether the invalidity of the stipulation on interest carries with it the invalidity of the
principal obligation.
The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of

the mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. Being a
mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it. 16
Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court in Solangon,
Imperial, Ruiz, Cuaton, and Arrofo.
The Court's ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity but
defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
interest.17 However, this Court adopted the contrary rule, as comprehensively
discussed in Briones v. Cammayo: 18
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court
likewise declared that, in any event, the debtor in a usurious
contract of loan should pay the creditor the amount which he
justly owes him, citing in support of this ruling its previous
decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil.
570, and Delgado vs. Duque Valgona, 44 Phil. 739.

xxx xxx xxx


Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249,
We also held that the standing jurisprudence of this Court on the
question under consideration was clearly to the effect that
the Usury Law, by its letter and spirit, did not deprive the lender of
his right to recover from the borrower the money actually loaned
to and enjoyed by the latter. This Court went further to say that
the Usury Law did not provide for the forfeiture of the capital in
favor of the debtor in usurious contracts, and that while the
forfeiture might appear to be convenient as a drastic measure to
Page 79 of 505

eradicate the evil of usury, the legal question involved should not
be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio,
97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964,
10 SCRA 199, 200-202. In the latter We expressly held that when
a contract is found to be tainted with usury "the only right of the
respondent (creditor) . . . was merely to collect the amount of the
loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus
consistently adhered to should now be abandoned because
Article 1957 of the new Civil Code a subsequent law
provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury,
shall be void, and that in such cases "the borrower may recover
in accordance with the laws on usury." From this the conclusion is
drawn that the whole contract is void and that, therefore, the
creditor has no right to recover not even his capital.
The meaning and scope of our ruling in the cases mentioned
heretofore is clearly stated, and the view referred to in the
preceding paragraph is adequately answered, in Angel Jose, etc.
vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the
question of whether a creditor in a usurious contract may or may
not recover the principal of the loan, and, in the affirmative,
whether or not he may also recover interest thereon at the legal
rate, We said the following:
"xxx xxx xxx
Appealing directly to Us, defendants raise two questions
of law: (1) In a loan with usurious interest, may the
creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the
New Civil Code . . . .
Since, according to the appellants, a usurious loan is
void due to illegality of cause or object, the rule of pari
delicto expressed in Article 1411, supra, applies, so that

neither party can bring action against each other. Said


rule, however, appellants add, is modified as to the
borrower, by express provision of the law (Art. 1413,
New Civil Code), allowing the borrower to recover
interest paid in excess of the interest allowed by
the Usury Law. As to the lender, no exception is made to
the rule; hence, he cannot recover on the contract. So
they continue the New Civil Code provisions must
be upheld as against the Usury Law, under which a loan
with usurious interest is not totally void, because of
Article 1961 of the New Civil Code, that: "Usurious
contracts shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent with this
Code." HEcSDa
We do not agree with such reasoning. Article 1411 of
the New Civil Code is not new; it is the same as Article
1305 of the Old Civil Code. Therefore, said provision is
no warrant for departing from previous interpretation
that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally
void only as to the interest.
. . . [a]ppellants fail to consider that a contract of
loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay
the debt; the accessory stipulation is to pay interest
thereon.
And said two stipulations are divisible in the sense
that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The
renunciation of the principal debt shall extinguish
the accessory obligations; but the waiver of the
latter shall leave the former in force."
The question therefore to resolve is whether the
illegal terms as to payment of interest likewise
renders a nullity the legal terms as to payments of
the principal debt. Article 1420 of the New Civil
Code provides in this regard: "In case of a divisible
Page 80 of 505

contract, if the illegal terms can be separated from


the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest,
the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article
1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only
should be deemed void, since it is the only one that
is illegal.
xxx xxx xxx
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial
action. And in case of such demand, and the debtor
incurs in delay, the debt earns interest from the date of
the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to
the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code). The
court a quo therefore, did not err in ordering defendants
to pay the principal debt with interest thereon at the legal
rate, from the date of filing of the complaint." 19
The Court's wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited
above, in all of which the main obligation was upheld and the offending interest rate
merely corrected. Hence, it is clear and settled that the principal loan obligation still
stands and remains valid. By the same token, since the mortgage contract derives its
vitality from the validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage contract. cTaDHS
It should be noted that had the Court declared the loan and mortgage agreements
void for being contrary to public policy, no prescriptive period could have run. 20 Such
benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts.

This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.
There is ultimately no showing that petitioners' consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners
may have motivated them to contract with respondents, but undue influence cannot
be attributed to respondents simply because they had lent money. Article 1391, in
relation to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain
the annulment of contract on account of factors which vitiate consent. Article 1337
defines the concept of undue influence, as follows:
There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties or the fact that
the person alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial distress.
While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than
his own. 21 The alleged lingering financial woes of petitioners per se cannot be
equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing
the validity of the real estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the agreement, they should have raised
this issue as early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in the loan contract in
their action for annulment of mortgage. Evidently, petitioners slept on their rights. The
Court of Appeals succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by
the issuance of a provisional certificate of sale; then the definite
certificate of sale; then the issuance of TCT No. 29338 in favor of
the defendants and finally the petition for the issuance of the writ
Page 81 of 505

of possession in favor of the defendants, there is no showing that


plaintiffs questioned the validity of these proceedings. It was only
after the issuance of the writ of possession in favor of the
defendants, that plaintiffs allegedly tendered to the defendants
the amount of P260,000.00 which the defendants refused. In all
these proceedings, why did plaintiffs sleep on their rights? 22
Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity of
the mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted.

We now resolve the petition in G.R. No. 153599.


Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action
for certiorari andmandamus as the reglementary period for such action had already
elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of
the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)day period, the said Order became functus officio. Thus, there is really no sense in
assailing the validity of this Order, mooted as it was. For the same reason, the validity
of the order need not have been assailed by respondents in their special civil action
before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature. ICAcHE
As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order. 23 Petitioners argue that the
3 August 1999 Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was filed beyond sixty
(60) days following respondents' receipt of the Order. Considering that the 3 August
1999 Order had become functus officio in the first place, this argument deserves
scant consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise been
the subject of a special civil action for certiorari, as it is according to them a final
order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its effects
would only be provisional in character and would still leave substantial proceedings to
be further had by the issuing court in order to put the controversy to rest. 24 The
injunctive relief granted by the order is definitely final, but merely provisional, its
effectivity hinging on the ultimate outcome of the then pending action for annulment of
real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or
disposes of, a case or a disputed issue leaving nothing else to be done by the court in
respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature,
we cannot agree with petitioners who insist that it may be assailed only through an
appeal perfected within fifteen (15) days from receipt thereof by respondents. It is
axiomatic that an interlocutory order cannot be challenged by an appeal, but is
susceptible to review only through the special civil action of certiorari. 25 The sixty
(60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents' petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition
for certiorari and mandamus. As pointed out by respondents, the remedy
ofmandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial
function. 26
Thus, we also affirm the Court of Appeals' ruling to set aside the RTC orders enjoining
the enforcement of the writ of possession. 27 The purchaser in a foreclosure sale is
entitled as a matter of right to a writ of possession, regardless of whether or not there
is a pending suit for annulment of the mortgage or the foreclosure proceedings. An
injunction to prohibit the issuance or enforcement of the writ is entirely out of place. 28
One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may be void for being contrary
to public policy, an action to annul said interest rate does not prescribe. Such indeed
is the remedy; it is not the action for annulment of the ancillary real estate mortgage.
Despite the nullity of the stipulated interest rate, the principal loan obligation subsists,
and along with it the mortgage that serves as collateral security for it. IEcDCa

Page 82 of 505

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
||| (Spouses Carpo v. Chua, G.R. Nos. 150773 & 153599, [September 30, 2005], 508
PHIL 462-478)

DECISION

REGALADO, J p:
Before us is a petition seeking the amendment and modification of the dispositive
portion of respondent court's decision in CA-G.R. No. SP-09331, 1 allegedly to make
it conform with the findings, arguments and observations embodied in said decision,
which relief was denied by respondent court in its resolution, dated January 15,
1980, 2 rejecting petitioner's ex parte motion filed for that purpose. 3
While not involving the main issues in the case threshed out in the court a quo, the
judgment in which had already become final and executory, the factual backdrop of
the present petition is summarized by respondent court as follows:

SECOND DIVISION
[G.R. No. L-52482. February 23, 1990.]
SENTINEL INSURANCE CO., INC., petitioner, vs. THE HONORABLE
COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME,
Presiding Judge, Court of First Instance of Rizal, Seventh Judicial
District, Branch XV, THE PROVINCIAL SHERIFF OF RIZAL, and
ROSE INDUSTRIES, INC., respondents.

Jesus I. Santos Law Office for petitioner.


Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private
respondent.

"Petitioner Sentinel Insurance Co., Inc., was the surety in a


contract of suretyship entered into on November 15, 1974 with
Nemesio Azcueta, Sr., who is doing business under the name
and style of 'Malayan Trading' as reflected in SICO Bond No.
G(16)00278 where both of them bound themselves, 'jointly and
severally, to fully and religiously guarantee the compliance with
the terms and stipulations of the credit line granted by private
respondent Rose Industries, Inc., in favor of Nemesio Azcueta,
Sr., in the amount of P180,00.00.' Between November 23 to
December 23, 1974, Azcueta made various purchases of tires,
batteries and tire tubes from the private respondent but failed to
pay therefor, prompting the latter to demand payment but
because Azcueta failed to settle his accounts, the case was
referred to the Insurance Commissioner who invited the attention
of the petitioner on the matter and the latter cancelled the
Suretyship Agreement on May 13, 1975 with due notice to the
private respondent. Meanwhile, private respondent filed with the
respondent court of Makati a complaint for collection of sum of
money against herein petitioner and Azcueta, docketed as Civil
Case No. 21248 alleging the foregoing antecedents end praying
that said defendants be ordered to pay jointly and severally unto
the plaintiff:

Page 83 of 505

a) The amount of P198,602.41 as its


principal obligation, including interest and damage
dues as of April 29, 1975;
b) To pay interest at 14% per annum and
damage dues at the rate of 2% every 45 days
commencing from April 30, 1976 up to the time the
full amount is fully paid:
xxx xxx xxx
"After petitioner filed its answer with counterclaim, the case, upon
agreement of the parties, was submitted for summary judgment
and on December 29, 1975, respondent court rendered its
decision with the following dispositive portion:
'xxx xxx xxx
a) To pay interest on the principal obligation at the rate of 14%
per annum at the rate of 2% every 45 days commencing from
April 30, 1975 until the amount is fully paid.'
"The decision having become final and executory, the prevailing
party moved for its execution which respondent judge granted
and pursuant thereto, a notice of attachment and levy was served
by respondent Provincial Sheriff upon the petitioner. On the same
day, however, the latter filed a motion for 'clarification of the
judgment as to its real and true import because on its face, it
would appear that aside from the 14% interest imposed on the
principal obligation, an additional 2% every 45 days
corresponding to the additional penalty has been imposed
against the petitioner which imposition would be usurious and
could not have been the intention of respondent Judge.' But the
move did nor prosper because on May 22, 1971, the judge
denied the motion on the theory that the judgment, having
become final and executory, it can no longer be amended or
corrected." 4
Contending that the order was issued with grave abuse of discretion, petitioner went
to respondent court on a petition for certiorari and mandamus to compel the court
below to clarify its decision, particularly Paragraph 1(a) of the dispositive portion
thereof.

Respondent court granted the petition in its decision dated December 3, 1979, the
disquisition and dispositive portion whereof read:
"While it is an elementary rule of procedure that after a decision,
order or ruling has become final, the court loses its jurisdiction
over the same and can no longer be subjected to any
modification or alteration, it is likewise well-settled that courts are
empowered even after such finality, to correct clerical errors or
mistakes in the decisions (Potenciano vs. CA, L-11569, 55 O.G.
2895). A clerical error is 'one that is visible to the eyes or obvious
to the understanding' (Black vs. Republic, 104 Phil. 849).
"That there was a mistake in the dispositive portion of the
decision cannot be denied considering that in the complaint filed
against the petitioner, the prayer as specifically stated in
paragraph (b) was to 'order the latter to pay interest at 14% per
annum and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the amount is
fully paid.' But this notwithstanding the respondent court in its
questioned decision decreed the petitioner 'to pay the interest on
the principal obligation at the rate of 14% per annum and 2%
every 45 days commencing from April 30, 1975 until the amount
is fully paid,' so that, as petitioner correctly observes, it would
appear that on top of the 14% per annum on the principal
obligation, another 2% interest every 45 days commencing from
April 30, 1975 until the amount is fully paid has been imposed
against him (petitioner). In other words, 365 days in one year
divided by 45 days equals 8-1/9 which, multiplied by 2% as
ordered by respondent judge would amount to a little more than
16%. Adding 16% per annum to the 14% interest imposed on the
principal obligation would be 30% which is veritably usurious and
this cannot be countenanced, much less sanctioned by any court
of justice.
"We agree with this observation and what is more, it is likewise a
settled rule that although a court may grant any relief allowed by
law, such prerogative is delimited by the cardinal principle that it
cannot grant anything more than what is prayed for, for certainly,
the relief to be dispensed cannot rise above its source.
(Potenciano vs. CA, supra.)
Page 84 of 505

"WHEREFORE, the writ of certiorari is hereby granted and the


respondent judge is ordered to clarify its judgment complained of
in the following manner:

decision) would be usurious is a sound observation. It should, however, be stressed


that such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.

xxx xxx xxx


a) to pay interest at 14% per annum on the
principal obligation and damage dues at the rate of
2% every 45 days commencing from April 30, 1975
up to the time the full amount is fully paid;" 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the abovequoted decretal portion which respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said
decision would conform with the body thereof, is the sole issue for resolution by the
Court. Petitioner itself cites authorities in support of its contention that it is entitled to a
correct and clear expression of a judgment to avoid substantial injustice. 6 In
amplification of its plaint, petitioner further asseverates that respondent court should
not have made an award for "damage dues" at such late stage of the proceeding
since said dues were not the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort
to the pleadings filed by the parties, the findings of fact and the conclusions of law
expressed in the text or body of the decision. 8
Indeed, this was what respondent court did in resolving the original petition. It
examined the complaint filed against the petitioner and noted that the prayer as stated
in Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and
damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to
the time the full amount is fully paid." 9
Insofar as the findings and the dispositive portion set forth in respondent court's
decision are concerned, there is really no inconsistency as wittingly or unwittingly
asserted by petitioner.
The findings made by respondent court did not actually nullify the judgment of the trial
court. More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, 1975 on top of the 14% per annum (as would be the
impression from a superficial reading of the dispositive portion of the trial court's

Certainly, the damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are distinct claims
which may be demanded separately, in the same manner that commissions, fines and
penalties are excluded in the computation of interest where the loan or forbearance is
not secured in whole or in part by real estate or an interest therein. 10
While interest forms part of the consideration of the contract itself, damage dues
(penalties, and so forth) are usually made payable only in case of default or nonperformance of the contract. 11 Also, although interest is subject to the provisions of
the Usury Law, 12 there is no policy or provision in such law preventing the
enforcement of damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in appending the
award of damage dues to the judgment of the trial court should be rejected. As
correctly pointed out by private respondent, the opening sentence of Paragraph 1(a)
of the dispositive portion of the lower court's decision explicitly ordered petitioner to
pay private respondent "the amount of P198,602.41 as principal obligation including
interest and damage dues," which is a clear and unequivocal indication of the lower
court's intent to award both interest and damage dues. 13
Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage dues. 14 As ramified by
private respondent:
"2. . . . the then counsel of record for the petitioner, Atty. Porfirio
Bautista, and Atty. Teodulfo L. Reyes, petitioner's Assistant VicePresident for Operations, had a conference with the undersigned
attorneys as to how petitioner will settle its account to avoid
execution. During the conference, both parties arrived at almost
the same computation and the amount due from petitioner, which
includes 2% damage dues every 45 days from 30 April 1975 until
the amount is fully paid, under the judgment. No question was
ever raised as regards same.
Page 85 of 505

xxx xxx xxx


"5. The very face of Annex 'D' shows that the '2%' damage dues
being questioned by the present counsel of petitioner had been
mentioned no less than TEN (10) TIMES and was clearly and
distinctly defined by petitioner and included in the computation of
its obligation to herein petitioner as '2% penalty for every 45
days.'
xxx xxx xxx
"Petitioner's pretense that it was not the intent of the court to
award the damage dues of 2% every 45 days commencing 30
April 1975 is belied by the fact (and this is admitted by petitioner)
that upon agreement of the parties, the case before the lower
court was submitted for summary judgment; in other words, the
case was submitted upon the facts as appear in the pleadings
with no other evidence presented and a fact that appears clearly
in the pleadings is that the defendants in the case before the
lower court were under contract to pay private respondent,
among others, the damage dues of 2% every 45 days
commencing on 30 April 1975 until the obligation is fully
paid; . . ." 15
Respondent court demonstrably did not err in ordering the clarification of the decision
of the trial court by amending the questioned part of its dispositive portion to include
therein the phrase "damage dues" to modify the stated rate of 2%, and thereby
obviate any misconception that it is being imposed as interest. LLpr
ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of
Appeals is hereby AFFIRMED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
||| (Sentinel Insurance Co., Inc. v. Court of Appeals, G.R. No. L-52482, [February 23,
1990], 261 PHIL 640-648)

FIRST DIVISION
[G.R. Nos. 43697 & 44200. March 31, 1938.]
In re Liquidation of the Mercantile Bank of China. GOPOCO
GROCERY
(GOPOCO)
ET
AL., claimantsappellants, vs. PACIFIC
COAST
BISCUIT
CO.
ET
AL.,oppositors-appellees.

Page 86 of 505

A. M. Zarate for appellants Gopoco Grocery et al.


Laurel, Del Rosario & Sabido for appellant Tiong Chui Gion.
Ross, Lawrence & Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese
Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.

II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48
plus P460. It describe its claim as follows:
Balance
check P4,927.95

due

on

open

account

subject

to

Interest on c/a .4.53


_________
4,932.48
Surety deposit 460.00

DECISION

DIAZ, J p:
On petition of the Bank Commissioner who alleged to have found, after
an investigation, that the Mercantile Bank of China could not continue operating
as such without running the risk of suffering losses and prejudicing its depositors
and customers; and that with the requisite approval of the corresponding
authorities, he had taken charge of all the assets thereof; the Court of First
Instance of Manila declared the said bank in liquidation; approved all the acts
theretofore executed by the commissioner; prohibited the officers and agents of
the bank from interfering with said commissioner in the possession of the assets
thereof, its documents, deeds, vouchers, books of account, papers,
memorandums, notes, bonds, bonds and accounts, obligations or securities and
its real and personal properties; required its creditors and all those who had any
claim against it, to present the same in writing before the commissioner within
ninety days; and ordered the publication, as was in fact done, of the order
containing all these provisions, for two consecutive weeks in two newspapers of
general circulation in the City of Manila, at the expense of the aforesaid bank.
After these publications, and within the period of ninety days, the following
creditors, among others, presented their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy
Guan Huat, and La Bella Tondea.
I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged
that he deposited said sum in the bank under liquidation on current account.

III. The claim of Tan Locko is for the sum of P7,624.20, and he
describes it in turn as follows:
Balance due on open account subject to check L759 P7,610.44
Savings account No. 156 (foreign) with Mercantile Bank
of China L-1611 Amoy $16,000.00
Interest on said Savings Account No. 156 3.22
Interest on checking a/c 10.54
_________
7,624.20
IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set
out in its written claim appearing in the record of appeal as follows:
Balance due on open account subject to check L845 P6,961.01
Interest on checking a/c 11.87
_________
6,972.88
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and he
describes it as follows:
Balance due on open account subject to check L718 P6,224.34
Page 87 of 505

Interest on checking a/c 8.54

$565.40 including interest and other expenses, the amount of two drafts drawn
upon and accepted by it.

_________
6,232.88
VI. The claim of La Bella Tondea is for the sum of P1,912.79, also
described as follows;
Balance
check P1,910.59

due

on

open

account

subject

to

Interest on account 2.20


_________
1,912.79
To better resolve not only these claims but also the many others which
were presented against the bank, the lower court, on July 15, 1932, appointed
Fulgencio Borromeo as commissioner and referee to receive the evidence which
the interested parties may desire to present; and the commissioner and referee
thus named, after qualifying for the office and receiving the evidence presented to
him, resolved the aforesaid six claims by recommending that the same be
considered as an ordinary credit only, and not as a preferred credit as the
interested parties wanted, because they were at the same time debtors of the
bank.
The evidence adduced and the very admissions of the said interested
parties in fact show that (a) the claimant Tiong Chui Gion, while he was a creditor
of the Mercantile Bank of China in the sum of P10,285.27 which he deposited on
current account, was also a debtor not only in the sum of P633.76 but also in the
sum of P664.77, the amount of a draft which he accepted, plus interest thereon
and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco)
had a current account in the bank n the sum of P5,392.48, but it is indebted to it,
in turn the sum of $2,334.80, the amount of certain drafts which it had accepted;
(c) the claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90,
the amount of a draft which he also accepted; (d) the claimant Woo & Lo & Co.
had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the
amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and
Siy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two
drafts accepted by them and already due; and (f) the claimant La Bella Tondea
had, in turn, a deposit of P1,912.79, but it was, in turn, indebted in the sum of

The lower court approved all the recommendations of the commissioner


and referee as to the claims of the six appellants-as follows: (1) To approve the
claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit, minus the
amount of the draft for P664.77; (2) to approve the claim of Gopoco Grocery
(Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee),
minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the
claim of Tan Locko but as an ordinary credit only P7,610.44 according to the
referee), deducting therefrom his obligation amounting to $1,378.90 or
P2,757.80; (4) to approve the claim of Woo & Lo & Co. but only as an ordinary
credit (P6,961.01 according to the referee), after deducting its obligation to the
bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan
Huat but only as an ordinary credit (P6,224.34 according to the referee), after
deducting his obligation amounting to $3,107.37 or P6,214.74; and, finally, (6) to
approve the claim of La Bella Tondea but also as an ordinary credit only
(P1,917.50 according to the referee), after deducting its obligation amounting to
$565.40 or P1,130.80; but he expressly refused to authorize the payment of
interest by reason of impossibility upon the grounds set out in the decision. Not
agreeable to the decision of the lower court, each of the interested parties
appealed therefrom and thereafter filed their respective briefs.
Tiong Chui Gion argues in his brief filed in case G. R. No. 44200, that
the lower court erred:
"1. In holding that his deposit of P10,285.27 in the
Mercantile Bank of China, constitutes an ordinary credit only and
not a preferred credit.
"2. In holding as preferred credits the drafts and checks
issued by the bank under liquidation in payment of the drafts
remitted to it for collection from merchants residing in the country,
by foreign entities or banks; and in not holding that the deposits
on current account in said bank should enjoy preference over
said drafts and checks; and

"3. In holding that the amount of P633.76 (which should


be understood as P664.77), which the claimant owes to the bank
under liquidation, be deducted from his current account deposit
therein, amounting to P10,285.27, upon the distribution of the
Page 88 of 505

assets of the bank among its various creditors, instead of holding


that, after deducting the aforesaid sum of P633.76 (should be
P664.77) from his aforesaid deposit, there be turned over to him
the balance together with the dividends or shares then
corresponding to him, on the basis of said amount."
The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo
& Co., Sy Guan Huat and La Bella Tondea, in turn, argue in the brief they jointly
filed in case G. R. No. 43697, that the lower court erred:
"1. In not first deducting from their respective deposits in
the bank under liquidation, whose payment they claim, their
respective obligations thereto.
"2. In not holding that their claims constitute a preferred
credit.
"3. In holding that the drafts and checks issued by the
bank under liquidation in payment of the drafts remitted to it by
foreign entities and banks for collection from the certain
merchants residing in the country, are preferred credits; and in
not holding that the deposits made by each of them enjoy
preference over said drafts and checks, and
"4. In denying their motion for a new trial based on the
proposition that the appealed decision is not in accordance with
law and is contrary to the evidence adduced at the trial."
The questions raised by the appellant in case G. R. No. 44200 and by
the appellants in case G. R. No. 43697 being identical in nature, we believe it
practical and proper to resolve said questions jointly in one decision. Before
proceeding, however, it is convenient to note that the commissioner and referee,
classifying the various claims presented against the bank, placed under one
group those partaking of the same nature, the classification having resulted in six
groups.
In the first group he included all the claims for current account, savings
and fixed deposits.
In the second group he included the claims for checks or drafts sold by
the bank under liquidation and not paid by the agents or banks in whose favor
they had been issued.
In the third group he included the claims for checks or drafts issued by
the bank under liquidation in payment or reimbursement of the drafts or goods

remitted to it for collection, from resident merchants and entities, by foreign banks
and entities.
In the fourth group he included the claims for drafts or securities to be
collected from resident merchants and entities which were pending collection on
the date payments were suspended.
In the fifth group he included the claims of certain depositors or creditors
of the bank who were at the same time debtors thereof; and he considered of this
class the claims of the appellants in these two cases, and.
In the sixth group he included the other claims different in nature from
that of the aforesaid five claims.
I. Now, then, should the appellants' deposits on current account in the
bank now under liquidation be considered preferred credits, and not otherwise, or
should they be considered ordinary credits only? The appellants contend that
they are preferred credits because they are deposits in contemplation of law, and
as such should be returned with the corresponding interest thereon. In support
thereof they cite Manresa (11 Manresa, Civil Code, page 663), and what has
been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing
the said commentator who maintains that, notwithstanding the provisions of
articles 1767 and 1768 and others of the aforesaid Code, from which it is inferred
that the so-called irregular deposits no longer exist, the fact is that said deposits
still exist. And they contend and argue that what they had in the bank should be
considered as of this character. But it happens that they themselves admit that
the bank had been paying them interest and that even now the bank owes them
interest which should have been paid to them before it was declared in a state of
liquidation. This fact undoubtedly destroys the character which they would
impress upon their deposits on current account, and nullifies their contention that
the same be considered as irregular deposits, because the payment of interest
only takes place in the case of loans. On the other hand, as we stated with
respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of
China, G. R. No. 43682), the provisions of the Code of Commerce, and not those
of the Civil Code, are, applicable to cases of the nature of those at bar, which
have to do with parties who are both merchants. (Articles 303 and 309, Code of
Commerce.) We there said, and it is not amiss to repeat now, that the so-called
current account and savings deposits have lost their character of deposits,
properly so-called, and are converted into simple commercial loans because, in
cases of such deposits, the bank has made use thereof in the ordinary course of
its transactions as an institution engaged in the banking business, not because it
so wishes, but precisely because of the authority deemed to have been granted
Page 89 of 505

to it by the appellants to enable them to collect the interest which they had been
and they are now collecting, and by virtue further of the authority granted to it by
section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos.
2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without
considering of course the provisions of article 1768 of the Civil Code. Wherefore,
it is held that the deposits on current account of the appellants in the bank under
liquidation, with the right on their part to collect interest, have not created and
could not create a juridical relation between them except that of creditors and
debtor, they being the creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the
appellants, the question raised in the first and second assigned errors of Tiong
Chui Gion in case G. R. No. 44200, and the appellants' second and third
assigned errors in case G. R. No. 43697.
II. As to the third and first errors attributed to the lower court by Tiong
Chui Gion in his case, and by the other appellants in theirs, respectively, it should
be stated that the question of set-off raised by them cannot be resolved except in
the same way that we resolved a like question in the said case, G. R. No. 436&2,
entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant."
It is proper that set-offs be made, inasmuch as the appellants and the bank being
reciprocally debtors and creditors, the same is only just and according to law (art.
1195, Civil Code), particularly as none of the appellants falls within the
exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956),
reading:
"SEC. 58. In all cases of mutual debts and mutual
credits between the parties, the account between them shall be
stated, and one debt set off against the other, and the balance
only shall be allowed and paid. But no set-off or counterclaim
shall be allowed of a claim in its nature not provable against the
estate: Provided, That no set-off or counterclaim shall be allowed
in favor of any debtor to the insolvent of a claim purchased by or
transferred to such debtor within thirty days immediately
preceding the filing, or after the filing of the petition by or against
the insolvent."
It has been said with much basis by Morse, in his work on Bank &
Banking (6th ed., vol. 1, pages 776 and 784) that:

"The rules of law as to the right of set-off between the


bank and its depositors are not different from those applicable to
other parties." (Page 776.)
"Where the bank itself stops payment and becomes
insolvent, the customer may avail himself in set-off against his
indebtedness to the bank of any indebtedness of the bank to
himself, as, for example, the balance due him on his deposit
account." (Page 784.)
But if set-offs are proper in these cases, when and how should they be
made, considering that the appellants ask for the payment of interest? Are they
by any chance entitled to interest? If they are, when and until what time should
they be paid the same?
The question of whether they are entitled to interest should be resolved
in the same way that we resolved the case of the claimant Tan Tiong Tick in the
said case, G. R. No. 43682. The circumstances in these two cases are certainly
the same as those in the said case with reference to the said question. the
Mercantile Bank of China owes to each of the appellants the interest claimed by
them, corresponding to the year ending December 4, 1931, the date it was
declared in a state of liquidation, but not those which the appellants claim should
be earned by their deposits after said date and until the full amounts thereof are
paid to them. And with respect to the question of set-off, this should be deemed
made, of course, as of the date when the Mercantile Bank of China was declared
in a state of liquidation, that is, on December 4, 1931, for then there was already
a reciprocal concurrence of debts, with respect to said bank and the appellants.
(Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)
III. With respect to the fourth assigned error of the appellants in case G.
R. No. 43697, we hold, in view of the considerations set out in resolving the other
assignments of error, that the lower court properly denied the motion for new trial
of said appellants.
In view of the foregoing, we modify the appealed judgments by holding
that the deposits, claimed by the appellants, and declared by the lower court to
be ordinary credits, are for the following amounts: P10,285.27 of Tiong Chui
Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of Tan Locko;
P6,981.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La
Bella Tondea, plus their corresponding interests up to December 4, 1931; that
their obligations to the bank under liquidation which should be set off against said
deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion;
Page 90 of 505

P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko; P6,929.68 of


Woo & Lo & Co.; P6,214.74 of Sy Guan Huat; and P1,130.80 of La Bella
Tondea; and we order that the set-offs in question be made in the manner stated
in this decision, that is, as of the date already indicated, December 4, 1931. In all
other respects, we affirm the aforesaid judgments, without special
pronouncement as to costs. So ordered.

accordance with Article 2244 (14) (b) of the Civil Code was directed by the liquidation
court. From this order, the Central Bank appealed by certiorari.
The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply and
the judgments obtained by the respondents against the involvent savings bank do not
enjoy preference.
Orders of the lower court reversed and set aside.

Avancea, C. J., Villa-Real, Abad Santos, Imperial and Horrilleno,


JJ., concur.

DECISION

||| (In re: Gopoco Grocery v. Pacific Coast Biscuit Co., G.R. Nos. 43697 & 44200,
[March 31, 1938], 65 PHIL 443-454)

SECOND DIVISION
[G.R. No. L-38427. March 12, 1975.]
CENTRAL BANK OF THE PHILIPPINES as Liquidator of the
FIDELITY
SAVINGS
BANK, petitioner, vs. HONORABLE
JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII,
Court of First Instance of Manila, Spouses AUGUSTO and
ADELAIDA PADILLA and Spouses MARCELA and JOB
ELIZES,respondents.

F.E. Evangelista & Agapito S. Fajardo for petitioner.


Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.

SYNOPSIS
Private respondents secured against Savings Bank, after the same had been
declared insolvent, final judgments for the recovery of the balance of their time
deposits. Payment of the same as preferred credits evidenced by final judgments in

AQUINO, J p:
This case involves the question of whether a final judgment for the payment of a time
deposit in a savings bank, which judgment was obtained after the bank was declared
insolvent, is a preferred claim against the bank. The question arises under the
following facts:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its
assets, forbade it to do business, and instructed the Central Bank Legal Counsel to
take appropriate legal actions (Resolution No. 350).
On December 9, 1969 the Board resolved to seek the court's assistance and
supervision in the liquidation of the bank. The resolution was implemented only on
January 25, 1972 when the Central Bank of the Philippines filed the corresponding
petition for assistance and supervision in the Court of First Instance of Manila (Civil
Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and
Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the
Fidelity Savings Bank for the recovery of the sum of P50,584 as the balance of their
time deposits (Civil Case No. 82520 assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings
Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated
interest.
Page 91 of 505

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the
spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of
their time deposits, plus interests, P70,000 as moral and exemplary damages and
P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on
September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII
having cognizance of the liquidation proceeding), upon motions of the Elizes and
Padilla spouses and over the opposition of the Central Bank, directed the latter, as
liquidator, to pay their time deposits as preferred credits, evidenced by final
judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are
enough funds in the liquidator's custody in excess of the credits more preferred under
section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends
that the final judgments secured by the Elizes and Padilla spouses do not enjoy any
preference because (a) they were rendered after the Fidelity Savings Bank was
declared insolvent and (b) under the charter of the Central Bank and the General
Banking Law, no final judgment can be validly obtained against an insolvent bank.
Republic Act No. 265 provides:
"SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the Superintendent or his examiners or agents
into the condition of any banking institution, it shall be disclosed
that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the Superintendent
forthwith, in writing, to inform the Monetary Board of the facts,
and the Board, upon finding the statements of the Superintendent
to be true, shall forthwith forbid the institution to do business in
the Philippines and shall take charge of its assets and proceeds
according to law.
"The Monetary Board shall thereupon determine within thirty days
whether the institution may be reorganized or otherwise placed in
such a condition so that it may be permitted to resume business
with safety to its creditors and shall prescribe the conditions
under which such resumption of business shall take place. In

such case the expenses and fees in the administration of the


institution shall be determined by the Board and shall be paid to
the Central Bank out of the assets of such banking institution.
"At any time within ten days after the Monetary Board has taken
charge of the assets of any banking institution, such institution
may apply to the Court of First Instance for an order requiring the
Monetary Board to show cause why it should not be enjoined
from continuing such charge of its assets, and the court may
direct the Board to refrain from further proceedings and to
surrender charge of its assets.
"If the Monetary Board shall determine that the banking institution
cannot resume business with safety to its creditors, it shall, by the
Solicitor General, file a petition in the Court of First Instance
reciting the proceedings which have been taken and praying the
assistance and supervision of the court in the liquidation of the
affairs of the same. The Superintendent shall thereafter, upon
order of the Monetary Board and under the supervision of the
court and with all convenient speed, convert the assets of the
banking institution to money.
"SEC. 30. Distribution of assets. In case of liquidation of a
banking institution, after payment of the costs of the proceedings,
including reasonable expenses and fees of the Central Bank to
be allowed by the court, the Central Bank shall pay the debts of
such institution, under the order of the court, in accordance with
their legal priority."
The General Banking Act, Republic Act No. 337, provides:
"SEC. 85. Any director or officer of any banking institution who
receives or permits or causes to be received in said bank any
deposit, or who pays out or permits or causes to be paid out any
funds of said bank, or who transfers or permits or causes to be
transferred any securities or property of said bank, after said
bank becomes insolvent, shall be punished by fine of not less
than one thousand nor more than ten thousand pesos and by
imprisonment for not less than two nor more than ten years."
The Civil Code provides:
Page 92 of 505

"ART. 2237. Insolvency shall be governed by special laws insofar


as they are not inconsistent with this Code. (n)
"ART. 2244. With reference to other property, real and personal,
of the debtor, the following claims or credits shall be preferred in
the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments
and of the judgments, respectively. ( 1924a)

"ART. 2251. Those credits which do not enjoy any preference


with respect to specific property, and those which enjoy
preference, as to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in article 2244;(2) Common credits
referred to in article 2246 shall be paid pro rata regardless of
dates. (1929a)".
The trial court or, to be exact, the liquidation court noted that there is no provision in
the charter of the Central Bank and in the General Banking Law (Republic Acts Nos.
265 and 337, respectively) which suspends or abates civil actions against an insolvent
bank pending in courts other than the liquidation court. It reasoned out that, because
such actions are not suspended, judgments against insolvent banks could be
considered as preferred credits under article 2244(14)(b) of the Civil Code. It further
noted that, in contrast with the Central Bank Act, section 18 of the Insolvency
Law provides that upon the issuance by the court of an order declaring a person
insolvent, "all civil proceedings against the said insolvent shall be stayed".
The liquidation court directed the Central Bank to honor the writs of execution issued
by Branches I and XXX for the enforcement of the judgments obtained by the Elizes
and Padilla spouses. It suggested that, after satisfaction of the judgments, the Central
Bank, as liquidator, should include said judgments in the list of preferred credits
contained in the "Project of Distribution" "with the notation 'already paid'".

On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the Board
becomes the trustee of its assets "for the equal benefit of all the creditors, including
the depositors". The Central Bank cites the ruling that "the assets of an insolvent
banking institution are held in trust for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76
Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent bank
should file their actions with the liquidation court. In support of that view it cites the
provision that the Insolvency Law does not apply to banks (last sentence, sec. 52
of Act No. 1956).
It also invokes the provision penalizing a director or officer of a hank who disburses,
or allows disbursement, of the funds of the bank after it becomes insolvent (Sec.
85, General Banking Act, Republic Act No. 337). It cites the ruling that "a creditor of
an insolvent state bank in the hands of a liquidator who recovered a judgment against
it is not entitled to a preference for (by) the mere fact that he is a judgment creditor"
(Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver,
Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are not true deposits. They are considered simple loans and, as
such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile
Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific
Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American
National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil.
443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when
a bank is found to be insolvent, the Monetary Board shall forbid it to do business and
shall take charge of its assets. The Board in its Resolution No. 350 dated February
18, 1969 banned the Fidelity Savings Bank from doing business. It took charge of the
bank's assets. Evidently, one purpose in prohibiting the insolvent bank from doing
business is to prevent some depositors from having an undue or fraudulent
preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent,
suits by some depositors could be maintained and judgments would be rendered for
Page 93 of 505

the payment of their deposits and then such judgments would be considered preferred
credits under article 2244(14)(b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that
article 2244(14)(b) does not apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To
recognize such judgments as entitled to priority would mean that depositors in
insolvent banks, after learning that the bank is insolvent as shown by the fact that it
can no longer pay withdrawals or that it has closed its doors or has been enjoined by
the Monetary Board from doing business, would rush to the courts to secure
judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character.
Some of the judgments would be default judgments. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the basis of
article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable
situation could not have been contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant
case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls
closed its doors to business on July 9, 1923. On November 7, 1924 the bank (then
already under liquidation) issued to William Rohr a certificate stating that he was
entitled to claim from the bank $1,191.72 and that he was entitled to dividends
thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred
to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming
the order sustaining the demurrer, the Supreme Court of Montana said:
"The general principle of equity that the assets of an insolvent are
to be distributed ratably among general creditors applies with full
force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is
not entitled to any preference or priority over other general
creditors.
"The assets of a bank in process of liquidation are held in trust for
the equal benefit of all creditors. and one cannot be permitted to
obtain an advantage or preference over another by an
attachment, execution or otherwise. A disputed claim of a creditor
may be adjudicated, but those whose claims are recognized and
admitted may not successfully maintain action thereon. So to

permit would defeat the very purpose of the liquidation of a bank


whether being voluntarily accomplished or through the
intervention of a receiver.
xxx xxx xxx
"The available assets of such a bank are held in trust, and so
conserved that each depositor or other creditor shall receive
payment or dividend according to the amount of his debt, and
that none of equal class shall receive any advantage or
preference over another."
And with respect to a national bank under voluntary liquidation, the court noted in
the Rohr case that the assets of such a bank "become a trust fund, to be administered
for the benefit of all creditors pro rata, and, while the bank retains its corporate
existence, and may be sued, the effect of a judgment obtained against it by a creditor
is only to fix the amount of debt. He can acquire no lien which will give him any
preference or advantage over other general creditors." (245 Pac. 249) **
Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the category of
preferred credits simply because the depositors, taking advantage of the long interval
between the declaration of insolvency and the filing of the petition for judicial
assistance and supervision, were able to secure judgments for the payment of their
time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses a
priority over the other depositors whose deposits were likewise indisputably due and
owing from the insolvent bank but who did not want to incur litigation expenses in
securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since
February 19, 1969, was forbidden to do business (and that ban would include the
payment of time deposits) implies that suits for the payment of such deposits were
prohibited. What was directly prohibited should not be encompassed indirectly. (See
Maurello vs. Broadway Bank & Trust Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the
Bank Liquidation Rules and Regulations, it indicated in Step III the procedure for
processing the claims against the insolvent bank. In Step IV, the court directed the
Central Bank, as liquidator, to submit a Project of Distribution which should include "a
Page 94 of 505

list of the preferred credits to be paid in full in the order of priorities established in
Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article 2244
was not mentioned). There is no cogent reason why the Elizes and Padilla spouses
should not adhere to the procedure outlined in the said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974
are reversed and set aside. No costs.
SO ORDERED.
Makalintal, C.J., Fernando, Barredo and Fernandez, JJ., concur.
Antonio, J., did not take part.
||| (Central Bank of the Phil. v. Morfe, G.R. No. L-38427, [March 12, 1975], 159 PHIL
727-737)

[G.R. No. L-30511. February 14, 1980.]


MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE
PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA
RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B.
RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA,
VICTORIA
RAMOS
TANJUATCO,
and
TEOFILO
TANJUATCO, respondents.

Rene Diokno for petitioner.


F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of
the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for
respondent Overseas Bank of Manila.
Josefina G. Salonga for all other respondents.

DECISION

CONCEPCION, JR., J p:

SECOND DIVISION

Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty
Thousand Pesos, with interest, against respondent Central Bank of the Philippines
and Overseas Bank of Manila and its stockholders, on the alleged failure of the
Overseas Bank of Manila to return the time deposits made by petitioner and assigned
to him, on the ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors and the
general public. 1 Petitioner also prays that both respondent banks be ordered to
execute the proper and necessary documents to constitute all properties listed in
Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L29352, entitled "Emerito M. Ramos, et al. vs. Central Bank of the Philippines," into a
trust fund in favor of petitioner and all other depositors of respondent Overseas Bank
Page 95 of 505

of Manila. It is also prayed that the respondents be prohibited permanently from


honoring, implementing, or doing any act predicated upon the validity or efficacy of
the deeds of mortgage, assignment, and/or conveyance or transfer of whatever nature
of the properties listed in Annex "7" of the Answer of respondent Central Bank in G.R.
No. 29352. 2 cdtai

sound banking supervision requires respondent Central Bank to advertise or


represent to the public any remedial measures it may impose upon chronic delinquent
banks as such action may inevitably result to panic or bank "runs". In the years 19661967, there were no findings to declare the respondent Overseas Bank of Manila as
insolvent. 8

A sought for ex-parte preliminary injunction against both respondent banks was not
given by this Court.

Respondent Central Bank likewise denied that a constructive trust was created in
favor of petitioner and his predecessor in interest Concepcion Maneja when their time
deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila
as during that time the latter was not an insolvent bank and its operation as a banking
institution was being salvaged by the respondent Central Bank. 9

Undisputed pertinent facts are:


On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one
year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the
respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time
deposit, for one year with 6-1/2% interest, on March 6, 1967, of Two Hundred
Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned
and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with
respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time
deposits from the respondent Overseas Bank of Manila, dating from December 6,
1967 up to March 4, 1968, not a single one of the time deposit certificates was
honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the
banking system of the Republic and it exercises supervision over all doing business in
the Philippines, but denies the petitioner's allegation that the Central Bark has the
duty to exercise a most rigid and stringent supervision of banks, implying that
respondent Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims that as of
March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited
degree of banking operations since the Monetary Board decided in its Resolution No.
322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new
loans and investments in view of its chronic reserve deficiencies against its deposit
liabilities. This limited operation of respondent Overseas Bank of Manila continued up
to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency
of any banking institution as claimed by petitioner. It claims that neither the law nor

Respondent Central Bank avers no knowledge of petitioner's claim that the properties
given by respondent Overseas Bank of Manila as additional collaterals to respondent
Central Bank of the Philippines for the former's overdrafts and emergency loans were
acquire through the use of depositors' money, including that of the petitioner and
Concepcion Maneja. 10
In G.R. No. L-29352, entitled "Emerito M. Ramos, et al. vs. Central Bank of the
Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas
Bank of Manila sought to prevent respondent Central Bank from closing, declaring the
former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case,
filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground
that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila
in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352
opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground
that his claim as depositor of the Overseas Bank of Manila should properly be
ventilated in the Court of First Instance, and if this Court were to allow Serrano to
intervene as depositor in G.R. No. L-29352, thousands of other depositors would
follow and thus cause an avalanche of cases in this Court. In the resolution dated
October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of
said motion to intervene are substantially the same as those of the present petition.11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became
final and executory on March 3, 1972, favorable to the respondent Overseas Bank of
Manila, with the dispositive portion to wit: Cdpr
WHEREFORE, the writs prayed for in the petition are hereby
granted and respondent Central Bank's resolution Nos. 1263,
1290 and 1333 (that prohibit the Overseas Bank of Manila to
participate in clearing, direct the suspension of its operation, and
Page 96 of 505

ordering the liquidation of said bank) are hereby annulled and set
aside; and said respondent Central Bank of the Philippines is
directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor.
Costs against respondent Central Bank of the Philippines." 12
Because of the above decision, petitioner in this case filed a motion for judgment in
this case, praying for a decision on the merits, adjudging respondent Central Bank
jointly and severally liable with respondent Overseas Bank of Manila to the petitioner
for the P350,000 time deposit made with the latter bank, with all interests due therein;
and declaring all assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds for the
benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents, they in
reality are recovery of time deposits plus interest from respondent Overseas Bank of
Manila, and recovery of damages against respondent Central Bank for its alleged
failure to strictly supervise the acts of the other respondent Bank and protect the
interests of its depositors by virtue of the constructive trust created when respondent
Central Bank required the other respondent to increase its collaterals for its overdrafts
and emergency loans, said collaterals allegedly acquired through the use of
depositors money. These claims should be ventilated in the Court of First Instance of
proper jurisdiction as We already pointed out when this Court denied petitioner's
motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in
actions for mandamus and prohibition as there is no shown clear abuse of discretion
by the Central Bank in its exercise of supervision over the other respondent Overseas
Bank of Manila, and if there was, petitioner here is not the proper party to raise that
question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352.
Neither is there anything to prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of
Manila), which petitioner here intends to use as his basis for claims of damages
against respondent Central Bank, had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust
in his favor when the respondent Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's overdrafts and emergency loans,
since these collaterals were acquired by the use of depositors' money. LexLib
Bank deposits are in the nature of irregular deposits. They are really loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to

be treated as loans and are to be covered by the law on loans. 14 Current and
savings deposits are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests with respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to
honor the time deposit is failure to pay its obligation as a debtor and not a breach of
trust arising from a depositary's failure to return the subject matter of the deposit.

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.
Antonio, Abad Santos, JJ., concur.
||| (Serrano v. Central Bank of the Phil., G.R. No. L-30511, [February 14, 1980], 185
PHIL 54-62)

SECOND DIVISION
[G.R. No. 60033. April 4, 1984.]
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and
TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF
Page 97 of 505

MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL


FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

Feliciano C. Tumale for petitioners.


Asuncion, Gomez & de Leon for private respondents.
The Solicitor General for respondents.

DECISION

MAKASIAR, J p:
This is a petition for prohibition and injunction with a prayer for the immediate
issuance of restraining order and/or writ of preliminary injunction filed by petitioners
on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same
date, a temporary restraining order was duly issued ordering the respondents, their
officers, agents, representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from proceeding with the
preliminary investigation in Case No. 81-31938 of the Office of the City Fiscal of
Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed
a motion to lift restraining order which was denied in the resolution of this Court dated
May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-31938,
in which petitioners were charged by private respondent Clement David, with estafa
and violation of Central Bank Circular No. 364 and related regulations regarding
foreign exchange transactions principally, on the ground of lack of jurisdiction in that
the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners'
obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the
Solicitor General in its Comment dated June 28, 1982, as follows:

"On December 23, 1981, private respondent David filed I.S. No.
81-31938 in the Office of the City Fiscal of Manila, which case
was assigned to respondent Lota for preliminary investigation
(Petition, p. 8).
"In I.S. No. 81-31938, David charged petitioners (together with
one Robert Marshall and the following directors of the Nation
Savings and Loan Association, Inc., namely Homero Gonzales,
Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Maalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe)
with estafa and violation of Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex 'A'):
"'From March 20, 1979 to March, 1981, David invested
with the Nation Savings and Loan Association,
(hereinafter called NSLA) the sum of P1,145,546.20 on
time deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on
time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a
receipt dated June 8, 1980 (all jointly with Denise
Kuhne), that David was induced into making the
aforestated investments by Robert Marshall, an
Australian national who was allegedly a close associate
of petitioner Guingona Jr., then NSLA President,
petitioner Martin, then NSLA Executive Vice-President
and petitioner Santos, then NSLA General Manager;
that on March 21, 1981 NSLA was placed under
receivership by the Central Bank, so that David filed
claims therewith for his investments and those of his
sister; that on July 22, 1981 David received a report
from the Central Bank that only P305,821.92 of those
investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938
misappropriated the balance of the investments, at the
same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr.
Page 98 of 505

paid only P200,000.00, thereby reducing the amounts


misappropriated to P959,078.14 and US$75,000.00.
"Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex 'B') in which they stated the following:
"'That Martin became President of NSLA in March 1978
(after the resignation of Guingona, Jr.) and served as
such until October 30, 1980, while Santos was General
Manager up to November 1980; that because NSLA was
urgently in need of funds and at David's insistence, his
investments were treated as special accounts with
interests above the legal rate, and recorded in separate
confidential documents only a portion of which were to
be reported because he did not want the Australian
government to tax his total earnings (nor) to know his
total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a
personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s
dollar account because NSLA did not have one, that a
draft of US$30,000.00 was placed in the name of one
Paz Roces because of a pending transaction with her;
that the Philippine Deposit Insurance Corporation had
already reimbursed David within the legal limits; that
majority of the stockholders of NSLA had filed Special
Proceedings No. 82-1695 in the Court of First Instance
to contest its (NSLA's) closure; that after NSLA was
placed under receivership, Martin executed a
promissory note in David's favor and caused the transfer
to him of a nine and one half (9 1/2) carat diamond ring
with a net value of P510,000.00; and, that the liabilities
of NSLA to David were civil in nature.'
"Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex
'C') stated the following:
"'That he had no hand whatsoever in the transactions
between David and NSLA since he (Guingona Jr.) had
resigned as NSLA president in March 1978, or prior to
those transactions; that he assumed a portion of the

liabilities of NSLA to David because of the latter's


insistence that he placed his investments with NSLA
because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex
"D") he (Guingona, Jr.) bound himself to pay David the
sums of P668.307.01 and US$37,500.00 in stated
installments; that he (Guingona, Jr.) secured payment of
those amounts with second mortgages over two (2)
parcels of land under a deed of Second Real Estate
Mortgage (Petition, Annex" E") in which it was provided
that the mortgage over one (1) parcel shall be cancelled
upon payment of one half of the obligation to David; that
he (Guingona, Jr.) paid P200,000.00 and tendered
another P300,000.00 which David refused to accept,
hence, he (Guingona, Jr.) filed Civil Case No. Q-33865
in the Court of First Instance of Rizal at Quezon City, to
effect the release of the mortgage over one (1) of the
two parcels of land conveyed to David under second
mortgages.'

"At the inception of the preliminary investigation before


respondent Lota, petitioners moved to dismiss the charges
against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself
novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8)
"But, after the presentation of David's principal witness,
petitioners filed the instant petition because: (a) the production of
the Promissory Notes, Banker's Acceptance, Certificates of Time
Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e.,
civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's
principal witness allegedly testified that the duplicate originals of
the aforesaid instruments of indebtedness were all on file with
NSLA, contrary to David's claim that some of his investments
were not recorded (Petition, pp. 8-9).

Page 99 of 505

"Petitioners alleged that they did not exhaust available


administrative remedies because to do so would be futile
(Petition, p. 9)" [pp. 153-157, rec.]
As correctly pointed out by the Solicitor General, the sole issue for resolution is
whether public respondents acted without jurisdiction when they investigated the
charges (estafa and violation of CB Circular No. 364 and related regulations regarding
foreign exchange transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa. prLL
A casual perusal of the December 23, 1981 affidavit-complaint filed in the Office of the
City Fiscal of Manila by private respondent David against petitioners Teofisto
Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert
Marshall and the other directors of the Nation Savings and Loan Association, will
show that from March 20, 1979 to March, 1981, private respondent David, together
with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association
the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits
covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16,
rec.). It appears further that private respondent David, together with his sister, made
investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of
private respondent David, assumed the obligation of the bank to private respondent
David by executing on June 17, 1981 a joint promissory note in favor of private
respondent acknowledging an indebtedness of P1,336,614.02 and US$75,000.00 (p.
80, rec.). This promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness
assumed appears to be bigger than the original claim because of the added interest
and the inclusion of other deposits of private respondent's sister in the amount of
P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note
antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in
favor of private respondent (p. 25, rec.). The aforesaid promissory notes were

executed as a result of deposits made by Clement David and Denise Kuhne with the
Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David
before this Court indisputably show that he has indeed invested his money on time
and savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on time
and savings deposits with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of
the New Civil Code provides that:
"Article 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions
concerning simple loan."
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114, 119 [1975],
We said:
"It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are not true deposits.
They are considered simple loans and, as such, are not preferred
credits (Art. 1980 Civil Code: In re Liquidation of Mercantile Bank
of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil.
414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association,
65 Phil. 375; Fletcher American National Bank vs. Ang Cheng
Lian, 65 Phil. 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific
Coast Biscuit Co., 65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA 96, 102 [1980]) that: prLL
"Bank deposits are in the nature of irregular deposits. They are
really loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans (Art. 1980, Civil
Code; Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
savings deposits are loans to a bank because it can use the
same. The petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was in reality
a creditor of the respondent Bank and not a depositor. The
Page 100 of 505

respondent Bank was in turn a debtor of petitioner. Failure of the


respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a
depository's failure to return the subject matter of the deposit"
(emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and
Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract and
it can make use of the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to return or deliver
the same money that was deposited. And, the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation punishable under Article
315, par. 1(b) of the Revised Penal Code, but it will only give rise to civil liability over
which the public respondents have no jurisdiction.
WE have already laid down the rule that:
"In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver
or return the same money, goods or personal property that he
received. Petitioners had no such obligation to return the same
money, i.e., the bills or coins, which they received from private
respondents. This is so because as clearly stated in criminal
complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were
loans.
"The nature of simple loan is defined in Articles 1933 and 1953 of
the Civil Code.
"'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.'
"It can be readily noted from the above quoted provisions that in
simple loan (mutuum), as contrasted to commodatum, the
borrower acquires ownership of the money, goods or personal
property borrowed. Being the owner, the borrower can dispose of
the thing borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof" (Yam vs. Malik, 94 SCRA
30, 34 [1979]; emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of
private respondent David would constitute a violation of paragraph 1(b) of Article 315
of the Revised Penal Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtorcreditor relation between the petitioners and private respondent. Consequently, the
failure of the bank or petitioners Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may
however, prevent the rise of criminal liability as long as it occurs prior to the filing of
the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69
[1968]) We held that: LexLib

"As pointed out in People vs. Nery, novation prior to the filing of
the criminal information as in the case at bar may convert
Page 101 of 505

the relation between the parties into an ordinary creditor-debtor


relation, and place the complainant in estoppel to insist on the
original transaction or 'cast doubt on the true nature' thereof."
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580581 [1983]), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964]),
declaring that:
"The novation theory may perhaps apply prior to the filing of the
criminal information in court by the state prosecutors because up
to that time the original trust relation may be converted by the
parties into an ordinary creditor-debtor situation, thereby placing
the complainant in estoppel to insist on the original trust. But after
the justice authorities have taken cognizance of the crime and
instituted action in court, the offended party may no longer divest
the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against
the state, only the latter can renounce it (People vs. Gervacio, 54
Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs.
Montaes, 8 Phil. 620).
"It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be to
either prevent the rise of criminal liability or to cast doubt on the
true nature of the original basic transaction, whether or not it was
such that its breach would not give rise to penal responsibility, as
when money loaned is made to appear as a deposit, or other
similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581;
U.S. vs. Villareal, 27 Phil. 481)."
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23,
1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but
there will still be a civil liability on the part of petitioners Guingona and Martin to pay
the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the amount of US$75,000.00
without authority from the Central Bank. They contend however, that the US dollars
intended by respondent David for deposit were all converted into Philippine currency
before acceptance and deposit into Nation Savings and Loan Association. LLphil
Petitioners' contention is worthy of belief for the following reasons:
1. It appears from the records that when respondent David was about to make a
deposit of bank draft issued in his name in the amount of US$50,000.00 with the
Nation Savings and Loan Association, the same had to be cleared first and converted
into Philippine currency. Accordingly, the bank draft was endorsed by respondent
David to petitioner Guingona, who in turn deposited it to his dollar account with the
Security Bank and Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and Loan Association in order to clear the bank draft
through his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona authorized Nation
Savings and Loan Association to withdraw the same in order to be utilized by the
bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos
before they were accepted and deposited in Nation Savings and Loan Association,
because the bank is presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that the transaction was
regular and fair, in the absence of a clear and convincing evidence to the contrary
(see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners
despite the fact that it was raised in petitioners' reply filed on May 7, 1982 to private
respondent's comment and in the July 27, 1982 reply to public respondents' comment
and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding
more support to the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature
and that there is no clear showing that they engaged in foreign exchange
transactions, We hold that the public respondents acted without jurisdiction when they
investigated the charges against the petitioners. Consequently, public respondents
Page 102 of 505

should be restrained from further proceeding with the criminal case for to allow the
case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the
proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of
prohibition and injunction, this court has recognized the resort to the extraordinary
writs of prohibition and injunction in extreme cases, thus:
"On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
'ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction.' Exceptions, however, are allowed in the
following instances:
"'1. for the orderly administration of justice;
"'2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;

policy, In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a


petition to restrain the prosecution of certain chiropractors
although, if convicted, they could have appealed. We gave due
course to their petition for the orderly administration of justice and
to avoid possible oppression by the strong arm of the law. And in
Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari
challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at the
proper time."
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.
Concepcion, Jr., Guerrero, De Castro and Escolin JJ ., concur.
Aquino, J ., took no part.

"'3. to avoid multiplicity of actions;

Abad Santos, J ., concurs in the result.

"'4. to afford adequate protection to constitutional rights;

||| (Guingona, Jr. v. City Fiscal of Manila, G.R. No. 60033, [April 4, 1984], 213 PHIL
516-529)

"'5. in proper cases, because the statute relied upon is


unconstitutional or was held invalid'" (Primicias vs.
Municipality of Urdaneta, Pangasinan, 93 SCRA 462,
469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557
[1968]; and Hernandez vs. Albano, 19 SCRA 95, 96
[1967]).
Likewise, in Lopez vs. The City Judge, et al. (18 SCRA 616, 621-622 [1966]), We held
that: cdll
"The writs of certiorari and prohibition, as extraordinary legal
remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration
of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We
took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due
time from the order complained of, our action in the premises
being based on the public welfare and the advancement of public

Page 103 of 505

THIRD DIVISION
[G.R. Nos. 173654-765. August 28, 2008.]
PEOPLE OF THE PHILIPPINES, petitioners, vs. TERESITA
PUIG and ROMEO PORRAS, respondent.

DECISION

CHICO-NAZARIO, J p:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with
petitioner People of the Philippines, represented by the Office of the Solicitor General,
praying for the reversal of the Orders dated 30 January 2006 and 9 June 2006 of the
Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo,
dismissing the 112 cases of Qualified Theft filed against respondents Teresita Puig
and Romeo Porras, and denying petitioner's Motion for Reconsideration, in Criminal
Cases No. 05-3054 to 05-3165. IDAaCc
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before Branch 68
of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents
Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and
Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. The
cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations 1 filed before the RTC were uniform and proforma, except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality
of Pototan, Province of Iloilo, Philippines, and within the
jurisdiction of this Honorable Court, above-named [respondents],

conspiring, confederating, and helping one another, with grave


abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge
and/or consent of the management of the Bank and with intent of
gain, did then and there willfully, unlawfully and feloniously take,
steal and carry away the sum of FIFTEEN THOUSAND PESOS
(P15,000.00), Philippine Currency, to the damage and prejudice
of the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence
of probable cause that would have necessitated the issuance of a warrant of arrest
based on the following grounds:
(1) the element of 'taking without the consent of the owners'
was missing on the ground that it is the depositorsclients, and not the Bank, which filed the complaint in
these cases, who are the owners of the money allegedly
taken by respondents and hence, are the real parties-ininterest; and
(2) the

Informations are bereft of the phrase alleging


"dependence, guardianship or vigilance between the
respondents and the offended party that would have
created a high degree of confidence between them
which the respondents could have abused." ADECcI

It added that allowing the 112 cases for Qualified Theft filed against the
respondents to push through would be violative of the right of the respondents
under Section 14 (2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration 2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order 3 denying petitioner's Motion for Reconsideration was
issued by the RTC, finding as follows:
Accordingly, the prosecution's Motion for Reconsideration should
be, as it hereby, DENIED. The Order dated January 30, 2006
STANDS in all respects.
Page 104 of 505

Petitioner went directly to this Court via Petition for Review on Certiorari under Rule
45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR
QUALIFIED THEFT SUFFICIENTLY ALLEGE THE ELEMENT
OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND
THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders
dated 30 January 2006 and 9 June 2006 issued by the trial court, and that it be
directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and
current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article 1953 of the same Code
provides that "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." Thus, it posits that the depositors who place their
money with the bank are considered creditors of the bank. The bank acquires
ownership of the money deposited by its clients, making the money taken by
respondents as belonging to the bank. aSEHDA
Petitioner also insists that the Informations sufficiently allege all the elements of the
crime of qualified theft, citing that a perusal of the Informations will show that they
specifically allege that the respondents were the Cashier and Bookkeeper of the Rural
Bank of Pototan, Inc., respectively, and that they took various amounts of money with
grave abuse of confidence, and without the knowledge and consent of the bank, to
the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on
the ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of
appeal because a finding of probable cause for the issuance of a warrant of arrest
presupposes evaluation of facts and circumstances, which is not proper under said
Rule.
Respondents further claim that the Department of Justice (DOJ), through the
Secretary of Justice, is the principal party to file a Petition for Review
on Certiorari,considering that the incident was indorsed by the DOJ. HECTaA
We find merit in the petition.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of
the Informations and, therefore, because of this defect, there is no basis for the
existence of probable cause which will justify the issuance of the warrant of arrest.
Petitioner assails the dismissal contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse
of confidence; and (b) the element of taking, with intent to gain and without the
consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC
judge found the allegations in the Information inadequate. He ruled that the
Information failed to state facts constituting the qualifying circumstance of grave
abuse of confidence and the element of taking without the consent of the owner, since
the owner of the money is not the Bank, but the depositors therein. He also
cites People v. Koc Song, 4 in which this Court held:
There must be allegation in the information and proof of a
relation, by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created
a high degree of confidence between them, which the
respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that
there was no probable cause simply on the insufficiency of the allegations in the
Informations concerning the facts constitutive of the elements of the offense
charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal
Code, is committed as follows, viz.:
ART. 310. Qualified Theft. The crime of theft shall be punished
by the penalties next higher by two degrees than those
respectively specified in the next preceding article, if committed
by a domestic servant, or with grave abuse of confidence, or if
the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the
occasion of fire, earthquake, typhoon, volcanic eruption, or any
other calamity, vehicular accident or civil disturbance. (Emphasis
supplied.) HcaDIA

Page 105 of 505

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical
taking of another's property without violence or intimidation against persons or force
upon things. The elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force
upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner's consent;
5. That it be accomplished without the use of violence or
intimidation against persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court
requires, inter alia, that the information must state the acts or omissions complained
of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the
Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions
complained of as constituting the offense and the qualifying and
aggravating circumstances must be stated in ordinary and
concise language and not necessarily in the language used in the
statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as
its qualifying and aggravating circumstances and for the court to
pronounce judgment.
It is evident that the Information need not use the exact language of the statute in
alleging the acts or omissions complained of as constituting the offense. The test is

whether it enables a person of common understanding to know the charge against


him, and the court to render judgment properly. 5

The portion of the Information relevant to this discussion reads: HcTSDa


[A]bove-named [respondents], conspiring, confederating, and
helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the
management of the Bank . . . .
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank
who come into possession of the monies deposited therein enjoy the confidence
reposed in them by their employer. Banks, on the other hand, where monies are
deposited, are considered the owners thereof. This is very clear not only from the
express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor.
Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by
petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions
concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the
nature of possession by the Bank of the money deposits therein, and the duties being
performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it as owner of the
money deposits, as sufficient to make out a case of Qualified Theft. For a graphic
illustration, we cite Roque v. People, 6 where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the
municipality of Floridablanca, province of Pampanga, Philippines
and within the jurisdiction of his Honorable Court, the abovePage 106 of 505

named accused ASUNCION GALANG ROQUE, being then


employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base,
Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital
contributions from its member/contributors of said corporation,
and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00),
said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said
corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00,
Philippine currency, by making it appear that a certain depositor
by the name of Antonio Salazar withdrew from his Savings
Account No. 1359, when in truth and in fact said Antonio Salazar
did not withdr[a]w the said amount of P10,000.00 to the damage
and prejudice of BABSLA in the total amount of P10,000.00,
Philippine currency. aEcHCD
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank
places money in the teller's possession due to the confidence
reposed on the teller, the felony of qualified theft would be
committed. 7
Also in People v. Sison, 8 the Branch Operations Officer was convicted of the crime
of Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between
January 24, 1992 and February 13, 1992, both dates inclusive, in
the City of Manila, Philippines, the said accused did then and
there wilfully, unlawfully and feloniously, with intent of gain and
without the knowledge and consent of the owner thereof, take,
steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different
denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS,

to the damage and prejudice of the said owner in the aforesaid


amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted
with grave abuse of confidence and unfaithfulness, he being
the Branch Operation Officer of the said complainant and as
such he had free access to the place where the said amount of
money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the
Philippine Commercial and Industrial Bank (PCIB), is Qualified
Theft. Appellant could not have committed the crime had he not
been holding the position of Luneta Branch Operation Officer
which gave him not only sole access to the bank vault . . . . The
management of the PCIB reposed its trust and confidence in the
appellant as its Luneta Branch Operation Officer, and it was this
trust and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB . . . . 9 cCTAIE
From another end, People v. Locson, 10 in addition to People v. Sison, described
the nature of possession by the Bank. The money in this case was in the possession
of the defendant as receiving teller of the bank, and the possession of the defendant
was the possession of the Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use
without the consent of the Bank, there was taking as contemplated in the crime of
Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged
the positions of the respondents; that the crime was committed with grave abuse of
confidence, with intent to gain and without the knowledge and consent of the Bank,
without necessarily stating the phrase being assiduously insisted upon by
respondents, "of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree
of confidence between them, which respondents abused," 12 and without
employing the word "owner" in lieu of the "Bank" were considered to have satisfied the
test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the
Bank in this case, there is even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of confidence. In fact, the Information
Page 107 of 505

which alleged grave abuse of confidence by accused herein is even more precise, as
this is exactly the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and
the employees of the Bank, who are entrusted with the possession of money of the
Bank due to the confidence reposed in them, occupy positions of confidence. The
Informations, therefore, sufficiently allege all the essential elements constituting the
crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the
instant petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa 13 is
instructive. The Court thus enunciated: CacTIE
In a criminal case in which the offended party is the State, the
interest of the private complainant or the offended party is limited
to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal
aspect thereof is concerned and may be made only by the public
prosecutor; or in the case of an appeal, by the State only, through
the OSG. . . . .

a trial once it is ascertained that no probable cause exists to form a sufficient belief as
to the guilt of the respondents, conversely, it is also equally imperative upon the judge
to proceed with the case upon a showing that there is a prima facie case against the
respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE.
Let the corresponding Warrants of Arrest issue against herein respondents TERESITA
PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is
directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive,
with reasonable dispatch. No pronouncement as to costs. CDEaAI

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Reyes and Leonardo-de Castro, * JJ., concur.
||| (People v. Puig, G.R. Nos. 173654-765, [August 28, 2008], 585 PHIL 555-568)

On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is
well-settled that in appeals by certiorari under Rule 45 of the Rules of Court, only
errors of law may be raised, 14 and herein petitioner certainly raised a question of
law.
As an aside, even if we go beyond the allegations of the Informations in these cases,
a closer look at the records of the preliminary investigation conducted will show that,
indeed, probable cause exists for the indictment of herein respondents. Pursuant to
Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest
only upon a finding of probable cause after personally evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v. Makasiar, 15 as reiterated
in Allado v. Driokno, 16 explained that probable cause for the issuance of a warrant
of arrest is the existence of such facts and circumstances that would lead a
reasonably discreet and prudent person to believe that an offense has been
committed by the person sought to be arrested. 17 The records reasonably indicate
that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the
judge, as the case may be, to relieve the respondents from the pain of going through

TITLE XII DEPOSIT


CHAPTER 1

SECOND DIVISION
[G.R. No. 7593. March 27, 1914.]
Page 108 of 505

THE UNITED STATES, plaintiff-appellee, vs.


IGPUARA, defendant-appellant.

JOSE

M.

W. A. Kincaid, Thos. L. Hartigan and Jose Robles Lahesa for appellant.


Solicitor-General Harvey for appellee.

DECISION

ARELLANO, C. J p:
The defendant herein is charged with the crime of estafa, for having
swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency,
which he had taken on deposit from the former to be at the latter's disposal. The
document setting forth the obligation reads:
"We hold at the disposal of Eugenio Veraguth the sum of two thousand
four hundred and ninety-eight pesos P2,498), the balance from Juana Montilla's
sugar. Iloilo, June 26, 1911. Jose Igpuara, for Ramirez & Co."
The Court of First Instance of Iloilo sentenced the defendant to two
years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency,
and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to
exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the
document executed by him was a certificate of deposit; (2) holding the existence
of a deposit, without precedent transfer or delivery of the P2,498; and (3)
classifying the facts in the case as the crime of estafa.
"A deposit is constituted from the time a person receives
a thing belonging to another with the obligation of keeping and
returning it." (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant
drew up a document declaring that they remained in his possession, which he
could not have said had he not received them. They remained in his possession,
surely in no other sense than to take care of them, for they remained has no other
purpose. They remained in the defendant's possession at the disposal of

Veraguth; but on August 23 of the same year Veraguth demanded of him through
a notarial instrument restitution of them, and to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the
sum of P2,498 in an instrument payable on demand, and as no attempt was
made to cash it until August 23, 1911, he could indorse and negotiate it like any
other commercial instrument. There is no doubt that if Veraguth accepted the
receipt for P2,498 it was because at that time he agreed with the defendant to
consider the operation of sale on commission closed, leaving the collection of
said sum until later, which sum remained as a loan payable upon presentation of
the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) That a sales commission was
precedent; (2) that this commission was settled with a balance of P2,498 in favor
of the principal, Juana Montilla; and (3) that this balance remained in the
possession of the defendant, who drew up an instrument payable on demand, he
has drawn two conclusions, both erroneous: One, that the instrument drawn up in
the form of a deposit certificate could be indorsed or negotiated like any other
commercial instrument; and the other, that the sum of P2,498 remained in
defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is
negotiable like any other commercial instrument; First, because every commercial
instruments payable to order are negotiable. Hence, this instrument not being to
order but to bearer, it is not negotiable.
It is also erroneous to assert that the sum of money set forth in said
certificate is, according to it, in the defendant's possession as a loan. In a loan
the lender transmits to the borrower the use of the thing lent, while in a deposit
the use of the thing is not transmitted, but merely possession for its custody or
safe-keeping.
In order that the depositary may use or dispose of the things deposited,
the depositor's consent is required, and then:
"The rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions applicable to
commercial loans, commission, or contract which took the place
of the deposit shall be observed." (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of
the depositary for using or disposing of the P2,498, which the certificate
acknowledges, or any contract entered into with the depositor to convert the
deposit into a loan, commission, or other contract.
Page 109 of 505

That demand was not made for restitution of the sum deposited, which
could have been claimed on the same or the next day after the certificate was
signed, does not operate against the depositor, or signify anything except the
intention not to press it. Failure to claim at once or delay for some time in
demanding restitution of the thing deposited, which was immediately due, does
not imply such permission to use the thing deposited as would convert the
deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now
in force, provided:
"The depositary of an amount of money cannot use the
amount, and if he makes use of it, he shall be responsible for all
damages that may accrue and shall respond to the depositor for
the legal interest on the amount."
Whereupon the commentators say:
"In this case the deposit becomes in fact a loan, as a
just punishment imposed upon him who abuses the sacred
nature of a deposit and as a means of preventing the desire of
gain from leading him into speculations that may be disastrous to
the depositor, who is much better secured while the deposit exists
that when he only has a personal action for recovery.
"Accordingly to article 548, No. 5, of the Penal Code,
those who to the prejudice of another appropriate or abstract for
their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for
administration, or for any other purpose which produces the
obligation of delivering it or returning it, and deny having received
it, shall suffer the penalty of the preceding article," which
punished such act as the crime of estafa. The corresponding
article of the Penal Code of the Philippine is 535, No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid
down that: "Since he commits the crime of estafa under article 548 of the Penal
Code of Spain who to another's detriment appropriates to himself or abstracts
money or goods received on commission for delivery, the court rightly applied this
article to the appellant, who, to the manifest detriment of the owner or owners of
the securities, since he has not restored them, willfully and wrongfully disposed of
them by appropriating them to himself or at least diverting them from the purpose
to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully


and wrongfully disposed of to the detriment of his principal, Juana Montilla, and
of the depositor, Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently attempted to be given
to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580,
and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what
constitutes estafa is not the disposal of money deposited, but denial of having
received same. In the first of said cases there was no evidence that the
defendant had appropriated the grain deposited in his possession.
"On the contrary, it is entirely probable that, after the
departure of the defendant from Libmanan on September 20,
1898, two days after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the revolutionists and
appropriated to their own uses."
In this connection it was held that failure to return the thing deposited
was not sufficient, but that it was necessary to prove that the depositary had
appropriated it to himself or diverted the deposit to his own or another's benefit.
He was accused of refusing to restore, and it was held that the code does not
penalize refusal to restore but denial of having received. So much for the crime of
omission; now with reference to the crime of commission, it was not held in that
decision that appropriation or diversion of the thing deposited would not
constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the proceeds
of the sales. Those, such as they were, he turned over the owner;" and there
being no proof of the appropriation, the agent could not be found guilty of the
crime of estafa.
Being in accord with law and the merits of the case, the judgment
appealed from is affirmed, with costs.
Torres, Johnson and Trent, JJ., concur.
||| (United States v. Igpuara, G.R. No. 7593, [March 27, 1914], 27 PHIL 619-624)

Page 110 of 505

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank
and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In
1980, the Bank of the Philippine Islands (hereafter referred to as "BPI") absorbed
COMTRUST through a corporate merger, and was substituted as party to the
case. prLL
Rizaldy Zshornack initiated proceedings on June 28, 1976 by filing in the Court of
First Instance of Rizal Caloocan City a complaint against COMTRUST alleging four
causes of action. Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate Court which modified
the CFI decision absolving the bank from liability on the fourth cause of action. The
pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar
savings account of plaintiff (No. 25-4109) the amount of U.S
$1,000.00 as of October 27, 1975 to earn interest together with
the remaining balance of the said account at the rate fixed by the
bank for dollar deposits under Central Bank Circular 343;
THIRD DIVISION
[G.R. No. 66826. August 19, 1988.]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE
INTERMEDIATE APPELLATE COURT and RIZALDY T.
ZSHORNACK respondents.

2. Ordering defendant COMTRUST to return to the plaintiff the


amount of U.S. $3,000.00 immediately upon the finality of this
decision, without interest for the reason that the said amount was
merely held in custody for safekeeping, but was not actually
deposited with the defendant COMTRUST because being cash
currency, it cannot by law be deposited with plaintiff's dollar
account and defendant's only obligation is to return the same to
plaintiff upon demand;
xxx xxx xxx

Pacis & Reyes Law Office for petitioner.


Ernesto T. Zshornack, Jr. for private respondent.

DECISION

5. Ordering defendant COMTRUST to pay plaintiff in the amount


of P8,000.00 as damages in the concept of litigation expenses
and attorney's fees suffered by plaintiff as a result of the failure of
the defendant bank to restore to his (plaintiff's) account the
amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.

CORTES, J p:

SO ORDERED. [Rollo, pp. 47-48.]


Page 111 of 505

Undaunted, the bank comes to this Court praying that it be totally absolved from any
liability to Zshornack. The latter not having appealed the Court of Appeals decision,
the issues facing this Court are limited to the bank's liability with regard to the first and
second causes of action and its liability for damages.
1. We first consider the first cause of action.
On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe,
maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso
current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated
that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and
others totalling P17.46 were to be charged to Current Acct. No. 210-465-29, again,
the current account of the Zshornacks. There was no indication of the name of the
purchaser of the dollar draft.
On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it
was to be charged to Dollar Savings Acct. No. 25-4109. prcd
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he
demanded an explanation from the bank. In answer, COMTRUST claimed that the
peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of
Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to
Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the
ruling of both the trial court and the Appellate Court on the first cause of action.
Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from
private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings
account, the bank has adopted inconsistent theories. First, it still maintains that the
peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when
the latter encashed the Manilabank Cashier's Check. At the same time, the bank
claims that the withdrawal was made pursuant to an agreement where Zshornack

allegedly authorized the bank to withdraw from his dollar savings account such
amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar
account was credited to the peso current account, why did the bank still have to pay
Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon financed by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be
considered payment to Rizaldy. prcd
As to the second explanation, even if we assume that there was such an agreement,
the evidence do not show that the withdrawal was made pursuant to it. Instead, the
record reveals that the amount withdrawn was used to finance a dollar draft in favor of
Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is
no proof whatsoever that peso Current Account No. 210-465-29 was ever credited
with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from
Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged
that on December 8, 1975, Zshornack entrusted to COMTRUST, thru
Garcia,US$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that
the agreement was embodied in a document, a copy of which was attached to and
made part of the complaint. The document reads:
Makati Cable
Philippines "COMTRUST"

Address:

COMMERCIAL BANK AND TRUST COMPANY


of the Philippines
Quezon City Branch
Dec
ember 8,
1975
MR.
RIZALDY
T.
&/OR MRS. SHIRLEY E. ZSHORNACK

ZSHORNACK

Sir/Madam:
Page 112 of 505

We acknowledged (sic) having received from you today the sum


of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.
Received by:
(Sgd.)
VIRGILIO V.
GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return
the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's
peso current account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered
to the bank US$3,000 for safekeeping. When he requested the return of the money on
May 10, 1976, COMTRUST explained that the sum was disposed of in this manner:
US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip
accomplished by Garcia; the remaining US$1,000. 00 was sold on February 3, 1976
and the peso proceeds amounting to P8,350.00 were deposited to his current account
per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to
defeat private respondent's claim. It now argues that the contract embodied in the
document is the contract of depositum (as defined in Article 1962, New Civil Code),
which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable
under the contract, and the obligation is purely personal to Garcia. LexLib
Before we go into the nature of the contract entered into, an important point which
arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short, the
second cause of action was based on an actionable document. It was therefore

incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever filed. Hence, the bank is deemed to have admitted
not only Garcia's authority, but also the bank's power, to enter into the contract in
question.
In the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities
will, we think, be readily appreciated. In dealing with corporations
the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want
of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind
the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation
will be bound notwithstanding the actual authority may never
have been granted . . . Whether a particular officer actually
possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not
readily accessible to the stranger who deals with the corporation
on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable in a case where an
officer of a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to state
such defense in its answer. By this means the plaintiffs apprised
of the fact that the agent's authority is contested; and he is given
an opportunity to adduce evidence showing either that the
authority existed or that the contract was ratified and approved
[Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645-646
(1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which
Page 113 of 505

is beyond corporate powers, even without the proper allegation or proof that the
corporation has not authorized nor ratified the officer's act, is to cast corporations in
so perfect a mold that transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a very plain
truism; but to say that such bodies have no power or capacity to err is to impute to
them an excellence which does not belong to any created existence with which we are
acquainted. The distinction between power and right is no more to be lost sight of in
respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its legal
consequences, including its enforceability. LibLex
The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show
that the intent of the parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code,
which reads:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of 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.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December
9, 1949, which was in force at the time the parties entered into the transaction
involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in
them of whatever nature, including, where applicable their
exportation and importation, shall NOT be effected, except with
respect to deposit accounts included in sub-paragraphs (b) and

(c) of this paragraph, when such deposit accounts are owned by


and in the name of banks.
(a) Any and all assets, provided they are held
through, in, or with banks or banking institutions located
in the Philippines, including money, checks, drafts,
bullions, bank drafts deposit accounts (demand, time
and savings), all debts, indebtedness or obligations,
financial brokers and investment houses notes,
debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable
abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or corporation
residing or located within the Philippines;
(b) Any and all assets of the kinds included and
or described in subparagraph (a) above, whether or not
held through, in, or with banks or banking institutions,
and existent within the Philippines, which belong to any
person, film, partnership, association, branch office,
agency, company or other unincorporated body or
corporation not residing or located within the Philippines;
(c) Any and all assets existent within the
Philippines including money, checks, drafts, bullions,
bank drafts, all debts, indebtedness or obligations,
financial securities commonly dealt in by bankers,
brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages,
pledges, liens or other rights in the nature of
security expressed in foreign currencies, or if payable
abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or corporation
residing or located within the Philippines.
xxx xxx xxx
Page 114 of 505

4. (a) All receipts of foreign exchange shall be sold daily to the


Central Bank by those authorized to deal in foreign exchange. All
receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation shall be sold to the
authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign exchange.
Any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation, residing or
located within the Philippines, who acquires on and after the date
of this Circular foreign exchange shall not unless licensed by the
Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or receiving
payment, of foreign exchange the aforementioned persons and
entities shall sell such foreign exchange to designated agents of
the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined;
and any person, firm or corporation, foreign or domestic, who
being bound to the observance thereof, or of such other rules,
regulations or directives as may hereafter be issued in
implementation of this Circular, shall fail or refuse to comply with,
or abide by, or shall violate the same, shall be subject to the
penal sanctions provided in the Central Bank Act.

xxx xxx xxx


Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281,
Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its
coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person,
firm, company or corporation shall be sold to authorized agents of
the Central Bank by the recipients within one business day
following
the
receipt
of
such
foreign
exchange.
Any resident person, firm, company or corporation residing or

located within the Philippines, who acquires foreign exchange


shall not, unless authorized by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack,
who alleged in his complaint that he is a Philippine resident. The parties did not
intended to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at
all.
Since the mere safekeeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which is not authorized by
CB Circular No. 20, it must be considered as one which falls under the general class
of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of action against the other. "When
the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no
cause of action against each other . . . " [Art. 1411, New Civil Code.] The only remedy
is one on behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the
concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained. LLpr
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered
to restore to the dollar savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent
are ordered dismissed.
SO ORDERED.
Page 115 of 505

Gutierrez, Jr. and Bidin, JJ., concur.


Fernan, C.J., took no part was counsel for Bank of P.I. (Cebu).
Feliciano, J., concurs in the result.
||| (Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 66826,
[August 19, 1988], 247 PHIL 599-611)

THIRD DIVISION
[G.R. No. 90027. March 3, 1993.]
CA
AGRO-INDUSTRIAL
CORP., petitioner, vs. THE
HONORABLE
APPEALS
and
SECURITY
BANK
COMPANY,respondents.

DEVELOPMENT
COURT
OF
AND
TRUST

Dolorfino & Dominguez Law Offices for petitioner.


Danilo B. Banares for private respondent.

amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of Land were that
the titles to the lots shall be transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety
deposit box of any bank. The same could be withdrawn only upon the joint signatures
of a representative of the petitioner and the Pugaos upon full payment of the purchase
price .Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit
Box No. 1448 of private respondent Security Bank and Trust Company, a domestic
banking corporation hereinafter referred to as the respondent Bank. For this purpose,
both signed a contract of lease (Exhibit "2") which contains, inter alia, the following
conditions:
"13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability
in connection therewith." 1
After the execution of the contract, two (2) renter's keys were given to the renters
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained
in the possession of the respondent Bank. The safety deposit box has two (2)
keyholes, one for the guard key and the other for the renter's key, and can be opened
only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.

DECISION

DAVIDE, JR., J p:
Is 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
bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy. LLjur
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two
(2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00
for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos
withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the
Page 116 of 505

latter filed on 1 September 1980 a complaint 2 for damages against the respondent
Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro
Manila which docketed the same as Civil Case No. 38382. Cdpr
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit
"2"); corollarily, loss of any of the items or articles contained in the box could not give
rise to an action against it. It then interposed a counterclaim for exemplary damages
as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed
an answer to the counterclaim. 4
In due course, the trial court. now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner
on 8 December 1986, the dispositive portion of which reads:
"WHEREFORE, premises considered, judgment is hereby
rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff." 6
The unfavorable verdict is based on the trial court's 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. The court declared that the said provisions are binding on the
parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being contrary
to law, public order and public policy, the provisions in the contract for lease of the
safety deposit box absolving the Bank from any liability for loss, (c) not concluding
that in this jurisdiction, as well as under American jurisprudence, the liability of the
Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of

which the petitioner and its co-renter were given control over the safety deposit box
and its contents while the Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As such, the contract is
governed by Article 1643 of the Civil Code 10 which provides:
"ARTICLE 1643. In the lease of things, one of 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 or indefinite.
However, no lease for more than ninety-nine years shall be valid."
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:
"ARTICLE 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound to
collect the latter when it becomes due, and to take such steps as
may be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes."
and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendantappellee 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." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area
or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it." 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion
Page 117 of 505

or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is
contrary to, or is a departure from precedents adhered to and affirmed by decisions of
this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's
decision, the brief submitted to the respondent Court and the motion to reconsider the
latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature,
the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss
of the certificates of title pursuant to Article 1972 of the said Code which
provides: prLL
"ARTICLE 1972. The depositary is obliged to keep the thing
safely and to return it, when required, to the depositor, or to his
heirs and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe."
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
"The prevailing rule appears to be that where a safe-deposit
company leases a safe-deposit box or safe and the lessee takes
possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bailor is created
between the parties to the transaction as to such securities or
other valuables; the fact that the safe-deposit company does not
know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safedeposit box or safe does not change that relation. That access to
the contents of the safe-deposit box can be had only by the use
of a key retained by the lessee (whether it is the sole key or one
to be used in connection with one retained by the lessor) does
not operate to alter the foregoing rule. The argument that there is
not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been

generally rejected by the courts, usually on the ground that as


possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in the
former, since the company is, by the nature of the contract, given
absolute control of access to the property, and the depositor
cannot gain access thereto without the consent and active
participation of the company. . . ." (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order
or public policy.
After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention 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, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the renters
the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the
other hand, the respondent Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made so that both renters
could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as
Page 118 of 505

an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or instruments
which earn interest if such documents are kept in a rented safety deposit box. It is
clear that the depositary cannot open the box without the renter being present. prcd
We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner that
under the latter, the prevailing rule is that the relation between a bank renting out safedeposit boxes and its customer with respect to the contents of the box is that of a
bailor and bailee, the bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
"There is, however, some support for the view that the
relationship in question might be more properly characterized as
that of landlord and tenant, or lessor and lessee. It has also been
suggest that should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written,
in whole or in part. But there is apparently no jurisdiction in which
any rule other than that applicable to bailments governs
questions of the liability and rights of the parties in respect of loss
of the contents of safe-deposit boxes." 22 (citations omitted).
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States
has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
"SECTION 72. In addition to the operations specifically
authorized elsewhere in this Act, banking institutions other than
building and loan associations may perform the following
services:
(a) Receive in custody funds, documents, and
valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as depositories or as
agents. . . . " 24 (emphasis supplied).

Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing 25 and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. The depositary's
responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 2 6 In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting the depositary from any liability arising
from the loss of the thing deposited on account of fraud, negligence or delay would be
void for being contrary to law and public policy. In the instant case, petitioner
maintains that conditions 13 and 14 of the questioned contract of lease of the safety
deposit box, which read:
"13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same. LLphil
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability
in connection therewith." 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of
the General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it." 2 9
Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety
deposit box itself is located in its premises and is under its absolute control;
Page 119 of 505

moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and ineffective. It has
been said:
"With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one may by special contract define their
respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation
of law or public policy. It must clearly appear that there actually
was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of
the contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as
an attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may
limit its liability to some extent by agreement or
stipulation." 30 (citations omitted).
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware
of the agreement between the petitioner and the Pugaos 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 negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed that each should have one
(1) renter's key, it was obvious that either of them could ask the Bank for access to the

safety deposit box and, with the use of such key and the Bank's own guard key, could
open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award
for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals
in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made
above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for lack of merit. LLpr
No pronouncement as to costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ ., concur.
Gutierrez, Jr., J ., is on terminal leave.
||| (CA Agro-Industrial Development Corp. v. Court of Appeals, G.R. No. 90027,
[March 3, 1993])

EN BANC
Page 120 of 505

[G.R. No. 4015. August 24, 1908.]


ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET.
AL., defendants-appellants.

R. Zaldarriaga for appellants.


B. Montinola for appellee.

DECISION

TORRES, J p:
The attorney for the plaintiff, Angel Javellana, filed a complaint on the
30th of October, 1906, with the Court of First Instance of Iloilo, praying that the
defendants, Jose Lim and Ceferino Domingo Lim, be sentenced to jointly and
severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per
cent per annum from the 20th of January, 1898, until full payment should be
made, deducting from the amount of interest due the sum of P1,102.16, and to
pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint
was amended on the 10th of January, 1907; it was then alleged, that on the 26th
of May, 1897, the defendants executed and subscribed a document in favor of the
plaintiff reading as follows:
"We have received from Angel Javellana, as a deposit
without interest, the sum of two thousand six hundred and eightysix pesos and fifty-eight cents of pesos fuentes, which we will
return to the said gentleman, jointly and severally, on the 20th of
January, 1898. Jaro, 26th of May, 1897. Signed: Jose Lim.
Signed: Ceferino Domingo Lim."
That, when the obligation became due, the defendants begged the
plaintiff for an extension of time for the payment thereof, binding themselves to
pay interest at the rate of 15 per cent on the amount of their indebtedness, to
which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on

account of interest due the sum of 1,000 pesos, with the exception of which they
had not paid any other sum on account of either capital or interest,
notwithstanding the requests made by the plaintiff, who had thereby been
subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of
January, 1907, the defendants answered the original complaint before its
amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2
of the complaint; that they admitted the statements of the plaintiff relative to the
payment of 1,102.16 pesos made on the 15th of November, 1902, not, however,
as payment of interest on the amount stated in the foregoing document, but on
account of the principal, and denied that there had been any agreement as to an
extension of the time for payment and the payment of interest at the rate of 15 per
cent per annum as alleged in paragraph 3 of the complaint, and also denied all
the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the
plaintiff sums which, together with the P1,102.16 acknowledged in the complaint,
aggregated the total sum of P5,602.16, and that, deducting therefrom the
P2,686.58 stated in the document transcribed in the complaint, the plaintiff still
owed the defendants P2,915.58; therefore, they asked that judgment be entered
absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58
with the costs.
Evidence was adduced by both parties and, upon their exhibits, together
with an account book having been made of record, the court below rendered
judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of
the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new
trial. This motion was overruled and was also excepted to by them; the bill of
exceptions presented by the appellants having been approved, the same was in
due course submitted to this court.
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which they were
jointly and severally obliged to return on a certain date fixed in the document; but
that, nevertheless, when the document appearing as Exhibit 2, written in the
Visayan dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902, that the amount
deposited had not yet been returned to the creditor, whereby he was subjected to
losses and damages amounting to 830 pesos since the 20th of January, 1898,
Page 121 of 505

when the return was again stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per annum from the
aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on
the 15th of May, 1900, according to the receipt issued by him to the debtors,
would be included, and that the said rate of interest would obtain until the
debtors, paid the creditor the said amount in full. In this second document the
contract between the parties, which is a real loan of money with interest, appears
perfectly defined, notwithstanding the fact that in the original document executed
by the debtors, on the 26th of May, 1897, it is called a deposit; so that when they
bound themselves jointly and severally to refund the sum of 2,686.58 pesos to
the depositor, Javellana, they did not engage to return the same coins received
and of which the amount deposited consisted, and they could have accomplished
the return agreed upon by the delivery of a sum equal to the one received by
them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time for the return
thereof, inasmuch as, acknowledging that they have subjected the lender, their
creditor, to losses and damages for not complying with what had been stipulated,
and being conscious that they had used, for their own profit and gain, the money
that they received apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund should be made.
Such conduct on the part of the debtors is unquestionable evidence that the
transaction entered into between the interested parties was not a deposit, but a
real contract of loan.
Article 1767 of the Civil Code provides that
"The depositary can not make use of the thing deposited
without the express permission of the depositor.
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that
"When the depositary has permission to make use of
the thing deposited, the contract loses the character of a deposit
and becomes a loan or bailment.
"The permission shall not be presumed, and its
existence must be proven."
When on one of the latter days of January, 1898, Jose Lim went to the
office of the creditor asking for an extension of one year, in view of the fact that
money was scarce, and because neither himself nor the other defendant were

able to return the amount deposited, for which reason he agreed to pay interest at
the rate of 15 per cent per annum, it was because, as a matter of fact, he did not
have in his possession the amount deposited, he having made use of the same in
his business and for his own profit; and the creditor, by granting them the
extension, evidently confirmed the express permission previously given them to
use and dispose of the amount slated as having been deposited, which, in
accordance with the terms of the law, must be considered as given them on loan,
to all intents and purposes gratuitously, until the 20th of January, 1898, and from
that date with interest at 15 per cent per annum until its full payment, deducting
from the total amount of interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.
Notwithstanding the fact that it does not appear that Jose Lim signed the
document (Exhibit 2) executed in the presence of three witnesses on the 15th of
November, 1902, by Ceferino Domingo Lim on behalf of himself and the former,
nevertheless, the said document has not been contested as false, either by a
criminal or by a civil proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested the execution of the
same; and from the evidence in the case one is sufficiently convinced that the
said Jose Lim was perfectly aware of and had authorized his joint codebtor to
liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to
execute the aforesaid document No. 2. A true ratification of the original document
of deposit was thus made, and not the least proof is shown in the record that
Jose Lim had ever paid the whole or any part of the capital stated in the original
document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000
pesos appears as fully established, such is not the case with the defendants'
counterclaim for P5,602.16, because the existence and certainty of said
indebtedness imputed to the plaintiff has not been proven, and the defendants,
who call themselves creditors for the said amount, have not proven in a
satisfactory manner that the plaintiff had received partial payments on account of
the same; the latter alleges with good reason, that they should produce the
receipts which he may have issued, and which he did issue whenever they paid
him any money on account. The plaintiff's allegation that the two amounts of 400
and 1,200 pesos, referred to in documents marked "C" and "D" offered in
evidence by the defendants, had been received from Ceferino Domingo Lim on
account of other debts of his, has not been contradicted, and the fact that in the
original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000
pesos, the only payment made on account of interest on the amount deposited
Page 122 of 505

according to documents No. 2 and letter "B" above referred to, was due to a
mistake.

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE


NATIONAL BANK, defendant-appellant.

Moreover, for the reasons above set forth it may, as a matter of course,
be inferred that there was no renewal of the contract of deposit converted into a
loan, because, as has already been stated, the defendants received said amount
by virtue of a real loan contract under the name of a deposit, since the so-called
bails were forthwith authorized to dispose of the amount deposited. This they
have done, as has been clearly shown.

Gullas, Lopez, Tuao & Leuterio for plaintiff-appellant.

The original joint obligation contracted by the defendant debtors still


exists, and it has not been shown or proven in the proceedings that the creditor
had released Jose Lim from complying with his obligation in order that he should
not be sued for or sentenced to pay the amount of capital and interest together
with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory
evidence against the pretension of Jose Lim, and it further appears that
document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for
himself and on behalf of Jose Lim; and it has also been proven that Jose Lim,
being fully aware that his debt had not yet been settled, took steps to secure an
extension of the time for payment, and consented to pay interest in return for the
concession requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment
appealed from, it is our opinion that the same should be and is hereby affirmed
with the costs of this instance against the appellant, provided that the interest
agreed upon shall be paid until the complete liquidation of the debt. So ordered.

Jose Delgado for defendant-appellant.

SYLLABUS
1. BANKS AND BANKING; CIVIL CODE, ARTICLES 1195 et seq. AND
1758 et seq. CONSTRUED; RELATIONSHIP BETWEEN DEPOSITOR AND
BANK. The relation existing between a depositor and a bank is that of creditor
and debtor.
2. ID.; ID.; ID.; BANK'S RIGHT OF SET OFF. The general rule is
adopted for this jurisdiction that a bank has a right of set off of the deposit in its
hands for the payment of any indebtedness to it on the part of the depositor.
3. ID.; NEGOTIABLE INSTRUMENTS LAW CONSTRUED; LIABILITY
OF INDORSERS OF NEGOTIABLE INSTRUMENTS. Notice of dishonor is
necessary in order to charge an indorser, and the right of action against him does
not accrue until the notice is given.

DECISION

Arellano, C.J., Carson, Willard and Tracey, JJ., concur.


||| (Javellana v. Lim, G.R. No. 4015, [August 24, 1908], 11 PHIL 141-146)

CHAPTER 2

SECOND DIVISION
[G.R. No. 43191. November 13, 1935.]

MALCOLM, J p:
Both parties to this case appealed from a judgment of the Court of First
Instance of Cebu, which sentenced the defendant to return to the account of the
plaintiff the sum of P509, with legal interest and costs, the plaintiff to secure
damages in the amount of P10,000 more or less, and the defendant to be
absolved totally from the amended complaint. As it is conceded that the plaintiff.
As it is conceded that the plaintiff has already received the sum represented by
the United States treasury warrant, which is in question, the appeal will thus
determine the amount, if any, which should be paid to the plaintiff by the
defendant.
Page 123 of 505

The parties to the case are Paulino Gullas and the Philippine National
Bank. The first named is a member of the Philippine Bar, resident in the City of
Cebu. The second named is a banking corporation with a branch in the same
city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the
United States for the United States Veterans Bureau issued a warrant in the
amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino
Gullas and Pedro Lopez signed as indorsers of this check. Thereupon it was
cashed by the Philippine National Bank. Subsequently the treasury warrant was
dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of
the bank was P509. Against this balance he had issued certain checks which
could not be paid when the money was sequestered by the bank. On August 20,
1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent
notices by mail to Mr. Gullas which could not be delivered to him at that time
because he was in Manila. In the bank's letter of August 21, 1933, addressed to
Messrs. Paulino Gullas and Pedro Lopez, they were informed that the United
States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos
for $361 or P722, the payment for which had been received has been returned by
our Manila office with the notation that the payment of his check has been
stopped by the Insular Treasurer. "In view of this therefore we have applied the
outstanding balances of your current accounts with us to the part payment of the
foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney
Gullas to Cebu on August 31, 1933, notice of dishonor was received and the
unpaid balance of the United States Treasury warrant was immediately paid by
him.
As a consequence of these happenings, two occurrences transpired
which inconvenienced Attorney Gullas. In the first place, as above indicated,
checks including one for his insurance were not paid because of the lack of funds
standing to his credit in the bank. In the second place, periodicals in the vicinity
gave prominence to the news to the great mortification of Gullas.
A variety of incidental questions have been suggested on the record
which it can be taken for granted as having been adversely disposed of in this
opinion. The main issues are two, namely, (1) as to the right of the Philippine
National Bank to apply a deposit to the debt of a depositor to the bank, and (2) as
to the amount of damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and
deposit. (Articles 1195 et seq., 1758 et seq.) These portions of Philippine law
provide that compensation shall take place when two persons are reciprocally
creditor and debtor of each other (Civil Code, article 1195). In this connection, it
has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1930],
55 Phil., 208; San Carlos Milling Co. vs. Bank of the Philippine Islands and China
Banking Corporation [1933], 50 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the
liability of a general indorser and giving the procedure for notice of dishonor. The
general indorser of a negotiable instrument engages that if it be dishonored and
the necessary proceedings of dishonor be duly taken, he will pay the amount
thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it
has been held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him does not
accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923]. 44
Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a depositor. In
Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a
bank has no right, without an order from or special assent of the depositor to
retain out of his deposit an amount sufficient to meet his indebtedness. The basis
of the Louisiana doctrine is the theory of confidential contracts arising from
irregular deposits, e. g., the deposit of money with a banker. With freedom of
selection and after full consideration, we have decided to adopt the general rule
in preference to the minority rule as more in harmony with modern banking
practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union
Trust Company, [1905], 111 A. S. R., 407; Louisiana Civil Code Annotated, arts.
2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Espaol, 4th ed., 359 et seq.; 11 Manresa,
pp. 694 et seq.).
Starting, therefore, from the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next consider if that
remedy was enforced properly. The fact we believe is undeniable that prior to the
mailing of notice of dishonor, and without waiting for any action by Gullas, the
bank made use of the money standing in his account to make good for the
treasury warrant. At his point recall that Gullas was merely an indorser and had
issued checks in good faith.
Page 124 of 505

As to a depositor who has funds sufficient to meet payment of a check


drawn by him in favor of a third party, it has been held that he has a right of action
against the bank for its refusal to pay such a check in the absence of notice to
him that the bank has applied the funds so deposited in extinguishment of past
due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann.
Cas., 203.) The decision cited represents the minority doctrine, for on principle it
would seem that notice is not necessary to a maker because the right is based
on the doctrine that the relationship is that of creditor and debtor. However this
may be, as to an indorser the situation is different, and notice should actually
have been given him in order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas. But to follow up that statement with others proving exact
damages is not so easy. For instance, for alleged libelous articles the bank would
not be primarily liable. The same remarks could be made relative to the loss of
business which Gullas claims but which could not be traced definitely to this
occurrence. Also Gullas having eventually been reimbursed lost little through the
actual levy by the bank on his funds. On the other hand, it was not agreeable for
one to draw checks in all good faith, then leave for Manila, and on return find that
those checks had not been cashed because of the action taken by the bank. That
caused a disturbance in Gullas' finances, especially with reference to his
insurance, which was injurious to him. All facts and circumstances considered,
we are of the opinion that Gullas should be awarded nominal damages because
of the premature action of the bank against which Gullas had no means of
protection, and have finally determined that the amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the
main be overruled, with the result that the judgment of the trial court will be
modified by sentencing the defendant to pay the plaintiff the sum of P250, and
the costs of both instances.

THIRD DIVISION
[G.R. No. 156940. December 14, 2004.]
ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs.
VICENTE HENRY TAN, respondent.

Villa-Real, Imperial, Butte, and Goddard., JJ., concur.


||| (Gullas v. PNB, G.R. No. 43191, [November 13, 1935], 62 PHIL 519-523)
DECISION

PANGANIBAN, J p:

Page 125 of 505

While banks are granted by law the right to debit the value of a dishonored check from
a depositor's account, they must do so with the highest degree of care, so as not to
prejudice the depositor unduly.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the
January 27, 2003 Decision 2 of the Court of Appeals (CA) in CA-GR CV No. 56292.
The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated
December 3, 1996, of the Regional Trial Court of Cabanatuan
City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF
is hereby AFFIRMED. Costs against the [petitioner]." 3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a
regular depositor-creditor of the Associated Bank (hereinafter
referred to as the BANK). Sometime in September 1990, he
deposited a postdated UCPB check with the said BANK in the
amount of P101,000.00 issued to him by a certain Willy Cheng
from Tarlac. The check was duly entered in his bank record
thereby making his balance in the amount of P297,000.00, as of
October 1, 1990, from his original deposit of P196,000.00.
Allegedly, upon advice and instruction of the BANK that the
P101,000.00 check was already cleared and backed up by
sufficient funds, TAN, on the same date, withdrew the sum of
P240,000.00, leaving a balance of P57,793.45. A day after, TAN
deposited the amount of P50,000.00 making his existing balance
in the amount of P107,793.45, because he has issued several
checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00

e. 167054 Sept. 29, 1990 4,093.40


f. 138792 Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners went back to him
alleging that the checks he issued bounced for insufficiency of
funds. Thereafter, TAN, thru his lawyer, informed the BANK to
take positive steps regarding the matter for he has adequate and
sufficient funds to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor offer any apology
regarding the incident. Consequently, TAN, as plaintiff, filed a
Complaint for Damages on December 19, 1990, with the
Regional Trial Court of Cabanatuan City, Third Judicial Region,
docketed as Civil Case No. 892-AF, against the BANK, as
defendant. SDITAC
"In his [C]omplaint, [respondent] maintained that he ha[d]
sufficient funds to pay the subject checks and alleged that his
suppliers decreased in number for lack of trust. As he has been
in the business community for quite a time and has established a
good record of reputation and probity, plaintiff claimed that he
suffered embarrassment, humiliation, besmirched reputation,
mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he
continuously lost profits in the amount of P250,000.00.
[Respondent] therefore prayed for exemplary damages and that
[petitioner] be ordered to pay him the sum of P1,000,000.00 by
way of moral damages, P250,000.00 as lost profits, P50,000.00
as attorney's fees plus 25% of the amount claimed including
P1,000.00 per court appearance. 2004cdasia
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7,
1991, but the same was denied for lack of merit in an Order
dated March 7, 1991. Thereafter, [petitioner] BANK on March 20,
1991 filed its Answer denying, among others, the allegations of
[respondent] and alleged that no banking institution would give an
Page 126 of 505

assurance to any of its client/depositor that the check deposited


by him had already been cleared and backed up by sufficient
funds but it could only presume that the same has been honored
by the drawee bank in view of the lapse of time that ordinarily
takes for a check to be cleared. For its part, [petitioner] alleged
that on October 2, 1990, it gave notice to the [respondent] as to
the return of his UCPB check deposit in the amount of
P101,000.00, hence, on even date, [respondent] deposited the
amount of P50,000.00 to cover the returned check.
"By way of affirmative defense, [petitioner] averred that
[respondent] had no cause of action against it and argued that it
has all the right to debit the account of the [respondent] by reason
of the dishonor of the check deposited by the [respondent] which
was withdrawn by him prior to its clearing. [Petitioner] further
averred that it has no liability with respect to the clearing of
deposited checks as the clearing is being undertaken by the
Central Bank and in accepting [the] check deposit, it merely
obligates itself as depositor's collecting agent subject to actual
payment by the drawee bank. [Petitioner] therefore prayed that
[respondent] be ordered to pay it the amount of P1,000,000.00 by
way of loss of goodwill, P7,000.00 as acceptance fee plus
P500.00 per appearance and by way of attorney's fees.
"Considering that Westmont Bank has taken over the
management of the affairs/properties of the BANK, [respondent]
on October 10, 1996, filed an Amended Complaint reiterating
substantially his allegations in the original complaint, except that
the name of the previous defendant ASSOCIATED BANK is now
WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision
dated December 3, 1996 in favor of the [respondent] and against
the [petitioner], ordering the latter to pay the [respondent] the sum
of P100,000.00 by way of moral damages, P75,000.00 as
exemplary damages, P25,000.00 as attorney's fees, plus the
costs of this suit. In making said ruling, it was shown that
[respondent] was not officially informed about the debiting of the
P101,000.00 [from] his existing balance and that the BANK
merely allowed the [respondent] to use the fund prior to clearing
merely for accommodation because the BANK considered him as

one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking
account of the [respondent] stating that such lapses caused all
the inconveniences to the [respondent]. The trial court also took
into consideration that [respondent's] mother was originally
maintaining with the . . . BANK [a] current account as well as [a]
time deposit, but [o]n one occasion, although his mother made a
deposit, the same was not credited in her favor but in the name of
another." 4
Petitioner appealed to the CA on the issues of whether it was within its rights, as
collecting bank, to debit the account of its client for a dishonored check; and whether
it had informed respondent about the dishonor prior to debiting his account.
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that the bank should not have authorized the
withdrawal of the value of the deposited check prior to its clearing. Having done so,
contrary to its obligation to treat respondent's account with meticulous care, the bank
violated its own policy. It thereby took upon itself the obligation to officially inform
respondent of the status of his account before unilaterally debiting the amount of
P101,000. Without such notice, it is estopped from blaming him for failing to fund his
account.
The CA opined that, had the P101,000 not been debited, respondent would have had
sufficient funds for the postdated checks he had issued. Thus, the supposed
accommodation accorded by petitioner to him is the proximate cause of his business
woes and shame, for which it is liable for damages.
Because of the bank's negligence, the CA awarded respondent moral damages of
P100,000. It also granted him exemplary damages of P75,000 and attorney's fees of
P25,000.
Hence this Petition. 5
Issue
In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner,
which is acting as a collecting bank, has the right to debit the account of its client for a
check deposit which was dishonored by the drawee bank." 6
The Court's Ruling
The Petition has no merit. ESaITA
Page 127 of 505

Sole Issue:
Debit of Depositor's Account
Petitioner-bank contends that its rights and obligations under the present set of facts
were misappreciated by the CA. It insists that its right to debit the amount of the
dishonored check from the account of respondent is clear and unmistakable. Even
assuming that it did not give him notice that the check had been dishonored, such
right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent
on September 17, 1990, expressly stipulated that the bank was obligating itself merely
as the depositor's collecting agent and until such time as actual payment would be
made to it it was reserving the right to charge against the depositor's account any
amount previously credited. Respondent was allowed to withdraw the amount of the
check prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial court's factual findings that were affirmed by the
CA are not subject to review by this Court. 7 As petitioner itself takes no issue with
those findings, we need only to determine the legal consequence, based on the
established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any
withdrawals on the part of a depositor. 8 The right of a collecting bank to debit a
client's account for the value of a dishonored check that has previously been credited
has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil
Code provides that "[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of
creditor and debtor. 9 Thus, legal compensation under Article 1278 10 of the Civil
Code may take place "when all the requisites mentioned in Article 1279 are
present," 11 as follows:
"(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) That the two debts be due;


(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor." 12
Nonetheless, the real issue here is not so much the right of petitioner to debit
respondent's account but, rather, the manner in which it exercised such right. The
Court has held that even while the right of setoff is conceded, separate is the question
of whether that remedy has properly been exercised. 13
The liability of petitioner in this case ultimately revolves around the issue of whether it
properly exercised its right of setoff. The determination thereof hinges, in turn, on the
bank's role and obligations, first, as respondent's depositary bank; and second, as
collecting agent for the check in question.
Obligation
Depositary Bank

as

In BPI v. Casa Montessori, 14 the Court has emphasized that the banking business is
impressed with public interest. "Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required of it. By
the nature of its functions, a bank is under obligation to treat the accounts of its
depositors with meticulous care." 15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of
Appeals 16 has held that "the degree of diligence required of banks is more than that
of a good father of a family where the fiduciary nature of their relationship with their
depositors is concerned." 17 Indeed, the banking business is vested with the trust and
confidence of the public; hence the "appropriate standard of diligence must be very
high, if not the highest, degree of diligence." 18 The standard applies, regardless of
whether the account consists of only a few hundred pesos or of millions. 19
The fiduciary nature of banking, previously imposed by case law, 20 is now enshrined
in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law
specifically says that the State recognizes the "fiduciary nature of banking that
requires high standards of integrity and performance."
Did petitioner treat respondent's account with the highest degree of care? From all
indications, it did not.
Page 128 of 505

It is undisputed nay, even admitted that purportedly as an act of accommodation


to a valued client, petitioner allowed the withdrawal of the face value of the deposited
check prior to its clearing. That act certainly disregarded the clearance requirement of
the banking system. Such a practice is unusual, because a check is not legal tender
or money; 21 and its value can properly be transferred to a depositor's account only
after the check has been cleared by the drawee bank. 22
Under ordinary banking practice, after receiving a check deposit, a
bank either immediately credit the amount to a depositor's account; or infuse value to
that account only after the drawee bank shall have paid such amount. 23 Before the
check shall have been cleared for deposit, the collecting bank can only "assume" at
its own risk as herein petitioner did that the check would be cleared and paid
out.
Reasonable business practice and prudence, moreover, dictated that petitioner should
not have authorized the withdrawal by respondent of P240,000 on October 1, 1990,
as this amount was over and above his outstanding cleared balance of
P196,793.45. 24 Hence, the lower courts correctly appreciated the evidence in his
favor.
Obligation
Collecting Agent

as

Indeed, the bank deposit slip expressed this reservation:


"In receiving items on deposit, this Bank obligates itself only as
the Depositor's Collecting agent, assuming no responsibility
beyond carefulness in selecting correspondents, and until such
time as actual payments shall have come to its possession, this
Bank reserves the right to charge back to the Depositor's account
any amounts previously credited whether or not the deposited
item is returned. . . ." 25
However, this reservation is not enough to insulate the bank from any liability. In the
past, we have expressed doubt about the binding force of such conditions unilaterally
imposed by a bank without the consent of the depositor. 26 It is indeed arguable that
"in signing the deposit slip, the depositor does so only to identify himself and not to
agree to the conditions set forth at the back of the deposit slip." 27
Further, by the express terms of the stipulation, petitioner took upon itself certain
obligations as respondent's agent, consonant with the well-settled rule that the
relationship between the payee or holder of a commercial paper and the collecting

bank is that of principal and agent. 28 Under Article 1909 29 of the Civil Code, such
bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of
its officers or agents within the course and scope of their employment. 30 Due to the
very nature of their business, banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees. 31 Jurisprudence has
established that the lack of diligence of a servant is imputed to the negligence of the
employer, when the negligent or wrongful act of the former proximately results in an
injury to a third person; 32 in this case, the depositor.
The manager of the bank's Cabanatuan branch, Consorcia Santiago, categorically
admitted that she and the employees under her control had breached bank policies.
They admittedly breached those policies when, without clearance from the drawee
bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount
of the check deposited. Santiago testified that respondent "was not officially informed
about the debiting of the P101,000 from his existing balance of P170,000 on October
2, 1990 . . . " 33
Being the branch manager, Santiago clearly acted within the scope of her authority in
authorizing the withdrawal and the subsequent debiting without notice. Accordingly,
what remains to be determined is whether her actions proximately caused
respondent's injury. Proximate cause is that which in a natural and continuous
sequence, unbroken by any efficient intervening cause produces the injury, and
without which the result would not have occurred. 34
Let us go back to the facts as they unfolded. It is undeniable that the bank's
premature authorization of the withdrawal by respondent on October 1, 1990,
triggered in rapid succession and in a natural sequence the debiting of his
account, the fall of his account balance to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds. The CA correctly noted thus:
". . . [T]he depositor . . . withdrew his money upon the advice by
[petitioner] that his money was already cleared. Without such
advice, [respondent] would not have withdrawn the sum of
P240,000.00. Therefore, it cannot be denied that it was
[petitioner's] fault which allowed [respondent] to withdraw a huge
sum which he believed was already his. TaCEHA
"To emphasize, it is beyond cavil that [respondent] had sufficient
funds for the check. Had the P101,000.00 not [been] debited, the
subject checks would not have been dishonored. Hence, we can
Page 129 of 505

say that [respondent's] injury arose from the dishonor of his wellfunded checks. . . ." 35
Aggravating matters, petitioner failed to show that it had immediately and duly
informed respondent of the debiting of his account. Nonetheless, it argues that the
giving of notice was discernible from his act of depositing P50,000 on October 2,
1990, to augment his account and allow the debiting. This argument deserves short
shrift.
First, notice was proper and ought to be expected. By the bank manager's account,
respondent was considered a "valued client" whose checks had always been
sufficiently funded from 1987 to 1990, 36 until the October imbroglio. Thus, he
deserved nothing less than an official notice of the precarious condition of his
account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability
of a general indorser 37 and the procedure for a notice of dishonor, 38 it was
incumbent on the bank to give proper notice to respondent. In Gullas v. National
Bank, 39 the Court emphasized:
". . . [A] general indorser of a negotiable instrument engages that
if the instrument the check in this case is dishonored and
the necessary proceedings for its dishonor are duly taken, he will
pay the amount thereof to the holder (Sec. 66) It has been held
by a long line of authorities that notice of dishonor is necessary to
charge an indorser and that the right of action against him does
not accrue until the notice is given.

different, and notice should actually have been given him in order
that he might protect his interests." 40

Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we


fully subscribe to the CA's observations that it was not unusual for a well-reputed
businessman like him, who "ordinarily takes note of the amount of money he takes
and releases," to immediately deposit money in his current account to answer for the
postdated checks he had issued. 41
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and
attorney's fees, we will no longer address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Sandoval-Gutierrez, Carpio Morales and Garcia, JJ ., concur.
Corona, J ., is on leav
||| (Associated Bank (now Westmont Bank) v. Tan, G.R. No. 156940, [December 14,
2004], 487 PHIL 512-530)

". . . The fact we believe is undeniable that prior to the mailing of


notice of dishonor, and without waiting for any action by Gullas,
the bank made use of the money standing in his account to make
good for the treasury warrant. At this point recall that Gullas was
merely an indorser and had issued checks in good faith. As to a
depositor who has funds sufficient to meet payment of a check
drawn by him in favor of a third party, it has been held that he has
a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied
the funds so deposited in extinguishment of past due claims held
against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas.,
203.) However this may be, as to an indorser the situation is

Page 130 of 505

Lorenzo Taada, Teofisto Guingona and Feliciano C. Tumale for


petitioners.
Vicente V. Asuncion Jr. for private respondent.

DECISION

AQUINO, J p:

SECOND DIVISION
[G.R. No. 60033. April 4, 1984.]

Respondent Clement David filed a motion for the reconsideration of this Court's
decision dated April 4, 1984, 128 SCRA 577. He contends that this Court failed to
consider that the petitioners entered in the records and books of the Nation Savings
and Loan Association only P305,821.92 out of his deposits in the amounts of
P1,145,546.20, P15,531.94 and $75,000 and that they admitted that they did not
deliver the difference when they assumed in their personal capacities the obligation to
pay him. He argues that the petitioners committed estafa through
misappropriation. LLphil

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and


TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF
MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

On the other hand, the petitioners contend that the decision had already become final
because the Solicitor General did not file any motion for reconsideration; that David
cannot adopt a theory which is inconsistent with his original theory; that his claim is
clearly civil, not criminal; that his claim has been novated, and that prohibition is
proper to stop a void proceeding, to prevent the unlawful and oppressive exercise of
lawful authority and to provide a just and orderly administration of justice.

(REFER TO PAGE 82)

The petitioners filed this prohibition action because their obligation is allegedly civil in
character and because of the adverse publicity supposedly instigated by David.
The factual background may be restated as follows:
EN BANC

[G.R. No. L-60033. July 18, 1985.]


TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE
B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

1. Clement David and his sister Denise Kuhne during the period from March 20, 1979
to March, 1981 made placements with the Nation Savings and Loan Association, Inc.
in the total sum of P1,145,546.20 as evidenced by seven bankers acceptances and
five certificates of time deposits.
He and his sister Denise also had savings deposits in the Nation Savings in the sum
of P13,531.94 as shown in Passbooks Nos. 6-632 and 29-740.

Page 131 of 505

They also invested in Nation Savings US$75,000 in 1980 as evidenced by receipts, of


which $50,000 was deposited in the account of Teofisto Guingona, Jr. with the
Security Bank and Trust Company.
Aggregate investments of David and Kuhne in Nation Savings: P1,159,078.14 in local
currency and 75,000 in U.S. dollars. Nation Savings allegedly paid David from 1979 to
the early part of 1981 interests of P240,000 a year (p. 193, Rollo). llcd
At the time the deposits were made, Antonio I. Martin was the president of Nation
Savings, Teresita G. Santos was its general manager, and Guingona was a director.
2. On March 21, 1981, Nation Savings was placed under receivership by the Central
Bank because of serious fraud and irregularities committed by its key officers (Annex
12).
3. On June 17, 1981, Guingona and Martin executed a promissory note
acknowledging a debt of P1,336,614.02 and $75,000 to be paid in installments within
180 days from said date with interest at 16% per annum from July 1, 1981 until fully
paid.
4. The promissory note was novated by another note, antedated June 17, 1981,
whereby Guingona acknowledged one-half of the obligation as his debt or the sums of
P668,307.01 and $37,500 and secured the same by second mortgages on his
Quezon City properties (Annex D). Guingona paid P200,000 on that note.
5. Martin assumed the other half of the total debt. He secured it with the pledge of a
ring valued according to him at P560,000 but appraised by a jewel appraiser at
P280,000. Martin is also indebted to David in the sum of P60,000 which David paid to
Monte de Piedad to redeem the ring.
6. On July 22, 1981, David received a report from the Central Bank that only
P305,821.92 of the placements made by him and his sister were entered in the NSLA
records (Annex 4, p. 218, Rollo). The director of the CB Department of Rural Banks
and Savings and Loan Associations in a report dated June 23, 1981 recommended
that the irregularities be brought to the attention of the CB consultant on criminal
cases for appropriate investigation of Nation Savings' officials (p. 240, Rollo).
7. In view of the promissory note and the mortgages, David, on July 22, 1981,
executed an affidavit wherein he bound himself to desist from any prosecution of
Guingona without prejudice to the balance of his claim against Nation Savings (Annex
M, p. 46, Rollo).

8. On November 19, 1981, Guingona filed against David Civil Case No. Q-33865 in
the Quezon City Court of First Instance. He prayed for damages of P785,000 against
David for his failure to accept payment of a cashier's check for P300,000 (in addition
to the P200,000) and to release one of the mortgaged properties (Annex K, p. 37,
Rollo).
9. On December 22, 1981, David filed with the City Fiscal's Office, Manila I.S. No. 8131938, a complaint for estafa and violation of CB Circular No. 364 and related
regulations. He claimed that the difference between his placements of P1,159,078.14
and $75,000, on one hand, and the sum of P305,821.92, the amount entered in
Nation Savings' books, on the other hand, constitutes the defraudation against
him. Cdpr
10. He filed the complaint against Guingona, as board chairman, director and
principal stockholder of Nation Savings; Martin, as vice-president, director and
shareholder, and Santos, as general manager. David dealt directly with Guingona,
Martin and Santos in his transactions with Nation Savings. The three filed a countercharge of perjury against David and his lawyers (p. 59, Rollo).
11. On January 20, 1982, David sought to foreclose extrajudicially the two mortgages
(p. 58, Rollo). The foreclosure was restrained by the Quezon City Court of First
Instance.
12. On March 15, 1982, the Solicitor General, in behalf of the Central Bank, filed a
petition in the Court of First Instance of Manila for assistance in the liquidation of
Nation Savings as an insolvent firm (Spec. Proc. No. 82-7552, p. 111, Rollo). The
receivership was challenged by Nation Savings stockholders in Special Proceedings
No. 82-1655 (p. 125, Rollo). The Solicitor General answered that petition by alleging
that Nation Savings was plagued with irregularities (p. 225, Rollo).
With the foregoing background, the prohibition petition should be dismissed. The
petitioners have no cause of action for prohibition because the City Fiscal has
jurisdiction to conduct the preliminary investigation. It has not been finished. The filing
of this petition is premature. The case does not fall within any of the exceptions when
prohibition lies to stop the preliminary investigation (Hernandez vs. Albano, 125 Phil.
513).
"As a general rule, an injunction will not be granted to restrain a criminal prosecution"
(People vs. Mencias, 124 Phil. 1436, 1441). With more reason will injunction not lie
when the case is still at the preliminary investigation stage. This Court should not
usurp the primary function of the City Fiscal to conduct the preliminary investigation of
Page 132 of 505

the estafa charge and of the petitioners' countercharge for perjury, which was
consolidated with the estafa charge (p. 59, Rollo).
The City Fiscal's office should be allowed to finish its investigation and make its
factual findings. This Court should not conduct the preliminary investigation. It is not a
trier of facts. *
The instant case is primarily a litigation between David and the petitioners. The fact
that the Solicitor General, as counsel of the public respondents, did not file a motion
for reconsideration does not estop David from continuing with the prosecution of the
petitioners. In the present posture of the case, the City Fiscal occupies the analogous
position of judge. He has to maintain an attitude of neutrality, not that of partiality.
In view of the foregoing considerations, the decision is reconsidered, the petition is
dismissed and the City Fiscal of Manila is directed to finish the preliminary
investigation. No costs. LLphil
SO ORDERED.
Escolin, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur.
Fernando, C.J., took no part.
Abad Santos, J., I vote to deny the motion for reconsideration.
Plana, J., took no par
||| (Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-60033, [July 18, 1985], 222 PHIL
119-151)
(REFER TO PAGE

SECOND DIVISION
[G.R. No. 128452. November 16, 1999.]
COMPANIA MARITIMA, INC., EL VARADERO DE MANILA,
MINDANAO TERMINAL AND BROKERAGE SERVICES,
CARLOS P. FERNANDEZ, VICENTE T. FERNANDEZ, LUIS T.
FERNANDEZ, and RAMON B. FERNANDEZ, petitioners, vs.
COURT
OF
APPEALS
and
EXEQUIEL
S.
CONSULTA, respondents.

Ceballos & Associates for petitioners.


Exequiel S. Consulta for private respondent.

SYNOPSIS
When properties of petitioner corporations worth P51,000,000.00 were levied upon
and sold at public auction for only P1,235,000.00, petitioners engaged the services of
Atty. Exequiel S. Consulta to represent them in three cases where they were billed
P100,000.00, P50,000.00 and P5,000,000.00 including subsequent appeals to the
Court of Appeals and the Supreme Court. Petitioners, however, paid Atty. Consulta
only a total of P40,000, prompting the latter to file suit for payment of the balance
thereof. The trial court modified the amount claimed and the Court of Appeals
affirmed the same. Here in issue is the reasonableness of the amount of the attorneys
fees awarded and the propriety of the inclusion of private petitioners.
Considering the factors in determining the amount of attorney's fees, both the Court of
Appeals and the trial court approved as reasonable the attorney's fees in three cases
Page 133 of 505

in the amounts of P50,000.00, P30,000.00 and P2,550,000.00 (5% of


P51,000,000.00). With respect to the liability of the individual petitioners, the mere fact
that they were stockholders and directors of corporate petitioners did not justify a
finding that they are liable for the obligations of the corporations. It is well-settled that
as a legal entity, a corporation has a personality separate and distinct from its
individual stockholders or members. They cannot be held guilty of fraud because they
refused to pay the attorneys fees demanded as the amount due was still in dispute at
the time.

DECISION

MENDOZA, J p:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals,
dated February 27, 1996, affirming the decision of the Regional Trial Court, Branch
94, Quezon City, dated March 16, 1993, which ordered petitioners to pay private
respondent, Atty. Exequiel S. Consulta, the total amount of P2,590,000.00, as
attorney's fees, and P21,856.40, as filing fees, in connection with three cases which
the latter, as attorney, handled for the former. LLphil
The facts are as follows:
Maritime Company of the Philippines was sued by Genstar Container Corporation
before the Regional Trial Court, Branch 31, Manila. On November 29, 1985, it was
ordered to pay Genstar Container Corporation the following amounts:
a. $469,860.35, or its equivalent in pesos at the current exchange
rate.
b. 25% of the total obligation, P2,000.00 as Acceptance Fee, and
P250.00 per appearance as Attorney's Fees. LexLib
c. Costs of suit.
As a result, properties of petitioners Compania Maritima, Inc., El Varadero de Manila,
and Mindanao Terminal and Brokerage Services at Sangley Point, Cavite, were levied
upon in execution. The properties, consisting of the tugboats Dadiangas, Marinero,
and Timonel, the floating crane Northwest Murphy Diesel Engine, and the motorized
launch Sea Otter, were worth P51,000,000.00 in sum. However, the same were sold

at public auction for only P1,235,000.00 to the highest bidder, a certain Rolando
Patriarca. 2
Petitioners Compania Maritima, Inc., El Varadero de Manila, and Mindanao Terminal
and Brokerage Services engaged the services of private respondent, Atty. Exequiel S.
Consulta, who represented them in the following cases: (1) Civil Case No. 85-30134,
entitled "Genstar Container Corporation v. Maritime Company of the Philippines,"
wherein petitioners' properties were levied upon although petitioners had not been
impleaded as defendants therein; (2) TBP Case No. 86-03662, entitled "Compania
Maritima, Inc., v. Ramon C. Enriquez," which was a criminal case for falsification and
for violation of R.A. No. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act, against Deputy Sheriff Enriquez before the Tanodbayan; and (3) Civil
Case No. 86-37196 entitled "Compania Maritima v. Genstar Container Corporation,"
an action for Injunction, Annulment of Execution Proceedings, and Damages. 3
The cases were eventually resolved in this wise: (1) in Civil Case No. 85-30134, the
trial court dismissed the third-party claim and motion for the issuance of a writ of
preliminary injunction filed by Atty. Consulta; (2) after Atty. Consulta filed the
complaint with the Tanodbayan in TBP Case No. 86-03662, petitioners transferred the
handling of the case to another lawyer; and (3) Civil Case No. 86-37196 was
eventually dismissed on motion of both parties, but only after the trial court's denial of
the motion to dismiss filed by Genstar Container Corporation was upheld on appeal
by both the Court of Appeals and the Supreme Court. 4
For his services in the three cases, Atty. Consulta billed petitioners as follows: (1)
P100,000.00 for Civil Case No. 85-30134; (2) P50,000.00 for TBP Case No. 8603662; and (3) P5,000,000.00 for Civil Case No. 86-37196, including the subsequent
appeals to the Court of Appeals and the Supreme Court. Petitioners did not pay the
amount demanded but only P30,000.00 for Civil Case No. 85-30134 and P10,000.00
for TBP Case No. 86-03662. 5
Because of the failure of corporate petitioners to pay the balance of his attorney's
fees, Atty. Consulta brought suit against petitioners in the Regional Trial Court, Branch
94, Quezon City. He sought the recovery of the following: (1) P70,000.00, as the
balance of the P100,000.00 attorney's fees billed for Civil Case No. 85-30134; (2)
P40,000.00, as the balance of the P50,000.00 attorney's fees for TBP Case No. 8603662, and (3) P5,000,000.00 as attorney's fees for Civil Case No. 86-37196,
including the subsequent appeals therefrom to the Court of Appeals and the Supreme
Court. He likewise asked for moral and exemplary damages, attorney's fees, and the
costs of suit. 6
Page 134 of 505

On March 16, 1993, the trial court rendered a decision which in part stated:
Considering all the circumstances as above set forth, this Court
believes that the amount equivalent to five percent (5%) of the
amount involved, or the amount of Two Million Five Hundred Fifty
Thousand Pesos (P2,550,000.00) would be reasonable attorney's
fees for the services rendered by the plaintiff in Civil Case No.
37196 and the two related proceedings in the Court of Appeals
and the Supreme Court.
As for the services rendered by the plaintiff in Civil Case No.
30134, for which he appears to have already been paid
P30,000.00, the Court believes that an additional amount of
P20,000.00 would be reasonable.
On plaintiff's demand of P40,000.00, in addition to the
P10,000.00 he had initially received for services rendered in the
Tanodbayan case No. 86-03662, the Court grants him an
additional P20,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court. Said the
appellate court:
In Civil Case No. 37196, where appellee rendered his legal
services, appellants' property worth Fifty One Million Pesos
(P51,000,000.00) was involved. Likewise, the aforementioned
case was not a simple action for collection of money, considering
that complex legal issues were raised therein which reached until
the Supreme Court. In the course of such protracted legal battle
to save the appellants' properties, the appellee prepared
numerous pleadings and motions, which were diligently and
effectively executed, as a result of which, the appellants'
properties were saved from execution and their oppositors were
forced to settle by way of a compromise agreement.
xxx xxx xxx

WHEREFORE, judgment is hereby rendered for the plaintiff and


orders the defendant to pay the plaintiff, jointly and severally,
damages as follows:

It is a well-settled rule that in the recovery of attorney's fees,


whether as a main action or as an incident of another action, the
determination of the reasonableness is within the prerogative of
the courts (Roldan vs. Court of Appeals, 218 SCRA
713; Radiowealth Finance Co., Inc. vs. International Corporate
Bank, 182 SCRA 862; Panay Electric vs. Court of Appeals, 119
SCRA 456). LibLex

a. For services rendered by plaintiff in Civil Case No. 37196 and


the related proceedings in the Court of Appeals and the Supreme
Court Two Million Five Hundred Fifty Thousand Pesos
(P2,550,000.00).

Based on the aforequoted ruling, We find that the court a quo did
not commit any reversible error in awarding attorney's fees
equivalent to five percent (5%) of the total value of properties
involved in Civil Case No. 37196.

b. For services rendered by plaintiff in Civil Case No. 30134


Twenty Thousand Pesos (P20,000.00).
c. For services rendered in the TBP Case No. 86-03662
Twenty Thousand Pesos (P20,000.00).
d. Filing fees in the amount of P21,856.40.
The defendants' counterclaim and plaintiff's counterclaim to
defendants counterclaim are both dismissed.
SO ORDERED.

Hence, this appeal. Petitioners raise the following issues:


a) Whether or not the amount of attorney's fees awarded to the
private respondent by the court a quo and affirmed by
the Honorable Court is reasonable.
b) Whether or not the doctrine of piercing the veil of corporate
fiction may be applied in the case at bar.
With respect to the first question, it is pertinent to note two concepts of attorney's fees
in this jurisdiction. In the ordinary sense, attorney's fees represent the reasonable
compensation paid to a lawyer by his client for the legal services he has rendered to
the latter. On the other hand, in its extraordinary concept, attorney's fees may be
Page 135 of 505

awarded by the court as indemnity for damages to be paid by the losing party to the
prevailing party. 7
The issue in this case concerns attorney's fees in the ordinary concept. Generally, the
amount of attorney's fees due is that stipulated in the retainer agreement which is
conclusive as to the amount of the lawyer's compensation. In the absence thereof, the
amount of attorney's fees is fixed on the basis of quantum meruit, i.e., the reasonable
worth of his services. 8 In determining the amount of attorney's fees, the following
factors are considered: (1) the time spent and extent of services rendered; (2) the
novelty and difficulty of the questions involved; (3) the importance of the subject
matter; (4) the skill demanded; (5) the probability of losing other employment as a
result of the acceptance of the proffered case; (6) the amount involved in the
controversy and the benefits resulting to the client; (7) the certainty of compensation;
(8) the character of employment; and (9) the professional standing of the lawyer. 9
Both the Court of Appeals and the trial court approved attorney's fees in the total
amounts of P50,000.00 and P30,000.00 for the services of Atty. Consulta in Civil
Case No. 85-30134 and TBP Case No. 86-03662, respectively. Based on the above
criteria, we think said amounts are reasonable, although the third-party claim and
motion for the issuance of a writ of preliminary injunction filed by Atty. Consulta in Civil
Case No. 85-30134 was dismissed by the trial court, while TBP Case No. 86-03662
was given by petitioners to another lawyer after Atty. Consulta had filed the complaint.
On the other hand, although the order of the trial court in Civil Case No. 86-37196
granting the motion to dismiss filed by both parties did not state the grounds therefor,
it is reasonable to infer that petitioners agreed thereto in consideration of some
advantage. Hence, the rulings of the Court of Appeals and the trial court that,
because of the complexity of the issues involved and the work done by counsel, the
amount of P2,550,000.00 was reasonable for Atty. Consulta's services.
In addition, the value of the properties involved was considerable. As already stated,
to satisfy the judgment in favor of Genstar Container Corporation in Civil Case No. 8530134, properties of petitioners worth P51,000,000.00 were sold at public auction.
Only P1,235,000.00 was realized from the sale and petitioners were in danger of
losing their properties. As the appellate court pointed out, Atty. Consulta rendered
professional services not only in the trial court but in the Court of Appeals and in this
Court. There is no question that through his efforts, properties owned by petitioners
were saved from execution.
It is settled that great weight, and even finality, is given to the factual conclusions of
the Court of Appeals which affirm those of the trial courts. 10 Only where it is shown
that such findings are whimsical, capricious, and arbitrary can they be overturned. In

the present case, the Court of Appeals affirmed the factual conclusions of the trial
court that: (1) the issues in Civil Case No. 86-03662, including the appeals taken
therefrom to the Court of Appeals and the Supreme Court, were quite complex; (2)
the pleadings filed by Atty. Consulta were well-researched; and (3) as a result of Atty.
Consulta's efforts, the adverse parties were induced to agree to the dismissal of the
case.
Petitioners contend, however, that: (1) the said cases merely involved simple issues;
(2) the pleadings filed by Atty. Consulta did not exhibit an extraordinary level of
competence, effort, and skill; and (3) they did not benefit from the efforts of Atty.
Consulta. These allegations have not been proven. Petitioners have not shown that
the factual findings of both the Court of Appeals and the trial court are contrary to the
evidence. Nor have they shown that they did not benefit from their representation by
Atty. Consulta.
With respect to the liability of individual petitioners Carlos P. Fernandez, Vicente T.
Fernandez, Luis T. Fernandez, and Ramon B. Fernandez, we hold that the mere fact
that they were stockholders and directors of corporate petitioners does not justify a
finding that they are liable for the obligations of the corporations.
It is well-settled that as a legal entity, a corporation has a personality separate and
distinct from its individual stockholders or members. The fiction of corporate entity will
be set aside and the individual stockholders will be held liable for its obligation only if
it is shown that it is being used for fraudulent, unfair, or illegal purposes. 11 In this
case, the Court of Appeals held that individual petitioners were guilty of fraud, based
on its finding that they refused to pay the attorney's fees demanded by Atty. Consulta.
It should be noted, however, that although petitioners Compania Maritima, Inc., El
Varadero de Manila, and Mindanao Terminal and Brokerage Services have an
obligation to pay Atty. Consulta for his attorney's fees, the amount thereof was still in
dispute. It was therefore improper for the Court of Appeals to conclude that individual
petitioners were guilty of fraud simply because corporate petitioners had refused to
make the payments demanded. The fact remains that at the time of demand, the
amount due to Atty. Consulta had not been finally determined.
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals, dated
February 27, 1996, is AFFIRMED with the modification that individual petitioners
Carlos P. Fernandez, Vicente T. Fernandez, Luis T. Fernandez, and Ramon B.
Fernandez are absolved from personal liability for attorney's fees to Atty. Exequiel S.
Consulta. LLjur
SO ORDERED.
Page 136 of 505

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.


||| (Compania Maritima, Inc. v. Court of Appeals, G.R. No. 128452, [November 16,
1999], 376 PHIL 278-287)

CHAPTER 3

SECOND DIVISION
[G.R. No. 126780. February 17, 2005.]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA
PAYAM, petitioners, vs. THE COURT OF APPEALS and
MAURICE McLOUGHLIN,respondents.

DECISION

TINGA, J p:
Page 137 of 505

The primary question of interest before this Court is the only legal issue in the case: It
is whether a hotel may 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.
Before this Court is a Rule 45 petition for review of the Decision 1 dated 19 October
1995 of the Court of Appeals which affirmed the Decision 2 dated 16 December 1991
of the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty
Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam
(Payam) jointly and solidarily liable for damages in an action filed by Maurice
McLoughlin (McLoughlin) for the loss of his American and Australian dollars deposited
in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned and
operated by YHT Realty Corporation.
The factual backdrop of the case follow. IHcSCA
Private respondent McLoughlin, an Australian businessman-philanthropist, used to
stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met
Tan. Tan befriended McLoughlin by showing him around, introducing him to important
people, accompanying him in visiting impoverished street children and assisting him
in buying gifts for the children and in distributing the same to charitable institutions for
poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana
where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of
the hotel while Lainez and Payam had custody of the keys for the safety deposit boxes
of Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he
started staying during his trips to the Philippines from December 1984 to September
1987. 3
On 30 October 1987, McLoughlin arrived from Australia and registered with
Tropicana. He rented a safety deposit box as it was his practice to rent a safety
deposit box every time he registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by Tropicana relative to its safety
deposit boxes. The safety deposit box could only be opened through the use of two
keys, one of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel. When a registered guest wished to open
his safety deposit box, he alone could personally request the management who then
would assign one of its employees to accompany the guest and assist him in opening
the safety deposit box with the two keys. 4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand
US Dollars (US$15,000.00) which he placed in two envelopes, one envelope
containing Ten Thousand US Dollars (US$10,000.00) and the other envelope Five
Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars
(AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged
side by side inside the safety deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin
opened his safety deposit box with his key and with the key of the management and
took therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the
envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his
passports and his credit cards. 6 McLoughlin left the other items in the box as he did
not check out of his room at the Tropicana during his short visit to Hongkong. When
he arrived in Hongkong, he opened the envelope which contained Five Thousand US
Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US
Dollars (US$3,000.00) were enclosed therein. 7 Since he had no idea whether
somebody else had tampered with his safety deposit box, he thought that it was just a
result of bad accounting since he did not spend anything from that envelope. 8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left
for Australia. When he arrived in Australia, he discovered that the envelope with Ten
Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored
in the safety deposit box upon his return to Tropicana was likewise missing, except for
a diamond bracelet. 9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if
some money and/or jewelry which he had lost were found and returned to her or to
the management. However, Lainez told him that no one in the hotel found such things
and none were turned over to the management. He again registered at Tropicana and
rented a safety deposit box. He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to
open his safety deposit box. He noticed that in the envelope containing Fifteen
Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00)
were missing and in the envelope previously containing Ten Thousand Australian
Dollars (AUS$10,000.00), Four Thousand Five Hundred Australian Dollars
(AUS$4,500.00) were missing. 10
Page 138 of 505

When McLoughlin discovered the loss, he immediately confronted Lainez and Payam
who admitted that Tan opened the safety deposit box with the key assigned to
him. 11 McLoughlin went up to his room where Tan was staying and confronted her.
Tan admitted that she had stolen McLoughlin's key and was able to open the safety
deposit box with the assistance of Lopez, Payam and Lainez. 12 Lopez also told
McLoughlin that Tan stole the key assigned to McLoughlin while the latter was
asleep. 13
McLoughlin requested the management for an investigation of the incident. Lopez got
in touch with Tan and arranged for a meeting with the police and McLoughlin. When
the police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana
and thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988.
The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of
AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine
currency on or before May 5, 1988. 14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also
signed as a witness. Despite the execution of promissory note by Tan, McLoughlin
insisted that it must be the hotel who must assume responsibility for the loss he
suffered. However, Lopez refused to accept the responsibility relying on the conditions
for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit
Box," 15 specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any loss in
the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use
thereof by any other person should the key be lost;
xxx xxx xxx
4. To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use of the
box. 16
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as
to the validity of the abovementioned stipulations. They opined that the stipulations
are void for being violative of universal hotel practices and customs. His lawyers
prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent to
President Corazon Aquino. 17 The Office of the President referred the letter to the

Department of Justice (DOJ) which forwarded the same to the Western Police District
(WPD). 18
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to
Malacaang to follow up on his letter but he was instructed to go to the DOJ. The DOJ
directed him to proceed to the WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came
back to the Philippines to follow up on his letter to the President but he failed to obtain
any concrete assistance. 19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August
1989 to pursue his claims against petitioners, the WPD conducted an investigation
which resulted in the preparation of an affidavit which was forwarded to the Manila
City Fiscal's Office. Said affidavit became the basis of preliminary investigation.
However, McLoughlin left again for Australia without receiving the notice of the
hearing on 24 November 1989. Thus, the case at the Fiscal's Office was dismissed for
failure to prosecute. McLoughlin requested the reinstatement of the criminal charge
for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to
those having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate,
Manila. Meetings were held between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990 against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's
money which was discovered on 16 April 1988. After filing the complaint, McLoughlin
left again for Australia to attend to an urgent business matter. Tan and Lopez,
however, were not served with summons, and trial proceeded with only Lainez,
Payam and YHT Realty Corporation as defendants. jur2005cd

After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed
anAmended/Supplemental Complaint 20 dated 10 June 1991 which included another
incident of loss of money and jewelry in the safety deposit box rented by McLoughlin
in the same hotel which took place prior to 16 April 1988. 21 The trial court admitted
the Amended/Supplemental Complaint. IcDESA

Page 139 of 505

During the trial of the case, McLoughlin had been in and out of the country to attend
to urgent business in Australia, and while staying in the Philippines to attend the
hearing, he incurred expenses for hotel bills, airfare and other transportation
expenses, long distance calls to Australia, Meralco power expenses, and expenses
for food and maintenance, among others. 22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby
rendered by this Court in favor of plaintiff and against the
defendants, to wit:
1. Ordering defendants, jointly and severally, to
pay plaintiff the sum of US$11,400.00 or
its equivalent in Philippine Currency of
P342,000.00, more or less, and the sum
of AUS$4,500.00 or its equivalent in
Philippine Currency of P99,000.00, or a
total of P441,000.00, more or less, with
12% interest from April 16, 1988 until
said amount has been paid to plaintiff
(Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to
pay plaintiff the sum of P3,674,238.00
as actual and consequential damages
arising from the loss of his Australian
and American dollars and jewelries
complained against and in prosecuting
his claim and rights administratively and
judicially (Items II, III, IV, V, VI, VII, VIII,
and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P500,000.00 as
moral damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P350,000.00 as

exemplary damages (Item XI, Exh.


"CC");
5. And ordering defendants, jointly and severally,
to pay litigation expenses in the sum of
P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P200,000.00 as
attorney's fees, and a fee of P3,000.00
for every appearance; and
7. Plus costs of suit.
SO ORDERED. 23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the
amount of money he lost were sufficiently shown by his direct and straightforward
manner of testifying in court and found him to be credible and worthy of belief as it
was established that McLoughlin's money, kept in Tropicana's safety deposit box, was
taken by Tan without McLoughlin's consent. The taking was effected through the use
of the master key which was in the possession of the management. Payam and
Lainez allowed Tan to use the master key without authority from McLoughlin. The trial
court added that if McLoughlin had not lost his dollars, he would not have gone
through the trouble and personal inconvenience of seeking aid and assistance from
the Office of the President, DOJ, police authorities and the City Fiscal's Office in his
desire to recover his losses from the hotel management and Tan. 24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which
allegedly occurred during his stay at Tropicana previous to 4 April 1988, no claim was
made by McLoughlin for such losses in his complaint dated 21 November 1990
because he was not sure how they were lost and who the responsible persons were.
But considering the admission of the defendants in their pre-trial brief that on three
previous occasions they allowed Tan to open the box, the trial court opined that it was
logical and reasonable to presume that his personal assets consisting of Seven
Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and
Lainez. 25

Page 140 of 505

The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and were
therefore liable to answer for the losses incurred by McLoughlin. 26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The
Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of
Article 2003 of the New Civil Code and against public policy. 27 Thus, there being
fraud or wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual
obligations. 28
The Court of Appeals affirmed the disquisitions made by the lower court except as to
the amount of damages awarded. The decretal text of the appellate court's decision
reads:
THE FOREGOING CONSIDERED, the appealed Decision is
hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00
and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from
Sidney [sic] to Manila and back for a total of eleven (11)
trips;
3) One-half of P336,207.05 or P168,103.52
payment to Tropicana Apartment Hotel;

representing

4) One-half of P152,683.57 or P76,341.785


payment to Echelon Tower;

representing

5) One-half of P179,863.20 or P89,931.60 for the taxi . . .


transportation from the residence to Sidney [sic] Airport
and from MIA to the hotel here in Manila, for the eleven
(11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;
7) One-half of P356,400.00 or P178,000.00
expenses for food and maintenance;

representing

8) P50,000.00 for moral damages;


9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED. 29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this
appeal by certiorari. cACEHI
Petitioners submit for resolution by this Court the following issues: (a) whether the
appellate court's conclusion on the alleged prior existence and subsequent loss of the
subject money and jewelry is supported by the evidence on record; (b) whether the
finding of gross negligence on the part of petitioners in the performance of their duties
as innkeepers is supported by the evidence on record; (c) whether the "Undertaking
For The Use of Safety Deposit Box" admittedly executed by private respondent is null
and void; and (d) whether the damages awarded to private respondent, as well as the
amounts thereof, are proper under the circumstances. 30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law
and any peripheral factual question addressed to this Court is beyond the bounds of
this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the
safety deposit boxes of Tropicana, the basis of the trial court and the appellate court
being the sole testimony of McLoughlin as to the contents thereof. Likewise,
petitioners dispute the finding of gross negligence on their part as not supported by
the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in open
court by McLoughlin. Such findings are factual and therefore beyond the ambit of the
present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while
testifying which reflected the veracity of the facts testified to by him. On this score, we
give full credence to the appreciation of testimonial evidence by the trial court
especially if what is at issue is the credibility of the witness. The oft-repeated principle
Page 141 of 505

is that where the credibility of a witness is an issue, the established rule is that great
respect is accorded to the evaluation of the credibility of witnesses by the trial
court.31 The trial court is in the best position to assess the credibility of witnesses and
their testimonies because of its unique opportunity to observe the witnesses firsthand
and note their demeanor, conduct and attitude under grilling examination. 32
We are also not impressed by petitioners' argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not supported by
evidence. The evidence reveals that two keys are required to open the safety deposit
boxes of Tropicana. One key is assigned to the guest while the other remains in the
possession of the management. If the guest desires to open his safety deposit box, he
must request the management for the other key to open the same. In other words, the
guest alone cannot open the safety deposit box without the assistance of the
management or its employees. With more reason that access to the safety deposit
box should be denied if the one requesting for the opening of the safety deposit box is
a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is
inevitable to conclude that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss took place. In fact, they
even admitted that they assisted Tan on three separate occasions in opening
McLoughlin's safety deposit box. 33 This only proves that Tropicana had prior
knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and
waited for him to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by McLoughlin by
reason of the negligence of its employees.

The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three times in
opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while
the latter was still asleep. 34 In light of the circumstances surrounding this case, it is
undeniable that without the acquiescence of the employees of Tropicana to the
opening of the safety deposit box, the loss of McLoughlin's money could and should
have been avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most of the

time. The evidence on record, however, is bereft of any showing that McLoughlin
introduced Tan to the management as his wife. Such an inference from the act of
McLoughlin will not exculpate the petitioners from liability in the absence of any
showing that he made the management believe that Tan was his wife or was duly
authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved
in the instant case is the very safety of McLoughlin's deposit. If only petitioners
exercised due diligence in taking care of McLoughlin's safety deposit box, they should
have confronted him as to his relationship with Tan considering that the latter had
been observed opening McLoughlin's safety deposit box a number of times at the
early hours of the morning. Tan's acts should have prompted the management to
investigate her relationship with McLoughlin. Then, petitioners would have exercised
due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotelkeepers under the law. TEDHaA
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the same Code provides
that the owners and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the service of the branches in
which the latter are employed or on the occasion of their functions. Also, this Court
has ruled that if an employee is found negligent, it is presumed that the employer was
negligent in selecting and/or supervising him for it is hard for the victim to prove the
negligence of such employer. 35 Thus, given the fact that the loss of McLoughlin's
money was consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's consent, both the
assisting employees and YHT Realty Corporation itself, as owner and operator of
Tropicana, should be held solidarily liable pursuant to Article 2193. 36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed
by McLoughlin is tainted with nullity presents a legal question appropriate for
resolution in this petition. Notably, both the trial court and the appellate court found the
same to be null and void. We find no reason to reverse their common conclusion.
Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself 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 responsibility of the
Page 142 of 505

former as set forth in Articles 1998 to 2001 37 is suppressed or


diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business
like the common carrier's business is imbued with public interest. Catering to the
public, hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public to be negated or
diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in
prepared forms imposed by hotel keepers on guests for their signature.
In an early case, 38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they be actually
delivered to the innkeepers or their employees. It is enough that such effects are
within the hotel or inn. 39 With greater reason should the liability of the hotelkeeper 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, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the
New Civil Code for they allow Tropicana to be released from liability arising from any
loss in the contents and/or use of the safety deposit box for any cause
whatsoever. 40 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. 41 It is the loss through force majeure that may spare the hotelkeeper 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 asforce majeure. 42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotelkeeper from liability if the loss is due to the acts of his guest, his family, or visitors.
Even a cursory reading of the provision would lead us to reject petitioners' contention.
The justification they raise would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the employer or its employees
facilitated the consummation of a crime committed by the registered guest's relatives
or visitor? Should the law exculpate the hotel from liability since the loss was due to

the act of the visitor of the registered guest of the hotel? Hence, this provision
presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not
responsible for the loss of goods by theft, unless his actionable negligence
contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two keys are necessary
to open the safety deposit box. Without the assistance of hotel employees, the loss
would not have occurred. Thus, Tropicana was guilty of concurrent negligence in
allowing Tan, who was not the registered guest, to open the safety deposit box of
McLoughlin, even assuming that the latter was also guilty of negligence in allowing
another person to use his key. To rule otherwise would result in undermining the
safety of the safety deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a family member or a
visitor of the guest, to have access to the safety deposit box without fear of any liability
that will attach thereafter in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any liability incurred by its
employees in conspiracy with the guest's relatives and visitors. DaECST
Petitioners contend that McLoughlin's case was mounted on the theory of contract,
but the trial court and the appellate court upheld the grant of the claims of the latter on
the basis of tort. 45 There is nothing anomalous in how the lower courts decided the
controversy for this Court has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual relations. The act that breaks the contract
may also be tort. 46
As to damages awarded to McLoughlin, we see no reason to modify the amounts
awarded by the appellate court for the same were based on facts and law. It is within
the province of lower courts to settle factual issues such as the proper amount of
damages awarded and such finding is binding upon this Court especially if sufficiently
proven by evidence and not unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four
Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at
the time of payment, 47 being the amounts duly proven by evidence. 48 The alleged
loss that took place prior to 16 April 1988 was not considered since the amounts
alleged to have been taken were not sufficiently established by evidence. The
appellate court also correctly awarded the sum of P308,880.80, representing the peso
value for the air fares from Sydney to Manila and back for a total of eleven (11)
trips; 49 one-half of P336,207.05 or P168,103.52 representing payment to
Tropicana; 50 one-half of P152,683.57 or P76,341.785 representing payment to
Page 143 of 505

Echelon Tower; 51 one-half of P179,863.20 or P89,931.60 for the taxi or


transportation expenses from McLoughlin's residence to Sydney Airport and from MIA
to the hotel here in Manila, for the eleven (11) trips; 52 one-half of P7,801.94 or
P3,900.97 representing Meralco power expenses; 53 one-half of P356,400.00 or
P178,000.00 representing expenses for food and maintenance. 54

(7) One-half of P356,400.00 or P178,200.00


expenses for food and maintenance;

The amount of P50,000.00 for moral damages is reasonable. Although trial courts are
given discretion to determine the amount of moral damages, the appellate court may
modify or change the amount awarded when it is palpably and scandalously
excessive. Moral damages are not intended to enrich a complainant at the expense of
a defendant. They are awarded only to enable the injured party to obtain means,
diversion or amusements that will serve to alleviate the moral suffering he has
undergone, by reason of defendants' culpable action. 55

(10) P200,000 representing attorney's fees.

The awards of P10,000.00 as exemplary damages and P200,000.00 representing


attorney's fees are likewise sustained.

(8) P50,000.00 for moral damages;


(9) P10,000.00 as exemplary damages; and

With costs.
SO ORDERED.
Puno, Callejo, Sr. and Chico-Nazario, JJ., concur.
Austria-Martinez, J., took no part.
||| (YHT Realty Corp. v. Court of Appeals, G.R. No. 126780, [February 17, 2005], 492
PHIL 29-51)

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals


dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at
the time of payment;
(2) P308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven
(11) trips;

SECOND DIVISION
[G.R. No. 179419. January 12, 2011.]
DURBAN APARTMENTS CORPORATION, doing business
under the name and style of City Garden Hotel, petitioner, vs.
PIONEER
INSURANCE
AND
SURETY
CORPORATION, respondent.

(3) One-half of P336,207.05 or P168,103.52 representing


payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785
payment to Echelon Tower;

representing

DECISION

representing

(5) One-half of P179,863.20 or P89,931.60 for the taxi or


transportation expense from McLoughlin's residence to
Sydney Airport and from MIA to the hotel here in Manila,
for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;

NACHURA, J p:
For review is the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 86869,
which affirmed the decision 2 of the Regional Trial Court (RTC), Branch 66, Makati
City, in Civil Case No. 03-857, holding petitioner Durban Apartments Corporation
solely liable to respondent Pioneer Insurance and Surety Corporation for the loss of
Jeffrey See's (See's) vehicle.
Page 144 of 505

The facts, as found by the CA, are simple.


On July 22, 2003, [respondent] Pioneer Insurance and Surety
Corporation . . ., by right of subrogation, filed [with the RTC of
Makati City] a Complaint for Recovery of Damages against
[petitioner] Durban Apartments Corporation, doing business
under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste . . . . [Respondent averred]
that: it is the insurer for loss and damage of Jeffrey S. See's [the
insured's] 2001 Suzuki Grand Vitara . . . with Plate No. XBH-510
under Policy No. MC-CV-HO-01-0003846-00-D in the amount of
P1,175,000.00; on April 30, 2002, See arrived and checked in at
the City Garden Hotel in Makati corner Kalayaan Avenues, Makati
City before midnight, and its parking attendant, defendant . . .
Justimbaste got the key to said Vitara from See to park it[. O]n
May 1, 2002, at about 1:00 o'clock in the morning, See was
awakened in his room by [a] telephone call from the Hotel Chief
Security Officer who informed him that his Vitara was carnapped
while it was parked unattended at the parking area of Equitable
PCI Bank along Makati Avenue between the hours of 12:00 [a.m.]
and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer,
thereafter reported the incident to the Operations Division of the
Makati City Police Anti-Carnapping Unit, and a flash alarm was
issued; the Makati City Police Anti-Carnapping Unit investigated
Hotel Security Officer, Ernesto T. Horlador, Jr. . . . and defendant .
. . Justimbaste; See gave hisSinumpaang Salaysay to the police
investigator, and filed a Complaint Sheet with the PNP Traffic
Management Group in Camp Crame, Quezon City; the Vitara has
not yet been recovered since July 23, 2002 as evidenced by a
Certification of Non-Recovery issued by the PNP TMG; it paid the
P1,163,250.00 money claim of See and mortgagee ABN AMRO
Savings Bank, Inc. as indemnity for the loss of the Vitara; the
Vitara was lost due to the negligence of [petitioner] Durban
Apartments and [defendant] 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 service of [petitioner] Durban Apartments and no
necessary precautions were taken to prevent its repetition;
[petitioner] Durban Apartments was wanting in due diligence in
the selection and supervision of its employees particularly

defendant . . . Justimbaste; and defendant . . . Justimbaste and


[petitioner] Durban Apartments failed and refused to pay its valid,
just, and lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and
[defendant] Justimbaste filed their Answer with Compulsory
Counterclaim alleging that: See did not check in at its hotel, on
the contrary, he was a guest of a certain Ching Montero . . .;
defendant . . . Justimbaste did not get the ignition key of See's
Vitara, on the contrary, it was See who requested a parking
attendant to park the Vitara at any available parking space, and it
was parked at the Equitable Bank parking area, which was within
See's view, while he and Montero were waiting in front of the
hotel; they made a written denial of the demand of [respondent]
Pioneer Insurance for want of legal basis; 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 that it gave to Montero and See; it does not include
responsibility for any losses or damages to motor vehicles and its
accessories in the parking area; and the same holds true even if
it was See himself who parked his Vitara within the premises of
the hotel as evidenced by the valet parking customer's claim stub
issued to him; the carnapper was able to open the Vitara without
using the key given earlier to the parking attendant and
subsequently turned over to See after the Vitara was stolen;
defendant . . . Justimbaste saw the Vitara speeding away from
the place where it was parked; he tried to run after it, and blocked
its possible path but to no avail; and See was duly and
immediately informed of the carnapping of his Vitara; the matter
was reported to the nearest police precinct; and defendant . . .
Justimbaste, and Horlador submitted themselves to police
investigation. SATDHE
During the pre-trial conference on November 28, 2003, counsel
for [respondent] Pioneer Insurance was present. Atty. Monina Lee
. . ., counsel of record of [petitioner] Durban Apartments and
Justimbaste was absent, instead, a certain Atty. Nestor Mejia
appeared for [petitioner] Durban Apartments and Justimbaste,
but did not file their pre-trial brief.
Page 145 of 505

On November 5, 2004, the lower court granted the motion of


[respondent] Pioneer Insurance, despite the opposition of
[petitioner] Durban Apartments and Justimbaste, and allowed
[respondent] Pioneer Insurance to present its evidence ex
parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the
evening, he drove his Vitara and stopped in front of City Garden
Hotel in Makati Avenue, Makati City; a parking attendant, whom
he had later known to be defendant . . . Justimbaste, approached
and asked for his ignition key, told him that the latter would park
the Vitara for him in front of the hotel, and issued him a valet
parking customer's claim stub; he and Montero, thereafter,
checked in at the said hotel; on May 1, 2002, at around 1:00 in
the morning, the Hotel Security Officer whom he later knew to be
Horlador called his attention to the fact that his Vitara was
carnapped while it was parked at the parking lot of Equitable PCI
Bank which is in front of the hotel; his Vitara was insured with
[respondent] Pioneer Insurance; he together with Horlador and
defendant . . . Justimbaste went to Precinct 19 of the Makati City
Police to report the carnapping incident, and a police officer came
accompanied them to the Anti-Carnapping Unit of the said station
for investigation, taking of their sworn statements, and flashing of
a voice alarm; he likewise reported the said incident in PNP TMG
in Camp Crame where another alarm was issued; he filed his
claim with [respondent] Pioneer Insurance, and a representative
of the latter, who is also an adjuster of Vesper Insurance
Adjusters-Appraisers [Vesper], investigated the incident; and
[respondent] Pioneer Insurance required him to sign a Release of
Claim and Subrogation Receipt, and finally paid him the sum of
P1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of
[petitioner] Pioneer Insurance tasked, among others, with the
receipt of claims and documents from the insured, investigation of
the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until its
payment; he monitored the processing of See's claim when the
latter reported the incident to [respondent] Pioneer Insurance;
[respondent] Pioneer Insurance assigned the case to Vesper who

verified See's report, conducted an investigation, obtained the


necessary documents for the processing of the claim, and
tendered a settlement check to See; they evaluated the case
upon receipt of the subrogation documents and the adjuster's
report, and eventually recommended for its settlement for the
sum of P1,163,250.00 which was accepted by See; the matter
was referred and forwarded to their counsel, R.B. Sarajan &
Associates, who prepared and sent demand letters to [petitioner]
Durban Apartments and [defendant] Justimbaste, who did not
pay [respondent] Pioneer Insurance notwithstanding their receipt
of the demand letters; and the services of R.B. Sarajan &
Associates were engaged, for P100,000.00 as attorney's fees
plus P3,000.00 per court appearance, to prosecute the claims of
[respondent] Pioneer Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper;
[respondent] Pioneer Insurance assigned to Vesper the
investigation of See's case, and he was the one actually assigned
to investigate it; he conducted his investigation of the matter by
interviewing See, going to the City Garden Hotel, required
subrogation documents from See, and verified the authenticity of
the same; he learned that it is the standard procedure of the said
hotel as regards its valet parking service to assist their guests as
soon as they get to the lobby entrance, park the cars for their
guests, and place the ignition keys in their safety key box;
considering that the hotel has only twelve (12) available parking
slots, it has an agreement with Equitable PCI Bank permitting the
hotel to use the parking space of the bank at night; he also
learned that a Hyundai Starex van was carnapped at the said
place barely a month before the occurrence of this incident
because Liberty Insurance assigned the said incident to Vespers,
and Horlador and defendant . . . Justimbaste admitted the
occurrence of the same in their sworn statements before the AntiCarnapping Unit of the Makati City Police; upon verification with
the PNP TMG [Unit] in Camp Crame, he learned that See's Vitara
has not yet been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle See's
claim for P1,045,750.00; See contested the recommendation of
Vesper by reasoning out that the 10% depreciation should not be
Page 146 of 505

applied in this case considering the fact that the Vitara was used
for barely eight (8) months prior to its loss; and [respondent]
Pioneer Insurance acceded to See's contention, tendered the
sum of P1,163,250.00 as settlement, the former accepted it, and
signed a release of claim and subrogation receipt.
The lower court denied the Motion to Admit Pre-Trial Brief and
Motion for Reconsideration field by [petitioner] Durban
Apartments and Justimbaste in its Orders dated May 4, 2005 and
October 20, 2005, respectively, for being devoid of
merit. 3 HDTISa
Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as follows:
WHEREFORE, judgment is hereby rendered ordering [petitioner
Durban Apartments Corporation] to pay [respondent Pioneer
Insurance and Surety Corporation] the sum of P1,163,250.00
with legal interest thereon from July 22, 2003 until the obligation
is fully paid and attorney's fees and litigation expenses amounting
to P120,000.00.
SO ORDERED. 4
On appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January
27, 2006 of the RTC, Branch 66, Makati City in Civil Case No. 03857 is hereby AFFIRMED insofar as it holds [petitioner] Durban
Apartments Corporation solely liable to [respondent] Pioneer
Insurance and Surety Corporation for the loss of Jeffrey See's
Suzuki Grand Vitara.
SO ORDERED. 5
Hence, this recourse by petitioner.
The issues for our resolution are:
1.Whether the lower courts erred in declaring petitioner as in
default for failure to appear at the pre-trial conference
and to file a pre-trial brief;
2.Corollary thereto, whether the trial court correctly allowed
respondent to present evidence ex-parte;

3.Whether petitioner is liable to respondent for attorney's fees in


the amount of P120,000.00; and
4.Ultimately, whether petitioner is liable to respondent for the loss
of See's vehicle.
The petition must fail.
We are in complete accord with the common ruling of the lower courts that petitioner
was in default for failure to appear at the pre-trial conference and to file a pre-trial
brief, and thus, correctly allowed respondent to present evidence ex-parte. Likewise,
the lower courts did not err in holding petitioner liable for the loss of See's vehicle.
Well-entrenched in jurisprudence is the rule that factual findings of the trial court,
especially when affirmed by the appellate court, are accorded the highest degree of
respect and are considered conclusive between the parties. 6 A review of such
findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises, or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd, or impossible; (3) when there is grave
abuse of discretion in the appreciation of facts; (4) when the findings of the appellate
court go beyond the issues of the case, or fail to notice certain relevant facts which, if
properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention
of the specific evidence on which they are based, are premised on the absence of
evidence, or are contradicted by evidence on record. 7 None of the foregoing
exceptions permitting a reversal of the assailed decision exists in this
instance. IDASHa
Petitioner urges us, however, that "strong [and] compelling reason[s]" such as the
prevention of miscarriage of justice warrant a suspension of the rules and excuse its
and its counsel's non-appearance during the pre-trial conference and their failure to
file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for equivocation; appearance of parties
and their counsel at the pre-trial conference, along with the filing of a corresponding
pre-trial brief, is mandatory, nay, their duty. Thus, Section 4 and Section 6 thereof
provide:
SEC. 4.Appearance of parties. It shall be the duty of the
parties and their counsel to appear at the pre-trial. The nonPage 147 of 505

appearance of a party may be excused only if a valid cause is


shown therefor or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement, to
submit to alternative modes of dispute resolution, and to enter
into stipulations or admissions of facts and documents.
SEC. 6.Pre-trial brief. The parties shall file with the court and
serve on the adverse party, in such manner as shall ensure their
receipt thereof at least three (3) days before the date of the pretrial, their respective pre-trial briefs which shall contain, among
others:
xxx xxx xxx
Failure to file the pre-trial brief shall have the same effect as
failure to appear at the pre-trial.
Contrary to the foregoing rules, petitioner and its counsel of record were not present
at the scheduled pre-trial conference. Worse, they did not file a pre-trial brief. Their
non-appearance cannot be excused as Section 4, in relation to Section 6, allows only
two exceptions: (1) a valid excuse; and (2) appearance of a representative on behalf
of a party who is fully authorized in writing to enter into an amicable settlement, to
submit to alternative modes of dispute resolution, and to enter into stipulations or
admissions of facts and documents.
Petitioner is adamant and harps on the fact that November 28, 2003 was merely the
first scheduled date for the pre-trial conference, and a certain Atty. Mejia appeared on
its behalf. However, its assertion is belied by its own admission that, on said date, this
Atty. Mejia "did not have in his possession the Special Power of Attorney issued by
petitioner's Board of Directors."
As pointed out by the CA, petitioner, through Atty. Lee, received the notice of pre-trial
on October 27, 2003, thirty-two (32) days prior to the scheduled conference. In that
span of time, Atty. Lee, who was charged with the duty of notifying petitioner of the
scheduled pre-trial conference, 8 petitioner, and Atty. Mejia should have discussed
which lawyer would appear at the pre-trial conference with petitioner, armed with the
appropriate authority therefor. Sadly, petitioner failed to comply with not just one rule;
it also did not proffer a reason why it likewise failed to file a pre-trial brief. In all,
petitioner has not shown any persuasive reason why it should be exempt from abiding
by the rules.

The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial brief and
with only his bare allegation that he is counsel for petitioner, was correctly rejected by
the trial court. Accordingly, the trial court, as affirmed by the appellate court, did not
err in allowing respondent to present evidence ex-parte. SEDaAH
Former Chief Justice Andres R. Narvasa's words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory, and
has been so since January 1, 1964. Yet to this day its place in the
scheme of things is not fully appreciated, and it receives but
perfunctory treatment in many courts. Some courts consider it a
mere technicality, serving no useful purpose save perhaps,
occasionally to furnish ground for non-suiting the plaintiff, or
declaring a defendant in default, or, wistfully, to bring about a
compromise. The pre-trial device is not thus put to full use.
Hence, it has failed in the main to accomplish the chief objective
for it: the simplification, abbreviation and expedition of the trial, if
not indeed its dispensation. This is a great pity, because the
objective is attainable, and with not much difficulty, if the device
were more intelligently and extensively handled.
xxx xxx xxx
Consistently with the mandatory character of the pre-trial, the
Rules oblige not only the lawyers but the parties as well to appear
for this purpose before the Court, and when a party "fails to
appear at a pre-trial conference (he) may be non-suited or
considered as in default." The obligation "to appear" denotes not
simply the personal appearance, or the mere physical
presentation by a party of one's self, but connotes as importantly,
preparedness to go into the different subject assigned by law to a
pre-trial. And in those instances where a party may not himself be
present at the pre-trial, and another person substitutes for him, or
his lawyer undertakes to appear not only as an attorney but in
substitution of the client's person, it is imperative for that
representative of the lawyer to have "special authority" to make
such substantive agreements as only the client otherwise has
capacity to make. That "special authority" should ordinarily be in
writing or at the very least be "duly established by evidence other
than the self-serving assertion of counsel (or the proclaimed
representative) himself." Without that special authority, the lawyer
Page 148 of 505

or representative cannot be deemed capacitated to appear in


place of the party; hence, it will be considered that the latter has
failed to put in an appearance at all, and he [must] therefore "be
non-suited or considered as in default," notwithstanding his
lawyer's or delegate's presence. 9
We are not unmindful that defendant's (petitioner's) preclusion from presenting
evidence during trial does not automatically result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate the allegations in its
complaint. 10 Otherwise, it would be inutile to continue with the plaintiff's presentation
of evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a contract
of necessary deposit existed between the insured See and petitioner. On this score,
we find no error in the following disquisition of the appellate court:
[The] records also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and parking attendant of
the said hotel, . . . Justimbaste, about his Vitara when he
entrusted its ignition key to the latter. . . . Justimbaste issued a
valet parking customer claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed the ignition key
inside a safety key box while See proceeded to the hotel lobby to
check in. The Equitable PCI Bank parking area became an annex
of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the
evening after banking hours. 11
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit
and a necessary deposit made by persons in hotels or inns:
Art. 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. aCSTDc
Art. 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 depositaries, provided
that notice was given to them, or to their employees, of the effects
brought by the guests and that, on the part of the latter, they take

the precautions which said hotel-keepers or their substitutes


advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited his vehicle
for safekeeping with petitioner, through the latter's 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 to Justimbaste the keys to his vehicle,
which Justimbaste received with the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of See's vehicle.
Lastly, petitioner assails the lower courts' award of attorney's fees to respondent in the
amount of P120,000.00. Petitioner claims that the award is not substantiated by the
evidence on record.
We disagree.
While it is a sound policy not to set a premium on the right to litigate, 12 we find that
respondent is entitled to reasonable attorney's fees. Attorney's fees may be awarded
when a party is compelled to litigate or incur expenses to protect its interest, 13 or
when the court deems it just and equitable. 14 In this case, 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, we reduce the award of P120,000.00 to
P60,000.00 in view of the simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 86869 is AFFIRMED with the MODIFICATION that the award of
attorney's fees is reduced to P60,000.00. Costs against petitioner.
SO ORDERED.
Carpio, Peralta, Abad and Mendoza, JJ., concur.
||| (Durban Apartments Corp. v. Pioneer Insurance and Surety Corp., G.R. No.
179419, [January 12, 2011], 654 PHIL 413-427)

CONTRACTS OF SECURITY

FIRST DIVISION
Page 149 of 505

[G.R. No. 72275. November 13, 1991.]

DECISION

pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred
by said Celia Aurora Syjuco Regala with the use of the Pacificard,
or renewals thereof, issued in her favor by the Pacific Banking
Corporation'. It was also agreed that 'any changes of or novation
in the terms and conditions in connection with the issuance or
use of the Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release
me/us from responsibility hereunder, it being understood that I
fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me
until the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid.'

This is a petition for review on certiorari of the decision (pp. 21-31, Rollo) of the
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No.
02753, 1 which modified the decision of the trial court against herein private
respondent Roberto Regala, Jr., one of the defendants in the case for sum of money
filed by Pacific Banking Corporation.

"Plaintiff-appellee Pacific Banking Corporation has contracted


with accredited business establishments to honor purchases of
goods and or services by Pacificard holders and the cost thereof
to be advanced by the plaintiff-appellee for the account of the
defendant cardholder, and the latter undertook to pay any
statements of account rendered by the plaintiff-appellee for the
advances thus made within thirty (30) days from the date of the
statement, provided that any overdue account shall earn interest
at the rate of 14% per annum from date of default.

PACIFIC
BANKING
CORPORATION, petitioner, vs. HON.
INTERMEDIATE APPELLATE COURT AND ROBERTO
REGALA, JR., respondents.

Ocampo, Dizon & Domingo for petitioner.


Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J p:

The facts of the case as adopted by the respondent appellate court from herein
petitioner's brief before said court are as follows:
"On October 24, 1975, defendant Celia Syjuco Regala
(hereinafter referred to as Celia Regala for brevity), applied for
and obtained from the plaintiff the issuance and use of Pacificard
credit card (Exhs. 'A', 'A-1'), under the "Terms and Conditions
Governing the Issuance and Use of Pacificard (Exh. 'B' and
hereinafter referred to as Terms and Conditions), a copy of which
was issued to and received by the said defendant on the date of
the application and expressly agreed that the use of the
Pacificard is governed by said Terms and Conditions. On the
same date, the defendant-appellant Robert Regala, Jr., spouse of
defendant Celia Regala, executed a 'Guarantor's Undertaking'
(Exh. 'A-1-a') in favor of the appellee Bank, whereby the latter
agreed 'jointly and severally of Celia Aurora Syjuco Regala, to

"The defendant Celia Regala, as such Pacificard holder, had


purchased goods and/or services on credit (Exh. 'C', 'C-1' to 'C112') under her Pacificard, for which the plaintiff advanced the
cost amounting to P92,803.98 at the time of the filing of the
complaint.
'In view of defendant Celia Regala's failure to settle her account
for the purchases made thru the use of the Pacificard, a written
demand (Exh. 'D') was sent to the latter and also to the defendant
Roberto Regala, Jr. ('Exh.' ') under his 'Guarantor's Undertaking.'
"A complaint was subsequently filed in Court for defendant's (sic)
repeated failure to settle their obligation. Defendant Celia Regala
was declared in default for her failure to file her answer within the
reglementary period. Defendant-appellant Roberto Regala, Jr., on
the other hand, filed his Answer with Counterclaim admitting his
execution of the 'Guarantor's Understanding, but with the
Page 150 of 505

understanding that his liability would be limited to P2,000.00 per


month.'

The defendants appealed from the decision of the court a quo to the Intermediate
Appellate Court.

"In view of the solidary nature of the liability of the parties, the
presentation of evidence ex-parte as against the defendant Celia
Regala was jointly held with the trial of the case as against the
defendant Roberto Regala.

On August 12, 1985, respondent appellate court rendered judgment modifying the
decision of the trial court. Private respondent Roberto Regala, Jr. was made liable
only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00
a month and only for the advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive
portion of the decision states:

"After the presentation of plaintiff's testimonial and documentary


evidence, fire struck the City Hall of Manila, including the court
where the instant case was pending, as well as all its records.
"Upon plaintiff-appellee's petition for reconstitution, the records of
the instant case were duly reconstituted. Thereafter, the case was
set for pre-trial conference with respect to the defendantappellant Roberto Regala on plaintiff-appellee's motion, after
furnishing the latter a copy of the same. No opposition thereto
having been interposed by defendant-appellant, the trial court set
the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the
trial court for said conference despite due notice. Consequently,
plaintiff-appellee moved that the defendant-appellant Roberto
Regala be declared as in default and that it be allowed to present
its evidence ex-parte, which motion was granted. On July 21,
1983, plaintiff-appellee presented its evidence ex-parte. (pp. 2326, Rollo).
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive
portion of which reads:
"WHEREFORE, the Court renders judgment for the plaintiff and
against the defendants condemning the latter, jointly and
severally, to pay said plaintiff the amount of P92,803.98, with
interest thereon at 14% per annum, compounded annually, from
the time of demand on November 17, 1978 until said principal
amount is fully paid; plus 15% of the principal obligation as and
for attorney's fees and expense of suit, and the costs.
"The counterclaim of defendant Roberto Regala, Jr. is dismissed
for lack of merit.
"SO ORDERED." (pp. 22-23, Rollo)

WHEREFORE, the judgment of the trial court dated December 5,


1983 is modified only as to appellant Roberto Regala, Jr., so as
to make him liable only for the purchases made by defendant
Celia Aurora Syjuco Regala with the use of the Pacificard from
October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month only, with interest from the filing of the
complaint up to the payment at the rate of 14% per annum
without pronouncement as to costs." (p. 32, Rollo). Cdpr
A motion for reconsideration was filed by Pacific Banking Corporation which the
respondent appellate court denied for lack of merit on September 19, 1985 (p.
33,Rollo).

On November 8, 1985, Pacificard filed this petition. The petitioner contends that while
the appellate court correctly recognized Celia Regala's obligation to Pacific Banking
Corp. for the purchases of goods and services with the use of a Pacificard credit card
in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting
private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia
Regala with the use of the card from October 29, 1975 up to October 29, 1976 up to
the amount of P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking' which private respondent
Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:
"I/We, the undersigned, hereby agree, jointly and severally with
Celia Syjuco Regala to pay the Pacific Banking Corporation upon
demand any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the
use of the Pacificard or renewals thereof issued in his favor by
Page 151 of 505

the Pacific Banking Corporation. Any changes of or Novation in


the terms and conditions in connection with the issuance or use
of said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release
me/us from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid." ( p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a contract
of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of
the principal debtor only in case the latter should fail to do so, in a contract of
suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil
Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent
Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally
with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand,
any and all indebtedness, obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her)
favor by Pacific Banking Corporation." This undertaking was also provided as a
condition in the issuance of the Pacificard to Celia Regala, thus:
"5. A Pacificard is issued to a Pacificard-holder against the joint
and several signature of a third party and as such, the Pacificard
holder and the guarantor assume joint and several liabilities for
any and all amount arising out of the use of the Pacificard." (p
14, Rollo).
The respondent appellate court held that "all the other rights of the guarantor are not
thereby lost by the guarantor becoming liable solidarily and therefore a surety." It
further ruled that although the surety's liability is like that of a joint and several debtor,
it does not make him the debtor but still the guarantor (or the surety), relying on the
case of Government of the Philippines v. Tizon, G.R. No. L-22108, August 30, 1967,
20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited
liability on the part of the guarantor or debtor still applies. LexLib
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for
less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions. 2 It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala

succeeded in using the card beyond the original period of its effectivity, October 29,
1979. We do not agree however, that Roberto Jr.'s liability should be limited to that
extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound
himself up to the extent of the debtor's (Celia) indebtedness likewise expressly
waiving any "discharge in case of any change or novation of the terms and conditions
in connection with the issuance of the Pacificard credit card." Roberto, in fact, made
his commitment as a surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear under the
"Guarantor's Undertaking' Roberto signed, thus:
" . . . . Any changes of or novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the
liabilities of of the said Celia Syjuco Regala have been fully
satisfied or paid." (p. 12, supra; emphasis supplied).
Private respondent Roberto Regala, Jr. had been made aware by the terms of the
undertaking of future changes in the terms and conditions governing the issuance of
the credit card to his wife and that notwithstanding, he voluntarily agreed to be bound
as a surety. As in guaranty, a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is
misplaced. It was held in that case that:
" . . . , although the defendants bound themselves in solidum, the
liability of the Surety under its bond would arise only if its codefendants, the principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case of Municipality of
Orion vs. Concha, the liability of the Surety is 'consequent upon
the liability' of Tizon, or 'so dependent on that of the principal
debtor' that the Surety 'is considered in law as being the same
party as the debtor in relation to whatever is adjudged, touching
the obligation of the latter'; or the liabilities of the two defendants
herein 'are so interwoven and dependent as to be inseparable.'
Changing the expression, if the defendants are held liable, their
liability to pay the plaintiff would be solidary, but the nature of the
Page 152 of 505

Surety's undertaking is such that it does not incur liability unless


and until the principal debtor is held liable."
A guarantor or surety does not incur liability unless the principal debtor is held liable. It
is in this sense that a surety, although solidarily liable with the principal debtor, is
different from the debtor. It does not mean, however, that the surety cannot be held
liable to the same extent as the principal debtor. The nature and extent of the liabilities
of a guarantor or a surety is determined by the clauses in the contract of suretyship
(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24). prcd
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent
appellate court is SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.

SECOND DIVISION
[G.R. No. 113931. May 6, 1998.]
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL AND ELEA R. CLAVERIA, respondents.

Herrera, Teehankee & Faylona for petitioner.


De los Reyes, Banaga, Briones & Associates for private respondents.

Narvasa, Cruz, Feliciano and Grio-Aquino, JJ., concur.


||| (Pacific Banking Corp. v. Intermediate Appellate Court, G.R. No. 72275, [November
13, 1991])

SYNOPSIS
A complaint for sum of money with prayer for a writ of preliminary attachment was
filed by respondent SOLIDBANK against respondent spouses Raul and Elea Claveria
who failed to pay their loan which was secured by a chattel mortgage and a
Continuing Guaranty of herein petitioner E. Zobel, Inc. which was also joined as partydefendant. The petitioner moved to dismiss the complaint contending that its liability
was extinguished pursuant to Article 2080 of the Civil Code considering that it has lost
its right to subrogate to the chattel mortgage in view of the failure of SOLIDBANK to
register the chattel mortgage with the appropriate government agency. The trial court
in an order denied the said motion on the ground that based on the provisions of the
document signed by the petitioner, it acted as a surety and not as a guarantor. On
petition for certiorari, the Court of Appeals affirmed the said order.
Hence, this petition for review.
The Court ruled that the contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend
credit to respondent spouses. Likewise, the contract clearly disclose that petitioner
assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated
itself as an original promissor. It bound itself jointly and severally to the obligation with
the respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner
liable for the obligation. Thus, having established that petitioner is a surety, Article
2080 of the Civil Code, relied upon by petitioner, finds no application to the case at
Page 153 of 505

bar. In Bicol Savings and Loan Association vs. Guinhawa, the Court ruled that Article
2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor. aSEHDA

DECISION

MARTINEZ, J p:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court
of Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of
Manila, Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as
the Resolution 2 dated February 15, 1994 denying the motion for reconsideration
thereto. cdasia

SOLIDBANK opposed the motion contending that Article 2080 is not applicable
because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
"After a careful consideration of the matter on hand, the Court
finds the ground of the motion to dismiss without merit. The
document referred to as 'Continuing Guaranty' dated August 21,
1985 (Exh. 7) states as follows:
'For and in consideration of any existing indebtedness to
you of Agro Brokers, a single proprietorship owned by
Mr. Raul Claveria for the payment of which the
undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any other
manner, to, or at the request or for the account of the
borrower, . . . '

The facts are as follows:

"The provisions of the document are clear, plain and explicit.

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five
Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges
and one tugboat 3 which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage
over the three (3) vessels to be acquired and that a continuing guarantee be executed
by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of
SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity.
Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a
prayer for a writ of preliminary attachment, against respondents spouses and
petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional Trial
Court of Manila.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety.


Even though the title of the document is 'Continuing Guaranty',
the Court's interpretation is not limited to the title alone but to the
contents and intention of the parties more specifically if the
language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and Zobel)
to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank
inasmuch as the said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel mortgage is rendered
unnecessary and redundant.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor
of the loan was extinguished pursuant to Article 2080 of the Civil Code of the
Philippines. It argued that it has lost its right to be subrogated to the first chattel
mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the
appropriate government agency.

"With regard to the claim that the failure of the plaintiff to register
the chattel mortgage with the proper government agency, i.e. with
the Office of the Collector of Customs or with the Register of
Page 154 of 505

Deeds makes the obligation a guaranty, the same merits a scant


consideration and could not be taken by this Court as the basis of
the extinguishment of the obligation of the defendant corporation
to the plaintiff as surety. The chattel mortgage is an additional
security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to
register, extinction of the liability would not lie.
"WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint within ten (10) days from receipt of a copy of this
Order." 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive
portion of which reads:
"WHEREFORE, finding that respondent Judge has not committed
any grave abuse of discretion in issuing the herein assailed
orders, We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner was denied for lack of merit on
February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent Court of
Appeals erred in its finding: (1) that Article 2080 of the New Civil Code which
provides: "The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated to the
rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that
petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is
that of a surety; and (3) that the failure of respondent SOLIDBANK to register the
chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing
Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the

debtor does not. 7 A contract of guaranty, on the other hand, is a collateral


undertaking to pay the debt of another in case the latter does not pay the debt. 8
Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. However, under our civil law, they may be distinguished thus: A
surety is usually bound with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original promissor and debtor
from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of guaranty is the guarantor's
own separate undertaking, in which the principal does not join. It is usually entered
into before or after that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal. The original contract
of his principal is not his contract, and he is not bound to take notice of its nonperformance. He is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principals. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer
of the solvency of the debtor and thus binds himself to pay if the principal isunable to
pay while a surety is the insurer of the debt, and he obligates himself to pay if the
principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is
a contract of surety. The terms of the contract categorically obligates petitioner as
"surety" to induce SOLIDBANK to extend credit to respondent spouses. This can be
seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL
P. CLAVERIA, of legal age, married and with business address . .
. (hereinafter called the Borrower), for the payment of which
the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other instruments or
evidences of indebtedness . . . upon which the Borrower is or
Page 155 of 505

may become liable as maker, endorser, acceptor, or


otherwise, the undersigned agrees to guarantee, and does
hereby guarantee, the punctual payment, at maturity or
upon demand, to you of any and all such instruments, loans,
advances, credits and/or other obligations herein before referred
to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be
incurred by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to make or cause any
and all such payments to be made strictly in accordance with the
terms and provisions of any agreement (g), express or implied,
which has (have) been or may hereafter be made or entered into
by the Borrower in reference thereto, regardless of any law,
regulation or decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against the
Borrower, or cause or permit to be invoked any alteration in the
time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness; . . . " (Emphasis
Supplied) cdasia
One need not look too deeply at the contract to determine the nature of the
undertaking and the intention of the parties. The contract clearly disclose that
petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and
obligated itself as an original promissor. It bound itself jointly and severally to the
obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all
other legal remedies or exhaust respondent spouses' properties before it can hold
petitioner liable for the obligation. This can be gleaned from a reading of the
stipulations in the contract, to wit:
' . . . If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business, or become insolvent, . . , or if any funds
or other property of the Borrower, or of the undersigned which
may be or come into your possession or control or that of any
third party acting in your behalf as aforesaid should be attached
of distrained, or should be or become subject to any mandatory

order of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and
payable by the undersigned forthwith without demand of notice,
and full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the
property upon which you may then have a lien hereunder at any
broker's board, or at public or private sale at your option, either
for cash or for credit or for future delivery without assumption by
you of credit risk, and without either the demand, advertisement
or notice of any kind, all of which are hereby expressly waived. At
any sale hereunder, you may, at your option, purchase the whole
or any part of the property so sold, free from any right of
redemption on the part of the undersigned, all such rights being
also hereby waived and released. In case of any sale and other
disposition of any of the property aforesaid, after deducting all
costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue
of the proceeds of the sale and other disposition thereof, to the
payment or reduction, either in whole or in part, of any one or
more of the obligations or liabilities hereunder of the undersigned
whether or not except for disagreement such liabilities or
obligations would then be due, making proper allowance or
interest on the obligations and liabilities not otherwise then due,
and returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect
to any and all amounts which may be or remain unpaid on any of
the obligations or liabilities aforesaid at any time(s)"
xxx xxx xxx
'Should the Borrower at this or at any future time furnish, or
should be heretofore have furnished, another surety or sureties to
guarantee the payment of his obligations to you, the undersigned
hereby expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under
any and all circumstances being joint and several;" (Emphasis
Ours)
Page 156 of 505

The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation. 11 As aptly observed by the trial court,
the interpretation of a contract is not limited to the title alone but to the contents and
intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code,
relied upon by petitioner, finds no application to the case at bar. In Bicol Savings and
Loan Association vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil
Code does not apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register
the chattel mortgage did not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract. The pertinent portions of the contract
so provides:
" . . . the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence,
value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also
that all obligations of the Borrower to you outstanding and unpaid
at any time(s) may exceed the aggregate principal sum herein
above prescribed.
'This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that it
has been revoked by the undersigned, but any such notice shall
not be released the undersigned from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt or such notice. No act or
omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by
any change which may arise by reason of the death of the
undersigned, of any partner(s) of the undersigned, or of the

Borrower, or of the accession to any such partnership of any one


or more new partners." (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED. cdasia
Regalado, Melo and Puno, JJ ., concur.
Mendoza, J ., took no part, having concurred in the decision of the Court of Appeals
when I was a member of that Court.
||| (E. Zobel, Inc. v. Court of Appeals, G.R. No. 113931, [May 6, 1998], 352 PHIL 608619)

FIRST DIVISION
[G.R. No. L-16666. April 10, 1922.]
ROMULO MACHETTI, plaintiff-appellee, vs. HOSPICIO DE SAN
JOSE, defendant and appellee, and FIDELITY & SURETY
COMPANY OF THE PHILIPPINE ISLANDS, defendantappellant.

Ross & Lawrence and Wolfson, Wolfson & Schwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.

DECISION

Page 157 of 505

OSTRAND, J p:
It appears from the evidence that on July 17, 1916, one Romulo
Machetti, by a written agreement, undertook to construct a building on Calle
Rosario in the city of Manila for the Hospicio de San Jose, the contract price
being P64,000. One of the conditions of the agreement was that the contractor
should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P12,800 and the following endorsement in the
English language appears upon the contract:
"MANILA, July 15, 1916.
"For value received we hereby guarantee compliance
with the terms and conditions as outlined in the above contract.
"FIDELITY &
PHILIPPINE ISLANDS.

SURETY

COMPANY

OF

THE

(Sgd.) "OTTO VORSTER,


"Vice-President,"
Machetti constructed the building under the supervision of architects
representing the Hospicio de San Jose and, as the work progressed, payments
were made to him from time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the sum of P4,978.08, was
paid. Subsequently it was found that the work had not been carried out in
accordance with the specifications which formed part of the contract and that the
workmanship was not of the standard required, and the Hospicio de San Jose
therefore refused to pay the balance of the contract price. Machetti thereupon
brought this action, the complaint being filed May 28, 1917. On January 28, 1918,
the Hospicio de San Jose answered the complaint and presented a counterclaim
for damages for the partial noncompliance with the terms of the agreement above
mentioned, in the total sum of P71,350. After issue was thus joined, Machetti, on
petition of his creditors, was, on February 27,1918, declared insolvent and on
March 4, 1918, an order was entered suspending the proceeding in the present
case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking
that the Fidelity and Surety Company be made cross-defendant to the exclusion
of Machetti and that the proceedings be continued as to said company, but still
remain suspended as to Machetti. This motion was granted and on February 7,
1920, the Hospicio filed a complaint against the Fidelity and Surety Company
asking for a judgment for P12,800 against the company upon its guaranty. After

trial, the Court of First Instance rendered judgment against the Fidelity and
Surety Company for P12,800 in accordance with the complaint. The case is now
before this court upon appeal by the Fidelity and Surety Company from said
judgment.
As will be seen, the original action in which Machetti was the plaintiff
and the Hospicio de San Jose defendant, has been converted into an action in
which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company,
the original plaintiff's guarantor, is the defendant, Machetti having been practically
eliminated from the case.
We think the court below erred in proceeding with the case against the
guarantor while the proceedings were suspended as to the principal. The
guaranty in the present case was for a future debt of unknown amount and even
regarding the guaranty as an ordinary fianza under the Civil Code, the surety
cannot be held responsible until the debt is liquidated. (Civil Code, art. 1825.)
But in this instance the guarantor's case is even stronger than that of an
ordinary surety. The contract of guaranty is written in the English language and
the terms employed must of course be given the signification which ordinarily
attaches to them in that language. In English the term "guarantor" implies an
undertaking of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty" circumstances
may be shown which convert the contract into one of suretyship but such
circumstances do not exist in the present case: on the contrary it appears
affirmatively that the contract is the guarantor's separate undertaking in which the
principal does not join, that it rests on a separate consideration moving from the
principal and that although it is written in continuation of the contract for the
construction of the building, it is a collateral under taking separate and distinct
from the latter. All of these circumstances are distinguishing features of contracts
of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the
guarantor only binds himself to pay if the principal cannot pay. The one is the
insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs.
Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell vs. Sherman, 151 Pa. St., 70;
Castellvi de Higgins and Higgins vs. Sellner, 41, Phil., 142; U.S. vs. Varadero de
la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety
Company assumed in the present case. The undertaking is perhaps not exactly
that of a fianza under the Civil Code, but it is a perfectly valid contract and must
be given the legal effect it ordinarily carries. The Fidelity and Surety Company
having bound itself to pay only in the event its principal, Machetti, cannot pay it
Page 158 of 505

follows that it cannot be compelled to pay until it is shown that Machetti is unable
to pay. Such inability may be proven by the return of a writ of execution
unsatisfied or by other means, but is not sufficiently established by the mere fact
that he has been declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to pay is not determined
until the final liquidation of his estate.

GUARANTY
CHAPTER 1 NATURE AND EXTENT OF GUARANTY

The judgment appealed from is therefore reversed without costs and


without prejudice to such right of action as the cross-complainant, the Hospicio
de San Jose, may have after exhausting its remedy against the plaintiff Machetti.
So ordered.

SECOND DIVISION

Araullo, C.J., Malcolm, Villamor, Johns, and Romualdez, JJ., concur.


||| (Machetti v. Hospicio de San Jose, G.R. No. L-16666, [April 10, 1922], 43 PHIL
297-301)

[G.R. No. 160466. January 17, 2005.]


SPOUSES ALFREDO and SUSANA
PHILIPPINE
COMMERCIAL
BANK, respondent.

ONG, petitioners, vs.


INTERNATIONAL

DECISION

PUNO, J p:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set
aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February
17, 2003, affirming the decision of the trial court denying petitioners' motion to
dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged
in the manufacture and export of finished wood products. Petitioners-spouses Alfredo
and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now
Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for
collection of a sum of money 1 against petitioners-spouses. Respondent bank sought
to hold petitioners-spouses liable as sureties on the three (3) promissory notes they
issued to secure some of BMC's loans, totalling five million pesos (P5,000,000.00).

Page 159 of 505

The complaint alleged that in 1991, BMC needed additional capital for its business
and applied for various loans, amounting to a total of five million pesos, with the
respondent bank. Petitioners-spouses acted as sureties for these loans and issued
three (3) promissory notes for the purpose. Under the terms of the notes, it was
stipulated that respondent bank may consider debtor BMC in default and demand
payment of the remaining balance of the loan upon the levy, attachment or
garnishment of any of its properties, or upon BMC's insolvency, or if it is declared to
be in a state of suspension of payments. Respondent bank granted BMC's loan
applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its properties
were attached by creditors. Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from petitioners-spouses as
sureties. In due time, petitioners-spouses filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by debtor
BMC, the petitioners-spouses as President and Treasurer of BMC, and the
consortium of creditor banks of BMC (of which respondent bank is included). The
MOA took effect upon its approval by the SEC on November 27, 1992. 3
Thereafter, petitioners-spouses moved to dismiss 4 the complaint. They argued that
as the SEC declared the principal debtor BMC in a state of suspension of payments
and, under the MOA, the creditor banks, including respondent bank, agreed to
temporarily suspend any pending civil action against the debtor BMC, the benefits of
the MOA should be extended to petitioners-spouses who acted as BMC's sureties in
their contracts of loan with respondent bank. Petitioners-spouses averred that
respondent bank is barred from pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the
Court of Appeals which affirmed the trial court's ruling that a creditor can proceed
against petitioners-spouses as surety independently of its right to proceed against the
principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent
bank should be dismissed for three (3) reasons: First, the MOA provided that during
its effectivity, there shall be a suspension of filing or pursuing of collection cases
against the BMC and this provision should benefit petitioners as sureties. Second,
principal debtor BMC has been placed under suspension of payment of debts by the
SEC; petitioners contend that it would prejudice them if the principal debtor BMC

would enjoy the suspension of payment of its debts while petitioners, who acted only
as sureties for some of BMC's debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary to Article 2063 of the Civil
Code which provides that a compromise between the creditor and principal debtor
benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely
on Article 2081 of the Civil Code which provides that: "the guarantor may set up
against the creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor." Petitioners
aver that if the principal debtor BMC can set up the defense of suspension of payment
of debts and filing of collection suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
We find no merit in petitioners' contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMC's
debts. There is a sea of difference in the rights and liabilities of a guarantor and a
surety. A guarantor insures the solvency of the debtor while a surety is an insurer of
the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part
of the guarantor. It is only after the creditor has proceeded against the properties of
the principal debtor and the debt remains unsatisfied that a guarantor can be held
liable to answer for any unpaid amount. This is the principle of excussion. In a
suretyship contract, however, the benefit of excussion is not available to the surety as
he is principally liable for the payment of the debt. As the surety insures the debt itself,
he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor
can go directly against the surety although the principal debtor is solvent and is able
to pay or no prior demand is made on the principal debtor. A surety is directly, equally
and absolutely bound with the principal debtor for the payment of the debt and is
deemed as an original promissor and debtor from the beginning. 5
Under the suretyship contract entered into by petitioners-spouses with respondent
bank, the former obligated themselves to be solidarily bound with the principal debtor
BMC for the payment of its debts to respondent bank amounting to five million pesos
(P5,000,000.00). Under Article 1216 of the Civil Code, 6 respondent bank as creditor
may proceed against petitioners-spouses as sureties despite the execution of the
MOA which provided for the suspension of payment and filing of collection suits
against BMC. Respondent bank's right to collect payment from the surety exists
independently of its right to proceed directly against the principal debtor. In fact, the
Page 160 of 505

creditor bank may go against the surety alone without prior demand for payment on
the principal debtor. 7
The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of the
principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the
properties of BMC were mentioned in the petition with the SEC. 8 Secondly, there is
nothing in the MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the
MOA executed by BMC and signed by the creditor-banks was approved by the SEC
whose jurisdiction is limited only to corporations and corporate assets. It has no
jurisdiction over the properties of BMC's officers or sureties. ADaEIH
Clearly, the collection suit filed by respondent bank against petitioners-spouses as
sureties can prosper. The trial court's denial of petitioners' motion to dismiss was
proper.

Wolfson, Wolfson and Schwarzkopf for appellants.


William and Ferrier for appellee.

MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000.
The brief decision of the trial court held that the suit was premature, and absolved the
defendant from the complaint, with the costs against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John
T. Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following
tenor:lawph!l.net

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement


as to costs.

DEAR SIR: I hereby obligate and bind myself, my heirs, successors and

SO ORDERED.

assigns that if the promissory note executed the 29th day of May, 1915 by

Austria-Martinez, Callejo, Sr., Tinga and Chico-Nazario, JJ., concur


||| (Spouses Ong v. Philippine Commercial International Bank, G.R. No. 160466,
[January 17, 2005], 489 PHIL 673-678)

the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally,
in your favor and due six months after date for Pesos 10,000 is not fully paid
at maturity with interest, I will, within fifteen days after notice of such default,
pay you in cash the sum of P10,000 and interest upon your surrendering to
me the three thousand shares of stock of the Keystone Mining Co. held by

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-158025

November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffsappellants,


vs.
GEORGE C. SELLNER, defendant-appellee.

you as security for the payment of said note.


Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of
defendant's status in the transaction referred to. Plaintiffs contend that he is a surety;
defendant contends that he is a guarantor. Plaintiffs also admit that if defendant is a
guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title
XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza" is translated in
Page 161 of 505

the Washington and Walton editions of the Civil Code as "security." "Fianza" appears

civil law relationship existing between codebtors liable in solidum is similar to the

in the Fisher translation as "suretyship." The Spanish world "fiador" is found in all of

common law suretyship.

the English translations of the Civil Code as "surety." The law of guaranty is not
related of by that name in the Civil Code, although indirect reference to the same is

It is perfectly clear that the obligation assumed by defendant was simply that of a

made in the Code of Commerce. In terminology at least, no distinction is made in the

guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil

Civil Code between the obligation of a surety and that of a guarantor.

Code. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to

As has been done in the State of Louisiana, where, like in the Philippines, the

him of the three thousand shares of Keystone Mining Company stock, he will assume

substantive law has a civil law origin, we feel free to supplement the statutory law by a

responsibility. Sellner is not bound with the principals by the same instrument

reference to the precepts of the law merchant.

executed at the same time and on the same consideration, but his responsibility is a
secondary one found in an independent collateral agreement, Neither is Sellner jointly

The points of difference between a surety and a guarantor are familiar to American

and severally liable with the principal debtors.

authorities. A surety and a guarantor are alike in that each promises to answer for the
debt or default of another. A surety and a guarantor are unlike in that the surety

With particular reference, therefore, to appellants assignments of error, we hold that

assumes liability as a regular party to the undertaking, while the liability as a regular

defendant Sellner is a guarantor within the meaning of the provisions of the Civil

party to upon an independent agreement to pay the obligation if the primary pay or

Code.

fails to do so. A surety is charged as an original promissory; the engagement of the


guarantor is a collateral undertaking. The obligation of the surety is primary; the

There is also an equitable aspect to the case which reenforces this conclusion. The

obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919],

note executed by the Keystone Mining Company matured on November 29, 1915.

40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913],

Interest on the note was not accepted by the makers until September 30, 1916. When

173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by

the note became due, it is admitted that the shares of stock used as collateral security

many authorities.)

were selling at par; that is, they were worth pesos 30,000. Notice that the note had not
been paid was not given to and when the Keyston Mining Company stock was

Turning back again to our Civil Code, we first note that according to article 1822

worthless. Defendant, consequently, through the laches of plaintiff, has lost possible

"By fianza (security or suretyship) one person binds himself to pay or perform for a

chance to recoup, through the sale of the stock, any amount which he might be

third person in case the latter should fail to do so." But "If the surety binds himself in

compelled to pay as a surety or guarantor. The "indulgence," as this word is used in

solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title

the law of guaranty, of the creditors of the principal, as evidenced by the acceptance

first, shall be applicable." What the first portion of the cited article provides is,

of interest, and by failure promptly to notify the guarantor, may thus have served to

consequently, seen to be somewhat akin to the contract of guaranty, while what is last

discharge the guarantor.

provided is practically equivalent to the contract of suretyship. When in subsequent


articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks

For quite different reasons, which, nevertheless, arrive at the same result, judgment is

of the effects of suretyship between surety and creditor, it has, in comparison with the

affirmed, with costs of this instance against the appellants. So ordered.

common law, the effect of guaranty between guarantor and creditor. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the

Johnson, Araullo, and Villamor, JJ., concur.


Mapa, C.J. and Avancea, J., concur in the result.
Page 162 of 505

question is whether this obligation to repay is solidary, as contended by respondent


and the lower courts, or merely joint as argued by petitioners. ITEcAD
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP) 1 entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby
PDCP agreed to make available and lend to Falcon the amount of US$320,000.00, for
specific purposes and subject to certain terms and conditions. 2 On the same day,
three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr.
(Ortigas), George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment" of the loan contracted
by Falcon with PDCP. 3 In the meantime, two separate guaranties were executed to
guarantee the payment of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities. One Guaranty 4 was executed by
petitioner Salvador Escao (Escao), while the other 5 by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
Rodriguez (Rodriguez).

SECOND DIVISION
[G.R. No. 151953. June 29, 2007.]
SALVADOR P. ESCAO and MARIO M. SILOS, petitioners, vs.
RAFAEL ORTIGAS, JR., respondent.

DECISION

TINGA, J p:
The main contention raised in this petition is that petitioners are not under obligation
to reimburse respondent, a claim that can be easily debunked. The more perplexing

Two years later, an agreement developed to cede control of Falcon to Escao, Silos
and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George
A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey
assigned their shares of stock in Falcon to Escao, Silos and Matti. 6 Part of the
consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several undertakings
with Falcon, including those related to the loan with PDCP. Thus, an Undertaking
dated 11 June 1982 was executed by the concerned parties, 7 namely: with Escao,
Silos and Matti identified in the document as "SURETIES," on one hand, and Ortigas,
Inductivo and the Scholeys as "OBLIGORS," on the other. The Undertaking reads in
part:
3. That whether or not SURETIES are able to immediately cause
PDCP and PAIC to release OBLIGORS from their said
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs' said guarantees [sic]
to PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment of
FALCON's obligations with it, any of [the] OBLIGORS
shall immediately inform SURETIES thereof so that the
latter can timely take appropriate measures;
Page 163 of 505

b. Should suit be impleaded by PDCP and/or PAIC


against any and/or all of OBLIGORS for collection of
said loans and/or credit facilities, SURETIES agree to
defend OBLIGORS at their own expense, without
prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims
of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any
reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such
payment; CSEHIa
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees [sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended
by PDCP. It would also execute a Deed of Chattel Mortgage over its personal
properties to further secure the loan. However, Falcon subsequently defaulted in its
payments. After PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite
demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escao, Silos, Silverio and Inductivo. The case was docketed as Civil Case No. 895128. For his part, Ortigas filed together with his answer a cross-claim against his codefendants Falcon, Escao and Silos, and also manifested his intent to file a thirdparty complaint against the Scholeys and Matti. 10 The cross-claim lodged against
Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to
assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to
come to terms with PDCP was Escao, who in December of 1993, entered into a
compromise agreement whereby he agreed to pay the bank P1,000,000.00. In
exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the case. 11 The

compromise agreement was approved by the RTC in a Judgment 12 dated 6 January


1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement 13 with PDCP, allegedly without the knowledge of Escao, Matti and Silos.
Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as "full satisfaction of the
PDCP's claim against Ortigas," 14 in exchange for PDCP's release of Ortigas from
any liability or claim arising from the Falcon loan agreement, and a renunciation of its
claims against Ortigas. ACETSa
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay P500,000.00 in exchange for PDCP's waiver of its claims against
him. 15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escao, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a thirdparty complaint against Matti and Silos, 16 while he maintained his cross-claim
against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor
against Escao, Silos and Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the
amount of P1,300,000.00, as well as P20,000.00 in attorney's fees. 17 The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking,
and that "the mere denials of defendants with respect to non-compliance of Ortigas of
the terms and conditions of the Undertaking, unaccompanied by any substantial fact
which would be admissible in evidence at a hearing, are not sufficient to raise genuine
issues of fact necessary to defeat a motion for summary judgment, even if such facts
were raised in the pleadings." 18 In an Order dated 7 March 1996, the trial court
denied the motion for reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from 28 February
1994. 19 SaICcT
From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escao and Silos appealed jointly while Matti appealed by his lonesome. In
a Decision 20 dated 23 January 2002, the Court of Appeals dismissed the appeals
and affirmed the Summary Judgment. The appellate court found that the RTC did not
err in rendering the Summary Judgment since the three appellants did not effectively
deny their execution of the 1982 Undertaking. The special defenses that were raised,
"payment and excussion," were characterized by the Court of Appeals as "appear[ing]
to be merely sham in the light of the pleadings and supporting documents and
affidavits." 21 Thus, it was concluded that there was no genuine issue that would still
Page 164 of 505

require the rigors of trial, and that the appealed judgment was decided on the bases
of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos. 22 Two main issues
are raised. First, petitioners dispute that they are liable to Ortigas on the basis of the
1982 Undertaking, a document which they do not disavow and have in fact annexed to
their petition. Second, on the assumption that they are liable to Ortigas under the
1982 Undertaking, petitioners argue that they are jointly liable only, and not solidarily.
Further assuming that they are liable, petitioners also submit that they are not liable
for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a
relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil
Procedure, summary judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law. Petitioner have not attempted to demonstrate before
us that there existed a genuine issue as to any material fact that would preclude
summary judgment. Thus, we affirm with ease the common rulings of the lower courts
that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held
liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An
examination of the document reveals several clauses that make it clear that the
agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to
be released from their liability under the loan agreement which release was, in turn,
part of the consideration for the assignment of their shares in Falcon to petitioners
and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon
for the payment of the loan with PDCP, and that "amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES' relieving
OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON." 23 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs' said guarantees [sic] to PDCP . . . under the following terms and
conditions." 24

At the same time, it is clear that the assumption by petitioners of Ortigas's


"guarantees" [sic] to PDCP is governed by stipulated terms and conditions as set forth

in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by "any of OBLIGORS"


of any demand from PDCP for the payment of Falcon's obligations with it, "any of
OBLIGORS" was to immediately inform "SURETIES" thereof so that the latter can
timely take appropriate measures. Second, should "any and/or all of OBLIGORS" be
impleaded by PDCP in a suit for collection of its loan, "SURETIES agree[d] to defend
OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity, subrogation or other
relief" 25 in respect to any of the claims of PDCP. Third, if any of the "OBLIGORS is
for any reason made to pay any amount to [PDCP], SURETIES [were to] reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such payment." 26
Petitioners claim that, contrary to paragraph 3 (c) of the Undertaking, Ortigas was not
"made to pay" PDCP the amount now sought to be reimbursed, as Ortigas voluntarily
paid PDCP the amount of P1.3 Million as an amicable settlement of the claims posed
by the bank against him. However, the subject clause in paragraph 3 (c) actually
reads "[i]n the event that any of OBLIGORS is for any reason made to pay any
amount to PDCP . . . " 27 As pointed out by Ortigas, the phrase "for any reason"
reasonably includes any extra-judicial settlement of obligation such as what Ortigas
had undertaken to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment adverted to therein
unlimited and unqualified. ASHEca
The interpretation posed by petitioners would have held water had the Undertaking
made clear that the right of Ortigas to seek reimbursement accrued only after he had
delivered payment to PDCP as a consequence of a final and executory judgment. On
the contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve
the burden on Ortigas and his fellow "OBLIGORS" as soon as possible, and not only
after Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause
PDCP . . . to within a reasonable time release all the OBLIGORS . . . from their
guarantees [sic] to PDCP . . . " 28 In the event that Ortigas and his fellow
"OBLIGORS" could not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to pledge or assign
such payments to Ortigas, et al., as security for whatever amounts the latter may be
held liable under their guaranties. In addition, paragraph 1 also makes clear that
nothing in the Undertaking "shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP . . . for the release of their said guarantees
[sic]." 29
Page 165 of 505

There is no argument to support petitioners' position on the import of the phrase


"made to pay" in the Undertaking, other than an unduly literalist reading that is clearly
inconsistent with the thrust of the document. Under the Civil Code, the various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly. 30 Likewise applicable is
the provision that if some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most adequate to
render it effectual. 31 As a means to effect the general intent of the document to
relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that
holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions
set in paragraph 3, as they claim. Following the general assertion in the petition that
Ortigas violated the terms of the Undertaking, petitioners add that Ortigas "paid PDCP
BANK the amount of P1.3 million without petitioners ESCANO and SILOS's
knowledge and consent." 32 Paragraph 3 (a) of the Undertaking does impose a
requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if they
received any demand for payment of FALCON's obligations to PDCP, but that
requirement is reasoned "so that the [SURETIES] can timely take appropriate
measures" 33presumably to settle the obligation without having to burden the
"OBLIGORS." This notice requirement in paragraph 3 (a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been impleaded as a
defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP. CHDAEc
The other arguments petitioners have offered to escape liability to Ortigas are similarly
weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note
that Ortigas had, in his answer, denied any liability to PDCP and had alleged that he
signed the Assumption of Solidary Liability not in his personal capacity, but as an
officer of Falcon. However, such position, according to petitioners, could not be
justified since Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such
circumstances, according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The
Partial Compromise Agreement between PDCP and Ortigas expressly stipulated that
Ortigas's offer to pay PDCP was conditioned "without [Ortigas's] admitting liability to
plaintiff PDCP Bank's complaint, and to terminate and dismiss the said case as
against Ortigas solely." 34 Petitioners profess it is "unthinkable" for Ortigas to have

voluntarily paid PDCP without admitting his liability, 35 yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had
already assigned his obligation to petitioners through the 1982 Undertaking. Yet the
fact is PDCP did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress
through a settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking
expressly states that "nothing herein shall prevent OBLIGORS, or any one of them,
from themselves negotiating with PDCP . . . for the release of their said guarantees
[sic]." 36 Simply put, the Undertaking did not bar Ortigas from pursuing his own
settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through his own settlement.
The stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,]
. . . SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment" 37 makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP. ETDAaC
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on
the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,
claiming that the Undertaking did not provide for express solidarity. They cite Article
1207 of the New Civil Code, which states in part that "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable
for the Undertaking, as the language used in the agreement "clearly shows that it is a
surety agreement" 38 between the obligors (Ortigas group) and the sureties (Escao
group). Ortigas points out that the Undertaking uses the word "SURETIES"
althroughout the document, in describing the parties. It is further contended that the
principal objective of the parties in executing the Undertaking cannot be attained
unless petitioners are solidarily liable "because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or any of the SURETIES
default from their obligation in the Undertaking." 39

Page 166 of 505

In case there is a concurrence of two or more creditors or of two or more debtors in


one and the same obligation, Article 1207 of the Civil Code states that among them,
"[t]here is a solidary liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity." Article 1210 supplies further
caution against the broad interpretation of solidarity by providing: "The indivisibility of
an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing the obligation as solidary,
the presumption is that the obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary in character to prove such fact
with a preponderance of evidence. AECcTS
The Undertaking does not contain any express stipulation that the petitioners agreed
"to bind themselves jointly and severally" in their obligations to the Ortigas group, or
any such terms to that effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations.
We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen
(13) times in the document. Ortigas claims that such manner of identification
sufficiently establishes that the obligation of petitioners to him was solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides
the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[Emphasis supplied] 40
As provided in Article 2047, in a surety agreement the surety undertakes to be bound
solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract

as it presupposes the existence of a principal contract. It appears that Ortigas's


argument rests solely on the solidary nature of the obligation of the surety under
Article 2047. In tandem with the nomenclature "SURETIES" accorded to petitioners
and Matti in the Undertaking, however, this argument can only be viable if the
obligations established in the Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking. AcEIHC
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom
the surety is solidarily bound by way of an ancillary obligation of segregate identity
from the obligation between the principal debtor and the creditor. The suretyship does
bind the surety to the creditor, inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation. 41 At the same time, there is also a legal tie
created between the surety and the principal debtor to which the creditor is not privy
or party to. The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. 42 At the same time,
the surety may seek reimbursement from the principal debtor for the amount paid, for
the surety does in fact "become subrogated to all the rights and remedies of the
creditor." 43
Note that Article 2047 itself specifically calls for the application of the provisions on
solidary obligations to suretyship contracts. 44 Article 1217 of the Civil Code thus
comes into play, recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid (i.e., the
surety). 45However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt. The difference lies in the respective faculties of the
joint and several debtor and the surety to seek reimbursement for the sums they paid
out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal
debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes. There is
a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal
Page 167 of 505

debtor has been exhausted, retains all the other rights,


actions and benefits which pertain to him by reason of
thefiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title
I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil
law relationship existing between the co-debtors liable in
solidum is similar to the common law suretyship. 46
In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor "may claim from his co-debtors only
the share which corresponds to each, with the interest for the payment already
made." Such solidary debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular proportional
share of the solidary debtor who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just any proportional
share, from the principal debtor or debtors. Such right to full reimbursement falls
within the other rights, actions and benefits which pertain to the surety by reason of
the subsidiary obligation assumed by the surety. ISCaDH
What is the source of this right to full reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for
a debtor must be indemnified by the latter," such indemnity comprising of, among
others, "the total amount of the debt." 47 Further, Article 2067 of the Civil Code
likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor." 48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in Article
2047 that the provisions on joint and several obligations should apply to sureties. We
reject that argument, and instead adopt Dr. Tolentino's observation that "[t]he
reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean
that suretyship is withdrawn from the applicable provisions governing
guaranty." 49 For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors,

for both classes of obligors would be governed by exactly the same rules and
limitations.
Accordingly, the rights to indemnification and subrogation as established and granted
to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined
under Article 2047. These rights granted to the surety who pays materially differ from
those granted under Article 1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter extends "only [to] the share which
corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as "SURETIES,"
they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satisfied that among the
petitioners and Matti, there is one or some of them who stand as the principal debtor
to Ortigas and another as surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the parties that such is the
case, and certainly the Undertaking is not revelatory of such intention. If the Court
were to give full fruition to the use of the term "SURETIES" as conclusive indication of
the existence of a surety agreement that in turn gives rise to a solidary obligation to
pay Ortigas, the necessary implication would be to lay down a corresponding set of
rights and obligations as between the "SURETIES" which petitioners and Matti did not
clearly intend. AaIDCS
It is not impossible that as between Escao, Silos and Matti, there was an agreement
whereby in the event that Ortigas were to seek reimbursement from them per the
terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full,
subject to his right to full reimbursement from the other two obligors. In such case,
there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not
appear on the records. More consequentially, no such intention is reflected in the
Undertaking itself, the very document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term "SURETIES" could not work to such effect, especially as it does
not appear who exactly is the principal debtor whose obligation is "assured" or
"guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation
of the Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of any
and all liability arising from their said joint and several undertaking with [F]alcon," and
for the "sureties" to "irrevocably agree and undertake to assume all of obligors said
Page 168 of 505

guarantees to PDCP." 50 We do not doubt that a finding of solidary liability among the
petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that establishes petitioners'
obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity. Even if the
liability of petitioners and Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would still be
accomplished through the complete execution of such a judgment.

Petitioners further claim that they are not liable for attorney's fees since the
Undertaking contained no such stipulation for attorney's fees, and that the situation
did not fall under the instances under Article 2208 of the Civil Code where attorney's
fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his
being impleaded in the suit filed by PDCP. The Undertaking was precisely executed
as a means to obtain the release of Ortigas and the Scholeys from their previous
obligations as sureties of Falcon, especially considering that they were already
divesting their shares in the corporation. Specific provisions in the Undertaking
obligate petitioners to work for the release of Ortigas from his surety agreements with
Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas
should he still be made to pay PDCP by reason of the guaranty agreements from
which he was ostensibly to be released through the efforts of petitioners. None of
these provisions were complied with by petitioners, and Article 2208 (2) precisely
allows for the recovery of attorney's fees "[w]hen the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest." TDCAHE
Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they are
liable, that the rate of interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the
rules with respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept


of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should
be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the
rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or
damages except when or until the demand can
be established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall
begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so
reasonably established at the time the demand
is made, the interest shall begin to run only
from the date the judgment of the court is made
(at which time 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. DaTHAc
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
Page 169 of 505

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. 52
Since what was the constituted in the Undertaking consisted of a
payment in a sum of money, the rate of interest thereon shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand.
The interest rate imposed by the RTC is thus proper. However, the computation
should be reckoned from judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to petitioners and Matti
after he paid PDCP, but on 14 March 1994, Ortigas made a judicial demand
when he filed a Third-Party Complaint praying that petitioners and Matti be made
to reimburse him for the payments made to PDCP. It is the filing of this ThirdParty Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be
reckoned. 53 Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial
Court dated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M.
Matti are only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr.
in the amount of P1,300,000.00. The Order of the Regional Trial Court dated 7 March
1996 is MODIFIED in that the legal interest of 12% per annum on the amount of
P1,300,000.00 is to be computed from 14 March 1994, the date of judicial demand,
and not from 28 February 1994 as directed in the Order of the lower court. The
assailed rulings are affirmed in all other respects. Costs against petitioners.

SECOND DIVISION
[G.R. No. L-29139. November 15, 1974.]
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, plaintiffs-appellants, vs. ESTEBAN PICZON and
SOSING-LOBOS & CO., INC.,defendants-appellees.

Vicente C. Santos for plaintiff-appellants.


Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

DECISION

SO ORDERED.
Carpio, Carpio-Morales and Velasco, Jr., JJ., concur.
Quisumbing, J., is on official leave.
||| (Escao v. Ortigas, Jr., G.R. No. 151953, [June 29, 2007], 553 PHIL 24-48)

BARREDO, J p:
Appeal from the decision of the Court of First Instance of Samar in its Civil Case No.
5156, entitled Consuelo P. Piczon, et. al. vs. Esteban Piczon, et al., sentencing
defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon,
as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest
from August 6, 1964 until said principal amount of P12,500.00 shall have been duly
paid, and the costs."
Page 170 of 505

After issues were joined and at the end of the pre-trial held on August 22, 1967, the
trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and defendants
through their lawyers, appeared and entered into the following
agreement:
1. That defendants admit the due execution of Annexes 'A' and 'B'
of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds
itself to the plaintiffs for P12,600.00, the same to be paid on or
before October 31, 1967 together with the interest that this court
may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00
commence to run from August 6, 1964 when plaintiffs made the
first demand or from August 29, 1956 when the obligation
becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a
surety?
That the parties are hereby required to file their respective
memorandum if they so desire on or before September 15, 1967
to discuss the legal issues and therewith the case will be
considered submitted for decision.
WHEREFORE, the instant case is hereby considered submitted
based on the aforesaid facts agreed upon and upon submission
of the parties of their respective memorandum on or before
September 15, 1967.
SO ORDERED." 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
"AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and
resident of and with postal address in the municipality of

Catbalogan, Province of Samar, Philippines, in my capacity as


the President of the corporation known as the 'SOSING-LOBOS
and CO., INC.,' as controlling stockholder, and at the same time
as guarantor for the same, do by these presents contract a loan
of Twelve Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is hereby acknowledged,
from the 'Piczon and Co., Inc.' another corporation, the main
offices of the two corporations being in Catbalogan, Samar, for
which I undertake, bind and agree to use the loan as surety cash
deposit for registration with the Securities and Exchange
Commission of the incorporation papers relative to the 'SosingLobos and Co., Inc.,' and to return or pay the same amount with
Twelve Per Cent (12%) interest per annum, commencing from the
date of execution hereof, to the 'Piczon and Co., Inc., as soon as
the said incorporation papers are duly registered and the
Certificate of Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.
(Sgd.) ESTEBAN PICZON"
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted, appellants assign
the following alleged errors:
"I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF
12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM
AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX 'A' WAS DULY EXECUTED.
"II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT
ESTEBAN PICZON AS GUARANTOR ONLY AND NOT AS
SURETY.
"III
Page 171 of 505

THE TRIAL COURT ERRED IN NOT ADJUDICATING


DAMAGES IN FAVOR OF THE PLAINTIFFS-APPELLANTS."
(Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring appellees to pay
interest at 12% only from August 6, 1964, the trial court should have adhered to the
terms of the agreement which plainly provides that Esteban Piczon had obligated
Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the
same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum
commencing from the date of the execution hereof", Annex A, which was on
September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists
in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six
per cent per annum." In the case at bar, the "interest agreed upon" by the parties in
Annex A was to commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred by the debtor
which can serve as the basis for liability for interest is to that defined in Article 1169 of
the Civil Code reading thus:
"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.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation
it appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins."

is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article
cited by appellees (which was Article 1100 of the Old Civil Code read in relation
to Art. 1101) is applicable only when the obligation is to do something other than
the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104
Phil. 920, the Court squarely ruled that if the contract stipulates from what time
interest will be counted, said stipulated time controls, and, therefore interest is
payable from such time, and not from the date of the filing of the complaint (at p.
925). Were that not the law, there would be no basis for the provision of Article
2212 of the Civil Code providing that "(I)nterest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this
point." Incidentally, appellants would have been entitled to the benefit of this
article, had they not failed to plead the same in their complaint. Their prayer for it
in their brief is much too late. Appellees had no opportunity to meet the issue
squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be sustained.
Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself
only as guarantor, and there are no circumstances in the record from which it can be
deduced that his liability could be that of a surety. A guaranty must be express,
(Article 2055, Civil Code) and it would be violative of the law to consider a party to be
bound as a surety when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order,
appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc.
for the payment of the obligation in question, thereby modifying their original posture
that inasmuch as that corporation did not exist yet at the time of the agreement,
Piczon necessarily must have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest upon
interest due from the filing of the complaint can no longer be entertained, the same
not having been made an issue in the pleadings in the court below. We do not believe
that such a substantial matter can be deemed included in a general prayer for "any
other relief just and equitable in the premises", especially when, as in this case, the
pre-trial order does not mention it in the enumeration of the issues to be resolved by
the court.
PREMISES CONSIDERED, the judgment of the trial court is modified so as to make
appellees liable for the stipulated interest of 12% per annum from September 28,
1956, instead of August 6, 1964. In all other respects, said judgment is affirmed.
Costs against appellees.
Fernando (Chairman), Antonio, Fernandez and Aquino, JJ., concur.
Page 172 of 505

||| (Piczon v. Piczon, G.R. No. L-29139, [November 15, 1974], 158 PHIL 726-731)
SECOND DIVISION
[G.R. No. 126490. March 31, 1998.]
ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
Roco, Bunag, Kapunan & Magallos for petitioner.
Angelo E. Grasparail for private respondent.
SYNOPSIS
Petitioner signed as co-maker in a loan. A promissory note was executed whereby
she acknowledged her joint and several (solidary) liability with the principal, that the
creditor may demand payment in case of default, and that she fully understood the
contents thereof. Petitioner, when informed that the debtors defaulted, requested that
creditor try to collect from her principal first and offered to settle the obligation in case
the creditor fails to collect. She also offered a parcel of land to settle the obligation
which the creditor refused. Thereafter, a complaint was filed against petitioner to the
exclusion of the principal debtors. Again petitioner offered to pay but the amount
offered was way below the amount computed. The trial court dismissed the complaint
and ruled that the complaint against the petitioner amounted to a discharge of a prior
party, that the offer to pay made by petitioner who is secondarily liable to the
instrument discharged petitioner. The Court of Appeals, reversing the trial court, ruled
that petitioner is solidarily liable with the principal debtors and may be sued for the
entire obligation. Hence, this recourse. aTEScI
The Supreme Court held that it is a cardinal rule in interpretations of contracts that if
the terms of a contract are clear and leave no doubt upon the intention of the parties,
the literal meaning of its stipulation shall control. Hence, where petitioner expressly
binds herself to be jointly and severally or solidarily liable with the principal maker of
the note, her liability is that of a surety and is bound equally and absolutely with the
principal.
Having entered into a contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation or performance
stipulated, hence, an offer to pay obligation in an amount less or different from that
due does not discharge liability. SECIcT
REGALADO, J p:
Where a party signs a promissory note as a co-maker and binds herself to be jointly
and severally liable with the principal debtor in case the latter defaults in the payment

of the loan, is such undertaking of the former deemed to be that of a surety as an


insurer of the debt, or of a guarantor who warrants the solvency of the debtor? cdasia
Pursuant to a promissory note dated March 13, 1990, private respondent M.B.
Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. 1 On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance
of P13,700.00. No payments were made after the last payment on September 26,
1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone
party-defendant, to the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in
August 1990, immediately after the loan matured, she offered to settle the obligation
with respondent corporation but the latter informed her that they would try to collect
from the spouses Azarraga and that she need not worry about it; that there has
already been a partial payment in the amount of P17,010.00; that the interest of 6%
per month compounded at the same rate per month, as well as the penalty charges of
3% per month, are usurious and unconscionable; and that while she agrees to be
liable on the note but only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages should
be; (2) whether the liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings
filed and the memoranda to be submitted by them. On November 26, 1992, the
Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the
complaint without prejudice to the filing of a separate action for a sum of money
against the spouses Osmea and Merlyn Azarraga who are primarily liable on the
instrument. 6 This was based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to
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pay the obligation is considered a valid tender of payment sufficient to discharge a


person's secondary liability on the instrument; that petitioner, as co-maker, is only
secondary liable on the instrument; and that the promissory note is a contract of
adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and
rendered judgment declaring herein petitioner Palmares liable to pay respondent
corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing
with interest at six percent (6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of
the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and severally or
solidarity liable with the principal debtors, the Azarraga spouses, when she signed as
a co-maker. As such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation. It also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court ordered the imposition of
the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of
adhesion, the same is not entirely prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not
establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as
that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against
M.B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material
points by respondent corporation. They are further refuted by accepted doctrines in
the American jurisdiction after which we patterned our statutory law on suretyship and
guaranty. This case then affords us the opportunity to make an extended exposition
on the ramifications of these two specialized contracts, for such guidance as may be
taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in
this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarragadefaults in the payment of the note subject to the same conditions abovecontained. 8
Petitioner contends that the provisions of the second and third paragraph are
conflicting in that while the second paragraph seems to define her liability as that of a
surety which is joint and solidary with the principal maker, on the other hand, under
the third paragraph her liability is actually that of a mere guarantor because she
bound herself to fulfill the obligation only in case the principal debtor should fail to do
so, which is the essence of a contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the third paragraph defines the
nature of her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in the contract
should be interpreted in relation to one another and not by parts. In other words, the
second paragraph should not be taken in isolation, but should be read in relation to
the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner
avers that she could be held liable only as a guarantor for several reasons. First, the
words "jointly and severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an ordinary layman like
herein petitioner, a 65-year old housewife who is likely to enter into such transactions
without fully realizing the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law
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looks upon the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified limits,
taking into consideration the peculiar nature of a surety agreement which holds the
surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The note was brought
to petitioner partially filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent pursuant to Art. 1377
of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor. cdasia
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan
because the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings filed
by private respondent before the trial court. And, while petitioner may have admitted in
her Amended Answer that she received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or the principal debtors in
default for the simple reason that the latter subsequently made a partial payment on
the loan in September, 1991, a fact which was never controverted by herein private
respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the
outstanding balance of the loan is only P13,700.00. Where the interest charged on the
loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially
complied with, the court may equitable reduce the penalty 10 on grounds of
substantial justice. More importantly, respondent corporation never refuted petitioner's
allegation that immediately after the loan matured, she informed said respondent of
her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to
dismiss the petition for lack of merit, but to except therefrom the issue anent the
propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the
consistent holding of the Court that contracts of adhesion are not invalid per se and
that on numerous occasions the binding effects thereof have been upheld. The

peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to
which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding circumstances. 12 The factual scenario
obtaining in the case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarity liable" contained in the
second paragraph of her contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the principal maker.
Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the existence of fraud is unavailing.
Fraud must be established by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore,
fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving
allegations. 14
Having entered into the contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so under a misapprehension or in
ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule
that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no reason for relieving her of
liability. 16

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Petitioner would like to make capital of the fact that although she obligated herself to
be jointly and severally liable with the principal maker, her liability is deemed restricted
by the provisions of the third paragraph of her contract wherein she agreed "that M.B.
Lending Corporation may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which
makes her contract one of guaranty and not suretyship. The purported discordance is
more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of
the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty,
an undertaking that the debtor shall pay. 18 Stated differently, a surety promises to
pay the principal's debt if the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the guarantor if
the principal is unable to pay. 19 A surety binds himself to perform if the principal does
not, without regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so. 20 In other
words, a surety undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay if, by the use of
due diligence, the debt cannot be made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and
third paragraphs of the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's right against
petitioner. It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein petitioner only if and
when the defaulting principal has become insolvent. A contract of suretyship, to
repeat, is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and
without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes
the rule on strictissimi juris, which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then the liability of the
surety, under his contract, as thus interpreted and construed, is not to be extended
beyond its strict meaning. 23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining whether a party's undertaking is
that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship contract

merely elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by
petitioner, that she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being incongruent with the
judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall also be principally
considered. 24 Several attendant factors in that genre lend support to our finding that
petitioner is a surety. For one, when petitioner was informed about the failure of the
principal debtor to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial
payment up to the last, which were all issued in her name and of the Azarraga
spouses. 25 This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly
upon the account and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with that of her principals only goes
to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers. cdasia
In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, 26 and as such is deemed an original promisor and
debtor from the beginning. 27 This is because in suretyship there is but one contract,
and the surety is bound by the same agreement which binds the principal. 28 In
essence, the contract of a surety starts with the agreement, 29 which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately
follows the terms and conditions stipulated between respondent corporation, as
creditor, and the principal obligors. A surety is usually bound with his principal by the
same instrument, executed at the same time and upon the same consideration; he is
an original debtor, and his liability is immediate and direct. 30 Thus, it has been held
that where a written agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the
terms of the principal contract, the signers were "sureties" jointly liable with the
buyer. 31 A surety usually enters into the same obligation as that of his principal, and
the signatures of both usually appear upon the same instrument, and the same
consideration usually supports the obligation for both the principal and the surety.32
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There is no merit in petitioner's contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default, there having
been no judicial or extrajudicial demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions expressed in the
promissory note. Significantly, paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the creditor is no longer necessary in order
that delay may exist since the contract itself already expressly so declares. 33 As a
surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing
suit against them, since the commencement of the suit is a sufficient demand. 34 On
this point, it may be worth mentioning that a surety is not even entitled, as a matter of
right, to be given notice of the principal's default. Inasmuch as the creditor owes no
duty of active diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the creditor has not
notified him in the absence of a special agreement to that effect in the contract of
suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the
principal debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual requirement, it is not
necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account. 36The underlying principle therefor is that a suretyship is a direct contract to
pay the debt of another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default. 37 As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited
from the proceeds of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first against the principal
before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal. 39 Under Article 1216 of the Civil Code, the creditor

may proceed against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety alone. 40 Since, generally, it
is not necessary for a creditor to proceed against a principal in order to hold the surety
liable, where, by the terms of the contract, the obligation of the surety is the same as
that of the principal, then as soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against
the principal. 41 Perforce, in accordance with the rule that, in the absence of statute
or agreement otherwise, a surety is primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in the absence of any agreement
limiting the application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue
petitioner on her obligation does not release her from liability. Where a creditor
refrains from proceeding against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the creditor's rights visa-vis the surety, unless the surety requires him by appropriate notice to sue on the
obligation. Such gratuitous indulgence of the principal does not discharge the surety
whether given at the principal's request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to favor the principal, or is only the
result of passiveness. The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such delay continues until the
principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor's mere statement that the creditor will not look
to the surety, 44 or that he need not trouble himself. 45 The consequences of the
delay, such as the subsequent insolvency of the principal, 46 or the fact that the
remedies against the principal may be lost by lapse of time, are immaterial. 47
The raison d'trefor the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied
with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of the
creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would
release the surety. 50 In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period , pursuant to an enforceable
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agreement between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing
the principal contract within the period during which he could otherwise have enforced
it, and which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within
which to comply with their obligation did not effectively absolve herein petitioner from
the consequences of her undertaking. Besides, the burden is on the surety, herein
petitioner, to show that she has been discharged by some act of the
creditor, 52 herein respondent corporation, failing in which we cannot grant the relief
prayed for. LLjur
As a final issue, petitioner claims that assuming that her liability is solidary, the
interests and penalty chargers on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The statement, likewise traversed by
said respondent, is misleading.
In an affidavit 53 executed by petitioner, which was attached to her petition, she
stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan
has been released and that she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and
of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga.
At the same time, I offered to pay MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from Merlyn and Osmea
Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmea Azarraga, together with interest
and penalties thereon, has not been paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed
against me by MB Lending before the RTC-Iloilo. After learning that a complaint was
filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first

offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in
the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to collect
from her principal first, and she offered to pay only in case the creditor fails to collect.
The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land
which she owned. Respondent corporation was acting well within its rights when it
refused to accept the offer. The debtor of a thing cannot compel the creditor to receive
a different one, although the latter may be of the same value, or more valuable than
that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based on
the stipulated interests and penalty charges, as owing and due from herein petitioner.
A debt shall not be understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered, as the case may
be. 56 In other words, the prestation must be fulfilled completely. A person entering
into a contract has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing
to pay because the moment the latter accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection, then
the obligation shall be deemed fully complied with. 58 Precisely, this is what

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respondent corporation wanted to avoid when it continually refused to settle with


petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney's fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article
1229 of the Civil Code provides that the court shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the debtor. And,
even if there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent
M.B. Lending Corporation, and which is substantially on all fours with the one at bar,
we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3%) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended that is, to punish the obligor will have been
sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy
(albeit still lawful) regular compensatory interest, the penalty interest stipulated in the
parties' promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled
that even with an agreement thereon between the parties, the court may nevertheless
reduce such attorney's fees fixed in the contract when the amount thereof appears to
be unconscionable or unreasonable. 60 To that end, it is not even necessary to show,
as in other contracts, that it is contrary to morals or public policy. 61 The grant of
attorney's fees equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection of a sum of money.
We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be
sufficient in this case. 62

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the


MODIFICATION that the penalty interest of 3% per month is hereby deleted and the
award of attorney's fees is reduced to P10,000.00.
SO ORDERED. LLjur
Melo, Puno, Mendoza and Martinez, JJ .,concur.
||| (Palmares v. Court of Appeals, G.R. No. 126490, [March 31, 1998], 351 PHIL 664691)

EN BANC

Page 179 of 505

[G.R. No. 34642. September 24, 1931.]


FABIOLA SEVERINO, accompanied by her husband
RICARDO VERGARA, plaintiffs-appellees, vs. GUILLERMO
SEVERINO ET AL., defendants. ENRIQUE ECHAUS, appellant.

R. Nepomuceno, for appellant.


Jacinto E. Evidente, for appellees.

SYLLABUS
1. CONTRACT; CONSIDERATION; SURETY OR GUARANTOR. It is
not necessary that a surety or guarantor should participate in the benefit which
constitutes the consideration as between the principal parties to the contract.

DECISION

STREET, J p:
This action was instituted in the Court of First Instance of the Province
of Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara,
for the purpose of recovering the sum of P20,000 from Guillermo Severino and
Enrique Echaus, the latter in the character of guarantor for the former. Upon
hearing the cause the trial court gave judgment in favor of the plaintiff's to recover
the sum of P20,000 with lawful interest from November 15, 1929, the date of the
filing of the complaint, with costs. But it was declared that execution of this
judgment should issue first against the property of Guillermo Severino, and if no
property should be found belonging to said defendant sufficient to satisfy the
judgment in whole or in part, execution for the remainder should be issued
against the property of Enrique Echaus as guarantor. From this judgment the
defendant Echaus appealed, but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of
Melecio Severino, deceased, former resident of Occidental Negros. Upon the

death of Melecio Severino a number of years ago, he left considerable property


and litigation ensued between his widow, Felicitas Villanueva, and Fabiola
Severino, on the one part, and other heirs of the deceased on the other part. In
order to make an end of this litigation a compromise was effected by which
Guillermo Severino, a son of Melecio Severino, took over the property pertaining
to the estate of his father at the same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino. This sum of money was made payable, first,
P40,000 in cash upon the execution of the document of compromise, and the
balance in three several payments of P20,000 at the end of one year, two years,
and three years respectively. To this contract the appellant Enrique Echaus
affixed his name as guarantor. The first payment of P40,000 was made on July
11, 1924, the date when the contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the sum of P10,000. Of the
remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of
P20,000.
It appears that at the time the compromise agreement above- mentioned
was executed Fabiola Severino had not yet been judicially recognized as the
natural daughter of Melecio Severino, and it was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should be retained on deposit until the definite status of Fabiola
Severino as natural daughter of Melecio Severino should be established. The
judicial decree to this effect was entered in the Court of First Instance of
Occidental Negros on June 16, 1925, and as the money which was contemplated
to be held in suspense has never in fact been paid to the parties entitled thereto,
it results that the point respecting the deposit referred to has ceased to be of
moment.
The proof shows that the money claimed in this action has never been
paid and is still owing to the plaintiff; and the only defense worth noting in this
decision is the assertion on the part of Enrique Echaus that he received nothing
for affixing his signature as guarantor to the contract which is the subject of suit
and that in effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties
thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a
lawsuit is recognized in law as a valuable consideration; and the dismissal of the
action which Felicitas Villanueva and Fabiola Severino had instituted against
Guillermo Severino was an adequate consideration to support the promise on the
part of Guillermo Severino to pay the sums of money stipulated in the contract
Page 180 of 505

which is the subject of this action. The promise of the appellant Echaus as
guarantor is therefore binding. It is never necessary that a guarantor or surety
should receive any part of the benefit, if such there be, accruing to his principal.
But the true consideration of this contract was the detriment suffered bythe
plaintiffs in the former action in dismissing that proceeding, andit is immaterial
that no benefit may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will
be affirmed, with costs against the appellant. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, VillaReal and Imperial, JJ., concur.
||| (Severino v. Echaus, G.R. No. 34642, [September 24, 1931], 56 PHIL 185-188)

FIRST DIVISION
[G.R. No. 45571. June 30, 1939.]
FLORENTINA DE GUZMAN, as administratrix of the intestate
estate of the deceased Santiago Lucero, plaintiff-appellee, vs.
ANASTACIO R. SANTOS,defendant-appellant.

E, V. Filamor for appellant.


Antonio G. Lucero for appellee.

Page 181 of 505

DECISION

IMPERIAL, J p:
This is an appeal taken by the defendant from the decision of the Court
of First Instance of Nueva Ecija which sentenced him to pay the plaintiff the sum
of P3,665.55, plus legal interest thereon from February 10, 1932, until fully paid,
and the costs.
On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R.
Santos, the defendant, formed a general mercantile partnership under the style
Philippine-American Construction Company, with a capital of P14,000, P10,000
of which were taken by way of loan from Paulino Candelaria. The partnership and
the copartners undertook and bound themselves to pay, jointly and severally, the
said indebtedness in or before June, 1925. Having violated the conditions of the
contract executed for the purpose, Paulino Candelaria brought civil case No.
3838 of the Court of First Instance of Nueva Ecija on May 15, 1925, against the
Philippine-American Construction Company and its copartners, for the recovery
of the loan, plus interest thereon and stipulated attorney's fees. On January 25,
1926, the said court rendered judgment therein sentencing all the defendants to
pay the plaintiff, jointly and severally, the sum of P9,317, with legal interest
thereon from the filing of the complaint, plus P500 as liquidated damages and
P1,000 as attorney's fees. On appeal this judgment was affirmed by this court on
December 17, 1926 (G. R. No. 26131). A writ of execution of the affirmed
judgment having been issued, the herein plaintiff, in her capacity as judicial
administratrix of the deceased Santiago Lucero, on February 10, 1932, paid to
the creditor Paulino Candelaria the sum of P5,665.55 on account of the
judgment.
Upon the filing of the complaint in civil case No. 3838, Paulino
Candelaria obtained a writ of attachment against the then defendants by virtue of
which the sheriff attached properties of Jerry O. Toole valued at P50; of Antonio
K. Abad valued at P12,150; and