G.R. No.

133632 February 15, 2002

BPI INVESTMENT CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.

DECISION

QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution dated
April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial Court of Pasig
City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC
for brevity) against private respondents ALS Management and Development Corporation and Antonio K.
Litonjua,1 consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of preliminary
injunction by the private respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of their monthly amortization, hence,
the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private respondents
the amount of ₱300,000 for moral damages, ₱50,000 for exemplary damages, and ₱50,000 for attorney’s fees and
expenses for litigation. It likewise dismissed the foreclosure suit for being premature.

The facts are as follows:

Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development Corporation
(AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa.
Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private
respondents ALS and Antonio Litonjua for ₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000 balance of
Roa’s indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private respondents
and proposed to grant them a new loan of ₱500,000 to be applied to Roa’s debt and secured by the same property, at an
interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten
years in equal monthly amortization of ₱9,996.58 and penalty interest at the rate of 21% per annum per day from the date
the amortization became due and payable.

Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with the
provision that payment of the monthly amortization shall commence on May 1, 1981.

On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of ₱190,601.35. This reduced
Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated when BPIIC applied thereto the proceeds of private
respondents’ loan of ₱500,000.

On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what was left of their loan
after full payment of Roa’s loan.

In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay
the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five
Thousand Five Hundred Eighty Five and 31/100 Pesos (₱475,585.31). A notice of sheriff’s sale was published on August
13, 1984.

On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others, that they
were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they
should not be made to pay amortization before the actual release of the ₱500,000 loan in August and September 1982.
Further, out of the ₱500,000 loan, only the total amount of ₱464,351.77 was released to private respondents. Hence,
applying the effects of legal compensation, the balance of ₱35,648.23 should be applied to the initial monthly amortization
for the loan.

On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and Antonio K.
Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was
only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months. The
amortization schedule attached as Annex "A" to the "Deed of Mortgage" is correspondingly reformed as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in a
newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the following
sums:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorney’s fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.

Costs against BPI.

SO ORDERED.2

Both parties appealed to the Court of Appeals. However, private respondents’ appeal was dismissed for non-payment of
docket fees.

On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:

WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.

SO ORDERED.3

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of the
contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date
when BPIIC released the purported balance of the ₱500,000 loan after deducting therefrom the value of Roa’s
indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be
inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only ₱194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they already paid a total amount of
₱201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the publication
in newspapers concerning private respondents’ delinquency in the payment of their loan. This fact constituted sufficient
ground for moral damages in favor of private respondents.

The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC submits for
resolution the following issues:

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE
LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY’S FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE
LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.

On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is perfected
upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982.
Petitioner claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract
of mortgage is executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case,
the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan was
actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roa’s loan. This finds
support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring
the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the
delay in the release of the loan should be attributed to private respondents. As BPIIC only agreed to extend a ₱500,000
loan, private respondents were required to reduce Frank Roa’s loan below said amount. According to petitioner, private
respondents were only able to do so in August 1982.

In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a simple loan is perfected upon
the delivery of the object of the contract, hence a real contract. In this case, even though the loan contract was signed on
March 31, 1981, it was perfected only on September 13, 1982, when the full loan was released to private respondents.
They submit that petitioner misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was perfected on March 31, 1981
but the contract of loan itself was only perfected upon the delivery of the full loan to private respondents on September 13,
1982.

Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March 31,
1981, and their payment did not start a month thereafter, still no default took place. According to private respondents, a
perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each party is the
consideration of the other party. In this case, the consideration for BPIIC in entering into the loan contract is the promise of
private respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. 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. Therefore, private respondents conclude, they did not incur in delay when they
did not commence paying the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when
petitioner fully complied with its obligation under the loan contract.

We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected only
upon the delivery of the object of the contract.5 Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this
Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise
to deliver something by way of simple loan.

In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan
of ₱500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected consensual
contract which under normal circumstances could have made the bank liable for not releasing the loan. However, since
the fault was attributable to petitioner therein, the court did not award it damages.

A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does
not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which
gives rise to obligations only on the part of the borrower. 6

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected
only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the Court of Appeals, private respondents’ obligation to pay
commenced only on October 13, 1982, a month after the perfection of the contract. 7

We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other. 8 As averred by private respondents, the promise of BPIIC
to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that 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.9 Only when a party has performed his part of the contract can he demand that the other party
also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the
payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation
under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and
whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has not
shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in a petition
for review under Rule 45 of the Rules of Court,10 factual matters need not tarry us now. On these points we are bound by
the findings of the appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did not act
maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage contract
because private respondents were irregular in their monthly amortization.1âwphi1 It invoked our ruling in Social Security
System vs. Court of Appeals, 120 SCRA 707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals "the negligence
of the appellant is not so gross as to warrant moral and temperate damages," except that, said Court reduced those
damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of both the Trial Court and
respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was acting in the
legitimate exercise of its right under the mortgage contract in the face of irregular payments made by private respondents
and placed reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure application
should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among
the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted
on the payment of amortization on the loan even before it was released. Further, it did not make the corresponding
deduction in the monthly amortization to conform to the actual amount of loan released, and it immediately initiated
foreclosure proceedings when private respondents failed to make timely payment.

But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule out the
award of moral and exemplary damages.11

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without
checking and correspondingly adjusting its records on the amount actually released to private respondents and the date
when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal
damages should be given in recognition of their rights which were violated by BPIIC. 12 For this purpose, the amount of
₱25,000 is sufficient.

Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled to litigate, we sustain
the award of ₱50,000 in favor of private respondents as attorney’s fees.

WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, are
AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in favor of
private respondents is DELETED, but the award to them of attorney’s fees in the amount of ₱50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents ₱25,000 as nominal damages. Costs against petitioner.

SO ORDERED.
G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

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

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can
properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two
private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court
of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both
for Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial
Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as
follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the
Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan
Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo
Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby denied.
Said defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision
of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court,
touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of
the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of
acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that
those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA
G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole controversy started when
the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed
with the Court of First Instance of Baguio Benguet on September 5, 1962 an application
for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion
Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the
Catholic Church building, convents, high school building, school gymnasium, school
dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and
the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3,
respectively, asserting ownership and title thereto. After trial on the merits, the land
 registration court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of
Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of
the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-
R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision
of the land registration court and dismissing the VICAR's application as to Lots 2 and 3,
the lots claimed by the two sets of oppositors in the land registration case (and two sets
of plaintiffs in the two cases now at bar), the first lot being presently occupied by the
convent and the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the
Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their
motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the
names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of
Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the
ground that there was "no sufficient merit to justify reconsideration one way or the
other ...," and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of
the decision of the Court of Appeals dismissing his (its) application for registration of Lots
2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain
Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the Heirs of
Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a
petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and
Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O.
Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of
VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for
lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832
and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance
of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of
Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador
J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of
Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any
affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner
for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of
Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May
16, 1979, the Court of Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed
Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the
Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for
recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1)
witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their
predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. B—B-4 ) to defendant
Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00
per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of
Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name
of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would
 testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and
peacefully and has constructed permanent structures thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case
on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching
on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res
judicata.

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

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE
BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO
WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION
OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME
NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE
PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED
BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3
AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3
UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR
ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF
RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE
DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that
it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-
G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-
G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they
were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3,
with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to
1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied
for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary
acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription
requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R,
affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res 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 oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was
appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in
1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez.
Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

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

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of
ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and
repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact
have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final
and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the
Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule,
in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated
Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against
petitioner.

SO ORDERED
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.

ROMERO, J.:

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.

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 the private 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 THE AFFIRMING THE CONVICTION OF

THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT
EXIST (sic) BETWEEN THE ACCUSED-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".

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

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 of 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
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
26 H. Kaliraya St.
Quezon City

Signed in the presence of:

 (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

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. l(b) of the Revised Penal Code.

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
G.R. No. 195889 September 24, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES EDUARDO AND MA. ROSARIO TAJONERA and EDUAROSA REALTY DEVELOPMENT, INC., Respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure seeking to reverse and set aside the November 30, 2010
Decision1 of the Court of Appeals (CA), and its March 2, 2011 Resolution,2 in CA-G.R. CV No. 85458, entitled "Spouses Eduardo & Ma. Rosario
Tajonera and Eduarosa Realty & Development, Inc. v. Philippine National Bank," which affirmed with modification the December 8, 2003 Decision 3
of the Regional Trial Court, Branch 71, Pasig City (RTC), in a case for annulment of sale, cancellation of title, cancellation of mortgage and damages.

The Facts

Respondent Eduarosa Realty Development, Inc. (ERDI) was engaged in realty construction and sale of condominium buildings. Respondent Ma.
Rosario Tajonera (Rosario),as the Vice President ofERDI, also performed the duties of president and marketing director dealing with banks, suppliers
and contractors. ERDI, through Rosario, obtained loans from petitioner Philippine National Bank (PNB)and entered into several credit agreements to
finance the completion of the construction of their 20-storey Eduarosa Tower Condominium located in Roxas Boulevard, Paranaque City.

Pursuant to the Credit Agreement,4 dated March 5, 1991, the principal amount of loan extended by PNB to ERDI was Sixty Million Pesos
(60,000,000.00). As security for the initial loan, ERDI executed the Real Estate Mortgage (REM) consisting of three (3) parcels of land covered by
Transfer Certificate of Title (TCT) Nos. 38845, 38846 and 38847 with an aggregate area of 1,352 square meters situated in Roxas Boulevard, Tambo,
Paranaque, Metro Manila, registered in the name of ERDI (Paranaque properties).In addition, the loan was secured by the assignment of proceeds of
contract receivables arising from the sale of condominium units to be constructed on the mortgaged Paranaque properties.

On January 31, 1992, ERDI executed an amendment to the Credit Agreement5 (First Amendment)and obtained an additional loan of Forty Million
Pesos (₱40,000,000.00). As additional security to the increased amounts of loan, the respondent spouses’ 958-square meter lot and the improvements
thereon, situated in Greenhills, San Juan, Metro Manila (Greenhills property)and covered by TCT No. 29733, was mortgaged in favor of PNB as
evidencedby the Supplement to REM.6 On October 28, 1992, a Second Amendment to Credit Agreement7 (Second Amendment)was executed by the
parties to extend the repayment dates of the loan and the additional loan subject to the terms set forth in the said agreement.

The following year, or on November 3, 1993, a Third Amendment to the Credit Agreement8 (Third Agreement)was entered into by the parties
wherein PNB granted an additional loan of Fifty Five Million Pesos (₱55,000,000.00) to ERDI, subject to several conditions stated in the said
agreement.

As of September 30, 1994, ERDI’s outstanding loan obligation with PNB amounted to ₱211,935,067.40.9

ERDI failed to settle its obligation.As a consequence, PNB filed an application for foreclosure of the Greenhills property. As the highest bidder, PNB
was issued the Certificate of Sale,10 dated October 9, 1997. Upon ERDI’s failure to redeem the property, PNB consolidated its title and caused the
cancellation of TCT No. 29733.11 A new title, TCT No. 9424-R, was issued in the name of PNB.12

The Complaint

This prompted the respondents to file a complaint against PNB for annulment of sale, cancellation oftitle, cancellation of mortgage, and damages
before the RTC. In the complaint, the respondents alleged that: the title to the mortgaged property that was transferred to PNB as a consequence of
the foreclosure proceedings was null and void as their mortgage obligation had been novated and no new loans were released to them, in violation of
the provisions of the Supplement to REM; the foreclosure proceedings were defective due to PNB’s failure to send personal notice to the respondent
spouses; PNB’s delay in the release of loan proceeds under the credit agreements caused the non-completion of the condominium project; and the
properties mortgaged under the original mortgage contract covering the respondents’ condominium titles should now be discharged, as the property
of the respondent spouses had already been foreclosed.13

PNB’s Answer

In its Answer with Counterclaim, PNB denied the respondents’ allegations and raised the following defenses: 1) the mortgage contract was supported
by valuable consideration asthe loan proceeds under the credit agreements were fully released to them; 2) there was no novation of the contract; 3)
demand letters were given to and duly received by the respondents; and 4) the sufficiency of the mortgage over the condominium titles cannot be
determined because the court has no jurisdiction over such issue.14

The RTC Decision

On December 8, 2003, the RTC rendered its judgment in favor of the respondents and disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs and against the defendant:

1. NULLIFYING and CANCELLING the Supplement to Real Estate Mortgage dated January 28, 1992 and the Certificate of Sale dated
October 9, 1997.

2. NULLIFYING and CANCELLING the Transfer Certificate of Title No. 9424-R, Registry of Deeds for San Juan, Metro Manila, and
REINSTATING Transfer Certificate of Title No. 29733, Registry of Deeds for San Juan, Metro Manila.

3. ORDERING the defendant to pay the plaintiffs the amount of ₱500,000.00 as moral damages.

4. ORDERING the defendant to pay the plaintiffs the amount of ₱200,000.00 as exemplary damages.

5. ORDERING the defendant to pay the plaintiffs the amount of ₱100,000.00 as and by way of attorney’s fees.

6. Costs of suit.

Counterclaims are hereby DISMISSED for lack of merit.

SO ORDERED.15

The RTC annulled the mortgage contract constituted over the Greenhills property on the ground of breach of contract on the part of PNB by violating
the credit agreements.

The CA Decision

Aggrieved, PNB elevated the matter to the CA. In its Decision, dated November 30, 2010, the CA affirmed the decision of the RTC, but deleted the
award of moral and exemplary damages. In the dispositive portion of its assailed decision, the CA declared:

WHEREFORE, the challenged Decision dated 08 December 2003 is AFFIRMED with Modification in that the awards for moral and exemplary
damages are deleted.

SO ORDERED.16

The CA agreed with the RTC ruling that inasmuch as PNB did not release the remaining balance of the approved loan amounting to ₱39,503,088.84
under the Third Amendment, there was no sufficient valuable consideration in the execution of the Supplement to REM that secured the said credit
agreement. There was, according to the CA, breach of contract on the part of PNB that warranted the annulment and cancellation of the Supplement
to REM covering the Greenhills property. Further, the CA rejected PNB’s claim that its refusal to release the balance of the last loan was due to the
respondents’ failureto comply with the undertaking of bringing new investors with additional collaterals to secure the additional loan as such
requirement was not categorically stated in the terms of the credit agreement. Also, such claim was belied by PNB’s own witness who testified that
the reason for its refusal to release was simply the respondents’ failure to settle their amortization.

PNB filed a motion for reconsideration of the said decision, but the same was denied by the CA in its assailed Resolution, dated March 2, 2011.

Hence, this petition.

The Issues:
In its Memorandum,17 PNB submits the following issues for consideration:

Whether or not the CA decided in accordance with the applicable laws and jurisprudence when:

(1) it ruled that the Supplement to Real Estate Mortgage, dated 28 January 1992, lacked sufficient valuable consideration even when the loan
proceeds secured by it under the Third Amendment, dated 03 November 1993, had been substantially released by PNB, and the Credit
Agreement, dated 05 March 1991, as well as the First and Second Amendments thereto, dated 31 January 1992 and 28 October 1992,
respectively, upon which the same Supplement to Real Estate Mortgagewas similarly constituted as additional security, had all been duly
executed and consummated;

(2) it ruled that PNB breached its contractual obligation when it supposedly failed to release the remaining balance of the approved loan in
the amount of ₱39,503,088.84 to the respondents even when the latterhad not had a single history of payment and did not need the entire
amount for the purpose-specific loan grant under the Credit Agreement and its Amendments;

(3) upon a finding of breach of contractual obligation on the part of PNB due to its supposed unjustified release of a portion of the loan
proceeds, it ruled for the annulment and cancellation of supplement to real mortgage (the accessory contract) yet ratiocinated that the Third
Amendment (the principal contract) became unenforceable only to the extent of unreleased portion of the loan proceeds. 18

The Court’s Ruling

PNB’s assignment of errors boils down to the sole issue of whether the CA erred in annulling the mortgage contract constituted over the Greenhills
property of the respondents.

PNB contends that the Supplement to REM was supported by sufficient and valuable consideration because the loan proceeds secured by it under the
Third Amendment had been substantially released to the respondents. It avers that had it not been for the additional collateral over the Greenhills
property, PNB would not have made the respondents’ loan account current under the First Amendment. This consideration, according to it, must be
deemed valuable and sufficient enough to uphold the validity of the Supplement to the REM.

PNB insists that there was no breach, substantial or otherwise, of its contractual obligation when it did not release the remaining balance of the
approved loan to the respondents considering that the latter had no history of any payment either on interest or principal of the loan. PNB, thus,
asserts that the CA erred when it affirmed the RTC in ordering the annulment and cancellation of the supplement REM covering the Greenhills
property.

PNB’s arguments fail to persuade.

Record shows that ERDI obtained loans from, and entered into, several credit agreements with PNB to finance the completion of the construction of
its 20-storey condominium project, the Eduarosa Towers. Pertinent details of the said credit agreements are summarized as follows:

Amount of Loan ( ) Grant Date of Execution

Credit Agreement ₱60,000,000.00 Loan March 5, 1991

₱5,000,000.00 Domestic Bills
Purchased (DBP)

Amendment to ₱40,000,000.00 Additional Loan January 31, 1992

Credit Agreement

2nd Amendment to None Extension of October 28, 1992

Credit Agreement repayment dates
of the loan and
additional loan

3rd Amendment to ₱55,000,000.00 Additional Loan November 3, 1993

Credit Agreement
As recited earlier, on March 5, 1991, ERDI obtained from PNB a loan in the amount of ₱60,000,000.00 plus ₱5,000,000.00 Domestic Bills. To secure
this initial loan, ERDI mortgaged in favor of PNB its Paranaque properties together with the 20-storey condominium building to be erected thereon.

Thereafter or on January 31, 1992,ERDI and PNB entered into The First Amendment wherein the former obtained an additional loan of
₱40,000,000.00. As security for the additional loan, the respondents’ Greenhills property was mortgaged as evidenced by the Supplement to REM
executed by the parties on January 28,1992. The Second Amendment was likewise entered into by the parties for the purpose of extending the
repayment dates of the loan and the additional loan.

On November 3, 1993, the Third Amendment was entered into by the parties wherein the respondents were granted a second additional loan of
₱55,000,000.00.

The agreement between PNB and the respondents was one of a loan. Under the law, a loan requires the delivery of money or any other consumable
object by one party to another who acquires ownership thereof, on the condition that the same amount orquality shall be paid. Loan is a reciprocal
obligation, as it arises from the same causewhere one party is the creditor, and the other the debtor. The obligation of one party in a reciprocal
obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor
should release the full loan amountand the debtor repays it when it becomes due and demandable.19

PNB, not having released the balance of the last loan proceeds in accordance with the Third Amendment had no right to demand from the
respondents compliance with their own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its
obligation, the other party cannot be obliged to perform what is expected of them while the other's obligation remains unfulfilled. 20

When PNB and the respondents entered into the First, Second and Third Amendments on January 31, 1992, October 28,1992 and November 3, 1993,
respectively, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise ofeach party is the consideration for that of
the other; and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay.21 The promise of the respondents to pay was the consideration for the obligation of PNB to furnish
the ₱40,000,000.00 additional loan under the First Amendment as well as the ₱55,000,000.00 the second additional loan under the Third Amendment.
When the respondents executed the Supplement to REM covering their Greenhills property, they signified their willingness to pay the additional
loans. It should be noted, as correctly found by the CA, that the Supplement to REM was constituted not only as security for the execution of the First
Amendment but also in consideration of the Second and Third Amendments. The provisions of the Third Amendment read in part:

SECTION 2. THE AMENDMENTS

xxx

2.05 The full payment of the Loans and any and all sums payable by the Borrower hereunder and under the Notes and the other documents
contemplated hereby and the faithful compliance by the Borrower with the terms and conditions hereof and thereof and the Notes shall be secured by
the following collaterals:

xxx

b) Existing real estate mortgageon a parcel of land with an area of 958 sq. m., more or less, together with the improvements thereon, situated in San
Juan, Metro Manila, covered by TCT No. 29733 of the land records for Metro Manila (D-11) and registered in the name of Rosario M. Mendoza
married to Eduardo Tajonera (the "Accommodation Mortgagors"), as evidenced by that Supplement to Real Estate Mortgage dated January 28, 1992
and acknowledged before Notary Public for the City ofManila, Rowena Fe N. Suarez as Doc. No. 300, Page No. 61, Book No. II Series of 1992; 22

xxx

The obligation of PNB was to furnish the ₱55,000,000.00 additional loan accrued on November 3, 1993, the date the parties entered into the Third
Amendment. Thus, PNB’s delay in furnishing the entire additional loan started from the said date.

Considering that PNB refused to release the total amount of the additional loan granted to ERDI under the Third Amendment amounting to
₱39,503,088.84, the CA was correct in affirming the RTC’s conclusion that there was no sufficient valuable consideration in the execution of the
Supplement to REM. In the assailed decision, the CA wrote:

Indeed, the execution of the subject Supplement to Real Estate Mortgage dated January 28, 1992 lacks sufficient valuable consideration since PNB
did not release the balance of the Php160,000,000.00 approved loan in the amount of Php39,503,038.54, pursuant to the Third Amendment to Credit
Agreement of the parties. As the records would show, the subject Supplement to Real Estate Mortgage, supra, was constituted by Appellees as
additional security for the execution of the 1st, 2nd as well as the 3rd Amendment to Credit Agreements.

To elucidate, the Greenhills property was first mortgaged by Appellees in favor of PNB as collateral security to the additional loan of
Php40,000,000.00, evidenced by the provisions of the 1st Amendment to Credit Agreement, reading as follows:

xxx

We agree with the court a quowhen it correctly ruled that the subject supplement mortgage over Appellees’ Greenhills property was likewise
constituted in consideration of the Third Amendment to Credit Agreement, supra, as evidenced by 2.05 (b), Section 2 thereof which provides, to wit:
xxx

In view of the foregoing,We hold that the court a quoaptly ruled that the refusal of PNB to release portion of the additional loan granted under the
Third Amendment to Credit Transaction is not justified. In this jurisdiction, breach of contract is defined as follows:

xxx

[It] is the "failure without legal reason to comply with the terms of a contract." Itis also defined as the "[f]ailure, without legal excuse, to perform any
promise which forms the whole or part of the contract."

xxx

Undoubtedly, PNB breached its contractual obligation when it failed to release to Appellees the remaining balance of the approved loan amounting to
Php39,503,088.84.23

The RTC found that PNB was guilty of breach of contract as the credit agreements had been violated. For its failure to release the balance of the
approved loan, the construction of the Eduarosa Towers Condominium project was not finished, transgressing the very purpose of the credit
agreements, that is, to finance the completion of the construction of Eduarosa Towers. This factual findingwas affirmed by the CA. Thus, the Court is
bound to uphold such finding. "The settled rule is that conclusions and findings of fact of the trial court are entitled to great weight on appeal and
should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as observe
the demeanor of the witnesses while testifying in the case. The fact that the CA adopted the findings of fact of the trial court makes the same binding
upon this Court."24

At any rate, the Court finds no merit in PNB’s claim that its refusal to release the balance of the approved additional loan was justified on the ground
of the respondents’failure to settle their amortization. PNB’s own witness, Mr. Mallari, testified, thus:

Cross Examination

xxx

ATTY. LLAUDER:

Q. Now, what happened to the balance of the loan that was yet to be released to plaintiff corporation?

A: The bank did not allow further availments because of the failure of the borrower to pay the maturing obligation.

xxx

Redirect Examination

xxx

ATTY. BALDONO:

xxx
Q: What was the reason, Mr. Witness, why the PNB withheld the release of the additional loan?

A: Because the borrower failed to settle the quarterly amortization June 30, 1994. Even the June 30, the amortization were never settled by the
borrower.

COURT:

What year?

A: June 30, 1994, your Honor.25

Evidently and as aptly observed by the CA, PNB cannot justify its failure to release the balance of the last loan executed with the respondents under
the Third Amendment on November 3, 1993 considering that the latter’s liability to pay their first amortization arose only on June 30, 1994.

As expressly provided in the terms ofthe second additional loan embodied in the Third Amendment, to wit:

SECTION 1. TERMS OF THE SECOND ADDITIONAL LOAN

xxx

1.05 Repayment Dates. The Borrower agrees to repay the Second Additional Loan in full in eleven (11) equal (or as nearly equal as possible)
consecutive quarterly installments ("Repayment Dates"), the first installment to commence on June 30, 1994 and every quarter thereafter up to
December 31, 1996.

SECTION 2. THE AMENDMENTS

2.01 The Interest Payment Dates and Repayment Dates of the Loan, the Additional Loan and the Second Additional Loan (Collectively the "Loans")
shall be the same. Accordingly, the Credit Documents are hereby amended to change the Interest Payment Dates and Repayment Dates in the
following manner:

xxx

First principal payment on the Loans shall commence on June 30, 1994 and every quarter thereafter until maturity of all the loans on December 31,
1996.26 [Underscoring Supplied] Equally without merit is PNB’s reliance on the case of Sps. Omengan v. Philippine National Bank. 27 The said case
finds no application inasmuch as the circumstances in that case are not in all fours with the present case. In Omengancase, there was no actual
meeting of the minds with respect to the conditionally approved additional loan as the condition attached to the increase in borrowers’ credit line was
not acknowledged and accepted by them. Hence, there being no perfectedcontract over the increase in credit line, it was held that no breach of
contract could be attributed to PNB in not releasing the additional loan. In the present case, there was a perfected contract in so far as the Third
Amendment was concerned. Thus, PNB’s action in not releasing the entire amount of the additional loan was not justified.

Still in the said case, atthe time the original loan was approved, the title to the property offered as collateral appeared topertain exclusively to Spouses
Omengan. By the time the application for increase was considered, PNB had acquired information that the said property, although in the name of
spouses petitioners was owned in co-ownership. The Court justified PNB’s act of withholding the release of the additional loan because it already had
reason to suspect the spouses’ claim of exclusive ownership over the mortgaged collateral. Inthis case, the respondents were unquestionably the
exclusive owners ofthe mortgaged property (Greenhills property) at the time the initial and the additional loans were approved.

For said reasons, the Court holds that PNB was indeed guilty of breach of contract of its reciprocal obligation under the credit agreements.

Considering that there was no sufficient valuable consideration in the execution of the Supplement to REM on the Third Amendment as the balance
of the last approved additional loan in the amount of ₱39,503,088.54 remained unreleased, the cancellation of the Supplement to REM constituted
over the respondents’ Greenhills property was in order.

It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor's interest in case of the default of
the debtor. By its nature, however, a mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the
mortgage contract depends on whether or not there has been a violation of the principal obligation. While a creditor and a debtor could regulate the
order in which they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation – the
release of the full loan amount.28

In this case, to repeat, PNB did not fulfill its principal obligation under the Third Amendment by failing torelease the amount of the last additional
loan in full. Consequently, the Supplement to REM covering the Greenhills property became unenforceable, as the said property could not be entirely
foreclosed to satisfy the respondents’ total debts to PNB. Moreover, the Supplement to REM was no longer necessary because PNB’s interest was
amply protected as the loans had been sufficiently secured by the Paranaque properties. As aptly found by the RTC, the Paranaque properties together
with the 20-storey condominium building to be erected thereon would have been sufficient security in the execution of the REM even without the
Greenhills property as additional collateral. Thus, under the circumstances, PNB’s actuation in foreclosing the Greenhills property was legally
unfounded.

Being a banking institution, PNB owes it to the respondents to observe the high standards of integrity and performance in all its transactions because
its business is imbued with public interest. The high standards are also necessary to ensure public confidence in the banking system, for, according to
Philippine National Bank v. Pike,29 "[t]he stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks." 30
Thus, PNB was duty bound tocomply with the terms and stipulations under its credit agreements with the respondents, specifically the release of the
amount ofthe additional loan in its entirety, lest it erodes public confidence.1âwphi1 Yet, PNB failed in this regard.

Regarding the award of damages, the CA ruled that the RTC erred in awarding moral and exemplary damages for failure of the respondents to prove
with convincing evidence malice or bad faith on the part of PNB. The Court finds no reason to overturn this finding.

Moral damages are explicitly authorized in breaches of contract when the defendant has acted fraudulently or in bad faith. 31 Exemplary damages, on
the other hand, are intended to serve as an example or a correction for the public good. Courts may award them if the defendant is found to have
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. 32 Concededly, PNB was remiss in its obligation to release the balance of
the additional loan it extended to the respondents. Nothing in the records or findings of the RTC and the CA, however, would show that PNB acted
with a deliberate intent to maliciously cause damage or harm to the respondents. And, inasmuch as the respondents were also found to h;we been
remiss in their obligation to pay their loan amortization, the CA was correct in deleting the award for moral and exemplary damages in favor of the
respondents.

Finally, the Court sustains the award for attorney's fees because the same is just and equitable under the circumstances. 33 Considering PNB 's failure
to release the remaining balance of the approved loan, the Court agrees that the respondents were compelled to litigate for the purpose of recovering
their property and to protect their interest, making the awmd or attorney's fees proper.

WHEREFORE, the petition is DENIED. The November 30, 2010 Decision and the March 2, 2011 Resolution of the Court of Appeals in CAG.R. CV
No. 85458 are AFFIRMED.

SO ORDERED
G.R. No. 191015 August 6, 2014

PEOPLE OF THE PHILIPPINES Petitioner,

vs.
JOSE C. GO, AIDA C. DELA ROSA, and FELECITAS D. NECOMEDES,** Respondents.

DECISION

DEL CASTILLO, J.:

The power of courts to grant demurrer in criminal cases should be exercised with great caution, because not only the rights of the
accused - but those of the offended party and the public interest as well - are involved. Once granted, the accused is acquitted and the
offended party may be left with no recourse. Thus, in the resolution of demurrers, judges must act with utmost circumspection and
must engage in intelligent deliberation and reflection, drawing on their experience, the law and jurisprudence, and delicately
evaluating the evidence on hand.

This Petition for Review on Certiorari1 seeks to set aside the September 30, 2009 Decision2 of the Court of Appeals (CA) in CA-G.R.
SP No. 101823, entitled "People of the Philippines, Petitioner, versus Hon. Concepcion Alarcon-Vergara et al., Respondents," as well
as its January 22, 2010 Resolution3 denying reconsideration of the assailed judgment.

Factual Antecedents

The following facts appear from the account of the CA:

On October 14, 1998, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) issued Resolution No. 1427 ordering the closure
of the Orient Commercial Banking Corporation (OCBC) and placing such bank under the receivership of the Philippine Deposit
Insurance Corporation (PDIC). PDIC, as the statutory receiver of OCBC, effectively took charge of OCBC’s assets and liabilities in
accordance withits mandate under Section 30 of Republic Act 7653.

xxxx

While all the aforementioned events were transpiring, PDIC began collecting on OCBC’s past due loans receivable by sending
demand letters to its borrowers for the immediate settlement oftheir outstanding loans. Allegedly among these borrowers of OCBC are
Timmy’s, Inc. and Asia Textile Mills, Inc. which appeared to have obtained a loanof [P]10 Million each. A representative of Timmy’s,
Inc. denied being granted any loan by OCBC and insisted that the signatures on the loan documents were falsified. A representative of
Asia Textile Mills, Inc. denied having applied, much less being granted, a loan by OCBC.

The PDIC conducted an investigation and allegedly came out with a finding that the loans purportedly in the names of Timmy’s, Inc.
and Asia Textile Mills, Inc. were released in the form of manager’schecks in the name of Philippine Recycler’s and Zeta International,
Inc. These manager’s checks were then allegedly deposited to the savings account of the private respondent Jose C. Go with OCBC
and, thereafter, were automatically transferred to his current account in order to fund personal checks issued by him earlier.

On September 24, 1999, PDIC filed a complaint4 for two (2) counts of Estafa thru Falsification of CommercialDocuments in the
Office of the City Prosecutor of the City of Manila against the private respondents in relation to the purported loans of Timmy’s,
Inc.and Asia Textile Mills, Inc. On November 22, 2000, after finding probable cause, the Office of the City Prosecutor of the City of
Manila filed Informations5 against the private respondents which were docketed as Criminal Case Nos. 00-187318 and 00-187319 in
the RTC in Manila.

Upon being subjected to arraignment by the RTC in Manila, the private respondents pleaded not guilty to the criminal cases filed
against them. A pretrial was conducted. Thereafter, trial of the cases ensued and the prosecution presented its evidence. After the
presentation of all of the prosecution’s evidence, the private respondents filed a Motion for Leave to File Demurrer to Evidence and a
Motion for Voluntary Inhibition. The presiding judge granted the private respondents’ Motion for Voluntary Inhibition and ordered the
case to be re-raffled to another branch. The case was subsequently re-raffled to the branch of the respondent RTC judge. 6
In an Order dated December 19, 2006, the respondent RTC judge granted the private respondents’ Motion for Leave to File Demurrer
to Evidence. On January 17, 2007, the private respondents filed their Demurrer to Evidence7 praying for the dismissal of the criminal
cases instituted against them due to the failure of the prosecution to establish their guilt beyond reasonable doubt.

On July 2, 2007, an Order8 was promulgated by the respondent RTC judge finding the private respondents’ Demurrer to Evidence to
be meritorious, dismissing the Criminal Case Nos. 00-187318 and 00-187319 and acquitting all of the accused in these cases. On
July20, 2007, the private prosecutor in Criminal Case Nos. 00-187318 and 00-187319 moved for a reconsideration of the July 2, 2007
Order but the same was denied by the respondent RTC judge in an Order9 dated October 19, 2007.10

Surprisingly, and considering thathundreds of millions of Orient Commercial Banking Corporation (OCBC) depositors’ money appear
to have been lost – which must have contributed to the bank’s being placed under receivership, no motion for reconsideration of the
July 2, 2007 Order granting respondents’ demurrer to evidence was filed by the handling public prosecutor, Manila Prosecutor Marlo
B. Campanilla (Campanilla). Only complainant Philippine Deposit Insurance Corporation (PDIC) filed a Motion for Reconsideration,
and the same lacked Campanilla’s approval and/or conformé; the copy of the Motion for Reconsideration filed with the RTC 11 does not
bear Campanilla’s approval/conformé; instead,it indicates thathe was merely furnished with a copy of the motion by registered mail. 12
Thus, while the prosecution’s copy of PDIC’sMotion for Reconsideration13 bore Campanilla’s subsequent approval and conformity,
that which was actually filed by PDIC with the RTC on July 30, 2007 did not contain the public prosecutor’s written approval and/or
conformity.

Ruling of the Court of Appeals

On January 4, 2008, the prosecution, through the Office of the Solicitor General (OSG), filed anoriginal Petition for Certiorari 14 with
the CA assailing the July 2, 2007 Order of the trial court. Itclaimed that the Order was issued with grave abuse of discretion amounting
to lackor excess of jurisdiction; that it was issued with partiality; that the prosecution was deprived of its day in court; and that the trial
court disregarded the evidence presented, which undoubtedly showed that respondents committed the crime of estafa through
falsification ofcommercial documents.

On September 30, 2009, the CA issued the assailed Decision with the following decretal portion: WHEREFORE, in view of the
foregoing premises, the petition filed in this case is hereby DENIED and the assailed Orders of the respondent RTC judge are
AFFIRMED and deemed final and executory.

SO ORDERED.15

Notably, in dismissing the Petition, the appellate court held that the assailed July 2, 2007 Order of the trial court became final since the
prosecution failed to move for the reconsideration thereof, and thus double jeopardy attached. The CA declared thus –

More important than the fact that double jeopardy already attaches is the fact that the July 2, 2007 Order of the trial court has already
attained finality. This Order was received by the Office of the City Prosecutor of Manila on July 3, 2007 and by the Private Prosecutor
on July 5, 2007. While the Private Prosecutor filed a Motion for Reconsideration of the said Order, the Public Prosecutor did not seek
for the reconsideration thereof. It is the Public Prosecutor who has the authority to file a Motion for Reconsideration of the said order
and the Solicitor General who can file a petition for certiorari with respect to the criminal aspect of the cases. The failure of the Public
Prosecutor to file a Motion for Reconsideration on or before July 18, 2007 and the failure of the Solicitor General to file a Petition for
Certiorarion or before September 1, 2007 made the order of the trial court final.

As pointed out by the respondents, the Supreme Court ruled categorically on this matter in the case of Mobilia Products, Inc. vs.
Umezawa (452 SCRA 736), as follows:

"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 liabilityarising 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. The private
complainant or offended party may not undertake such motion for reconsideration or appeal on the criminal aspect ofthe case.
However, the offended party or private complainant may file a motion for reconsideration of such dismissal or acquittal or appeal
therefrom but only insofar as the civil aspect thereof is concerned. In so doing, the private complainant or offended party need not
secure the conformity of the public prosecutor. If the court denies his motion for reconsideration, the private complainant or offended
party may appeal or file a petition for certiorarior mandamus, if grave abuse amounting to excess or lack of jurisdiction is shown and
the aggrieved party has no right of appeal or given an adequate remedy in the ordinary course of law."16
In addition, the CA ruled that the prosecution failed to demonstrate that the trial court committed grave abuse of discretion in granting
the demurrer, or that it was denied its day in court; that on the contrary, the prosecution was afforded every opportunity to present its
evidence, yet it failed to prove that respondents committed the crime charged.

The CA further held that the prosecution failed to present a witness who could testify, based on personal knowledge, that the loan
documents were falsified by the respondents; that the prosecution should not have relied on "letters and unverified ledgers," and it
"should have trailed the money from the beginning to the end;"17 that while the documentary evidenceshowed that the signatures in the
loan documents were falsified, it has not been shown who falsified them. It added that since only two of the alleged 13 manager’s
checks were being questioned, there arose reasonable doubt as to whether estafa was committed, as to these two checks; instead, there
is an "inescapable possibility that an honest mistake was made in the preparation of the two questioned manager’s checks since these
checks were made out to the names of different payees and not in the names of the alleged applicants of the loans." 18 The appellate
court added –

x x x Finally, the petitioner failed to present evidence on where the money went after they were deposited to the checking account of
the private respondent Jose C. Go. There is only a vague reference that the money was used to fund the personal checks earlier issued
by x x x Go. The petitioner should have gone further and identified who were the recipients of these personal checks and if these
personal checks were negotiated and honored. With all the resources of the public prosecutor’s office, the petitioner should have done
a better job of prosecuting the cases filed against the private respondents. It isa shame that all the efforts of the government will go for
naught due to the negligence of the public prosecutors in tying up the chain of evidence in a criminal case. 19

As a final point, the CA held that if errors were made inthe appreciation of evidence, these are mere errors of judgment – and not
errors of jurisdiction – which may no longer be reviewed lest respondents be placed in double jeopardy.

The OSG moved for reconsideration, but in the assailed January 22, 2010 Resolution, the CA stood its ground. Hence, the instant
Petition was instituted.

Issues

In the Petition, it is alleged that –

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT RULED THAT –

(a) NO GRAVE ABUSE OF DISCRETION WAS COMMITTED BY RESPONDENT RTC JUDGE IN GRANTING THE
DEMURRER TO EVIDENCE;

(b) THE ORDER OF ACQUITTAL HAS ALREADY ATTAINED FINALITY WHEN IT WAS NOT CHALLENGED IN A
TIMELY AND APPROPRIATE MANNER; AND

(c) THE LOWER COURT MERELY COMMITTED ERRORS OF JUDGMENT AND NOT OF JURISDICTION. 20

Petitioner’s Arguments

Petitioner argues that the public prosecutor actually filed a Motion for Reconsideration of the assailed July 2,2007 Order of the trial
court granting respondents’ demurrer – that is, by "joining"the private prosecutor PDIC in the latter’s July 20, 2007 Motion for
Reconsideration. Nonetheless,it admitted that while it joined PDIC in the latter’s July 20, 2007 Motion for Reconsideration, it had
only until July 18, 2007 within which to seek reconsideration since it received the order on July 3, 2007, while the private prosecutor
received a copy of the Order only on July 5, 2007; it pleads thatthe two-day delay in filing the motion should not prejudice the
interests of the State and the People.

Petitioner assumes further that, since it was belated in its filing of the required Motion for Reconsideration, it may have been tardy as
well in the filing of the Petition for Certiorariwith the CA, or CA-G.R. SP No. 101823. Still, it begs the Court to excuse its mistake in
the nameof public interest and substantial justice, and in order to maintain stability in the banking industry given that the case involved
embezzlement of large sums ofdepositors’ money in OCBC.

Petitioner goes on to argue that the CAerred in affirming the trial court’s finding that demurrer was proper. It claims that it was able to
prove the offense charged, and it has shown that respondents were responsible therefor.

In its Reply,21 petitioner claims thatthe July 2, 2007 Order of the trial court granting respondents’ demurrer was null and void to begin
with, and thus it could not have attained finality. It adds thatcontrary to respondents’ submission, the private prosecutor’s Motion for
Reconsideration contained the public prosecutor’s written conformity, and that while it may be saidthat the public prosecutor’s motion
was two days late, still the trial court took cognizance thereof and passed upon its merits; by so doing, the trial court thus validatedthe
public prosecutor’s action of adopting the private prosecutor’sMotion for Reconsideration as his own. This being the case, it should
therefore besaid that the prosecution’s resultant Petition for Certiorariwith the CA on January 4, 2008 was timely filed within the
required 60-day period, counted from November 5, 2007,or the date the public prosecutor received the trial court’s October 19, 2007
Order denying the Motion for Reconsideration.

Petitioner submits further that a Petition for Certiorariwas the only available remedy against the assailed Orders of the trial court, since
the granting of a demurrer in criminal cases is tantamount to an acquittal and is thus immediately final and executory. It adds that the
denial of its right to due process is apparent since the trial court’s grant of respondents’ demurrer was purely capricious and done with
evident partiality, despite the prosecution having adduced proof beyond reasonable doubt that they committed estafa through
falsification of commercial documents. Petitioner thus prays that the assailed CA dispositions be reversed and that Criminal Case Nos.
00-187318 and 00-187319 be reinstated for further proceedings.

Respondents’ Arguments

Praying that the Petition be denied, respondents Jose C. Go (Go), Aida C. Dela Rosa (Dela Rosa), and Felecitas D. Necomedes
(Nicomedes) – the accused in Criminal Case Nos. 00-187318 and 00-187319 – argue in their Comment22 that the trial court’s grant of
their demurrer to evidence amounts to an acquittal; any subsequent prosecution for the same offense would thus violate their
constitutional right against double jeopardy. They add thatsince the public prosecutor failed to timely move for the reconsideration of
the trial court’s July 2, 2007 Order, it could not have validly filed an original Petition for Certiorariwith the CA. Nor can it be said that
the prosecution and the private prosecutor jointly filed the latter’s July 20, 2007 Motion for Reconsideration with the trial court
because the public prosecutor’s copy of PDIC’smotion was merely sent through registered mail. Therefore if it were true that the
public prosecutor gave his approval or conformity to the motion, he did so only afterreceiving his copy of the motion through the mail,
and not at the time the private prosecutor actually filed its Motion for Reconsideration with the trial court.

Next, respondents submit that petitioner was not deprived of its day in court; the grant of their demurrer to evidence is based on a fair
and judicious determination of the facts and evidence bythe trial court, leading it to conclude that the prosecution failed to meet the
quantum of proof required to sustain a finding of guilt on the part of respondents. They argue thatthere is no evidence to show that
OCBC released loan proceeds to the alleged borrowers, Timmy’s, Inc. and Asia Textile Mills, Inc., and that these loan proceeds were
then deposited in the account of respondent Go. Since no loans were granted to the two borrowers, then there is nothing for Go to
misappropriate. With respect to the two manager’s checks issued to Philippine Recycler’s Inc. and Zeta International, respondents
contend that these may not beconsidered to be the loan proceeds pertaining to Timmy’s, Inc. and Asia Textile Mills, Inc.’s loan
application because these checks were not in the name of the alleged borrowers Timmy’s, Inc.and Asia Textile Mills, Inc. as payees.
Besides, these two checks were never negotiated with OCBC, either for encashmentor deposit, since they did not bear the respective
indorsements or signatures and account numbers of the payees; thus, they could not be considered to havebeen negotiated nor
deposited with Go’s account with OCBC.

Next, respondents argue that the cash deposit slip used to deposit the alleged loan proceeds in Go’s OCBC account is questionable,
since under banking procedure, a cash deposit slip may not be used to deposit checks. Moreover, it has not been shown who prepared
the said cash deposit slip. Respondents further question the validity and authenticity of the other documentary evidence presented,
such as the Subsidiary Ledger, Cash Proof,23 Schedule of Returned Checks and Other Cash Items (RTCOCI), etc.

Finally, respondents claim that not all the elementsof the crime of estafa under Article 315, par. 1(b) of the Revised Penal Code have
been established; specifically, it has not been shown that Goreceived the alleged loan proceeds, and that a demand was made upon him
for the return thereof.

Our Ruling

The Court grants the Petition.

Criminal Case Nos. 00-187318 and 00-187319 for estafa through falsification of commercial documents against the respondents are
based on the theory that in 1997, fictitious loans in favor of two entities – Timmy’s, Inc. and Asia Textile Mills, Inc. – were approved,
after which two manager’s checks representing the supposed proceeds of these fictitious loans were issued but made payable to two
different entities – Philippine Recycler’sInc. and ZetaInternational – without any documents issued by the supposed borrowers
Timmy’s, Inc. and Asia Textile Mills, Inc. assigning the supposedloan proceeds tothe two payees. Thereafter, these two manager’s
checks – together with several others totaling ₱120,819,475.0024 – were encashed, and then deposited in the OCBC Savings Account
No. 00810-00108-0 of Go. Then, several automatic transfer deposits were made from Go’s savings account to his OCBC Current
Account No. 008-00-000015-0 which were then used to fund Go’s previously dishonored personal checks.
The testimonial and documentary evidenceof the prosecution indicate that OCBC, a commercial bank, was ordered closed by the BSP
sometime in October 1998. PDIC was designated as OCBC receiver, and it took over the bank’s affairs, assets and liabilities, records,
and collected the bank’s receivables.

During efforts to collect OCBC’s pastdue loan receivables, PDIC as receiver sent demand letters to the bank’s debtor-borrowers on
record, including Timmy’s, Inc. and Asia Textile Mills, Inc. which appeared to have obtained unsecured loans of ₱10 million each, and
which apparently remained unpaid. In response to the demand letters, Timmy’s, Inc. and Asia Textile Mills, Inc. denied having
obtained loans from OCBC. Timmy’s, Inc., through its designated representative, claimed that while it is true that it applied for an
OCBC loan, it no longer pursued the application after it was granted a loan by another bank. When the OCBC loan documents were
presented to Timmy’s, Inc.’s officers, it was discovered that the signatures therein of the corporate officers were forgeries. In their
defense and to clarify matters, Timmy’s, Inc.’s corporate officers executed affidavits and furnished official documents such as their
passports and the corporation’s Articles of Incorporation containing their respectivesignatures to show PDIC that their purported
signatures in the OCBC loan documents were forgeries. After its investigation into the matter, PDIC came to the conclusion that the
signatures on the Timmy’s, Inc. loan documents were indeed falsified.25

On the other hand, in a written reply26 to PDIC’s demand letter, Asia Textile Mills, Inc. vehemently denied thatit applied for a loan
with OCBC. On this basis, PDIC concluded that the AsiaTextile Mills, Inc.loan was likewise bogus. Moreover, PDIC discovered other
bogus loans in OCBC.

Through the falsified loan documents, the OCBC Loan Committee – composed of Go, who was likewise OCBCPresident, respondent
Dela Rosa (OCBC Senior Vice President, or SVP, and Chief Operating Officer, or COO), Arnulfo Aurellano and Richard Hsu –
approved a ₱10 million unsecured loan purportedly in favor of Timmy’s, Inc. After deducting finance charges, advance interest and
taxes, DelaRosa certified a net loan proceeds amounting to ₱9,985,075.00 covered by Manager’s Check No. 000000334727 dated
February 5, 1997.28 The face of the check bears the notation "Loan proceeds of CL-484," the alpha numeric code ("CL-484")of which
refers to the purported loan of Timmy’s, Inc.29 However, the payee thereof was not the purported borrower, Timmy’s, Inc., but a certain
"Zeta International". Likewise, on even date, Manager’s Check No. 000000334030 for ₱9,985,075.00 was issued, and on its face is
indicated "Loan proceeds of CL-477", which alpha numeric code ("CL-477") refers to the purported loan of AsiaTextile Mills, Inc. 31
Manager’s Check No. 0000003340 was made payable not to Asia Textile Mills, Inc., but to "Phil. Recyclers Inc."

On the same day that the subject manager’s checks were issued, or on February 5, 1997, it appears that the two checks – together with
other manager’s checks totaling ₱120,819,475.00– were encashed; on the face ofthe checks, the word "PAID" was stamped, and at the
dorsal portion thereof there were machine validations showing thatManager’s Check No. 0000003347 was presented at 6:16 p.m.,
while Manager’s Check No. 0000003340 was presented at 6:18 p.m.32

After presentment and encashment, the amount of ₱120,819,475.00 – which among others included the ₱9,985,075.00 proceeds of the
purported Timmy’s, Inc. loan and the ₱9,985,075.00 proceeds of the supposed Asia Textile Mills, Inc. loan – was deposited in Go’s
OCBC Savings Account No. 00810-00108-0 at OCBC Recto Branch, apparently on instructions of respondent Dela Rosa. 33 The
deposit is covered by OCBC Cash Deposit Slip34 dated February 5, 1997, with the corresponding machine validation thereon
indicating that the deposit was made at 6:19 p.m.35 The funds were credited to Go’s savings account.36

It appears that previously, or on February 4, 1997, seven OCBC checks issued by Go from his personal OCBC Current Account No.
008-00-000015-0 totaling ₱145,488,274.48 were dishonored for insufficiency of funds.37 After Manager’s Check Nos. 0000003340
and 0000003347, along with several other manager’s checks, were encashed and the proceeds thereof deposited in Go’s OCBC
Savings Account No. 00810-00108-0 withautomatic transferfeature to his OCBC Current Account No. 008-00-000015-0, funds were
automatically transferred from the said savings account to the current account, which atthe time contained only a total amountof
₱26,332,303.69. Go’sOCBC Current Account No. 008-00-000015-0 was credited with ₱120,819,475.00, and thereafter the account
registered a balance of ₱147,151,778.69. The seven previously dishonored personal checks were thenpresented for clearing, and were
subsequently cleared that sameday, or on February 5, 1997.38 Apparently, they were partly funded by the ₱120,819,475.00manager’s
check deposits – which include Manager’s Check Nos. 0000003340 and 0000003347.

During the examination and inquiry into OCBC’s operations, oron January 28, 1998, Go issued and sent a letter39 to the BSP, through
Maria Dolores Yuviengco, Director of the Departmentof Commercial Banks, specifically requesting that the BSP refrain from sending
any communication to Timmy’s, Inc. and Asia Textile Mills, Inc., among others. He manifested that he was "willing to assume the
viability and full payment"of the accounts under investigation and examination, including the Timmy’s, Inc. and AsiaTextile Mills,
Inc. accounts.

Demurrer to the evidence40 is "an objection by one of the parties in an action, to the effect that the evidence which his adversary
produced is insufficient in point of law, whether true or not, to make out a case or sustain the issue. The party demurring challenges
the sufficiencyof the whole evidence to sustain a verdict. The court, in passing upon the sufficiency of the evidence raised in a
demurrer, is merely required to ascertain whether there is competent or sufficient evidence to sustain the indictment or to support a
verdict of guilt. x x x Sufficient evidence for purposes of frustrating a demurrer thereto is such evidence in character, weight or
amount as will legally justify the judicial or official action demanded according to the circumstances. To be considered sufficient
therefore, the evidence must prove: (a) the commission of the crime, and (b) the precise degree of participation therein by the
accused."41 Thus, when the accused files a demurrer, the court must evaluate whether the prosecution evidence is sufficient enough to
warrant the conviction of the accused beyond reasonable doubt.42

"The grant or denial of a demurrer to evidence is left to the sound discretion of the trial court, and its ruling on the matter shall not be
disturbed in the absence of a grave abuse of such discretion."43 As to effect, "the grant of a demurrer to evidence amounts to an
acquittal and cannot be appealed because it would place the accused in double jeopardy. The order is reviewable only by certiorariif it
was issued with grave abuse of discretion amounting tolack or excess of jurisdiction."44 When grave abuse of discretion is present, an
order granting a demurrer becomes null and void.

As a general rule, an order granting the accused’s demurrer to evidence amounts to an acquittal. There are certain exceptions, however,
as when the grant thereof would not violate the constitutional proscription on double jeopardy. For instance, this Court ruled that when
there is a finding that there was grave abuse of discretion on the part of the trial court in dismissing a criminal case by granting the
accused’s demurrer to evidence,its judgment is considered void, as this Court ruled in People v. Laguio, Jr.:

By this time, it is settled that the appellate court may review dismissal orders of trial courts granting an accused’s demurrer to
evidence. This may be done via the special civil action of certiorariunder Rule 65 based on the ground of grave abuse of discretion,
amounting to lack or excess of jurisdiction. Such dismissal order, being considered void judgment, does not result in jeopardy. Thus,
when the order of dismissal is annulled or set aside by an appellate court in an original special civil action via certiorari, the right of
the accused against double jeopardy is not violated.

In the instant case, having affirmed the CA finding grave abuse of discretion on the part of the trial court when it granted the accused’s
demurrer to evidence, we deem its consequent order of acquittal void.45

Grave abuse of discretion is defined as "that capricious or whimsical exercise of judgment which is tantamount to lack of jurisdiction.
‘The abuse of discretion must be patent and gross as to amount to an evasion of a 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 is exercised in an arbitrary and despotic manner by reason
of passion and hostility.’ The party questioning the acquittal of an accused should be able toclearly establish that the trial court
blatantly abused its discretion such that it was deprived of its authority to dispense justice." 46

In the exercise of the Court’s "superintending control over inferior courts, we are to be guided by all the circumstances of each
particular case ‘as the ends of justice may require.’ So it is that the writ will be granted where necessary to prevent a substantial wrong
or to do substantial justice."47

Guided by the foregoing pronouncements, the Court declaresthat the CA grossly erred in affirming the trial court’s July 2, 2007 Order
granting the respondent’s demurrer, which Order was patently null and void for having been issued with grave abuse of discretion and
manifest irregularity, thus causing substantial injury to the banking industry and public interest.1avvphi1 The Court finds that the
prosecution has presented competent evidence to sustain the indictment for the crime of estafa through falsification of commercial
documents, and that respondents appear to be the perpetrators thereof. In evaluating the evidence, the trial court effectively failed
and/or refused to weigh the prosecution’s evidence against the respondents, which it was duty-bound to do as a trier of facts;
considering that the case involved hundreds of millions of pesos of OCBC depositors’ money – not to mention that the banking
industry is impressed with public interest, the trial court should have conducted itself with circumspection and engaged in intelligent
reflection in resolving the issues.

The elements of estafa through abuse ofconfidence under Article 315, par. 1(b) of the Revised Penal Code48 are: "(a) that money,goods
or other personal property is received by the offender in trust oron commission, or for administration, or under any other obligation
involving the duty to make delivery of or to return the same; (b) that there be misappropriation orconversion of such money or
property by the offender, or denial on his part of such receipt; (c) that such misappropriation or conversion or denial is to the prejudice
of another; and (d) there is demand by the offended party to the offender."49

Obviously, a bank takes its depositors’ money as a loan, under an obligation to return the same; thus, the term "demand deposit."

The contract between the bank and its depositor is governed by the provisions of the Civil Code on simpleloan. Article 1980 of the
Civil Code expressly provides that "x x x savingsx x x deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan." There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor
and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. x x x 50
Moreover, the banking laws impose high standards on banks in view of the fiduciary nature of banking."This fiduciary relationship
means that the bank’s obligation to observe ‘high standards ofintegrity and performance’ is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher
than that of a good father of a family."51

In Soriano v. People,52 it was held that the President of a bank is a fiduciary with respect to the bank’s funds, and he holds the same in
trust or for administration for the bank’s benefit. From this, it may beinferred that when such bank president makes it appear through
falsification that an individual or entity applied for a loan when in fact such individual or entity did not, and the bank president obtains
the loan proceeds and converts the same, estafa is committed.

Next, regarding misappropriation, the evidence tends to extablish that Manager’s Check Nos.0000003340 and 0000003347 were
encashed, using the bank’s funds which clearly belonged to OCBC’s depositors, and then deposited in Go’s OCBC Savings Account
No. 00810-00108-0 at OCBC Recto Branch – although he was not the named payee therein. Next, the money was automatically
transferred to Go’s OCBC Current Account No. 008-00-000015-0 and used to fund his seven previously-issued personal checks
totaling ₱145,488,274.48, which checks were dishonored the day before. Simply put, the evidence strongly indicates that Go
converted OCBC funds to his own personal use and benefit. "The words ‘convert’ and ‘misappropriate’ connote an act of using or
disposing of another’s property as if it were one’s own, or of devoting it to a purpose or use different from that agreed upon. To
misappropriate for one’s own use includes not only conversion to one’s personal advantage, but also every attempt to dispose of the
property of another without right. x x x In proving the element of conversion or misappropriation, a legal presumption of
misappropriation arises when the accused fails to deliver the proceeds of the sale or to return the items to be sold and fails to give an
account of their whereabouts.Thus, the merepresumption of misappropriation or conversion is enough to conclude thata probable
cause exists for the indictment x x x."53

As to the third element of estafa, there is no question that as a consequence of the misappropriation of OCBC’s funds, the bank and its
depositors have been prejudiced; the bank has been placed under receivership, and the depositors’ money is no longer under their
unimpeded disposal.

Finally, on the matter of demand, while it has not been shown that the bank demanded the return of the funds, it has nevertheless been
held that "[d]emand is not an element of the felony or a condition precedent tothe filing of a criminal complaint for estafa. Indeed, the
accusedmay be convicted ofthe felony under Article 315, paragraph 1(b) of the Revised Penal Code if the prosecution proved
misappropriation or conversion by the accused of the money or property subject of the Information. In a prosecution for estafa,
demand is not necessary where there is evidence of misappropriation or conversion."54 Thus, strictly speaking, demand is not an
element of the offense of estafa through abuse of confidence; even a verbal query satisfies the requirement. 55 Indeed, in several past
rulings of the Court, demand was not even included as anelement of the crime of estafa through abuse of confidence, orunder
paragraph 1(b).56

On the other hand, the elements of the crime of falsification of commercial document under Art. 17257 are: "(1) that the offender is a
private individual; (2) that the offender committed any of the acts of falsification; and (3) that the act of falsification is committed ina
commercial document."58 As to estafa through falsification of public, official or commercial documents, it has been held that –

The falsification of a public, official, or commercial document may be a means of committing Estafa, because before the falsified
document is actually utilized to defraud another, the crime of Falsification has already been consummated, damage or intent to cause
damage not being an element of the crime of falsification of public, official or commercial document. In other words, the crime of
falsification has already existed. Actually utilizing that falsified public, official or commercial document todefraud another is estafa.
But the damage is caused by the commission of Estafa, not by the falsification of the document. Therefore, the falsification of the
public, official or commercial document is only a necessary means to commit the estafa. 59

Simulating OCBC loan documents – such as loan applications, credit approval memorandums, and the resultant promissory notes and
other credit documents – by causing it to appear that persons have participated in any act or proceeding when they did not in fact so
participate, and by counterfeiting or imitating their handwriting or signatures constitute falsification of commercial and public
documents.

As to the respondents’ respective participation in the commission of the crime, suffice it to state that as the beneficiary of the proceeds,
Go is presumed to be the author of the falsification. The fact that previously, his personal checks totaling ₱145,488,274.48 were
dishonored, and the day after, the amount of ₱120,819,475.00 was immediately credited to his account, which included funds from the
encashment of Manager’s Check Nos. 0000003340 and 0000003347 or the loan proceeds of the supposed Timmy’s, Inc. and Asia
Textile Mills, Inc. accounts, bolsters this view. "[W]henever someone has in his possession falsified documents [which he used to] his
advantage and benefit, the presumption that he authored it arises."60
x x x This is especially true if the use or uttering of the forged documents was so closely connected in time with the forgery that the
user or possessor may be proven to have the capacity of committing the forgery, or to have close connection with the forgers, and
therefore, had complicity in the forgery.

In the absence of a satisfactory explanation, one who is found in possession of a forged document and who used or uttered it is
presumed to be the forger.

Certainly, the channeling of the subjectpayments via false remittances to his savings account, his subsequent withdrawals of said
amount as well as his unexplained flight at the height of the bank’s inquiry into the matter more than sufficiently establish x x x
involvement in the falsification.61

Likewise, Dela Rosa’s involvement inthe scheme has been satisfactorily shown. As OCBC SVP and COO and member of the OCBC
Loan Committee, she approved the purported Timmy’s, Inc.loan, and she certified and signed the February 2, 1997 OCBC Disclosure
Statement and other documents.62 She likewise gave specific instructions to deposit the proceeds of Manager’s Check Nos.
0000003340 and 0000003347, among others, in Go’s OCBC Savings Account No. 00810-00108-0 at OCBC Recto Branch. 63 Finally,
she was a signatory to the two checks.64

On the other hand, respondent Nicomedes as OCBC Senior Manager for Corporate Accounts – Account Management Group, among
others prepared the Credit Approval Memorandum and recommended the approval of the loans.65

In granting the demurrer, the trial court – in its assailed July 2, 2007 Order – concluded that based on the evidence adduced, the
respondents could not have falsified the loan documents pertaining toTimmy’s, Inc. and Asia Textile Mills, Inc. since the individuals
who assert that their handwriting and signatures were forged were not presented incourt to testify on such claim; that the prosecution
witnesses – Honorio E. Franco, Jr. (Franco) of PDIC, the designated Assisting Deputy Liquidator of OCBC, and Virginia Rowella
Famirin (Famirin), Cashier of OCBC Recto Branch – were not present when the loan documents were executed and signed, and thus
have no personal knowledge of the circumstances surrounding the alleged falsification; and as high-ranking officers of OCBC,
respondents could not be expected to have prepared the saiddocuments. The evidence, however, suggests otherwise; it shows that
respondents had a direct hand in the falsification and creation of fictitious loans. The loan documents were even signed by them. By
disregarding what is evident in the record, the trial court committed substantial wrong that frustrates the ends of justice and adversely
affects the public interest. The trial court’s act was so patent and gross as to amount to an evasion of positive duty or to a virtual
refusal to perform a duty enjoined by law.

An act of a court or tribunal may only be considered as committed in grave abuse of discretion when the same was performed in a
capricious or whimsical exercise of judgment which is equivalent to lack of jurisdiction. The abuse of discretion must be so patent and
gross as to amount to an evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion and personal hostility.
x x x66

On the charge of estafa, the trial court declared that since the payees of Manager’s Check Nos. 0000003340 and 0000003347 were not
Asia Textile Mills, Inc. and Timmy’s, Inc., respectively, but other entities– Phil. Recyclers Inc. and Zeta International, and there are no
documents drawn by the borrowers assigning the loan proceeds to these two entities, then it cannot besaid that there were loan
proceeds released to these borrowers. The trial court added that it is doubtful that the two manager’s checks were presented and
negotiated for deposit in Go’s savings account, since theydo not contain the required indorsements of the borrowers, the signatures of
the tellers and individuals/payees who received the checks and the proceeds thereof, and the respective account numbers of the
respondents; and the checks were presented beyond banking hours. The trial court likewise held that the fact that a cash deposit slip –
and not a check deposit slip – was used to allegedly deposit the checks raised doubts as to the truth of the allegation that the manager’s
checks were deposited and credited to Go’s savings account.

The CA echoed the trial court’s observations, adding that the evidence consisted of mere "letters and unverifiedledgers" which were
thus insufficient; that there was an "inescapable possibility that an honest mistake was made" in the preparation and issuance of
Manager’s CheckNos. 0000003340 and 0000003347, since these two checks are claimed to be just a few of several checks –
numbering thirteen in all – the rest of which werenever questioned by the receiver PDIC. The appellate court added that the
prosecution should have presented further evidence as to where the money went after being deposited inGo’s savings and current
accounts, identifying thus the recipients of Go’spersonal checks.

What the trial and appellate courts disregarded, however, is that the OCBC funds ended up in the personal bank accountsof respondent
Go, and were used to fund his personal checks, even as he was not entitled thereto. These, if not rebutted, are indicative ofestafa, as
may be seen from the afore-cited Sorianocase.
The bank money (amounting to ₱8million) which came to the possession of petitioner was money held in trust or administration by
him for the bank, in his fiduciary capacity as the President of said bank. It is not accurate to say that petitioner became the owner of
the ₱8 million because it was the proceeds of a loan. That would have been correct if the bank knowingly extended the loan to
petitioner himself. But that is not the case here. According to the information for estafa, the loan was supposed to be for another
person, a certain "Enrico Carlos"; petitioner, through falsification, made it appear that said "Enrico Carlos" applied for the loan when
infact he ("Enrico Carlos") did not. Through such fraudulent device, petitioner obtained the loan proceeds and converted the same.
Under these circumstances, it cannot be said that petitioner became the legal owner of the ₱8 million. Thus, petitioner remained the
bank’s fiduciary with respect to that money, which makes it capable of misappropriation or conversion in his hands. 67

Thus, it is irrelevant that the proceeds of the supposed loans were made payable to entities other than the alleged borrowers.1âwphi1
Besides, the manager’s checks themselves indicate that they were the proceeds of the purported Timmy’s, Inc.’s and Asia Textile
Mills, Inc.’s loans, through the alpha numeric codes specifically assigned to them that are printed on the face of the checks; the
connection between the checks and the purported loans is thus established. In the same vein, the CA’s supposition that there is an
"inescapable possibility that an honest mistake was made inthe preparation of the two questioned manager’s checks" is absurd; even
so, the bottom line is that they were encashed using bank funds, and the proceeds thereof were deposited in Go’s bank savings and
current accounts and used to fund his personal checks.

Furthermore, as correctly pointed outby petitioner, it issuperfluous to require that the recipients of Go’s personal checks be identified.
For purposes of proving the crime, it has been shown that Goconverted bank funds to his own personal use when they were deposited
in his accounts and his personal checks were cleared and the funds were debited from his account.1âwphi1 This suffices. Likewise, the
Court agrees that the prosecution’s reliance on the supposed loan documents, subsidiary ledgers, deposit slip, cash proof, RTCOCI and
other documents was proper. They are both public and private documents which may be received in evidence; notably, petitioner’s
documentary evidence was admitted in full by the trial court.68 With respect to evidence consisting of private documents, the
presumption remains that "therecording of private transactions has been fair and regular, and that the ordinary course of business has
been followed."69

Go’s January 28, 1998 letter to the BSP stating that he was "willing to assume the viabilityand full payment" of the accounts under
examination – which included the Timmy’s, Inc. and Asia Textile Mills, Inc. accounts, among others – is an offer of compromise, and
thus an implied admission of guilt under Rule 130, Section 27 of the Revised Rules on Evidence. 70

In addition, appellant’s act of pleading for his sister-in-law’s forgiveness may be considered as analogous to an attempt to
compromise, which in turn can be received as an implied admission ofguilt under Section 27, Rule 130 x x x. 71

As a result of the Court’s declaration of nullity of the assailed Orders of the trial court, any dissection of the truly questionable actions
of Prosecutor Campanilla – which should merit appropriate disciplinary action for they reveal a patent ignorance of procedure, if not
indolence or a deliberate intention to bungle his own case – becomes unnecessary. It is conceded that the lack of Campanilla’s
approval and/or conforméto PDIC’s Motion for Reconsideration should have rendered the trial court’s assailed Ordersfinal and
executory were it not for the fact that they were inherently null and void; Campanilla’s irresponsible actions almost cost the People its
day in court and their right to exact justice and retribution, not to mention that they could have caused immeasurable damage to the
banking industry. Just the same, "[a] void judgment or order has no legal and binding effect, force or efficacy for any purpose. In
contemplation of law, it is non-existent. Such judgment or order may be resisted in any action or proceeding whenever it is involved. It
is not even necessary to take any steps to vacate or avoid a void judgment or final order; it may simply be ignored." 72 More
appropriately, the following must be cited:

x x x Clearly, the assailed Order of Judge Santiago was issued in grave abuse of discretion amounting to lack of jurisdiction. A void
order is no order at all. It cannot confer any right or be the source of any relief. This Court is not merely a court of law; it is likewise a
court of justice.

To rule otherwise would leave the private respondent without any recourse to rectify the public injustice brought about by the trial
court's Order, leaving her with only the standing to file administrative charges for ignorance of the law against the judge and the
prosecutor. A party cannot be left without recourse to address a substantive issue in law. 73

Finally, it must be borne in mind that "[t]he granting of a demurrer to evidence should x x x be exercised with caution, taking into
consideration not only the rights of the accused, but also the right of the private offended party to be vindicated of the wrongdoing
done against him, for if it is granted, the accused is acquitted and the private complainant is generally left with no more remedy. In
such instances, although the decision of the court may be wrong, the accused can invoke his right against double jeopardy. Thus,
judges are reminded to be more diligent and circumspect in the performance of their duties as members of the Bench xx x." 74

WHEREFORE, the Petition is GRANTED. The September 30, 2009 Decision and January 22, 2010 Resolution of the Court of
Appeals are REVERSED and SET ASIDE. The July 2, 2007 and October 19, 2007 Orders of the Regional Trial Court of Manila,
Branch 49 in Criminal Case Nos. 00-187318 and 00-187319 are declared null and void, and the said cases are ordered REINSTATED
for the continuation of proceedings.

SO ORDERED.

G.R. No. 187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari 1 under Rule 45 of the Revised Rules of Court is the decision 2 dated
September 24, 2008 and the resolution3 dated April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301. The
appellate court affirmed the decision of the Regional Trial Court (RTC) of Quezon City, Branch 77, dismissing the
complaint for declaration of nullity of loan filed by petitioner Alvin Patrimonio and ordering him to pay respondent Octavio
Marasigan III (Marasigan) the sum of ₱200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture under the name of
Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts and shows related to basketball.
Petitioner was already then a decorated professional basketball player while Gutierrez was a well-known sports columnist.

In the course of their business, the petitioner pre-signed several checks to answer for the expenses of Slam Dunk.
Although signed, these checks had no payee’s name, date or amount. The blank checks were entrusted to Gutierrez with
the specific instruction not to fill them out without previous notification to and approval by the petitioner. According to
petitioner, the arrangement was made so that he could verify the validity of the payment and make the proper
arrangements to fund the account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan (the petitioner’s
former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse that the petitioner needed the money for
the construction of his house. In addition to the payment of the principal, Gutierrez assured Marasigan that he would be
paid an interest of 5% per month from March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez, Marasigan acceded to
Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994. Gutierrez simultaneously delivered to
Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank, Greenhills Branch, Check No. 21001764
with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of
"₱200,000.00". The upper right portion of the check corresponding to the date was also filled out with the words "May 23,
1994" but the petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED." It was later
revealed that petitioner’s account with the bank had been closed since May 28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the petitioner asking
for the payment of ₱200,000.00, but his demands likewise went unheeded. Consequently, he filed a criminal case for
violation of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration of Nullity of
Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely denied authorizing the
loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.

Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22, 1997,Gutierrez was declared in
default.

The Ruling of the RTC

The RTC ruled on February 3,2003 in favor of Marasigan. 4 It found that the petitioner, in issuing the pre-signed blank
checks, had the intention of issuing a negotiable instrument, albeit with specific instructions to Gutierrez not to negotiate
or issue the check without his approval. While under Section 14 of the Negotiable Instruments Law Gutierrez had the
prima facie authority to complete the checks by filling up the blanks therein, the RTC ruled that he deliberately violated
petitioner’s specific instructions and took advantage of the trust reposed in him by the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner’s complaint
for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the check with a right to
claim reimbursement from Gutierrez.

The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in due course. He
contended that when Marasigan received the check, he knew that the same was without a date, and hence, incomplete.
He also alleged that the loan was actually between Marasigan and Gutierrez with his check being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual findings. After careful
analysis, the CA agreed with the petitioner that Marasigan is not a holder in due course as he did not receive the check in
good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the petitioner’s authority.
It held that the loan may not be nullified since it is grounded on an obligation arising from law and ruled that the petitioner
is still liable to pay Marasigan the sum of ₱200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the present petition for
review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition

The petitioner argues that: (1) there was no loan between him and Marasigan since he never authorized the borrowing of
money nor the check’s negotiation to the latter; (2) under Article 1878 of the Civil Code, a special power of attorney is
necessary for an individual to make a loan or borrow money in behalf of another; (3) the loan transaction was between
Gutierrez and Marasigan, with his check being used only as a security; (4) the check had not been completely and strictly
filled out in accordance with his authority since the condition that the subject check can only be used provided there is
prior approval from him, was not complied with; (5) even if the check was strictly filled up as instructed by the petitioner,
Marasigan is still not entitled to claim the check’s value as he was not a holder in due course; and (6) by reason of the bad
faith in the dealings between the respondents, he is entitled to claim for damages.

The Issues

Reduced to its basics, the case presents to us the following issues:

1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent Marasigan to petitioner,
through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the ₱200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority given by
the petitioner; and
 4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main point of inquiry of
whether the contract of loan may be nullified, hinges on the very existence of the contract of loan – a question that, as
presented, is essentially, one of fact. Whether the petitioner authorized the borrowing; whether Gutierrez completely filled
out the subject check strictly under the petitioner’s authority; and whether Marasigan is a holder in due course are also
questions of fact, that, as a general rule, are beyond the scope of a Rule 45 petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for review under Rule 45
is limited only to questions of law, is not an absolute rule that admits of no exceptions. One notable exception is when the
findings off act of both the trial court and the CA are conflicting, making their review necessary. 5 In the present case, the
tribunals below arrived at two conflicting factual findings, albeit with the same conclusion, i.e., dismissal of the complaint
for nullity of the loan. Accordingly, we will examine the parties’ evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the borrowing of money. He
points to Article 1878, paragraph 7 of the Civil Code, which explicitly requires a written authority when the loan is
contracted through an agent. The petitioner contends that absent such authority in writing, he should not be held liable for
the face value of the check because he was not a party or privy to the agreement.

Contracts of Agency May be Oral Unless The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself to render some
service or to do something in representation or on behalf of another, with the consent or authority of the latter." Agency
may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the
agency, knowing that another person is acting on his behalf without authority.

As a general rule, a contract of agency may be oral. 6 However, it must be written when the law requires a specific form, for
example, in a sale of a piece of land or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an agent can loan or
borrow money in behalf of the principal, to wit:

Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are
under administration. (emphasis supplied)

Article 1878 does not state that the authority be in writing. As long as the mandate is express, such authority may be
either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al., 7 that the requirement under Article 1878 of
the Civil Code refers to the nature of the authorization and not to its form. Be that as it may, the authority must be duly
established by competent and convincing evidence other than the self serving assertion of the party claiming that such
authority was verbally given, thus:

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule 138 of
the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if there is a clear
mandate from the principal specifically authorizing the performance of the act. As early as 1906, this Court in Strong v.
Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the one vital thing being that it
shall be express. And more recently, We stated that, if the special authority is not written, then it must be duly established
by evidence:
x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And while the same
does not state that the special authority be in writing the Court has every reason to expect that, if not in writing, the same
be duly established by evidence other than the self-serving assertion of counsel himself that such authority was verbally
given him.(Home Insurance Company vs. United States lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez,
52 SCRA 210; 225). (emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified for Being Void; Petitioner is
Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of the
petitioner.1âwphi1 Records do not show that the petitioner executed any special power of attorney (SPA) in favor of
Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized Gutierrez (or anyone for that matter),
whether verbally or in writing, to borrow money in his behalf, nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing authorizing him to borrow using
your money?

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105) 8

xxxx

Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and releasing them to Gutierrez
suffice to establish that the petitioner had authorized Gutierrez to fill them out and contract the loan in his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the petitioner. As held in
Yasuma v. Heirs of De Villa,9 involving a loan contracted by de Villa secured by real estate mortgages in the name of East
Cordillera Mining Corporation, in the absence of an SPA conferring authority on de Villa, there is no basis to hold the
corporation liable, to wit:

The power to borrow money is one of those cases where corporate officers as agents of the corporation need a special
power of attorney. In the case at bar, no special power of attorney conferring authority on de Villa was ever presented. x x
x There was no showing that respondent corporation ever authorized de Villa to obtain the loans on its behalf.

xxxx

Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the corporation liable since
there was no authority, express, implied or apparent, given to de Villa to borrow money from petitioner. Neither was there
any subsequent ratification of his act.

xxxx

The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his death). (citations omitted;
emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado, 10 where this court held:

Petitioner submits that his following testimony suffices to establish that respondent had authorized Lilian to obtain a loan
from him.

xxxx

Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of respondent or of his
wife. While petitioner claims that Lilian was authorized by respondent, the statement of account marked as Exhibit "A"
states that the amount was received by Lilian "in behalf of Mrs. Annie Mercado.
It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she was acting for and in
behalf of respondent. She thus bound herself in her personal capacity and not as an agent of respondent or anyone for
that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real property executed by an
agent, it must upon its face purport to be made, signed and sealed in the name of the principal, otherwise, it will bind the
agent only. It is not enough merely that the agent was in fact authorized to make the mortgage, if he has not acted in the
name of the principal. x x x (emphasis supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of the petitioner, the
loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the petitioner is not bound by the parties’
loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally sufficient because the
authority to enter into a loan can never be presumed. The contract of agency and the special fiduciary relationship
inherent in this contract must exist as a matter of fact. The person alleging it has the burden of proof to show, not only the
fact of agency, but also its nature and extent.11 As we held in People v. Yabut:12

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in Caloocan City cannot,
contrary to the holding of the respondent Judges, be licitly taken as delivery of the checks to the complainant Alicia P.
Andan at Caloocan City to fix the venue there. He did not take delivery of the checks as holder, i.e., as "payee" or
"indorsee." And there appears to beno contract of agency between Yambao and Andan so as to bind the latter for the acts
of the former. Alicia P. Andan declared in that sworn testimony before the investigating fiscal that Yambao is but her
"messenger" or "part-time employee." There was no special fiduciary relationship that permeated their dealings. For a
contract of agency to exist, the consent of both parties is essential, the principal consents that the other party, the agent,
shall act on his behalf, and the agent consents so to act. It must exist as a fact. The law makes no presumption thereof.
The person alleging it has the burden of proof to show, not only the fact of its existence, but also its nature and extent.
This is more imperative when it is considered that the transaction dealt with involves checks, which are not legal tender,
and the creditor may validly refuse the same as payment of obligation.(at p. 630). (emphasis supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of the SPA in favor of
the latter and without verifying from the petitioner whether he had authorized the borrowing of money or release of the
check. He was thus bound by the risk accompanying his trust on the mere assurances of Gutierrez.

No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent Was Not Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any other contract, is subject
to the rules governing the requisites and validity of contracts in general. 13 Article 1318 of the Civil Code14 enumerates the
essential requisites for a valid contract, namely:

1. consent of the contracting parties;

2. object certain which is the subject matter of the contract; and

3. cause of the obligation which is established.

In this case, the petitioner denied liability on the ground that the contract lacked the essential element of consent. We
agree with the petitioner. As we explained above, Gutierrez did not have the petitioner’s written/verbal authority to enter
into a contract of loan. While there may be a meeting of the minds between Gutierrez and Marasigan, such agreement
cannot bind the petitioner whose consent was not obtained and who was not privy to the loan agreement. Hence, only
Gutierrez is bound by the contract of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the hands of Marasigan. This
act, however, does not constitute sufficient authority to borrow money in his behalf and neither should it be construed as
petitioner’s grant of consent to the parties’ loan agreement. Without any evidence to prove Gutierrez’ authority, the
petitioner’s signature in the check cannot be taken, even remotely, as sufficient authorization, much less, consent to the
contract of loan. Without the consent given by one party in a purported contract, such contract could not have been
perfected; there simply was no contract to speak of. 15
With the loan issue out of the way, we now proceed to determine whether the petitioner can be made liable under the
check he signed.

II. Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments Law (NIL)
which states:

Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper
delivered by the person making the signature in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when
completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given and within a reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a pre-
signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed
to have prima facie authority to fill it up. It merely requires that the instrument be in the possession of a person other than
the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the blanks. 16

In order however that one who is not a holder in due course can enforce the instrument against a party prior to the
instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with the authority
given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had not been filled up
strictly in accordance with the authority given and within a reasonable time, the maker can set this up as a personal
defense and avoid liability. However, if the holder is a holder in due course, there is a conclusive presumption that
authority to fill it up had been given and that the same was not in excess of authority. 17

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the contract and loan
and under the check because: first, the subject check was not completely filled out strictly under the authority he has
given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title
of the person negotiating it.(emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for value." It
also provides in Section 52(d) that in order that one may be a holder in due course, it is necessary that at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could beset up against a
prior holder of the instrument. 18 It means that he does not have any knowledge of fact which would render it dishonest for
him to take a negotiable paper. The absence of the defense, when the instrument was taken, is the essential element of
good faith.19
As held in De Ocampo v. Gatchalian:20

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad
faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant's assignor, it being sufficient to show that the defendant had notice that there was something wrong about his
assignor's acquisition of title, although he did not have notice of the particular wrong that was committed.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not
necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of
such facts that his action in taking the note amounted bad faith.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner
in which the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is
evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further
inquiries and they had no right to shut their eyes deliberately to obvious facts. (emphasis supplied).

In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of loan, and
correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith. The following exchange is
significant on this point:

WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?

A: Since I celebrated my birthday in that place where Nap and I live together with the other crew, there were several
visitors that included Danny Espiritu. So a week after my birthday, Bong Marasigan called me up again and he was fuming
mad. Nagmumura na siya. Hinahanap niya si… hinahanap niya si Nap, dahil pinagtataguan na siya at sinabi na niya na
kailangan I-settle na niya yung utang ni Nap, dahil…

xxxx

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang tsekeng tumalbog… (He
told me that we have to fix it up before it…) mauwi pa kung saan…

xxxx

Q: What was your reply, if any?

A: I actually asked him. Kanino ba ang tseke na sinasabi mo?

(Whose check is it that you are referring to or talking about?)

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

A: I told him do you know that it is not really Alvin who borrowed money from you or what you want to appear…

xxxx

Q: What was his reply?

A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.(T.S.N., Ambet Nabus, July 27,
2000; pp.65-71; emphasis supplied)21
Since he knew that the underlying obligation was not actually for the petitioner, the rule that a possessor of the instrument
is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction and failure to verify, despite
knowledge of that the petitioner was not a party to the loan, may be construed as gross negligence amounting to bad
faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally barred from
recovery. The NIL does not provide that a holder who is not a holder in due course may not in any case recover on the
instrument.22 The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable.23 Among such defenses is the filling up blank not within the authority.

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the authority he gave.
He points to his instruction not to use the check without his prior approval and argues that the check was filled up in
violation of said instruction.

Check Was Not Completed Strictly Under The Authority Given by The Petitioner

Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the blanks and use the
check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks to be used in their business provided that he could
only use them upon his approval. His instruction could not be any clearer as Gutierrez’ authority was limited to the use of
the checks for the operation of their business, and on the condition that the petitioner’s prior approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie authority does not
extend to its use (i.e., subsequent transfer or negotiation)once the check is completed. In other words, only the authority
to complete the check is presumed. Further, the law used the term "prima facie" to underscore the fact that the authority
which the law accords to a holder is a presumption juris tantumonly; hence, subject to subject to contrary proof. Thus,
evidence that there was no authority or that the authority granted has been exceeded may be presented by the maker in
order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the petitioner to fill up the
blank or to use the check. In his testimony, petitioner asserted that he never authorized nor approved the filling up of the
blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000 only xx in this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999). 24

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the authority when he
used the check to pay the loan he supposedly contracted for the construction of petitioner's house. This is a clear violation
of the petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded
that the check was completed strictly in accordance with the authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal defense that the
blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan has no right to enforce
payment against the petitioner and the latter cannot be obliged to pay the face value of the check.
WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the petitioner Alvin Patrimonio's petition
for review on certiorari. The appealed Decision dated September 24, 2008 and the Resolution dated April 30, 2009 of the
Court of Appeals are consequently ANNULLED AND SET ASIDE. Costs against the respondents.

SO ORDERED

G.R. No. 192518, October 15, 2014

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND/OR ERNANI TUMIMBANG, Petitioners,

v. HENRY ESTRANERO, Respondent.

DECISION

REYES, J.:

This appeal by petition for review1 seeks to annul and set aside the Decision2 dated February 15, 2010 and
Resolution3 dated May 25, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 108297, which affirmed
the Decision4 dated August 29, 2008 of the National Labor Relations Commission (NLRC) in NLRC-NCR
Case No. 00-10-08679-05, and its Resolution5 dated January 30, 2009 denying Philippine Long Distance
Telephone Company's (PLDT) Motion for Reconsideration. The NLRC Decision affirmed the Decision 6 dated
December 8, 2006 of the Labor Arbiter (LA) ordering PLDT to pay Henry Estranero (respondent) his
separation pay.

The Facts

Petitioner PLDT is a public utility corporation engaged in the business of providing telecommunication
services to the general public. On July 1, 1995, PLDT employed the respondent as an Auto-
Mechanic/Electrician Helper, Job Grade 3 with a monthly salary of P15,000.00 at the time of his separation
from the service in 2003.

In the year 1995, PLDT adopted a company-wide Manpower Reduction Program (MRP), aimed at reducing
its work force. To commence with its program, PLDT offered the affected employees an attractive
redundancy pay consisting of 100% of their basic monthly salary for every year of service, in addition to
their retirement benefits, if entitled. For those who were not qualified to the retirement benefits, they
were offered separation or redundancy package of 200% of their basic monthly salary for every year of
service.

By virtue of the MRP, a number of positions were declared redundant. Among those gravely affected by
the MRP was the Fleet Management Division where the respondent was assigned, on account of the
significant decrease of company vehicles, machineries, and equipment that required mechanical servicing
and repair. Consequently, the respondent's position was included in those declared as redundant.

Attracted by the separation pay offered by the company, the respondent expressed his conformity to his
inclusion in the MRP. In the inter-office Memorandum dated April 21, 2003, the respondent declared that
he has no objection to being included in the redundancy program of PLDT. After having signified his
intention and after approval thereof by his superior officers, the respondent's name was included in the list
of redundant employees for that period and a Notice of Separation Due to Redundancy was submitted to
the Department of Labor and Employment on April 25, 2003. He was then made to sign a deed
denominated as a Receipt, Release and Quitclaim for his severance from employment, thus availed of the
offered personnel reduction program. Thereafter, PLDT proceeded to compute the respondent's
redundancy/separation benefits.

Since his length of service was seven (7) years, eleven (11) months and fifteen (15) days, which was
rounded to 8 years, the respondent was not qualified for retirement pay which required an employee to
have worked for at least 15 years. The respondent was nonetheless entitled to 200% of his basic monthly
salary for every year of service by way of redundancy pay or equivalent to P240,000.00. In addition, he
was also entitled to other benefits he has earned for the years prior to, and during the year of his actual
separation, i.e., 2002 and 2003 sick leave benefits, 2002 and 2003 vacation leave and vacation leave
premium benefits, longevity pay, mid-year bonus, 13th month pay and Christmas bonus, all in the sum of
P27,028.37. Thus, his aggregate redundancy pay plus other earned benefits amounted to P267,028.37.

However, the respondent had outstanding liabilities arising from various loans he obtained from different
entities, namely: the Home Development Mutual Fund (HDMF), PLDT Employees Credit Cooperative, Inc.,
PLDT Service Cooperative, Inc.,7 Social Security System (SSS), and the Manggagawa ng Komunikasyon sa
Pilipinas, which summed to P267,028.37.8 Thus, PLDT deducted the said amount from the payment that
the respondent was supposed to receive as his redundancy pay.

As a result, when the respondent was made to sign the Receipt, Release and Quitclaim, it showed that his
take home pay was in the amount of "zero pesos." This prompted the respondent to retract his availment
of the separation pay package offered to him through a letter addressed to the company dated May 8,
2003. Despite said retraction, however, the respondent was no longer allowed to report for work.

Subsequently, the respondent filed a complaint for illegal dismissal with reinstatement, as well as moral
and exemplary damages plus attorney's fees, docketed as NLRC-NCR Case No. 04-02820-97, against
PLDT and Ernani Tumimbang (petitioners), the Division Head of the Fleet Management Division where the
respondent was assigned.

In due course, the LA rendered a Decision dated December 8, 2006 in favor of the respondent, disposing
as follows:chanRoblesvirtualLawlibrary

WHEREFORE, foregoing premises considered, respondent Philippine Long Distance Telephone Company is
hereby ordered to pay complainant Henry T. Estra[n]ero his separation pay in the amount of P267,038.37
[sic].

The "set-off of complainant's outstanding loans in the amount of P267,038.37 [sic] against his separation
pay invoked by respondents is hereby dismissed for lack of jurisdiction.

All other claims are hereby ordered dismissed for lack of merit.

SO ORDERED.9

The LA sustained the validity of PLDT's redundancy program as an authorized cause to terminate the
employment of the respondent, and his entitlement to the redundancy/separation pay pursuant to the
MRP, being more advantageous than the benefits allowed under the law. The LA, however, ruled that the
office lacks jurisdiction to pass upon the issue of PLDT's act in deducting the total outstanding loans which
the respondent obtained from different entities since the same does not involve an employer-employee
relationship, and may only be enforced by PLDT through a separate civil action in the regular courts.

On appeal, the NLRC affirmed the LA decision. The NLRC ruled that the respondent should be paid his
separation pay on account of redundancy. As to the setting-off of the respondent's outstanding loans, it
agreed with the LA that the same is not a labor dispute but one arising from a debtor-creditor relation
where PLDT stands as a collecting agent over which the labor tribunals has no jurisdiction.

The petitioners filed a motion for reconsideration but it was denied; hence, they filed a petition for
certiorari with the CA.

On February 15, 2010, the appellate court promulgated its Decision affirming the assailed NLRC decision.
The CA held that there is no more question as to the legality of the respondent's dismissal from
employment as the respondent had accepted the validity of his dismissal from service. The controversy
arose when the petitioners deducted from the respondent's redundancy pay the latter's outstanding
liabilities arising from various loans he obtained from different entities such that his take home pay
became zero.
In sustaining the respondent's claim for redundancy pay, the appellate court
ratiocinated:chanRoblesvirtualLawlibrary

The deductions subject of this case pertain to loans which x x x respondent availed from various entities.
Hence, as above stated, there must be proof that there is a personal written authorization from x x x
respondent authorizing petitioners to deduct from his terminal pay his outstanding loans from said
entities. Petitioners failed to present convincing evidence that, indeed, x x x respondent, has knowledge
and consented to these deductions. On the contrary, x x x respondent maintains that petitioners
unilaterally made the application of deductions without his knowledge, much less consent. Thus, it is the
burden of petitioners to present proof of the validity of the deductions. However, aside from their bare
allegations, they did not offer any concrete and tangible evidence proving their authority to deduct the
outstanding loans of x x x respondents from his redundancy pay. They did not submit any written
Authority to Deduct to evince the validity of the deductions. While they submitted two written Authority to
Deduct signed by x x x respondent pertaining to his loans in the PLDT Multi-Purpose [Cooperative], Inc.
(Telescoop), this Court cannot, on face value, conclude from said documents that x x x respondent has
given his consent to deduct his loans from his redundancy pay. At most, said Authority to Deduct
pertain[s] only to his loan obtained from Telescoop, but even so, the amount stated therein does not even
match the amount deducted from his redundancy pay.10 (Citation omitted)

The CA further stated that the petitioners are not without any recourse to recover from the respondent the
unauthorized payment they have made in his behalf. It has a right to recover from the respondent the
sum so paid out, at least to the extent in which the payment may have been beneficial to the respondent.

Aggrieved by the foregoing disquisition, the petitioners moved for reconsideration but it was denied by the
appellate court; hence, the present petition for review on certiorari.

The Issue

As presented, the issue for resolution hinges on whether or not the petitioners can validly deduct the
respondent's outstanding loan obligation from his redundancy pay.

Ruling of the Court

The petition is bereft of merit.

At the outset, the issues in this case are factual. "Under Rule 45 of the Rules of Court, only questions of
law may be raised in this Court; such factual issues may be considered and resolved only when the
findings of facts and the conclusions of the [LA] are inconsistent with those of the NLRC and the CA." 11 It
is apparent from the arguments of the petitioners that they are calling for the Court to re-evaluate the
evidence presented by the parties. "Once the issue invites a review of the evidence, the question posed is
one of fact."12 The petitioners are, therefore, raising questions of facts beyond the ambit of the Court's
review.

Nevertheless, this Court has thoroughly reviewed the records in this case and found that the NLRC did not
commit any grave abuse of its discretion amounting to lack or excess of jurisdiction in rendering its
decision in favor of the respondent. The CA acted in accord with the evidence on record and case law
when it dismissed the petition and affirmed the assailed decision and resolution of the NLRC.

In the main, this Court is in consonance with the CA that the instant case is not about jurisdiction to
determine the validity of the set-off but more of the petitioner's authority to deduct from the redundancy
pay of the respondent his outstanding loans obtained from different entities. It is whether the deductions
done by the petitioners are authorized under existing laws or subject to a written authorization from the
respondent.13cralawred

The antecedent facts that gave rise to the respondent's dismissal from employment are not disputed in
this case. There is no question about the validity of the MRP implemented by PLDT in 1995, since
redundancy is one of the authorized causes for termination of employment.14 The respondent, however,
argued that the deduction of the outstanding loans that he obtained from different entities from his
redundancy pay was contrary to law. On the other hand, the petitioners insisted that they can validly
deduct the said loans from the respondent's redundancy pay since the respondent was able to obtain said
loans because of his employment with PLDT.

It is clear in Article 11315 of the Labor Code that no employer, in his own behalf or in behalf of any person,
shall make any deduction from the wages of his employees, except in cases where the employer is
authorized by law or regulations issued by the Secretary of Labor and Employment, among others. The
Omnibus Rules Implementing the Labor Code, meanwhile, provides that deductions from the wages of the
employees may be made by the employer when such deductions are authorized by law, or when the
deductions are with the written authorization of the employees for payment to a third person. 16 Thus, any
withholding of an employee's wages by an employer may only be allowed in the form of wage deductions
under the circumstances provided in Article 113 of the Labor Code, as well as the Omnibus Rules
implementing it. Further, Article 11617 of the Labor Code clearly provides that it is unlawful for any person,
directly or indirectly, to withhold any amount from the wages of a worker without the worker's consent.

In this case, the deductions made to the respondent's redundancy pay do not fall under any of the
circumstances provided under Article 113, nor was it established with certainty that the respondent has
consented to the said deductions or that the petitioners had authority to make such deductions.

As aptly stated by the CA, the matter would have been different if the deductions refer to the respondent's
contributions for his being a member of SSS, HDMF, or withholding taxes on income, because if such was
the case, the contributions are deductions already sanctioned by existing laws. Here, it is evidently
emphasized that the subject deductions pertain to the respondent's outstanding loans from various
entities.

Furthermore, the petitioners may not offset the outstanding loans of the respondent against the latter's
monetary benefits. The records expressly revealed that the respondent has obtained various loans from
different entities and not with PLDT. Accordingly, set-off or legal compensation cannot take place between
PLDT and the respondent because they are not mutually creditor and debtor of each other. Thus, there
can be no valid set-off because the respondent's creditor is not PLDT.18cralawred

The Court further agrees with the labor tribunals that the petitioners cannot offset the outstanding balance
of the respondent's loan obligation with his redundancy pay because the balance on the loan does not
come within the scope of jurisdiction of the LA. The demand for payment of the said loans is not a labor,
but a civil dispute. It involves debtor-creditor relations, rather than employee-employer relations.
Evidently, the respondent's unpaid balance on his loans cannot be offset against the redundancy pay due
to him.

In fine, the Court rules that PLDT has no legal right to withhold the respondent's redundancy pay and
other benefits to recompense for his outstanding loan obligations to different entities. The respondent's
entitlement to his redundancy pay is mandated by law which the petitioners cannot unjustly deny.

WHEREFORE, the Decision dated February 15, 2010 and Resolution dated May 25, 2010 of the Court of
Appeals in CA-G.R. SP No. 108297 are AFFIRMED.

SO ORDERED
G.R. No. 183360 September 8, 2014

ROLANDO C. DE LA PAZ,* Petitioner,

vs.
L & J DEVELOPMENT COMPANY, Respondent.

DECISION

DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly stipulated in writing." 1

This is a Petition for Review on Certiorari 2 assailing the February 27, 2008 Decision 3 of the Court of Appeals (CA) in CA-
G.R. SP No. 100094, which reversed and set aside the Decision 4 dated April 19, 2007 of the Regional Trial Court (RTC),
Branch 192, Marikina City in Civil Case No. 06-1145-MK. The said RTC Decision affirmed in all respects the Decision 5
dated June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-7755, which
ordered respondent L & J Development Company (L&J) to pay petitioner Architect Rolando C. De La Paz (Rolando) its
principal obligation of ₱350,000.00, plus 12% interest per annumreckoned from the filing of the Complaint until full
payment of the obligation.

Likewise assailed is the CA’s June 6, 2008 Resolution6 which denied Rolando’s Motion for Reconsideration.

Factual Antecedents

On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property developer with Atty. Esteban
Salonga (Atty. Salonga) as its President and General Manager. The loan, with no specified maturity date, carried a 6%
monthly interest, i.e., ₱21,000.00. From December 2000 to August 2003, L&J paid Rolando a total of ₱576,000.00 7
representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint 8 for Collection of Sum of Money with Damages
against L&J and Atty. Salonga in his personal capacity before the MeTC, docketed as Civil Case No. 05-7755. Rolando
alleged, amongothers, that L&J’s debtas of January 2005, inclusive of the monthly interest, stood at ₱772,000.00; that the
6% monthly interest was upon Atty. Salonga’s suggestion; and, that the latter tricked him into parting with his money
without the loan transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged the loan as a corporate
debt, they claimed that the failure to pay the same was due to a fortuitous event, that is, the financial difficulties brought
about by the economic crisis. They further argued that Rolando cannot enforce the 6% monthly interest for being
unconscionable and shocking to the morals. Hence, the payments already made should be applied to the ₱350,000.00
principal loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan transaction but knew him
as a lawyer, a son of a former Senator, and the owner of L&J which developed Brentwood Subdivision in Antipolo where
his associate Nilo Velasco (Nilo) lives. When Nilo told him that Atty. Salonga and L&J needed money to finish their
projects, heagreed to lend them money. He personally met withAtty. Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was Arlene San Juan (Arlene),
the secretary/treasurer of L&J, who negotiated the terms and conditions thereof.She said that the money was to finance
L&J’s housing project. Rolando claimed that it was not he who demanded for the 6% monthly interest. It was L&J and Atty.
Salonga, through Arlene, who insisted on paying the said interest as they asserted that the loan was only a short-term
one.
 Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it ratiocinated that since L&J
agreed thereto and voluntarily paid the interest at suchrate from 2000 to 2003, it isalready estopped from impugning the
same. Nonetheless, for reasons of equity, the saidcourt reduced the interest rate to 12% per annumon the remaining
principal obligation of ₱350,000.00. With regard to Rolando’s prayer for moral damages, the MeTC denied the same as it
found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise relieved Atty. Salonga of any liability
as it found that he merely acted in his official capacity in obtaining the loan. The MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch. Rolando C. Dela Paz, and
against the defendant, L & J Development Co., Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three Hundred Fifty
Thousand Pesos (₱350,000.00) representing the principal obligation, plus interest at the legal rate of 12% per
annum to be computed from January 20, 2005, the date of the filing of the complaint, until the whole obligation is
fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five Thousand Pesos
(₱5,000.00) as and for attorney’s fees; and

c) to pay the costs of this suit.

SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from December 2000 to March 2003, it paid
monthly interest of ₱21,000.00 based on the agreed-upon interest rate of 6%monthly and from April 2003 to August 2003,
interest paymentsin various amounts.13 The total of interest payments made amounts to ₱576,000.00 – an amount which
is even more than the principal obligation of ₱350,000.00

L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per annumlegal interest
should have been applied from the time of the constitution of the obligation. At 12% per annum interest rate, it asserted
that the amount of interestit ought to pay from December 2000 to March 2003 and from April 2003 to August 2003, only
amounts to ₱105,000.00. If this amount is deducted from the total interest paymentsalready made, which is ₱576,000.00,
the amount of ₱471,000.00 appears to have beenpaid over and above what is due. Applying the rule on compensation,
the principal loan of ₱350,000.00 should be set-off against the ₱471,000.00, resulting in the complete payment of the
principal loan.

Unconvinced, the RTC, inits April 19, 2007 Decision, 14 affirmed the MeTC Decision, viz: WHEREFORE, premises
considered, the Decision appealed from is hereby AFFIRMED in all respects, with costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered before the RTC.

In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA stressed that the
parties failedto stipulate in writing the imposition of interest on the loan. Hence, no interest shall be due thereon pursuant
to Article 1956 of the Civil Code.17 And even if payment of interest has been stipulated in writing, the 6% monthly interest
is still outrightly illegal and unconscionable because it is contrary to morals, if not against the law. Being void, this cannot
be ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot collect any interest even if
L&J offered to pay interest. Consequently, he has to return all the interest payments of ₱576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA applied the principle
of legal compensation under Article 1279 of the Civil Code. 18 Accordingly, it set off the principal loan of ₱350,000.00
against the ₱576,000.00 total interest payments made, leaving an excess of ₱226,000.00, which the CA ordered Rolando
to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the petitioner the amount of
₱226,000.00,plus interest of 12% per annumfrom the finality of this decision.

Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the application of Article 1956 and
of jurisprudence holding that a 6% monthly interest is unconscionable, unreasonable, and exorbitant. He alleged that Atty.
Salonga, a lawyer, should have taken it upon himself to have the loan and the stipulated rate of interest documented but,
by way of legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into believing that the
undocumented and uncollateralized loan was withinlegal bounds. Had Atty. Salonga told him that the stipulated interest
should be in writing, he would have readily assented. Furthermore, Rolando insisted that the 6% monthly interest
ratecould not be unconscionable as in the first place, the interest was not imposed by the creditor but was in fact offered
by the borrower, who also dictated all the terms of the loan. He stressed that in cases where interest rates were declared
unconscionable, those meant to be protected by such declaration are helpless borrowers which is not the case here.

Still, the CA denied Rolando’s motion in its Resolution 21 of June 6, 2008.

Hence, this Petition.

The Parties’ Arguments

Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty. Salonga took advantage
of his legal knowledge to hoodwink him into believing that no document was necessaryto reflect the interest rate.
Moreover, the cases anent unconscionable interest rates that the CA relied upon involve lenders who imposed the
excessive rates,which are totally different from the case at bench where it is the borrower who decided on the high interest
rate. This case does not fall under a scenariothat ‘enslaves the borrower or that leads to the hemorrhaging of his assets’
that the courts seek to prevent.

L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of negotiation and is agreedupon by
both parties, not by the borrower alone. Furthermore, jurisprudence has nullified interestrates on loans of 3% per month
and higher as these rates are contrary to moralsand public interest. And while Rolando raises bad faithon Atty. Salonga’s
part, L&J avers thatsuch issue is a question of fact, a matter that cannot be raised under Rule 45.

Issue

The Court’s determination of whether to uphold the judgment of the CA that the principal loan is deemed paid isdependent
on the validity of the monthly interest rate imposed. And in determining such validity, the Court must necessarily delve into
matters regarding a) the form of the agreement of interest under the law and b) the alleged unconscionability of the
interest rate. Our Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to be due and payable, two conditions must concur: a) express
stipulation for the payment of interest; and b) the agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is due. The collection
of interest without any stipulation in writing is prohibited by law. 22

But Rolando asserts that his situation deserves an exception to the application of Article 1956. He blames Atty. Salonga
for the lack of a written document, claiming that said lawyer used his legal knowledge to dupe him. Rolando thus imputes
bad faith on the part of L&J and Atty. Salonga. The Court, however, finds no deception on the partof L&J and Atty.
Salonga. For one, despite the lack of a document stipulating the payment of interest, L&J nevertheless devotedly paid
interests on the loan. It only stopped when it suffered from financial difficulties that prevented it from continuously paying
the 6% monthly rate. For another,regardless of Atty. Salonga’s profession, Rolando who is an architect and an educated
man himself could have been a more reasonably prudent person under the circumstances. To top it all, he admitted that
he had no prior communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he immediately
trusted him and lent his company ₱350,000.00, a significant amount. Moreover, as the creditor,he could have requested
or required that all the terms and conditions of the loan agreement, which include the payment of interest, be put down in
writing to ensure that he and L&J are on the same page. Rolando had a choice of not acceding and to insist that their
contract be put in written form as this will favor and safeguard him as a lender. Unfortunately, he did not. It must be
stressed that "[c]ourts cannot follow one every step of his life and extricate him from bad bargains, protect him from
unwise investments, relieve him from one-sided contracts,or annul the effects of foolish acts. Courts cannotconstitute
themselves guardians of persons who are not legally incompetent." 23

It may be raised that L&J is estopped from questioning the interest rate considering that it has been paying Rolando
interest at such ratefor more than two and a half years. In fact, in its pleadings before the MeTCand the RTC, L&J merely
prayed for the reduction of interest from 6% monthly to 1% monthly or 12% per annum. However, in Ching v. Nicdao, 24 the
daily payments of the debtor to the lender were considered as payment of the principal amount of the loan because Article
1956 was not complied with. This was notwithstanding the debtor’s admission that the payments made were for the
interests due. The Court categorically stated therein that "[e]stoppel cannot give validity to an act that is prohibited by law
or one thatis against public policy."

Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is unconscionable,
regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury Law 25 by Central Bank
Circular No. 905 s. 1982. 26 Even so, not all interest rates levied upon loans are permitted by the courts as they have the
power to equitably reduce unreasonable interest rates. In Trade & Investment Development Corporation of the Philippines
v. Roblett Industrial Construction Corporation,27 we said:

While the Court recognizes the right of the parties to enter into contracts and who are expectedto comply with their terms
and obligations, this rule is not absolute. Stipulated interest rates are illegal if they are unconscionable and the Court is
allowed to temper interest rates when necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be iniquitous and unconscionable in
onecase, may be just in another. x x x28

Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per month and higher, are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against
the law.29 The Court, however, stresses that these rates shall be invalidated and shall be reduced only in cases where the
terms of the loans are open-ended, and where the interest rates are applied for an indefinite period. Hence, the imposition
of a specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not considered unconscionable. 30

In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6% monthly or 72%
interest per annumis "definitely outrageous and inordinate." 31 The situation that it was the debtor who insisted on the
interest rate will not exempt Rolando from a ruling that the rate is void. As this Court cited in Asian Cathay Finance and
Leasing Corporation v. Gravador,32 "[t]he imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man." 33 Indeed, "voluntariness does notmake the stipulation on
[an unconscionable] interest valid."34

As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article 1956.1âwphi1 The CA thus correctly
adjudged that the excess interest payments made by L&J should be applied to its principal loan. As computed by the CA,
Rolando is bound to return the excess payment of ₱226,000.00 to L&J following the principle of solutio indebiti. 35

However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013, 36 the interest imposed by
the CA must be accordingly modified. The ₱226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6%
per annumfrom the finality of this Decision.

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No. 100094 is hereby
AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to pay respondent L&J Development
Company the amount of ,₱226,000.00, plus interest of 6o/o per annum from the finality of this Decision until fully paid.
 SO ORDERED

G.R. No. 189871 August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591,
and the Resolution2 dated October 9, 2009 denying petitioner’s motion for reconsideration.

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 Decision3 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 ₱158,919.92. 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:

SEPARATION PAY

Date Hired = August 1990

Rate = ₱198/day

Date of Decision = Aug. 18, 1998

Length of Service = 8 yrs. & 1 month

₱198.00 x 26 days x 8 months = ₱41,184.00

BACKWAGES

Date Dismissed = January 24, 1997

Rate per day = ₱196.00

 Date of Decisions = Aug. 18, 1998

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

₱196.00/day x 12.36 mos. = ₱62,986.56

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

Prevailing Rate per day = ₱62,986.00

₱198.00 x 26 days x 6.4 mos. = ₱32,947.20

TO TAL = ₱95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56) Pesos
representing his separation pay;

To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and 36/100 (₱95,933.36) representing
his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4

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

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 ₱471,320.31.12

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from respondents the total amount of
₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter awarded separation
pay of ₱62,986.56 and limited backwages of ₱95,933.36, 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
Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 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 ₱471,320.31.18

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 ₱147,560.19.

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
₱147,560.19, 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 Order20 granting the motion, but only up to the amount of ₱11,459.73. 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 ₱158,919.92 that should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the balance of
₱11,459.73.

Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated September 27, 2006. Petitioner filed a
Motion for Reconsideration, but it was likewise denied in the Resolution23 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 Decision24 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:

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION
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 ₱158,919.92. 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.

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.

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.

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

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 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:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.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 234 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:

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 X305.136 of the Manual of Regulations for Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139 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 Lines40 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.1awp++i1

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, 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.1âwphi1

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:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.

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.

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

(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.

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

G.R. No. 194507 September 8, 2014

FEDERAL BUILDERS, INC., Petitioner,

vs.
FOUNDATION SPECIALISTS, INC., Respondent,

x-----------------------x

G.R. No. 194621

FOUNDATION SPECIALISTS, INC., Petitioner,

vs.
FEDERAL BUILDERS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court are two consolidated cases, namely: (1) Petition for review on certiorari under Rule 45 of the Rules of
Court, docketed as G.R. No. 194507, filed by Federal Builders, Inc., assailing the Decision 1 and Resolution,2 dated July
15, 2010 and November 23, 2010, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 70849, which affirmed
with modification the Decision3 dated May 3, 2001 of the Regional Trial Court (RTC) in Civil Case No. 92-075; and (2)
Petition for review on certiorari under Rule 45 of the Rules of Court,docketed as G.R. No. 194621, filed by Foundation
Specialists, Inc., assailing the same Decision4 and Resolution,5 dated July 15, 2010 and November 23, 2010,respectively,
of the CA in CA- G.R. CV No. 70849, which affirmed with modification the Decision 6 dated May 3, 2001 of the RTC in Civil
Case No. 92-075.

The antecedent facts are as follows:

On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with Foundation Specialists, Inc. (FSI)
whereby the latter, as subcontractor, undertook the construction of the diaphragm wall, capping beam, and guide walls of
the Trafalgar Plaza located at Salcedo Village, Makati City (the Project), for a total contract price of Seven Million Four
Hundred Thousand Pesos (₱7,400,000.00).7 Under the agreement,8 FBI was to pay a downpayment equivalent to twenty
percent (20%) of the contract price and the balance, through a progress billing every fifteen (15) days, payable not later
than one (1) week from presentation of the billing.

On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC of Makati City seeking to collect
the amount of One Million Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight Pesos and Ninety-One
Centavos (₱1,635,278.91), representing Billings No. 3 and 4, with accrued interest from August 1, 1991 plus moral and
exemplary damages with attorney’s fees.9 In its complaint,FSI alleged that FBI refused to pay said amount despite
demand and itscompletion of ninety-seven percent (97%) of the contracted works.

In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five percent (85%) of the contracted works,
failing to finish the diaphragm wall and component works in accordance with the plans and specifications and abandoning
the jobsite. FBI maintains that because of FSI’s inadequacy, its schedule in finishing the Project has been delayed
resulting in the Project owner’s deferment of its own progress billings. 10 It further interposed counterclaims for amounts it
spent for the remedial works on the alleged defects in FSI’s work.

On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor of FSI, the dispositive portion of its
Decision reads:

WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant to pay plaintiff the following:

1. The sum of ₱1,024,600.00 representing billings 3 and 4, less the amount of ₱33,354.40 plus 12% legal interest
from August 30, 1991;

2. The sum of ₱279,585.00 representing the cost of undelivered cement;

3. The sum of ₱200,000.00 as attorney’s fees; and

4. The cost of suit.

Defendant’s counterclaim is deniedfor lack of factual and legal basis.

SO ORDERED.11

On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of ₱279,585.00 representing the cost of
undelivered cement and reduced the award of attorney’s fees to ₱50,000.00. In its Decision 12 dated July 15, 2010, the CA
explained that FSI failed to substantiate how and in what manner it incurred the cost of cement by stressing that its claim
was not supported by actual receipts. Also, it found that while the trial court did not err in awarding attorney’s fees, the
same should be reduced for being unconscionable and excessive. On FBI’s rejection of the 12% annual interest rate on
the amount of Billings 3 and 4, the CA ruled that the lower court did not err in imposing the same in the following wise:

x x x The rule is well-settled that when an obligation is breached, and it consists in the payment of a sum of money, the
interest due shall itself earn legal interest from the time it is judicially demanded (BPI Family Savings Bank, Inc. vs. First
Metro Investment Corporation, 429 SCRA 30). When there is no rate of interest stipulated, such as in the present case,
the legal rate of interest shall be imposed, pursuant to Article 2209 of the New Civil Code. In the absence of a stipulated
interest rate on a loan due, the legal rate of interest shall be 12% per annum. 13

Both parties filed separate Motions for Reconsideration assailing different portions of the CADecision, but to no avail. 14
Undaunted, they subsequently elevated their claims withthis Court via petitions for review on certiorari.

On the one hand, FSI asserted that the CA should not have deleted the sum of ₱279,585.00 representing the cost of
undelivered cement and reduced the award of attorney’s fees to ₱50,000.00, since it was an undisputed fact that FBI
failed to deliver the agreed quantity of cement. On the other hand, FBI faulted the CA for affirming the decision of the
lower court insofar as the award of the sum representing Billings 3 and 4, the interest imposed thereon, and the rejection
of his counterclaim were concerned. In a Resolution 15 dated February 21, 2011, however, this Court denied, with finality,
the petition filed by FSI in G.R. No. 194621 for having been filed late.

Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following arguments:

I.

THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT AFFIRMED THE TRIAL
COURT’S JUDGMENT THAT FEDERAL BUILDERS, INC. WAS LIABLE TO PAY THE BALANCE OF
₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40 NOTWITHSTANDING THAT THE DIAPHRAGM WALL
CONSTRUCTED BY FOUNDATION SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-OF-
SPECIFICATIONS AND THAT PETITIONER HAD TO REDO IT AT ITS OWN EXPENSE.

II.

THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT IMPOSED THE 12%
LEGAL INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED CLAIM OF ₱1,024,600.00 LESS THE
 AMOUNT OF ₱33,354.40 DESPITE THE FACT THAT THERE WAS NO STIPULATION IN THE AGREEMENT OF
THE PARTIES WITH REGARD TO INTEREST AND DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT
A "LOAN OR FORBEARANCE OF MONEY."

III.

THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR WHEN IT
DISMISSED THE COUNTERCLAIM OF PETITIONER NOTWITHSTANDING OVERWHELMING EVIDENCE
SUPPORTING ITS CLAIM OF ₱8,582,756.29 AS ACTUAL DAMAGES.

The petition is partly meritorious.

We agree with the courts below and reject FBI’s first and third arguments. 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
respectand considered conclusive between the parties, save for the following exceptional and meritorious circumstances:
(1) when the factual findings of the appellate court and the trial court are contradictory; (2) whenthe findings of the trial
court are grounded entirely on speculation, surmises or conjectures; (3) when the lower court’s inference from its factual
findings is manifestly mistaken, absurd or impossible; (4) when there is grave abuse of discretion in the appreciation of
facts; (5) 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; (6) when there is a misappreciation of facts; (7) when the
findings of fact are themselves conflicting; and (8) 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. 16

None of the aforementioned exceptions are present herein. In the assailed Decision, the RTC meticulouslydiscussed the
obligations of each party, the degree of their compliance therewith, as well as their respective shortcomings, all of which
were properly substantiated with the corresponding documentary and testimonial evidence.

Under the construction agreement, FSI’s scope of workconsisted in (1) the construction of the guide walls, diaphragm
walls, and capping beam; and (2) the installation of steel props. 17 As the lower courts aptly observed from the records at
hand, FSI had, indeed, completed ninety-seven percent (97%) of its contracted works and the non-completion of the
remaining three percent (3%), as well as the alleged defects in the said works, are actually attributable to FBI’s own fault
such as, but not limited to, the failure to deliver the needed cement as agreed upon in the contract, to wit:

On March 8, 1991, plaintiff had finished the construction of the guide wall and diaphragm wall (Exh. "R") but had not yet
constructed the capping beam as of April 22, 1991 for defendant’s failure to deliver the needed cement in accordance with
their agreement(Exhibit "I"). The diaphragm wall had likewise been concrete tested and was found to have conformed with
the required design strength (Exh. "R").

Subsequently, plaintiff was paid the aggregate amount of ₱5,814,000.00. But as of May 30, 1991, plaintiff’s billings
numbers 3 and 4 had remained unpaid (Exhs. "L", "M", and "M-1").

xxxx

On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff explained thatin the excavation of the
soil where the rebar cages are lowered and later poured with concrete cement, the characteristics of the soil is not the
same or homogenous all throughout. Because of this property of the soil,in the process of excavation, it may erode in
some places that may cause spaces that the cement may fill or occupy which would naturally cause bulges, protrusions
and misalignment in the concrete cast into the excavated ground(tsn., June 1, 2000, pp 14-18). This, in fact was
anticipated when the agreement was executed and included as provision 6.4 thereof.

The construction of the diaphragm wall panel by panel caused misalignment and the chipping off of the portions
misaligned is considered a matter of course. Defendant, as the main contractor of the project, has the responsibility of
chopping or chipping off of bulges(tsn., ibid, pp 20-21). Wrong location of rebar dowels was anticipated by both contractor
and subcontractor as the latter submitted a plan called "Detail of Sheer Connectors" (Exh "T") which was approved.The
plan provided two alternatives by which the wrong location of rebar dowels may be remedied. Hence, defendant, aware of
the possibility of inaccurate location of these bars, cannot therefore ascribe the same to the plaintiff as defective work.

Construction of the capping beam required the use of cement. Records, however, show that from September 14, 1990 up
to May 30, 1991 (Exhs. "B" to "L"), plaintiff had repeatedly requested defendant to deliver cement. Finally, on April 22,
1991, plaintiff notified defendant of its inability to construct the capping beam for the latter’s failure to deliver the cement
as provided in their agreement(Exh. "I"). Although records show that there was mention of revision of design, there was no
evidence presented to show such revision required less amount of cement than what was agreed on by plaintiff and
defendant.

The seventh phase of the construction of the diaphragm wall is the construction of the steel props which could be installed
only after the soil has been excavated by the main contractor. When defendant directed plaintiff to install the props, the
latter requested for a site inspection to determine if the excavation of the soil was finished up to the 4th level basement.
Plaintiff, however, did not receive any response.It later learned that defendant had contracted out that portion of work to
another sub-contractor (Exhs. "O" and "P"). Nevertheless, plaintiff informed defendant of its willingness to execute that
portion of its work.18

It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed completed its assigned obligations,
with the exception of certain assigned tasks, which was due to the failure of FBI to fulfil its end of the bargain.

It can similarly be deduced that the defects FBI complained of, such as the misaligned diaphragm wall and the erroneous
location of the rebar dowels, were not only anticipated by the parties, having stipulated alternative plans to remedy the
same, but more importantly, are also attributable to the very actions of FBI. Accordingly, considering that the alleged
defects in FSI’s contracted works were not so much due to the fault or negligence of the FSI, but were satisfactorily
proven to be caused by FBI’s own acts, FBI’s claim of ₱8,582,756.29 representing the cost of the measures it undertook
to rectify the alleged defects must necessarily fail. In fact, as the lower court noted, at the time when FBI had evaluated
FSI’s works, it did not categorically pose any objection thereto, viz:

Defendant admitted that it had paid ₱6 million based on its evaluation of plaintiff’s accomplishments (tsn., Sept. 28, 2000,
p. 17) and its payment was made without objection on plaintiff’s works, the majority of which were for the
accomplishments in the construction of the diaphragm wall (tsn., ibid, p. 70).

xxxx

While there is no evidence to show the scope of work for these billings, it is safe to assume that these were also works in
the construction of the diaphragm wall considering that as of May 16, 1991, plaintiff had only the installation of the steel
props and welding works to complete (Exh. "H"). If defendant was able to evaluate the work finished by plaintiff the
majority of which was the construction of the diaphragm wall and paid it about ₱6 million as accomplishment, there was
no reason why it could not evaluate plaintiff’s works covered by billings 3 and 4.In other words, defendants did nothave to
excavate in order to determine and evaluate plaintiff’s works. Hence, defendant’s refusal to pay was not justified and the
alleged defects of the diaphragm wall (tsn, Sept. 28, 2000, p. 17) which it claims to have discovered only after January
1992 were mere afterthoughts.19

Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment of its obligations under the contract,
this Court shall refrain from reversing the findings of the courts below, which are fully supported by and deducible from,
the evidence on record. Indeed, FBI failed to present any evidence to justify its refusal to pay FSI for the works it was
contracted to perform. As such, We do not see any reason to deviate from the assailed rulings.

Anent FBI’s second assignment of error, however, We find merit in the argument that the 12% interest rateis inapplicable,
since this case does not involve a loan or forbearance ofmoney. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,20 We laid down the following guidelines in computing legal interest:

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 Article1169 of the Civil Code.

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.21

In line, however, with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, we
have modified the guidelines in Nacar v. Gallery Frames, 22 as follows:

I. When an obligation, regardless of itssource, 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:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annumto be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annumfrom 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. 23

It should be noted, however, 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. Thus, the need to determine whether the
obligation involved herein is a loanand forbearance of money nonetheless exists.

In S.C. Megaworld Construction and Development Corporation v. Engr. Parada, 24 We clarified the meaning of obligations
constituting loans or forbearance of money in the following wise:

As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money, goods or credit describes a
contractual obligation whereby a lender or creditor has refrained during a given period from requiring the borrower or
debtor to repay the loan or debt then due and payable. Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular No.
416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving payment of
indemnities in the concept of damages arising from default in the performance of obligations in general and/or for money
judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil
Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation ofa lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due
and payable.25

Forbearance of money, goods or credits, therefore, refers to arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods orcredits pending the happening of certain events or fulfilment of
certain conditions.26 Consequently, if those conditions are breached, said person is entitled not only to the return of the
principal amount paid, but also to compensation for the use of his money which would be the same rateof legal interest
applicable to a loan since the use or deprivation of funds therein is similar to a loan. 27

This case, however, does not involve an acquiescence to the temporary use of a party’s money but a performance of a
particular service, specifically the construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar
Plaza.

A review of similar jurisprudence would tell us that this Court had repeatedly recognized this distinction and awarded
interest at a rate of 6% on actual or compensatory damages arising from a breach not only of construction contracts, 28
such as the one subject ofthis case, but also of contracts wherein one of the parties reneged on its obligation to perform
messengerial services,29 deliver certain quantities of molasses, 30 undertake the reforestation of a denuded forest land, 31 as
well as breaches of contracts of carriage, 32 and trucking agreements.33 We have explained therein that the reason behind
such is that said contracts do not partake of loans or forbearance of money but are more in the nature of contracts of
service.

Thus, in the absence of any stipulation as to interest in the agreement between the parties herein, the matter of interest
award arising from the dispute in this case would actually fall under the second paragraph of the above-quoted guidelines
inthe landmark case of Eastern Shipping Lines, which necessitates the imposition of interestat the rate of 6%, instead of
the 12% imposed by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein until satisfaction thereof, in light of
our recent ruling in Nacar v. Gallery Frames.34

Note, however, that contrary to FBI’sassertion, We find no error in the RTC’s ruling that the interest shall begin to run from
August 30, 1991 as this is the date when FSI extrajudicially made its claim against FBI through a letter demanding
payment for its services.35

In view of the foregoing, therefore, We find no compelling reason to disturb the factual findings of the RTC and the CA,
which are fully supported by and deducible from, the evidence on record, insofar as the sum representing Billings 3 and 4
is concerned. As to the rate of interest due thereon, however, We note that the same should be reduced to 6% per annum
considering the fact that the obligation involved herein does not partake of a loan or forbearance of money.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision and Resolution, dated July 15, 2010
and November 23, 2010, respectively, of the Court of Appeals in CA-G.R. CV No. 70849 are hereby AFFIRMED with
MODIFICATION. Federal Builders, Inc. is ORDERED to pay Foundation Specialists, Inc. the sum of Pl ,024,600.00
representing billings 3 and 4, less the amount of ₱33,354.40, plus interest at six percent (6%) per annum reckoned from
August 30, 1991 until full payment thereof.

SO ORDERED
G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

DEL CASTILLO, J.:

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a party the
option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a
contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party
has been doing all along is improper or illegal.

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which
affirmed with modifications the February 28, 2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo,
Aklan in Civil Case No. 5975.

Factual Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store and buying and selling of
ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking corporation organized and existing under Philippine laws.

To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real Estate Mortgage 5 over a
370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was increased to ₱1.8
million and the mortgage was correspondingly increased to ₱1.8 million.6

And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the same credit line, which was increased to ₱2.5
million, and additional security was given in the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight
Promissory Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement contained a stipulation on interest which provides as follows:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in advance every one hundred twenty
days at the rate prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.10 (Emphases supplied)

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest rates "within the limits
allowed by law or by the Monetary Board."11

The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time depending on whatever policy PNB
may adopt in the future."12

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and

8. 8th Promissory Note dated July 11, 1991 – 24%.13

In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the
date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of
each Availment.15 (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which petitioners settled –
except the last (the note covering the principal) – at the following interest rates:

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

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

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

 10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and

18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice, raise within the
limits allowed by law x x x."17

On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the 26th promissory note – carried the following
provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines,
or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option top repay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting Date. 18 (Emphasis
supplied)

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously paying the interests
without objection or fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole outstanding
promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997 – became past due, and despite
repeated demands, petitioners failed to make good on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:

Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and in such cases or in case
of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the option of
the Bank and without prior notice of demand, shall immediately become due and payable and shall be subject to a penalty charge of twenty four
percent (24%) per annum based on the defaulted principal amount. x x x19 (Emphasis supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and demandable from petitioners in the total amount of
₱3,620,541.60, broken down as follows:

Principal P 2,500,000.00

Interest 538,874.94

Penalties 581,666.66

Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and
T-16208 were sold to it at auction for the amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11, 1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the foreclosure sale and an accounting of
the PNB credit. Petitioners theorized that after the first promissory note where they agreed to pay 19.5% interest, the succeeding stipulations for the
payment of interest in their loan agreements with PNB – which allegedly left to the latter the sole will to determine the interest rate – became null and
void. Petitioners added that because the interest rates were fixed by respondent without their prior consent or agreement, these rates are void, and as a
result, petitioners should only be made liable for interest at the legal rate of 12%. They claimed further that they overpaid interests on the credit, and
concluded that due to this overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T-
14250 and T-16208 became unnecessary and wrongful. As for the imposed penalty of ₱581,666.66, petitioners alleged that since the Real Estate
Mortgage and the Supplement thereto did not include penalties as part of the secured amount, the same should be excluded from the foreclosure
amount or bid price, even if such penalties are provided for in the final Promissory Note, or PN 9707237.22

In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00 made during the period August 21, 1991 to March 5,
1998,resulting from respondent’s imposition of the alleged illegal and steep interest rates. They also prayed to be awarded ₱200,000.00 by way of
attorney’s fees.23

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without prior notice, PNB may modify
interest rates depending on future policy adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It added that
the imposition of penalties is supported by the all-inclusive clause in the Real Estate Mortgage agreement which provides that the mortgage shall
stand as security for any and all other obligations of whatever kind and nature owing to respondent, which thus includes penalties imposed upon
default or non-payment of the principal and interest on due date.

On pre-trial, the parties mutually agreed to the following material facts, among others:

a) That since 1991 up to 1998, petitioners had paid PNB the total amount of ₱3,484,287.00;25 and

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter. 26

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement, Real Estate Mortgage and the
Supplement thereto were all prepared by respondent PNB and were presented to her and her husband Eduardo only for signature; that she was told by
PNB that the latter alone would determine the interest rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties executed the said Credit Agreement, she was not informed about the applicable spread that
PNB would impose on her account; that the interest rate portion of all Promissory Notes she and Eduardo issued were always left in blank when they
executed them, with respondent’s mere assurance that it would be the one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. She further testified that the two Real Estate Mortgage agreements she signed did not stipulate
the payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNB’s actions were improper, and so on March 20, 2000,
they wrote to the latter seeking a recomputation of their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27

On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other individuals and another bank; that
it was only with banks that she was asked to sign loan documents with no indicated interest rate; that she did not bother to read the terms of the loan
documents which she signed; and that she received several PNB statements of account detailing their outstanding obligations, but she did not
complain; that she assumed instead that what was written therein is correct.28

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on cross-examination that as a practice,
the determination of the prime rates of interest was the responsibility solely of PNB’s Treasury Department which is based in Manila; that these
prime rates were simply communicated to all PNB branches for implementation; that there are a multitude of considerations which determine the
interest rate, such as the cost of money, foreign currency values, PNB’s spread, bank administrative costs, profitability, and the practice in the
banking industry; that in every repricing of each loan availment, the borrower has the right to question the rates, but that this was not done by the
petitioners; and that anything that is not found in the Promissory Note may be supplemented by the Credit Agreement. 29

Ruling of the Regional Trial Court

On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30

It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate at any time depending on
 whatever policy it may adopt in the future, it likewise allows for the decrease at any time of the same. Thus, such stipulation authorizing
both the increase and decrease of interest rates as may be applicable is valid,31 as was held in Consolidated Bank and Trust Corporation
(SOLIDBANK) v. Court of Appeals;32

2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on prevailing rates upon which
to peg such variable interest rates;33

3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the Credit Agreement and the Real Estate
Mortgage.

As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note prevail over those mentioned in the Credit
Agreement and the Real Estate Mortgage agreements;34

4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct; 35

5. Because the loan was admittedly due and demandable, the foreclosure was regularly made;36

6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the principal, interest and penalties. 37

The dispositive portion of the trial court’s Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the petitioners by DISMISSING the latter’s
petition.

Costs against the petitioners.

SO ORDERED.38

Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted only a modification in the award of attorney’s fees,
reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in the amount of ₱356,589.90, viz:

WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as well as the extra-judicial
foreclosure proceedings and the Certificate of Sale. However, respondent is directed to refund to the petitioner the amount of ₱356,589.90
representing the excess interest charged against the latter.

No pronouncement as to costs.

SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:

WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the Regional Trial Court per Order
dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:

1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No. 9707237 should be 12% per annum;

2. [T]hat the attorney’s fees of10% is valid and binding; and

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of ₱377,505.99 which is the difference between the
total amount due [PNB] and the amount of its bid price.

SO ORDERED.41

On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its award of attorney’s fees. It simply raised the
issue in its appellee’s brief in the CA, and included a prayer for the reversal of said Order.

In effect, the CA limited petitioners’ appeal to the following issues:

1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally and arbitrarily imposed by PNB;

2) Whether x x x the penalty charges were secured by the real estate mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid.42

The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of ₱3,027,324.60 in interest for the period
August 7, 1991 to August 6, 1997, over and above the ₱2.5 million principal obligation. And this is exclusive of payments for insurance premiums,
documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the imposition of interest; they in fact paid the same
religiously and without fail for seven years. The appellate court ruled that petitioners are thus estopped from questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest rate of 25.72% instead of the
agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated the inclusion of the PN 9707237-
stipulated 24% penalty in the amount to be secured by the mortgaged property, thus –

For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the MORTGAGEE and to secure the payment of
the same and those others that the MORTGAGEE may extend to the MORTGAGOR, including interest and expenses, and other obligations owing by
the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or secondary, as appearing in the accounts, books and records of the
MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied)

The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the mortgagor to the mortgagee" and should thus be
added to the amount secured by the mortgages.44

The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and T-16208, which came as a necessary
result of petitioners’ failure to pay the outstanding obligation upon demand. 45 The CA saw fit to increase the trial court’s award of 1% to 10%, finding
the latter rate to be reasonable and citing the Real Estate Mortgage agreement which authorized the collection of the higher rate. 46

Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference between PNB’s bid price of ₱4,324,172.96 and
petitioners’ total computed obligation as of January 14, 1999, or the date of the auction sale, in the amount of ₱3,946,667.87. 47

Hence, the present Petition.

Issues

The following issues are raised in this Petition:

A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE INTEREST RATE
PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT AGREEMENT
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE
ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE
[NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996,
AND CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING
FROM THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.

B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT DECLARING THAT PNB IS NOT AT
ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE
EXCESS OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN THE
ADMITTED TOTAL AMOUNT OF ₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF ₱2,500,000.[00] LEAVING AN
 OVERPAYMENT OF₱984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.

II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE
MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM
[THE] FORECLOSURE AMOUNT.

III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH REDUCED THE ATTORNEY’S FEES
OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING]
10% ATTORNEY’S FEES.48

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement should be declared null and void,
for they relegated to PNB the sole power to fix interest rates based on arbitrary criteria or factors such as bank policy, profitability, cost of money,
foreign currency values, and bank administrative costs; spaces for interest rates in the two Credit Agreements and the promissory notes were left
blank for PNB to unilaterally fill, and their consent or agreement to the interest rates imposed thereafter was not obtained; the interest rate, which
consists of the prime rate plus the bank spread, is determined not by agreement of the parties but by PNB’s Treasury Department in Manila.
Petitioners conclude that by this method of fixing the interest rates, the principle of mutuality of contracts is violated, and public policy as well as
Circular 90549 of the then Central Bank had been breached.

Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can proceed from an illegal act. Though they failed to
timely question the imposition of the alleged illegal interest rates and continued to pay the loan on the basis of these rates, they cannot be deemed to
have acquiesced, and hence could recover what they erroneously paid.50

Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of July 1997; moreover, it would
appear that they even made an over payment to the bank in the amount of ₱984,287.00.

Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the secured amount, the penalty of
24% authorized in PN 9707237, such amount of ₱581,666.66 could not be made answerable by or collected from the mortgages covering TCTs T-
14250 and T-16208. Claiming support from Philippine Bank of Communications [PBCom] v. Court of Appeals, 51 petitioners insist that the phrase
"and other obligations owing by the mortgagor to the mortgagee"52 in the mortgage agreements cannot embrace the ₱581,666.66 penalty, because, as
held in the PBCom case, "[a] penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot
be understood to secure the penalty";53 while the mortgages are the accessory contracts, what items are secured may only be determined from the
provisions of the mortgage contracts, and not from the Credit Agreement or the promissory notes.

Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained, given that in foreclosures, a lawyer’s work consists
merely in the preparation and filing of the petition, and involves minimal study. 54 To allow the imposition of a staggering ₱396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorney’s fees in cases of this nature "is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any future loss or damage by being compelled to retain counsel x x x
to institute judicial proceedings for the collection of its credit."55 And because the instant case involves a simple extrajudicial foreclosure, attorney’s
fees may be equitably tempered.

Respondent’s Arguments

For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it, taking relief in the CA pronouncement that
petitioners are deemed estopped by their failure to question the imposed rates and their continued payment thereof without opposition. It adds that
because the Credit Agreement and promissory notes contained both an escalation clause and a de-escalation clause, it may not be said that the bank
violated the principle of mutuality. Besides, the increase or decrease in interest rates have been mutually agreed upon by the parties, as shown by
petitioners’ continuous payment without protest. Respondent adds that the alleged unilateral imposition of interest rates is not a proper subject for
review by the Court because the issue was never raised in the lower court.

As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1) the Credit Agreements and the promissory notes
were signed in blank; 2) interest rates were at short periods; 3) no interest rates could be charged where no agreement on interest rates was made in
writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing; and 5) interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary – PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank – Respondent claims that this issue was never raised
in the lower court. Besides, documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in this regard is self-serving,
unsupported and uncorroborated, and for being the lone evidence on this issue. The fact remains that these documents are in proper form,
presumed regular, and endure, against arbitrary claims by Silos – who is an experienced business person – that she signed questionable loan
documents whose provisions for interest rates were left blank, and yet she continued to pay the interests without protest for a number of
years.56

b. That interest rates were at short periods – Respondent argues that the law which governs and prohibits changes in interest rates made more
than once every twelve months has been removed57 with the issuance of Presidential Decree No. 858.58

c. That no interest rates could be charged where no agreement on interest rates was made in writing in violation of Article 1956 of the Civil
Code, which provides that no interest shall be due unless it has been expressly stipulated in writing – Respondent insists that the stipulated
25% per annum as embodied in PN 9707237 should be imposed during the interim, or the period after the loan became due and while it
remains unpaid, and not the legal interest of 12% as claimed by petitioners. 59

d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing – According to respondent, interest rates
were fixed taking into consideration increases or decreases as provided by law or by the Monetary Board, the bank’s overall costs of funds,
and upon agreement of the parties.60

e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary – On this score, respondent submits there are
various factors that influence interest rates, from political events to economic developments, etc.; the cost of money, profitability and foreign
currency transactions may not be discounted.61

On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial, petitioners admitted that the Statement of Account as of
October 12, 1998 – which detailed and included penalty charges as part of the total outstanding obligation owing to the bank – was correct.
Respondent justifies the imposition and collection of a penalty as a normal banking practice, and the standard rate per annum for all commercial
banks, at the time, was 24%.

Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the obligation and substitute for
damages and the payment of interest in the event of non-compliance.62 And the promissory note – being the principal agreement as opposed to the
mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of the secured amount in the mortgage agreements is
valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its ownership over TCTs T-14250 and T-
16208; that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of properties covered by TCTs T-14250 and T-16208
in a desperate move to retain ownership over these properties, because they failed to timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the propriety of the CA’s ruling on the following issues is
squarely raised:

1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237 should be 12% per annum; and

2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99 which is the difference between the total amount due to
PNB and the amount of its bid price.

Our Ruling

The Court grants the Petition.

Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate evidence adduced by the parties in the
proceedings below. The rule admits of certain well-recognized exceptions, though, as when the lower courts’ findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when certain relevant and undisputed facts were manifestly overlooked that, if
properly considered, would justify a different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division denying respondent’s petition in G.R. No. 181046, due
to late filing, failure to attach the required affidavit of service of the petition on the trial court and the petitioners, and submission of a defective
verification and certification of non-forum shopping. On June 25, 2008, the Court issued another Resolution denying with finality respondent’s
motion for reconsideration of the March 5, 2008 Resolution. And on August 15, 2008, entry of judgment was made. This thus settles the issues, as
above-stated, covering a) the interest rate – or 12% per annum– that applies upon expiration of the first 30 days interest period provided under PN
9707237, and b)the CA’s decree that PNB should reimburse petitioner the excess in the bid price of ₱377,505.09.

It appears that respondent’s practice, more than once proscribed by the Court, has been carried over once more to the petitioners. In a number of
decided cases, the Court struck down provisions in credit documents issued by PNB to, or required of, its borrowers which allow the bank to increase
or decrease interest rates "within the limits allowed by law at any time depending on whatever policy it may adopt in the future." Thus, in Philippine
National Bank v. Court of Appeals,64 such stipulation and similar ones were declared in violation of Article 130865 of the Civil Code. In a second case,
Philippine National Bank v. Court of Appeals,66 the very same stipulations found in the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court therein said:

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt
in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in the maximum interest rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only
"within the limits allowed by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.

xxxx

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement which provides,
as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the
future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended,
thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum rate of interest is increased bylaw or by the Monetary Board; Provided, That such
stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the maximum rates of interest for loans and certain
forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:

Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.

— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of
interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is
bereft of any binding effect.

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the
interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an important modification in
their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-
545 (1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take it or
leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. 67
(Emphases supplied)

Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very same provisions in the respondent’s prepared Credit
Agreement, declaring thus:

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract
has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been
"stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound
merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2)
within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase
"interest rate agreed upon," in reference to the original 21% interest rate. x x x
 xxxx

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal (₱7,735,004.66) which was applied to interest alone. By the time the
spouses tendered the amount of ₱40,142,518.00 in settlement of their obligations; respondent bank was demanding ₱58,377,487.00 over and above
those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid
grounds. Here, as clearly demonstrated above, not only [are] the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest
rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the
total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.69 (Emphases supplied)

Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was reiterated:

The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its
office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together with interest thereon at
the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed by law, and I/we
also agree to pay jointly and severally ____% per annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed
on due dated.

Payment of this note shall be as follows:

*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

On the reverse side of the note the following condition was stamped:

All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all extensions hereof that will leave
any portion of the amount still unpaid after 730 days shall automatically convert the outstanding balance into a medium or long-term obligation as the
case may be and give the Bank the right to charge the interest rates prescribed under its policies from the date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which provided:

(k) INCREASE OF INTEREST RATE:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.

xxxx

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s ruling. The Court of Appeals nullified the interest
rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of such
provision made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be
retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the banks, our cases after Banco Filipino have fashioned
the rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the stipulated interest per annum" within the
limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." The real estate
mortgage likewise provided:

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This Court declared the increases
unilaterally imposed by [PNB] to be in violation of the principle of mutuality as embodied in Art.1308 of the Civil Code, which provides that "[t]he
contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." As the Court explained:

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the ₱1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that case provided:

The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in
the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two years, 42%.
In declaring the increases invalid, we held:

We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the
interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an important modification in
their agreement, and would negate the element of mutuality in contracts.

Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with other borrowers:

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their
assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest rate. Private
respondents’ assent to the increases can not be implied from their lack of response to the letters sent by PNB, informing them of the increases. For as
stated in one case, no one receiving a proposal to change a contract is obliged to answer the proposal.71 (Emphasis supplied)

We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine National Bank, 72 thus –

Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to increase interest
rates, penalties and other charges at the latter’s sole discretion and without giving prior notice to and securing the consent of the borrowers. This
unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has
been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive interests,
penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect
under the Truth in Lending Act.73 (Emphasis supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora,74 the above pronouncements were reiterated to debunk PNB’s
repeated reliance on its invalidated contract stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of
these rulings, the escalation clause PNB used in the present case to justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per annum rate to 42%. x x x

xxxx

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest the increased interest rates that were purportedly
reflected in the statements of account and the demand letters sent by the bank amounted to their implied acceptance of the increase – should likewise
fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates prompted the lower courts to declare excessive and
illegal the interest rates imposed. Togo around this lower court finding, PNB alleges that the ₱206,297.47 deficiency claim was computed using only
the original 12% per annum interest rate. We find this unlikely. Our examination of PNB’s own ledgers, included in the records of the case, clearly
indicates that PNB imposed interest rates higher than the agreed 12% per annum rate. This confirmatory finding, albeit based solely on ledgers found
in the records, reinforces the application in this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this Court. 75
(Emphases supplied)

Verily, all these cases, including the present one, involve identical or similar provisions found in respondent’s credit agreements and promissory
notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent contained the following stipulation on interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be payable in advance every one hundred
twenty days at the rate prevailing at the time of the renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.76 (Emphases supplied)

while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest rates "within the limits allowed by law
or the Monetary Board"77 and the Real Estate Mortgage agreement included the same right to increase or reduce interest rates "at any time depending
on whatever policy PNB may adopt in the future."78

On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and respondent later on entered their
corresponding interest rates, as follows:

1st Promissory Note dated July 24, 1989 – 19.5%;

2nd Promissory Note dated November 22, 1989 – 23%;

3rd Promissory Note dated March 21, 1990 – 22%;

4th Promissory Note dated July 19, 1990 – 24%;

5th Promissory Note dated December 17, 1990 – 28%;

6th Promissory Note dated February 14, 1991 – 32%;

7th Promissory Note dated March 1, 1991 – 30%; and

8th Promissory Note dated July 11, 1991 – 24%.79

On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the
date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of
each Availment.80 (Emphases supplied)

and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory notes in blank, for the respondent to
later on enter the corresponding interest rates, which it did, as follows:

9th Promissory Note dated November 8, 1991 – 26%;

10th Promissory Note dated March 19, 1992 – 25%;

11th Promissory Note dated July 11, 1992 – 23%;

12th Promissory Note dated November 10, 1992 – 21%;

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

14th Promissory Note dated July 12, 1993 – 17.5%;

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

16th Promissory Note dated March 28, 1994 – 21%;

17th Promissory Note dated July 13, 1994 – 21%;

18th Promissory Note dated November 16, 1994 – 16%;

19th Promissory Note dated April 10, 1995 – 21%;

20th Promissory Note dated July 19, 1995 – 18.5%;

21st Promissory Note dated December 18, 1995 – 18.75%;

22nd Promissory Note dated April 22, 1996 – 18.5%;

23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

25th Promissory Note dated May 30, 1997 – 17.5%; and

26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice, raise within the
limits allowed by law x x x."82 On the other hand, the 18th up to the 26th promissory notes – which includes PN 9707237 – carried the following
provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines,
or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we
shall have the option to prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting Date. 83 (Emphasis
supplied)

These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these cases is the lack of agreement of
the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact,
its witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then
simply communicated to all PNB branches for implementation. If this were the case, then this would explain why petitioners had to sign the
promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as cost of money, foreign currency values, bank
administrative costs, profitability, and considerations which affect the banking industry – it can be seen that considerations which affect PNB’s
borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign
currency values or fluctuations on his business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be imposed on
him. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these considerations.

The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates on the
obligations of the spouses Beluso valid. According to said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with the BORROWER.

It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much weight as it desires to each of
the following considerations: (1) the prevailing financial and monetary condition;(2) the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin
above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both options
violate the principle of mutuality of contracts.84 (Emphases supplied)

To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made with the consent of
the contracting parties.1âwphi1 The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no binding effect.

What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree upon the interest rate to
be fixed; -instead, they are worded in such a way that the borrower shall agree to whatever interest rate respondent fixes. In credit agreements
covered by the above-cited cases, it is provided that:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease in maximum interest rate.85 (Emphasis supplied)

Whereas, in the present credit agreements under scrutiny, it is stated that:

IN THE JULY 1989 CREDIT AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.86 (Emphases supplied)

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the
date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of
each Availment.87 (Emphasis supplied)

Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely lacking, which makes
respondent’s unlawful act all the more reprehensible.

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy." 88

It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which was enacted "to protect x x x citizens from
a lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with a view of preventing the uninformed use of credit
to the detriment of the national economy."89 The law "gives a detailed enumeration of the specific information required to be disclosed, among which
are the interest and other charges incident to the extension of credit."90 Section 4 thereof provides that a disclosure statement must be furnished prior
to the consummation of the transaction, thus:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not
incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of credit such as interest or discounts,
collection fees, credit investigation fees, attorney’s fees, and other service charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the debtor, and (2) the sum of the cash price and non-finance charges. 91

By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally filling them up later on, respondent
violated the Truth in Lending Act, and was remiss in its disclosure obligations. In one case, which the Court finds applicable here, it was held:

UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution, then they were duly
notified of the terms thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the
consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not
incident to the extension of credit;
 (5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that
banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.
The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the
contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an
already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.92 (Emphases supplied)

However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently prescribed long ago, or
sometime in 2001, one year after petitioners received the March 2000 demand letter which contained the illegal charges.

The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure respondent’s breach. To
repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision. 93

Neither may the statements be considered proposals sent to secure the petitioners’ conformity; they were sent after the imposition and application of
the interest rate, and not before. And even if it were to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No one
receiving a proposal to modify a loan contract, especially regarding interest, is obliged to answer the proposal." 94

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually accompanied by
provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they have been lured into these contracts by initially low interest rates, borrowers get caught
and stuck in the web of subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should be
charged rightly; but then again this is not possible in a one-sided credit system where the temptation to abuse is strong and the willingness to rectify
is made weak by the eternal desire for profit.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in every repricing of petitioners’ loan availment, they are
given the right to question the interest rates imposed. The import of respondent’s line of reasoning cannot be other than that if one out of every
hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then only the loan arrangement with that lone complaining
borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent
will continue to reap the profits from such unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the Court
meant in the immediately preceding cited case when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision;"95 as to the 99 borrowers who did not or could not complain, the illegal act shall have become a fait
accompli– to their detriment, they have already suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we have a situation where
the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position would
dare question respondent’s power to arbitrarily modify interest rates at any time. In the second place, on what basis could any borrower question such
power, when the criteria or standards – which are really one-sided, arbitrary and subjective – for the exercise of such power are precisely lost on him?

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory notes, petitioners are granted the
option to prepay the loan or credit facility without penalty within 10 calendar days from the Interest Setting Date if they are not agreeable to the
interest rate fixed. It has been shown that the promissory notes are executed and signed in blank, meaning that by the time petitioners learn of the
interest rate, they are already bound to pay it because they have already pre-signed the note where the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular, and endure, against arbitrary claims by petitioners, experienced business persons that they are, they
signed questionable loan documents whose provisions for interest rates were left blank, and yet they continued to pay the interests without protest for
a number of years – deserve no consideration.

With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to the original or
stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform ruling
adopted in previous cases, including those cited here.96 The interests paid by petitioners should be applied first to the payment of the stipulated or
legal and unpaid interest, as the case may be, and later, to the capital or principal.97 Respondent should then refund the excess amount of interest that
it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no obligation to do so." 98 Thus,
the parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note
which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher
interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be
fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of
interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames 99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No.
799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall constitute default, and a penalty
charge of 24% per annum based on the defaulted principal amount shall be imposed. Petitioners claim that this penalty should be excluded from the
foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying that the purpose of the penalty or a penal clause is to ensure the performance
of the obligation and substitute for damages and the payment of interest in the event of non-compliance. 100 Respondent adds that the imposition and
collection of a penalty is a normal banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as
part of the secured amount in the mortgage agreements is thus valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the secured amount. Having found the credit agreements and
promissory notes to be tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and having the attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts strictly, and against the party who drafted it. An examination of the mortgage agreements
reveals that nowhere is it stated that penalties are to be included in the secured amount. Construing this silence strictly against the respondent, the
Court can only conclude that the parties did not intend to include the penalty allowed under PN 9707237 as part of the secured amount. Given its
resources, respondent could have – if it truly wanted to – conveniently prepared and executed an amended mortgage agreement with the petitioners,
thereby including penalties in the amount to be secured by the encumbered properties. Yet it did not.

With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it was not raised by the petitioners in their appeal; it
was the respondent that improperly brought it up in its appellee’s brief, when it should have interposed an appeal, since the trial court’s Decision on
this issue is adverse to it. It is an elementary principle in the subject of appeals that an appellee who does not himself appeal cannot obtain from the
appellate court any affirmative relief other than those granted in the decision of the court below.

x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make counter assignments of error in ordinary actions,
when the purpose is merely to defend himself against an appeal in which errors are alleged to have been committed by the trial court both in the
appreciation of facts and in the interpretation of the law, in order to sustain the judgment in his favor but not when his purpose is to seek modification
or reversal of the judgment, in which case it is necessary for him to have excepted to and appealed from the judgment. 102

Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no authority to pass upon it at the instance of respondent.
The ruling of the trial court in this respect should remain undisturbed.

For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor and to the petitioners who are entitled to a refund as
a consequence of overpayment considering that they paid more by way of interest charges than the 12% per annum103 herein allowed – the case
should be remanded to the lower court for proper accounting and computation, applying the following procedure:

1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;

2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate of only 12% per annum. 104 Thus,
interest payment made in excess of 12% on the 2nd promissory note shall immediately be applied to the principal, and the principal shall be
accordingly reduced. The reduced principal shall then be subjected to the 12%105 interest on the 3rd promissory note, and the excess over
12% interest payment on the 3rd promissory note shall again be applied to the principal, which shall again be reduced accordingly. The
reduced principal shall then be subjected to the 12% interest on the 4th promissory note, and the excess over12% interest payment on the 4th
 promissory note shall again be applied to the principal, which shall again be reduced accordingly. And so on and so forth;

3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);

4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest from October 28, 1997 until
January 14, 1999, which is the date of the auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August 14, 1997 until January 14, 1999. But
from this total penalty, the petitioners’ previous payment of penalties in the amount of ₱202,000.00made on January 27, 1998 106 shall be
DEDUCTED;

6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1% attorney’s fees shall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) shall be DEDUCTED from the bid price of
₱4,324,172.96. The penalties (5.) are not included because they are not included in the secured amount;

8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and 1% attorney’s fees (6.)] shall be
DELIVERED TO THE PETITIONERS;

9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an OVERPAYMENT, the interest
(4.), penalties (5.), and the award of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no outstanding
balance/obligation precisely because petitioners have paid beyond the amount of the principal and interest;

11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorney’s fees (6.), the excess shall be
RETURNED to the petitioners, with legal interest, under the principle of solutio indebiti; 107

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorney’s fees (6.), the trial court shall
INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) exceed petitioners’ overpayment, then the excess
shall be DEDUCTED from the bid price of ₱4,324,172.96;

14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1% attorney’s fees (6.)] shall be DELIVERED TO THE
PETITIONERS;

15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding penalties, if any, shall be collected
by other means.

From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made payments exceeding what they actually
owe by way of principal, interest, and attorney’s fees, then the mortgaged properties need not answer for any outstanding secured amount,
because there is not any; quite the contrary, respondent must refund the excess to petitioners.1âwphi1 In such case, the extrajudicial
foreclosure and sale of the properties shall be declared null and void for obvious lack of basis, the case being one of solutio indebiti instead.
If, on the other hand, it turns out that petitioners’ overpayments in interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption has expired. Its only obligation will be to return the difference
between its bid price (₱4,324,172.96) and petitioners’ total obligation outstanding – except penalties – after applying the latter’s
overpayments.

WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is
ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:

1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED NULL AND VOID, and such notes
shall instead be subject to interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and starting July 1, 2013, six percent
(6%) per annum until full satisfaction;
 2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts secured by the real estate
mortgages;

3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the computation of overpayments made by
petitioners spouses Eduardo and Lydia Silos to respondent Philippine National Bank, taking into consideration the foregoing dispositions,
and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial foreclosure and sale, declaring the
same null and void in case of overpayment and ordering the release and return of Transfer Certificates of Title Nos. T-14250 and TCT T-
16208 to petitioners, or ordering the delivery to the petitioners of the difference between the bid price and the total remaining obligation of
petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to Transfer Certificates of Title Nos. T-
14250 and T-16208 until all the steps in the procedure above set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent Philippine National Bank is ordered to reimburse
petitioners, should be HELD IN ABEYANCE until the true amount owing to or owed by the parties as against each other is determined;

8. Considering that this case has been pending for such a long time and that further proceedings, albeit uncomplicated, are required, the trial
court is ORDERED to proceed with dispatch.

SO ORDERED.

G.R. No. 174433 February 24, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO, and ARMA J.
MANALO, Respondents.

DECISION

BERSAMIN, J.:

Although banks are free to determine the rate of interest they could impose on their borrowers, they can do so only
reasonably, not arbitrarily. They may not take advantage of the ordinary borrowers' lack of familiarity with banking
procedures and jargon. Hence, any stipulation on interest unilaterally imposed and increased by them shall be struck
down as violative of the principle of mutuality of contracts.

Antecedents

Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an All-Purpose Credit Facility
in the amount of ₱1,000,000.00 with Philippine National Bank (PNB) to finance the construction of their house. After PNB
granted their application, they executed a Real Estate Mortgage on November 3, 1993 in favor of PNB over their property
covered by Transfer Certificate of Title No. S- 23191 as security for the loan. 1 The credit facility was renewed and
increased several times over the years. On September 20, 1996, the credit facility was again renewed for ₱7,000,000.00.
As a consequence, the parties executed a Supplement to and Amendment of Existing Real Estate Mortgage whereby the
property covered by TCT No. 171859 was added as security for the loan.
The additional security was registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all surnamed
Manalo, who were their children.2

It was agreed upon that the Spouses Manalo would make monthly payments on the interest. However, PNB claimed that
their last recorded payment was made on December, 1997. Thus, PNB sent a demand letter to them on their overdue
account and required them to settle the account. PNB sent another demand letter because they failed to heed the first
demand.3

After the Spouses Manalo still failed to settle their unpaid account despite the two demand letters, PNB foreclose the
mortgage. During the foreclosure sale, PNB was the highest bidder for ₱15,127,000.00 of the mortgaged properties of the
Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated November 13, 2000. 4

After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo instituted this action for
the nullification of the foreclosure proceedings and damages. They alleged that they had obtained a loan for
₱1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus Yuvienco, then the General Manager of
PNB’s Bangkal Branch where they had transacted; that they had been made to understand and had been assured that the
₱1,000,000.00 would be used to update their account, and that their loan would be restructured and converted into a long-
term loan;5 that they had been surprised to learn, therefore, that had been declared in default of their obligations, and that
the mortgage on their property had been foreclosed and their property had been sold; and that PNB did not comply with
Section 3 of Act No. 3135, as amended.6

PNB and Antoninus Yuvienco countered that the ₱1,000,000.00 loan obtained by the Spouses Manalo from Benito Tan
had been credited to their account; that they did not make any assurances on the restructuring and conversion of the
Spouses Manalo’s loan into a long-term one; 7 that PNB’s right to foreclose the mortgage had been clear especially
because the Spouses Manalo had not assailed the validity of the loans and of the mortgage; and that the Spouses Manalo
did not allege having fully paid their indebtedness.8

Ruling ofthe RTC

After trial, the RTC rendered its decision in favor of PNB, holding thusly:

In resolving this present case, one of the most significant matters the court has noted is that while during the pre-trial held
on 8 September 2003, plaintiff-spouses Manalo with the assistance counsel had agreed to stipulate that defendants had
the right to foreclose upon the subject properties and that the plaintiffs[‘] main thrust was to prove that the foreclosure
proceedings were invalid, in the course of the presentation of their evidence, they modified their position and claimed
[that] the loan document executed were contracts of adhesion which were null and void because they were prepared
entirely under the defendant bank’s supervision. They also questioned the interest rates and penalty charges imposed
arguing that these were iniquitous, unconscionable and therefore likewise void.

Not having raised the foregoing matters as issues during the pre-trial, plaintiff-spouses are presumably estopped from
allowing these matters to serve as part of their evidence, more so because at the pre-trial they expressly recognized the
defendant bank’s right to foreclose upon the subject property (See Order, pp. 193-195).

However, considering that the defendant bank did not interpose any objection to these matters being made part of
plaintiff’s evidence so much so that their memorandum contained discussions rebutting plaintiff spouses arguments on
these issues, the court must necessarily include these matters in the resolution of the present case. 9

The RTC held, however, that the Spouses Manalo’s "contract of adhesion" argument was unfounded because they had
still accepted the terms and conditions of their credit agreement with PNB and had exerted efforts to pay their obligation; 10
that the Spouses Manalo were now estopped from questioning the interest rates unilaterally imposed by PNB because
they had paid at those rates for three years without protest; 11 and that their allegation about PNB violating the notice and
publication requirements during the foreclosure proceedings was untenable because personal notice to the mortgagee
was not required under Act No. 3135.12

The Spouses Manalo appealed to the CA by assigning a singular error, as follows:

THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-APPELLANTS’ COMPLAINT FOR BEING (sic)
LACK OF MERIT NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN THAT THE FORECLOSURE
PROCEEDINGS WAS INVALID AND ILLEGAL.13
The Spouses Manalo reiterated their arguments, insisting that: (1) the credit agreements they entered into with PNB were
contracts of adhesion;14 (2) no interest was due from them because their credit agreements with PNB did not specify the
interest rate, and PNB could not unilaterally increase the interest rate without first informing them; 15 and (3) PNB did not
comply with the notice and publication requirements under Section 3 of Act 3135. 16 On the other hand, PNB and Yuvienco
did not file their briefs despite notice.17

Ruling ofthe CA

In its decision promulgated on March 28, 2006, 18 the CA affirmed the decision of the RTC insofar as it upheld the validity
of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalo’s liability for interest. It directed the
RTC to see to the recomputation of their indebtedness, and ordered that should the recomputed amount be less than the
winning bid in the foreclosure sale, the difference should be immediately returned to the Spouses Manalo.

The CA found it necessary to pass upon the issues of PNB’s failure to specify the applicable interest and the lack of
mutuality in the execution of the credit agreements considering the earlier cited observation made by the trial court in its
decision. Applying Article 1956 of the Civil Code, the CA held that PNB’s failure to indicate the rate of interest in the credit
agreements would not excuse the Spouses Manalo from their contractual obligation to pay interest to PNB because of the
express agreement to pay interest in the credit agreements. Nevertheless, the CA ruled that PNB’s inadvertence to
specify the interest rate should be construed against it because the credit agreements were clearly contracts of adhesion
due to their having been prepared solely by PNB.

The CA further held that PNB could not unilaterally increase the rate of interest considering that the credit agreements
specifically provided that prior notice was required before an increase in interest rate could be effected. It found that PNB
did not adduce proof showing that the Spouses Manalo had been notified before the increased interest rates were
imposed; and that PNB’s unilateral imposition of the increased interest rate was null and void for being violative of the
principle of mutuality of contracts enshrined in Article 1308 of the Civil Code. Reinforcing its "contract of adhesion"
conclusion, it added that the Spouses Manalo’s being in dire need of money rendered them to be not on an equal footing
with PNB. Consequently, the CA, relying on Eastern Shipping Lines, v. Court of Appeals, 19 fixed the interest rate to be paid
by the Spouses Manalo at 12% per annum, computed from their default.

The CA deemed to be untenable the Spouses Manalo’s allegation that PNB had failed to comply with the requirements for
notice and posting under Section 3 of Act 3135. The CA stated that Sheriff Norberto Magsajo’s testimony was sufficient
proof of his posting of the required Notice of Sheriff’s Sale in three public places; that the notarized Affidavit of Publication
presented by Sheriff Magsajo was prima facie proof of the publication of the notice; and that the Affidavit of Publication
enjoyed the presumption of regularity, such that the Spouses Manalo’s bare allegation of non-publication without other
proof did not overcome the presumption.

On August 29, 2006, the CA denied the Spouses Manalo’s Motion for Reconsideration and PNB’s Partial Motion for
Reconsideration.20

Issues

In its Memorandum,21 PNB raises the following issues:

WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING THE INTEREST RATES IMPOSED
ON RESPONDENT SPOUSES’ LOAN AND IN FIXING THE SAME AT TWELVE PERCENT (12%) FROM DEFAULT,
DESPITE THE FACT THAT (i) THE SAME WAS RAISED BY THE RESPONDENTS ONLY FOR THE FIRST TIME ON
APPEAL (ii) IT WAS NEVER PART OF THEIR COMPLAINT (iii) WAS EXLUDED AS AN ISSUE DURING PRE-TRIAL,
AND WORSE, (iv) THERE WAS NO FORMALLY OFFERED PERTAINING TO THE SAME DURING TRIAL.

II

WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THERE WAS NO MUTUALITY OF
CONSENT IN THE IMPOSITION OF INTEREST RATES ON THE RESPONDENT SPOUSES’ LOAN DESPITE THE
EXISTENCE OF FACTS AND CIRCUMSTANCES CLEARLY SHOWING RESPONDENTS’ ASSENT TO THE RATES OF
INTEREST SO IMPOSED BY PNB ON THE LOAN.
Anent the first issue, PNB argues that by passing upon the issue of the validity of the interest rates, and in nullifying the
rates imposed on the Spouses Manalo, the CA decided the case in a manner not in accord with Section 15, Rule 44 of the
Rules of Court, which states that only questions of law or fact raised in the trial court could be assigned as errors on
appeal; that to allow the Spouses Manalo to raise an issue for the first time on appeal would "offend the basic rules of fair
play, justice and due process;"22 that the resolution of the CA was limited to the issues agreed upon by the parties during
pre-trial;23 that the CA erred in passing upon the validity of the interest rates inasmuch as the Spouses Manalo did not
present evidence thereon; and that the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding, was not
offered to prove the invalidity of the interest rates and was, therefore, inadmissible for that purpose. 24

As to the substantive issues, PNB claims that the Spouses Manalo’s continuous payment of interest without protest
indicated their assent to the interest rates imposed, as well as to the subsequent increases of the rates; and that the CA
erred in declaring that the interest rates and subsequent increases were invalid for lack of mutuality between the
contracting parties.

Ruling

The appeal lacks merit.

1.
Procedural Issue

Contrary to PNB’s argument, the validity of the interest rates and of the increases, and on the lack of mutuality between
the parties were not raised by the Spouses Manalo’s for the first time on appeal. Rather, the issues were impliedly raised
during the trial itself, and PNB’s lack of vigilance in voicing out a timely objection made that possible.

It appears that Enrique Manalo’s Judicial Affidavit introduced the issues of the validity of the interest rates and the
increases, and the lack of mutuality between the parties in the following manner, to wit:

5. True to his words, defendant Yuvienco, after several days, sent us a document through a personnel of
defendant PNB, Bangkal, Makati City Branch, who required me and my wife to affix our signature on the said
document;

6. When the document was handed over me, I was able to know that it was a Promissory Note which was in ready
made form and prepared solely by the defendant PNB;

xxxx

21. As above-noted, the rates of interest imposed by the defendant bank were never the subject of any stipulation
between us mortgagors and the defendant PNB as mortgagee;

22. The truth of the matter is that defendant bank imposed rate of interest which ranges from 19% to as high as
28% and which changes from time to time;

23. The irregularity, much less the invalidity of the imposition of iniquitous rates of interest was aggravated by the
fact that we were not informed, notified, nor the same had our prior consent and acquiescence therefor. x x x 25

PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing that PNB raised any objection in the
course of the cross examination. 26 Consequently, the RTC rightly passed upon such issues in deciding the case, and its
having done so was in total accord with Section 5, Rule 10 of the Rules of Court, which states:

Section 5. Amendment to conform to or authorize presentation of evidence. – When issues not raised by the pleadings are
tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in
the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party at any time, even after judgment; but failure to amend does not
affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the
issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The court may grant
a continuance to enable the amendment to be made.
In Bernardo Sr. v. Court of Appeals,27 we held that:

It is settled that even if the complaint be defective, but the parties go to trial thereon, and the plaintiff, without objection,
introduces sufficient evidence to constitute the particular cause of action which it intended to allege in the original
complaint, and the defendant voluntarily produces witnesses to meet the cause of action thus established, an issue is
joined as fully and as effectively as if it had been previously joined by the most perfect pleadings. Likewise, when issues
not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if
they had been raised in the pleadings.

The RTC did not need to direct the amendment of the complaint by the Spouses Manalo. Section 5, Rule 10 of the Rules
of Court specifically declares that the "failure to amend does not affect the result of the trial of these issues." According to
Talisay-Silay Milling Co., Inc. v. Asociacion de Agricultores de Talisay-Silay, Inc.: 28

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude an
adjudication by the court on the basis of such evidence which may embody new issues not raised in the pleadings, or
serve as a basis for a higher award of damages. Although the pleading may not have been amended to conform to the
evidence submitted during trial, judgment may nonetheless be rendered, not simply on the basis of the issues alleged but
also on the basis of issues discussed and the assertions of fact proved in the course of trial.1âwphi1 The court may treat
the pleading as if it had been amended to conform to the evidence, although it had not been actually so amended. Former
Chief Justice Moran put the matter in this way:

When evidence is presented by one party, with the expressed or implied consent of the adverse party, as to issues not
alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they
have been raised in the pleadings. There is implied, consent to the evidence thus presented when the adverse party fails
to object thereto." (Emphasis supplied)

Clearly, a court may rule and render judgment on the basis of the evidence before it even though the relevant pleading
had not been previously amended, so long as no surprise or prejudice is thereby caused to the adverse party. Put a little
differently, so long as the basic requirements of fair play had been met, as where litigants were given full opportunity to
support their respective contentions and to object to or refute each other's evidence, the court may validly treat the
pleadings as if they had been amended to conform to the evidence and proceed to adjudicate on the basis of all the
evidence before it.

There is also no merit in PNB’s contention that the CA should not have considered and ruled on the issue of the validity of
the interest rates because the Judicial Affidavit of Enrique Manalo had not been offered to prove the same but only "for the
purpose of identifying his affidavit."29 As such, the affidavit was inadmissible to prove the nullity of the interest rates.

We do not agree.

Section 5, Rule 10 of the Rules of Court is applicable in two situations.1âwphi1 The first is when evidence is introduced on
an issue not alleged in the pleadings and no objection is interposed by the adverse party. The second is when evidence is
offered on an issue not alleged in the pleadings but an objection is raised against the offer. 30 This case comes under the
first situation. Enrique Manalo’s Judicial Affidavit would introduce the very issues that PNB is now assailing. The question
of whether the evidence on such issues was admissible to prove the nullity of the interest rates is an entirely different
matter. The RTC accorded credence to PNB’s evidence showing that the Spouses Manalo had been paying the interest
imposed upon them without protest. On the other hand, the CA’s nullification of the interest rates was based on the credit
agreements that the Spouses Manalo and PNB had themselves submitted.

Based on the foregoing, the validity of the interest rates and their increases, and the lack of mutuality between the parties
were issues validly raised in the RTC, giving the Spouses Manalo every right to raise them in their appeal to the CA.
PNB’s contention was based on its wrong appreciation of what transpired during the trial. It is also interesting to note that
PNB did not itself assail the RTC’s ruling on the issues obviously because the RTC had decided in its favor. In fact, PNB
did not even submit its appellee’s brief despite notice from the CA.

2.
Substantive Issue

The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate "determined by
the Bank to be its prime rate plus applicable spread, prevailing at the current month." 31 This stipulation was carried over to
or adopted by the subsequent renewals of the credit agreement. PNB thereby arrogated unto itself the sole prerogative to
determine and increase the interest rates imposed on the Spouses Manalo. Such a unilateral determination of the interest
rates contravened the principle of mutuality of contracts embodied in Article 1308 of the Civil Code. 32

The Court has declared that a contract where there is no mutuality between the parties partakes of the nature of a
contract of adhesion,33 and any obscurity will be construed against the party who prepared the contract, the latter being
presumed the stronger party to the agreement, and who caused the obscurity. 34 PNB should then suffer the consequences
of its failure to specifically indicate the rates of interest in the credit agreement. We spoke clearly on this in Philippine
Savings Bank v. Castillo,35 to wit:

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts
under Article 1308 of the Civil Code, which provides that ‘[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.’ A perusal of the Promissory Note will readily show that the increase
or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker
before a new interest rate could be enforced. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any
stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.
(Emphasis supplied)

PNB could not also justify the increases it had effected on the interest rates by citing the fact that the Spouses Manalo had
paid the interests without protest, and had renewed the loan several times. We rule that the CA, citing Philippine National
Bank v. Court of Appeals,36 rightly concluded that "a borrower is not estopped from assailing the unilateral increase in the
interest made by the lender since no one who receives a proposal to change a contract, to which he is a party, is obliged
to answer the same and said party’s silence cannot be construed as an acceptance thereof." 37

Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior notice would be
necessary before PNB could increase the interest rates. In failing to notify the Spouses Manalo before imposing the
increased rates of interest, therefore, PNB violated the stipulations of the very contract that it had prepared. Hence, the
varying interest rates imposed by PNB have to be vacated and declared null and void, and in their place an interest rate of
12% per annum computed from their default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals.38

The CA’s directive to PNB (a) to recompute the Spouses Manalo’s indebtedness under the oversight of the RTC; and (b)
to refund to them any excess of the winning bid submitted during the foreclosure sale over their recomputed indebtedness
was warranted and equitable. Equally warranted and equitable was to make the amount to be refunded, if any, bear legal
interest, to be reckoned from the promulgation of the CA’s decision on March 28, 2006. 39 Indeed, the Court said in Eastern
Shipping Lines, Inc. v. Court of Appeals 40 that interest should be computed from the time of the judicial or extrajudicial
demand. However, this case presents a peculiar situation, the peculiarity being that the Spouses Manalo did not demand
interest either judicially or extrajudicially. In the RTC, they specifically sought as the main reliefs the nullification of the
foreclosure proceedings brought by PNB, accounting of the payments they had made to PNB, and the conversion of their
loan into a long term one. 41 In its judgment, the RTC even upheld the validity of the interest rates imposed by PNB. 42 In
their appellant’s brief, the Spouses Manalo again sought the nullification of the foreclosure proceedings as the main
relief.43 It is evident, therefore, that the Spouses Manalo made no judicial or extrajudicial demand from which to reckon the
interest on any amount to be refunded to them. Such demand could only be reckoned from the promulgation of the CA’s
decision because it was there that the right to the refund was first judicially recognized. Nevertheless, pursuant to Eastern
Shipping Lines, Inc. v. Court of Appeals,44 the amount to be refunded and the interest thereon should earn interest to be
computed from the finality of the judgment until the full refund has been made.

Anent the correct rates of interest to be applied on the amount to be refunded by PNB, the Court, in Nacar v. Gallery
Frames45 and S.C. Megaworld Construction v. Parada, 46 already applied Monetary Board Circular No. 799 by reducing the
interest rates allowed in judgments from 12% per annum to 6% per annum. 47 According to Nacar v. Gallery Frames, MB
Circular No. 799 is applied prospectively, and judgments that became final and executory prior to its effectivity on July 1,
2013 are not to be disturbed but continue to be implemented applying the old legal rate of 12% per annum. Hence, the old
legal rate of 12% per annum applied to judgments becoming final and executory prior to July 1, 2013, but the new rate of
6% per annum applies to judgments becoming final and executory after said dater.

Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the proper interest
rates to be imposed in the present case are as follows:
 1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum computed from March
28, 2006, the date of the promulgation of the CA decision, until June 30, 2013; and 6% per annum computed from
July 1, 2013 until finality of this decision; and

2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until full refund.

WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals on March 28, 2006 in CA-G.R. CV
No. 84396, subject to the MODIFICATION that any amount to be refunded to the respondents shall bear interest of 12%
per annum computed from March 28, 2006 until June 30, 2013, and 6% per annum computed from July 1, 2013 until
finality hereof; that the amount to be refunded and its accrued interest shall earn interest at 6o/o per annum until full
refund; and DIRECTS the petitioner to pay the costs of suit.

SO ORDERED

G.R. No. 177348 October 17, 2008

SPOUSES RAMON PATRON and LUZVIMINDA PATRON, petitioners,

vs.
UNION BANK OF THE PHILIPPINES, THE INTERNATIONAL CORPORATE BANK, and THE QUEDAN AND RURAL
CREDIT GUARANTEE CORPORATION, respondents.

DECISION

CARPIO MORALES, J.:

The Spouses Ramon and Luzviminda Patron (petitioners), doing business under the name Ala Golden Grains Rice Mill, obtained on
September 9, 1988 a ₱2,000,000 quedan loan from respondent International Corporate Bank (Interbank) which was guaranteed by
respondent Quedan and Rural Credit Guarantee Corporation (Quedancor).1

Upon the maturity of the loan on March 8, 1989, it was renewed, to mature on September 4, 1989.2 On the maturity of the loan on
September 4, 1989, it was again renewed, to mature on March 3, 1990.3
In the meantime or on September 6, 1989, petitioners obtained an additional ₱1,500,000 loan from Interbank which was to mature on
March 5, 1990.4

On March 1, 1990, petitioners again obtained an additional ₱1,500,000 loan and renewed their outstanding loans which had amounted
to ₱3,500,000. Petitioners’ total ₱5,000,000 loans were consolidated and covered by Promissory Note No. AGL90-0011 which was to
mature on August 28, 1990.5 The consolidated loans covered by this promissory note were renewed several times including that made
on February 10, 1993 when Promissory Note No. AGL93-0004 was accomplished, to mature on August 9, 1993.6

On or before August 9, 1993, petitioners applied for the renewal of the loan covered thereby. Petitioners accomplished Promissory
Note No. AGL93-0022 for ₱4,900,000 (the remaining balance after some payments were made), to mature on February 4, 1994.7

In the meantime, Interbank8 was merged with respondent Union Bank of the Philippines (UBP).

On September 14, 1994, on UBP’s demand, guarantor Quedancor paid ₱3,771,348.89. UBP thereafter demanded, by letter of
September 30, 1994,9 from petitioners the payment of the balance of their loan computed to be ₱2,645,889.84,10 but they failed to heed
the same.

Petitioners subsequently filed in November 1994 a complaint against respondents before the Regional Trial Court (RTC) of Iloilo City,
for Cancellation of Documents, Declaration of Nullity, Injunction, and Damages. The complaint was docketed as Civil Case No.
22072.11

Petitioners claimed that in August 1993, they applied for the renewal of their quedan loan for ₱4,900,000, and after they had submitted
the requirements therefor including the duly accomplished Promissory Note No. AGL93-0022, Interbank informed them that it
(Interbank) had already been acquired by UBP which stopped, disapproved, and/or cancelled all quedan loan applications; and that
Interbank advised them that the documents bearing on their said August 1993 application for renewal of loan would be returned but
they never received them, hence, they were surprised to receive a demand for payment of a ₱4,900,000 loan. They thus prayed as
follows:

a. Declaring as null and void and without legal effect the Quedan Loan application and its supporting papers, especially the
promissory note and quedans as proposed collateral therefor, submitted by plaintiffs to defendant Interbank in August 1993;

b. Declaring the plaintiffs not liable for any and all obligations arising from the said loan application and its supporting documents,
which was in fact stopped, disapproved and/or cancelled by defendant banks, and whose proceeds plaintiffs never received;

c. Directing the defendant banks to restore to plaintiffs the sum of ₱500,000.00 defendant Interbank appropriated for itself, with
interest at the current inter-bank [sic] rate computed from date of said appropriation until full payment thereof to plaintiffs;

d. Ordering the defendants, jointly and severally, to pay plaintiffs the sum of at least ₱500,000.00 as moral damages, ₱300,000.00 as
attorney’s fees, P50,000.00 as expenses of litigation, exemplary damages in such this Honorable Court may deed just and proper, and

e. The costs of this litigation.12 (Underscoring supplied)

UBP thereafter also filed a complaint on December 12, 1994 against petitioners before the RTC of Iloilo City, for collection of the
remaining ₱2,645,889.84 unpaid balance of their loan, plus interests, expenses of litigation, and attorney’s fees. The complaint was
docketed as Civil Case No. 22105.13

Both cases were consolidated.14

UBP presented testimonial evidence that whenever petitioners renewed their loan on maturity, the proceeds of the renewed loan were
applied to the maturing loan, hence, no actual cash was released to them.15

By Decision of March 23, 200416 rendered in both cases, Branch 36 of the Iloilo City RTC, answering in the affirmative the issue of
whether there was a valid existing loan between petitioners and Interbank (before it was merged with UBP) which matured on August
9, 1993, rendered judgment in favor of respondents, disposing as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Dismissing the complaint of plaintiffs in Civil Case No. 22072 and their counter-claim in Civil Case No. 22105;
2. Dismissing the counter-claim of defendant QUEDANCOR in Civil Case No. 22105;

3. Declaring that Spouses Luzviminda Patron and Ramon Patron have a loan obligation with the Interbank (now Union Bank) in the
amount of ₱2,645,889.84;

4. Ordering Spouses Luzviminda and Ramon Patron to pay Union Bank the sum of ₱2,645.889.84 plus 12% interest per annum
computed from September 14, 1994 until the same is fully paid.

SO ORDERED.17 (Underscoring supplied)

On appeal, the Court of Appeals, by Decision of September 11, 2006,18 affirmed the RTC decision with modification on the rate of
interest on petitioners’ obligation, it noting as follows:

From a perusal of the facts as established and the record of the case, it must be pointed out that the interest stipulated by the parties
with regard to PN No. AGL93-0022 [sic] dated August 9, 1993 is 16.5% per annum. However, in the computation of the Spouses
Patron’s liability for the period August 9, 1993 until September 30, 1994, as evidenced by Union Bank’s statement of account as of
September 30, 1994, the said bank applied an interest rate of 24% per annum.19 (Emphasis in the original; underscoring supplied)

The Court notes that the appellate court, in affirming the decision of the trial court, erred in basing petitioners’ liability on Promissory
Note No. AGL93-0022 which was accomplished by them in support of their application for renewal of their loan covered by
Promissory Note No. AGL-93-0004, but which application for renewal was disapproved.

The Court of Appeals disposed:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DISMISSING the appeal filed in this case and
AFFIRMING with MODIFICATION the decision dated March 23, 2004 of the Regional Trial Court, Branch 36, in Iloilo City
Cases Nos. 22072 and 22105, such that the interest rate to be applied on PN No. AGL93-0022 for the period August 9, 1993 until
September 30, 1994 is 16.5% per annum instead of 24% per annum.

SO ORDERED.20 (Underscoring supplied)

Petitioners’ Motion for Reconsideration21 having been denied,22 they filed the present Petition for Review on Certiorari 23 faulting the
appellate court in:

(a) . . . ignor[ing] the fact that respondent Union Bank has admitted in their pleadings and through their witnesses that the previous
loan of the petitioners with the former Interbank were all paid and the [proceeds] of [the subject] Promissory Note No. AGL93-0022
were not released to petitioners;

(b) . . . holding that the loans of petitioners with respondent Union Bank, guaranteed by QUEDANCOR were consolidated into a
single loan and has been renewed for several times, despite the fact that the loan of appellants covered by PN No. AGL93-0022 in the
amount of P4.9 Million is separate and distinct from the previous loan, considering that in QUEDAN LOAN, previous loan must be
paid before new loan may be released, thus a borrower must borrow money from the outside sources and pay the quedan loan before
his loan is renewed;

(c) . . . ignor[ing] the fact that admission made in pleadings or trial or other proceedings need not be proved and are binding upon the
parties making them who are not allowed to contradict them unless they may show clearly that the admissions were made thru
palpable mistake;

(d) . . . not declaring as null and void and without legal effect and canceling PN No. AGL93-0022 despite the fact that the loan of the
petitioners with respondent bank was not released to them by the said bank;

(e) . . . not ordering respondent Union Bank to restore to appellants the amount of Php500,000.00 with interest at the current rate,
despite the fact that appellants have no obligation to pay the appellee bank[.]24 (Underscoring and emphasis in the original; italics
supplied)

The petition fails.

That petitioners’ application for renewal of loan was disapproved does not mean that they had been absolved from their obligation
which matured on August 9, 1993, subject of Promissory Note No. AGL93-0004. Thus respondent UBP’s witness Jonathan de Paz
explained:

xxxx

ATTY. SALAS: x x x When you say this was not internally approved this loan application for which Exhibit "O" [-Promissory Note
No. AGL93-0022] was signed did not materialize because it was not approved, is that correct?

WITNESS’ ANSWER: The renewal did not materialize but however as I have said there was already a loan BEFORE it started [in]
year 19[89] then it accumulated up to 5 million there was a payment of ₱100,000 prior to this promissory note. HOWEVER, AT
THE TIME THAT WE HAVE THIS APPROVED, THE RENEWAL . . . WAS DISAPPROVED BUT IT DOESN’T MEAN
THAT THEY DON’T HAVE AN EXISTING LOAN.

ATTY. SALAS: I’m not asking about the existing loan. I’m asking you about this promissory note because the loan for which the
promissory note, Exhibit "O" was not approved necessarily no money came out of that disapproved loan?

WITNESS’ ANSWER: There is no really money out of this because it is just a payment. As I have said before this is just a renewal in
reality there’s an exchange of paper. The matured promissory note will be given to them in exchange of the signed promissory note,
this one. Actually there was no money out because what has been money
out…it was to be dated back to the original promissory note, the first PN 198[9] and some succeeding increase[s] of the renewal
which in total is amounted to ₱5 million then there was a payment of ₱100,000.00.

COURT: But you are now very clear that Exhibit "O" which is a renewal of a promissory note marked as Exhibit "L" was not
approved?

WITNESS’ ANSWER: Internally, your Honor.

COURT: What do you mean by that?

WITNESS’ ANSWER: The common parlance of the bank if a loan is disapproved and if it is a renewal then our duty now is to collect.
It means to say that this renewal has not been approved to them so we are duty bound to collect this one as it is matured
already.25 (Emphasis, capitalization and underscoring supplied)

Petitioner Ramon Patron’s letter to UBP dated January 31, 1994 appealing for a condonation and/or reduction of the penalty charges of
2% per annum on the promissory note for ₱4,900,000 which matured on August 9, 1993 and requesting a restructuring of said loan, 26
as well as petitioners’ counsel’s letter to UBP dated January 10, 1994 seeking clarification on "x x x why [Ramon Patron] should be
liable for this additional 2% a month beginning August 9, 1993, when the note falls due only on February 4, 1994,"27 should dissipate
any doubts on, and unquestionably reflect the admission by petitioners of, their liability to respondent UBP.

Thus, petitioners’ obligation under Promissory Note No. AGL93-0004 to UBP stands. However, a recomputation of the amount which
they owe UBP is in order.

As earlier mentioned, the Court of Appeals erred in basing petitioners’ liability on Promissory Note No. AGL93-0022 which was
accomplished by them in support of the August 1993 application for renewal of loan but which was disapproved. Petitioners’ liability
should be based on Promissory Note No. AGL93-0004, which stipulates an interest of 23% per annum, and that "interest not paid
when due shall be added to and constitute a part of the principal and likewise bear interest at the same rate." 28 This Court finds such
interest rate unconscionable, however, and reduces it to 12% per annum.29 The monthly penalty charge of 2% of the amount due and
demandable is, likewise, under the circumstances attendant to this case, unconscionable, considering that partial payments had been
made on the principal.30 Thus, in Palmares v. Court of Appeals,31 this Court, citing its earlier minute resolution of May 16, 1994 in
G.R. No. 112614, eliminated the penalty charge altogether on the ground that:

Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three (3%)
per month of the 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 x x x the penalty stipulated in the parties’ promissory note is iniquitious and unconscionable and may
be equitably reduced further by eliminating such penalty interest altogether.32
The penalty charge of 2% per month should thus be eliminated. Petitioners’ liability stands then at ₱1,634,464.44. Following Eastern
Shipping Lines, Inc. v. Court of Appeals,33 this amount shall earn 12% interest per annum from the time of extrajudicial demand on
September 30, 1994 until it is fully paid.

In view of the stipulation in Promissory Note No. AGL93-0004 providing for the payment of attorney’s fees equivalent to 10% of the
amount due and demandable, this Court awards ₱163,446.44 to UBP as attorney’s fees.

WHEREFORE, the Decision of the Court of Appeals dated September 11, 2006 is AFFIRMED with MODIFICATION. The
interest rate in Promissory Note No. AGL93-0004 is reduced to 12% per annum, and the penalty charge is deleted, thus fixing the
liability of the petitioner-spouses Ramon and Luzviminda Patron at ₱1,634,464.44 to bear interest of 12% per annum from the time of
extrajudicial demand on September 30, 1994 until it is fully paid. In addition, the petitioner-spouses are ordered to pay ₱163,446.44 as
attorney’s fees.

Costs against petitioners.

SO ORDERED

G.R. No. 170452 August 13, 2008

SALVADOR CHUA and VIOLETA CHUA, petitioners,

vs.
RODRIGO TIMAN, MA. LYNN TIMAN and LYDIA TIMAN, respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review on certiorari assailing the Decision 1 and Resolution2 dated March 9, 2005 and November
24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the Decision 3 dated May 14,
2004 of the Regional Trial Court (RTC) of Quezon City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals
reduced the stipulated original interest rates of 7% and 5% per month to only 1% per month or 12% per annum and
ordered petitioners to refund the excess interest payments by respondents.
The pertinent facts are as follows:

In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia
Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These
loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month.
Rodrigo and Ma. Lynn issued five (5) postdated checks to secure the loans, except for the P150,000 loan which was
secured by a postdated check issued by Lydia.

Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per
month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the
loans through a Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same
insisting that the principal amount of the loans totalled P864,000.

On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a
case for consignation and damages. Petitioners moved to dismiss the case, but the RTC denied the motion, as well as the
subsequent motion for reconsideration.

By virtue of an order of Partial Judgment 4 dated October 16, 2002, the Clerk of Court of the RTC of Quezon City released
the amount of P864,000 to petitioners.

Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of damages, then proceeded.

On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original stipulated interest rates of
7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in
excess of the legal rate of 1% per month or 12% per annum. However, the RTC denied petitioners’ claim for damages.

On appeal, the Court of Appeals affirmed the trial court’s decision. The Court of Appeals declared illegal the stipulated
interest rates of 7% and 5% per month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the
Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum,
respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered
petitioners to refund to respondents all interest payments in excess of 12% per annum. Petitioners sought
reconsideration, but it was denied.

Hence, this petition raising the lone issue of:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR – OR

ACTED NOT IN ACCORD WITH THE LAW AND JURISPRUDENCE – WHEN IT AFFIRMED THE JUDGMENT
OF THE REGIONAL TRIAL COURT ORDERING THE RETURN OF THE EXCESS INTEREST TO
RESPONDENTS.5

Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original stipulated interest rates of 7% and
5%, equivalent to 84% and 60% per annum, are unconscionable, and in ordering petitioners to refund to respondents all
payments of interest in excess of 12% per annum?

Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because
these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905-82 6 which had expressly removed the
interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on
the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they
imposed on respondents’ loans were not usurious.

Respondents, invoking Medel v. Court of Appeals,7 counter that the stipulated interest rates of 7% and 5% per month are
iniquitous, unconscionable and exorbitant, thus, they are entitled to the return of the excessive interest paid. They also
contend that petitioners cannot raise the defense of in pari delicto for the first time on appeal. They further contend that
the defense of good faith is a factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of
the Rules of Civil Procedure.

The petition is patently devoid of merit.

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1%
per month or 12% per annum.8 We need not unsettle the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3%9 per month and higher10 are excessive, iniquitous, unconscionable and exorbitant. Such stipulations
are void for being contrary to morals, if not against the law. 11 While C.B. Circular No. 905-82, which took effect on January
1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, 12
nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to
levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. 13

Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in
the RTC, hence, such an issue cannot be raised for the first time on appeal. Petitioners must have seasonably raised it in
the proceedings before the lower court, because questions raised on appeal are confined only within the issues framed by
the parties.14 The defense of good faith must also fail because such an issue is a question of fact 15 which may not be
properly raised in a petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law. 16

As well set forth in Medel:17

We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court
has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent."

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB
Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter’s
effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal
another law." In the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by virtue of
CB Circular 905, the Usury Law has been rendered ineffective." "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon."

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.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated March 9, 2005 and
November 24, 2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865 are hereby AFFIRMED. Costs
against petitioners.

SO ORDERED.

G.R. No. 158040 April 14, 2008

SPOUSES ONESIFORO and ROSARIO ALINAS, petitioner,

vs.
SPOUSES VICTOR and ELENA ALINAS, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the Decision1 of the Court of
Appeals (CA) dated September 25, 2002, and the CA Resolution2 dated March 31, 2003, denying petitioners' motion for
reconsideration, be reversed and set aside.
The factual antecedents of the case are as follows.

Spouses Onesiforo and Rosario Alinas (petitioners) separated sometime in 1982, with Rosario moving to Pagadian City and Onesiforo
moving to Manila. They left behind two lots identified as Lot 896-B-9-A with a bodega standing on it and Lot 896-B-9-B with
petitioners' house. These two lots are the subject of the present petition.

Petitioner Onesiforo Alinas (Onesiforo) and respondent Victor Alinas (Victor) are brothers. Petitioners allege that they entrusted their
properties to Victor and Elena Alinas (respondent spouses) with the agreement that any income from rentals of the properties should
be remitted to the Social Security System (SSS) and to the Rural Bank of Oroquieta City (RBO), as such rentals were believed
sufficient to pay off petitioners' loans with said institutions. Lot 896-B-9-A with the bodega was mortgaged as security for the loan
obtained from the RBO, while Lot 896-B-9-B with the house was mortgaged to the SSS. Onesiforo alleges that he left blank papers
with his signature on them to facilitate the administration of said properties.

Sometime in 1993, petitioners discovered that their two lots were already titled in the name of respondent spouses.

Records show that after Lot 896-B-9-A was extra-judicially foreclosed, Transfer Certificate of Title (TCT) No. T-11853 3 covering said
property was issued in the name of mortgagee RBO on November 13, 1987. On May 2, 1988, the duly authorized representative of
RBO executed a Deed of Installment Sale of Bank's Acquired Assets 4 conveying Lot 896-B-9-A to respondent spouses. RBO's TCT
over Lot 896-B-9-A was then cancelled and on February 22, 1989, TCT No. T-126645 covering said lot was issued in the name of
respondent spouses.

Lot 896-B-9-B was also foreclosed by the SSS and on November 17, 1986, the Ex-Oficio City Sheriff of Ozamis City issued a
Certificate of Sale6 over said property in favor of the SSS. However, pursuant to a Special Power of Attorney 7 signed by Onesiforo in
favor of Victor, dated March 10, 1989, the latter was able to redeem, on the same date, Lot 896-B-9-B from the SSS for the sum of
P111,110.09. On June 19, 1989, a Certificate of Redemption8 was issued by the SSS.

Onesiforo's signature also appears in an Absolute Deed of Sale9 likewise dated March 10, 1989, selling Lot 896-B-9-B to respondent
spouses. The records also show a notarized document dated March 10, 1989 and captioned Agreement10 whereby petitioner Onesiforo
acknowledged that his brother Victor used his own money to redeem Lot 896-B-9-B from the SSS and, thus, Victor became the owner
of said lot. In the same Agreeement, petitioner Onesiforo waived whatever rights, claims, and interests he or his heirs, successors and
assigns have or may have over the subject property. On March 15, 1993, by virtue of said documents, TCT No. 1739411 covering Lot
896-B-9-B was issued in the name of respondent spouses.

On June 25, 1993, petitioners filed with the Regional Trial Court (RTC) of Ozamis City a complaint for recovery of possession and
ownership of their conjugal properties with damages against respondent spouses.

After trial, the RTC rendered its Decision dated November 13, 1995, finding that:

1. Plaintiffs have not proven that they entrusted defendant spouses with the care and administration of their properties. It was
Valeria Alinas, their mother, whom plaintiff Onesiforo requested/directed to "take care of everything and sell everything" and
Teresita Nuñez, his elder sister, to whom he left a "verbal" authority to administer his properties.

2. Plaintiffs have not proven their allegation that defendant spouses agreed to pay rent of P1,500.00 a month for the
occupancy of plaintiffs' house, which rent was to be remitted to the SSS and Rural Bank of Oroquieta to pay off plaintiffs'
loan and to keep for plaintiffs the rest of the rent after the loans would have been paid in full.

3. Plaintiff Onesiforo's allegation that defendants concocted deeds of conveyances (Exh. "M", "N" & "O") with the use of his
signatures in blank is not worthy of credence. Why his family would conspire to rob him at a time when life had struck him
with a cruel blow in the form of a failed marriage that sent him plummeting to the depths of despair is not explained and
likewise defies comprehension. That his signatures appear exactly on the spot where they ought to be in Exhs. "M", "N" &
"O" belies his pretension that he affixed them on blank paper only for the purpose of facilitating his sister Terry's acts of
administration.

This Court, therefore, does not find that defendant spouses had schemed to obtain title to plaintiffs' properties or enriched
themselves at the expense of plaintiffs.12

with the following dispositive portion:

WHEREFORE, this Court renders judgment:

 1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing
thereon and affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring [petitioners] Onesiforo and Rosario Alinas owners of Lot 896-B-9-B with the house standing thereon,
plaintiff Onesiforo's sale thereof to defendants spouses without the consent of his wife being null and void and
defendant spouses' redemption thereof from the SSS not having conferred its ownership to them;

3. ordering [petitioners] to reimburse [respondents] Victor Jr. and Elena Alinas the redemption sum of P111,100.09,
paid by them to the SSS (without interest as it shall be compensated with the rental value of the house they occupy)
within sixty days from the finality of this judgment;

4. ordering [respondents] to vacate the subject house within thirty days from receiving the reimbursement mentioned
in No. 3 above; and

5. reinstating TCT No. T-7248 in the name of [petitioners] and cancelling TCT No. T-17394 in the name of
[respondents].

No costs.

SO ORDERED.13

Only respondent spouses appealed to the CA assailing the RTC's ruling that they acquired Lot 896-B-9-B from the SSS by mere
redemption and not by purchase. They likewise question the reimbursement by petitioners of the redemption price without interest.

On September 25, 2002, the CA promulgated herein assailed Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing disquisitions, the first paragraph of the dispositive portion of the assailed decision is
AFFIRMED and the rest MODIFIED as follows:

1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing
thereon and affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to [respondents] in so far as
Rosario Alinas, his wife's share of one half thereof is concerned, of no force and effect;

3. ordering [petitioners] Rosario Alinas to reimburse [respondents] the redemption amount of P55,550.00 with
interest of 12% per annum from the time of redemption until fully paid.

4. ordering the [respondents] to convey and transfer one half portion of Lot 896-B-9-B unto Rosario Alinas, which
comprises her share on the property simultaneous to the tender of the above redemption price, both to be
accomplished within sixty (60) days from finality of this judgment.

5. in the event of failure of [respondents] to execute the acts as specified above, [petitioner] Rosario Alinas may
proceed against them under Section 10, Rule 39 of the 1997 Rules of Civil Procedure.

6. on the other hand, failure of [petitioner] Rosario Alinas to reimburse the redemption price within sixty (60) days
from the finality of this decision will render the conveyance and sale of her share by her husband to [respondents],
of full force and effect.

No costs.

SO ORDERED.14

Petitioners moved for reconsideration but the CA denied said motion per herein assailed Resolution dated March 31, 2003.

Hence, the present petition on the following grounds:

 The Honorable Court of Appeals abuse [sic] its discretion in disregarding the testimony of the Register of Deeds, Atty. Nerio
Nuñez, who swore that the signatures appearing on various TCTs were not his own;

The Honorable Court of Appeals manifestly abuse [sic] its discretion in declaring the respondents to be the owners of Lot
896-B-9-A with the building (bodega) standing thereon when they merely redeemed the property and are therefore mere
trustees of the real owners of the property;

It was pure speculation and conjecture and surmise for the Honorable Court of Appeals to impose an obligation to reimburse
upon petitioners without ordering respondents to account for the rentals of the properties from the time they occupied the
same up to the present time and thereafter credit one against the other whichever is higher. 15

The first issue raised by petitioners deserves scant consideration. By assailing the authenticity of the Registrar of Deeds' signature on
the certificates of title, they are, in effect, questioning the validity of the certificates.

Section 48 of Presidential Decree No. 1529 provides, thus:

Sec. 48. Certificate not subject to collateral attack. - A certificate of title shall not be subject to collateral attack. It cannot be
altered, modified, or cancelled except in a direct proceeding in accordance with law.

Pursuant to said provision, the Court ruled in De Pedro v. Romasan Development Corporation16 that:

It has been held that a certificate of title, once registered, should not thereafter be impugned, altered, changed, modified,
enlarged or diminished except in a direct proceeding permitted by law. x x x

The action of the petitioners against the respondents, based on the material allegations of the complaint, is one for recovery
of possession of the subject property and damages. However, such action is not a direct, but a collateral attack of TCT
No. 236044.17 (Emphasis supplied)

As in De Pedro, the complaint filed by herein petitioners with the RTC is also one for recovery of possession and ownership. Verily,
the present case is merely a collateral attack on TCT No. T-17394, which is not allowed by law and jurisprudence.

With regard to the second issue, petitioners’ claim that it was the CA which declared respondent spouses owners of Lot 896-B-9-A
(with bodega) is misleading. It was the RTC which ruled that respondent spouses are the owners of Lot 896-B-9-A and, therefore,
since only the respondent spouses appealed to the CA, the issue of ownership over Lot 896-B-9-A is not raised before the appellate
court. Necessarily, the CA merely reiterated in the dispositive portion of its decision the RTC's ruling on respondent spouses'
ownership of Lot 896-B-9-A.

It is a basic principle that no modification of judgment or affirmative relief can be granted to a party who did not appeal. 18 Hence, not
having appealed from the RTC Decision, petitioners can no longer seek the reversal or modification of the trial court's ruling that
respondent spouses had acquired ownership of Lot 896-B-9-A by virtue of the sale of the lot to them by RBO.

Furthermore, the CA did not commit any reversible error in affirming the trial court's factual findings as the records are indeed bereft
of proof to support the petitioners’ allegations that they left the care and administration of their properties to respondent spouses; and
that there is an agreement between petitioners and respondent spouses regarding remittance to the SSS and the RBO of rental income
from their properties. Thus, respondent spouses may not be held responsible for the non-payment of the loan with RBO and the
eventual foreclosure of petitioners' Lot 896-B-9-A.

Petitioners do not assail the validity of the foreclosure of said lot but argues that respondent spouses merely redeemed the property
from RBO. This is, however, belied by evidence on record which shows that ownership over the lot had duly passed on to the RBO, as
shown by TCT No. T-11853 registered in its name; and subsequently, RBO sold the lot with its improvements to respondent spouses.
Needless to stress, the sale was made after the redemption period had lapsed. The trial court, therefore, correctly held that respondent
spouses acquired their title over the lot from RBO and definitely not from petitioners.

However, with regard to Lot 896-B-9-B (with house), the Court finds it patently erroneous for the CA to have applied the principle of
equity in sustaining the validity of the sale of Onesiforo’s one-half share in the subject property to respondent spouses.

Although petitioners were married before the enactment of the Family Code on August 3, 1988, the sale in question occurred in 1989.
Thus, their property relations are governed by Chapter IV on Conjugal Partnership of Gains of the Family Code.
The CA ruling completely deviated from the clear dictate of Article 124 of the Family Code which provides:

Art. 124. The administration and enjoyment of the conjugal partnership property shall belong to both spouses jointly. x x x

In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal
properties, the other spouse may assume sole powers of administration. These powers do not include the powers of
disposition or encumbrance which must have the authority of the court or the written consent of the other spouse. In the
absence of such authority or consent the disposition or encumbrance shall be void . x x x (Underscoring and emphasis
supplied)

In Homeowners Savings & Loan Bank v. Dailo,19 the Court categorically stated thus:

In Guiang v. Court of Appeals, it was held that the sale of a conjugal property requires the consent of both the husband and
wife. In applying Article 124 of the Family Code, this Court declared that the absence of the consent of one renders the
entire sale null and void, including the portion of the conjugal property pertaining to the husband who contracted the
sale. x x x

xxxx

x x x By express provision of Article 124 of the Family Code, in the absence of (court) authority or written consent of the
other spouse, any disposition or encumbrance of the conjugal property shall be void. 20

Thus, pursuant to Article 124 of the Family Code and jurisprudence, the sale of petitioners' conjugal property made by petitioner
Onesiforo alone is void in its entirety.

It is true that in a number of cases, this Court abstained from applying the literal import of a particular provision of law if doing so
would lead to unjust, unfair and absurd results.21

In the present case, the Court does not see how applying Article 124 of the Family Code would lead to injustice or absurdity. It should
be noted that respondent spouses were well aware that Lot 896-B-9-B is a conjugal property of petitioners. They also knew that the
disposition being made by Onesiforo is without the consent of his wife, as they knew that petitioners had separated, and, the sale
documents do not bear the signature of petitioner Rosario. The fact that Onesiforo had to execute two documents, namely: the
Absolute Deed of Sale dated March 10, 1989 and a notarized Agreement likewise dated March 10, 1989, reveals that they had full
knowledge of the severe infirmities of the sale. As held in Heirs of Aguilar-Reyes v. Spouses Mijares,22 "a purchaser cannot close his
eyes to facts which should put a reasonable man on his guard and still claim he acted in good faith." 23 Such being the case, no injustice
is being foisted on respondent spouses as they risked transacting with Onesiforo alone despite their knowledge that the subject
property is a conjugal property.

Verily, the sale of Lot 896-B-9-B to respondent spouses is entirely null and void.

However, in consonance with the salutary principle of non-enrichment at another’s expense, the Court agrees with the CA that
petitioners should reimburse respondent spouses the redemption price paid for Lot 896-B-9-B in the amount of P111,110.09 with legal
interest from the time of filing of the complaint.

In Heirs of Aguilar-Reyes, the husband's sale of conjugal property without the consent of the wife was annulled but the spouses were
ordered to refund the purchase price to the buyers, it was ruled that an interest of 12% per annum on the purchase price to be refunded
is not proper. The Court elucidated as follows:

The trial court, however, erred in imposing 12% interest per annum on the amount due the respondents. In Eastern Shipping
Lines, Inc. v. Court of Appeals, it was held that interest on obligations not constituting a loan or forbearance of money is six
percent (6%) annually. If the purchase price could be established with certainty at the time of the filing of the complaint, the
six percent (6%) interest should be computed from the date the complaint was filed until finality of the decision. In Lui vs.
Loy, involving a suit for reconveyance and annulment of title filed by the first buyer against the seller and the second buyer,
the Court, ruling in favor of the first buyer and annulling the second sale, ordered the seller to refund to the second buyer
(who was not a purchaser in good faith) the purchase price of the lots. It was held therein that the 6% interest should be
computed from the date of the filing of the complaint by the first buyer. After the judgment becomes final and executory until
the obligation is satisfied, the amount due shall earn interest at 12% per year, the interim period being deemed equivalent to a
forbearance of credit.
 Accordingly, the amount of P110,000.00 due the respondent spouses which could be determined with certainty at the
time of the filing of the complaint shall earn 6% interest per annum from June 4, 1986 until the finality of this
decision. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate
shall be twelve percent (12%) per annum computed from the time the judgment becomes final and executory until it is
fully satisfied.24

Thus, herein petitioners should reimburse respondent spouses the redemption price plus interest at the rate of 6% per annum from the
date of filing of the complaint, and after the judgment becomes final and executory, the amount due shall earn 12% interest per annum
until the obligation is satisfied.

Petitioners pray that said redemption price and interest be offset or compensated against the rentals for the house and bodega.

The records show that the testimonial evidence for rentals was only with regard to the bodega. 25 However, the Court has affirmed the
ruling of the RTC that Lot 896-B-9-A with the bodega had been validly purchased by respondent spouses from the RBO and a TCT
over said property was issued in the name of respondent spouses on February 22, 1989. Testimonial evidence shows that the bodega
was leased out by respondent spouses only beginning January of 1990 when ownership had been transferred to them.26 Hence, any
rentals earned from the lease of said bodega rightfully belongs to respondent spouses and cannot be offset against petitioners'
obligation to respondent spouses.

As to rentals for Lot 896-B-9-B and the house thereon, respondent Victor testified that they never agreed to rent the house and when
they finally took over the same, it was practically inhabitable and so they even incurred expenses to repair the house. 27 There is
absolutely no proof of the rental value for the house, considering the condition it was in; as well as for the lot respondent spouses are
occupying.

Respondent spouses, having knowledge of the flaw in their mode of acquisition, are deemed to be possessors in bad faith under Article
52628 of the Civil Code. However, they have a right to be refunded for necessary expenses on the property as provided under Article
54629 of the same Code. Unfortunately, there is no credible proof to support respondent spouses' allegation that they spent more than
P400,000.00 to repair and make the house habitable.

Set-off or compensation is governed by Article 1279 of the Civil Code which provides, thus:

Article 1279. In order that compensation may be proper, it is necessary:

1. That each one of the obligors be bound principally, and that he be at the 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.

Therefore, under paragraph 4 of the foregoing provision, compensation or set-off is allowed only if the debts of both parties against
each other is already liquidated and demandable. To liquidate means "to make the amount of indebtedness or an obligation clear and
settled in the form of money."30 In the present case, no definite amounts for rentals nor for expenses for repairs on subject house has
been determined. Thus, in the absence of evidence upon which to base the amount of rentals, no compensation or set-off can take
place between petitioners and respondent spouses.

While the courts are empowered to set an amount as reasonable compensation to the owners for the use of their property, this Court
cannot set such amount based on mere surmises and conjecture

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals dated September 25, 2002 is
MODIFIED to read as follows:
1. declaring respondent spouses Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing thereon and
affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to respondent spouses null and void ab
initio;

3. ordering petitioners to jointly and severally reimburse respondent spouses the redemption amount of P111,110.09 with interest at
6% per annum from the date of filing of the complaint, until finality of this decision. After this decision becomes final, interest
at the rate of 12% per annum on the principal and interest (or any part thereof) shall be imposed until full payment;

4. ordering the respondent spouses to convey and transfer Lot 896-B-9-B to petitioners and vacate said premises within fifteen (15)
days from finality of this Decision; and

5. in the event of failure of respondent spouses to execute the acts as specified above, petitioners may proceed against them under
Section 10, Rule 39 of the 1997 Rules of Civil Procedure.

No costs.

SO ORDERED

G.R. No. 201264, January 11, 2016

FLORANTE VITUG, Petitioner, v. EVANGELINE A. ABUDA, Respondent.

DECISION

LEONEN, J.:chanRoblesvirtualLawlibrary
Parties who have validly executed a contract and have availed themselves of its benefits may not, to
escape their contractual obligations, invoke irregularities in its execution to seek its invalidation.

This is a Petition for Review on Certiorari under Rule 45 assailing the Court of Appeals' October 26, 2011
Decision and its March 8, 2012 Resolution. The Court of Appeals affirmed the Regional Trial Court's
December 19, 2008 Decision upholding the validity of the mortgage contract executed by petitioner
Florante Vitug (Vitug) and respondent Evangeline A. Abuda (Abuda).

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. 1 As security for the
loan, Vitug mortgaged to Abuda his property in Tondo Foreshore along R-10, Block A-50-3, Del Pan to
Kagitingan Streets, Tondo, Manila.2 The property was then subject of a conditional Contract to Sell
between the National Housing Authority and Vitug. Pertinent portions of the mortgage deed reads

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing Authority
(NHA) over a piece of property located at the Tondo Foreshore along R-10, Block "A-50-3, Delpan to
Kagitingan Streets in the district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with full
consent of husband Paulino Abuda, said property for TWO HUNDRED FIFTY THOUSAND PESOS ONLY
(P250,000.00), in hand paid by Mortgagee and in hand received to full satisfaction by Mortgagor, for SIX
MONTHS (6) within which to pay back the full amount plus TEN PERCENT (10%) agreed interest per
month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said property, the title-award thereof,
shall be received by the Mortgagee by virtue of a Special Power of Attorney, executed by Mortgagor in her
favor, authorizing Mortgagee to expedite, follow-up, cause the release and to received [sic] and take
possession of the title award of the said property from the NHA, until the mortgage amount is fully paid
for and settled[.]3ChanRoblesVirtualawlibrary
cralawlawlibrary

On November 17, 1997, the parties executed a "restructured"4 mortgage contract on the property to
secure the amount of P600,000.00 representing the original P250,000.00 loan, additional loans, 5 and
subsequent credit accommodations6 given by Abuda to Vitug with an interest of five (5) percent per
month.7 By then, the property was covered by Transfer Certificate of Title No. 234246 under Vitug's
name.8

Spouses Vitug failed to pay their loans despite Abuda's demands.9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional Trial
Court of Manila.10

On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of Abuda. 11The
dispositive portion of the Decision reads

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant

1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the reglementary
period of Ninety (90) days the principal sum of P600,000.00 with interest at 5% per month from May 31,
2002 to actual date of payment plus P20,000.00 as and for attorney's fees;

2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged property shall be
sold at public auction to pay off the mortgage debt and its accumulated interest plus attorney's fees,
expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons claiming rights under her [sic]
to immediately vacate the subject premises.

SO ORDERED.12cralawlawlibrary

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of Appeals. 13 He
contended that the real estate mortgage contract he and Abuda entered into was void on the grounds of
fraud and lack of consent under Articles 1318, 1319, and 1332 of the Civil Code.14 He alleged that he was
only tricked into signing the mortgage contract, whose terms he did not really understand. Hence, his
consent to the mortgage contract was vitiated.15

On October 26, 2011, the Court of Appeals promulgated a Decision,16 the dispositive portion of which
reads

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC dated December
19, 2008 in Civil Case No. 03-108470 in favor of the appellee and against the appellant is AFFIRMED with
the MODIFICATION that an interest rate of 1% per month or 12% per annum shall be applied to the
principal loan of P600,000.00, computed from the date of judicial demand, i.e., November 21, 2003; and
12% interest per annum on the amount due from the date of the finality of the Decision until fully paid.

SO ORDERED.17ChanRoblesVirtualawlibrary
cralawlawlibrary

The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-month period
under the March 17, 1997 mortgage contract.18 As a result of this failure, the parties entered into a
restructured mortgage contract on November 17, 1997.19 The new mortgage contract was signed before a
notary public by Vitug, his wife Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and Emily Vitug. 20

The Court of Appeals also found that all the elements of a valid mortgage contract were present in the
parties' mortgage contract.21 The mortgage contract was also clear in its terms—that failure to pay the
P600,000.00 loan amount, with a 5% interest rate per month from November 17, 1997 to November 17,
1998, shall result in the foreclosure of Vitug's mortgaged property.22 No evidence on record showed that
Vitug was defrauded when he entered into the agreement with Abuda. 23

However, the Court of Appeals found that the interest rates imposed on Vitug's loan were "iniquitous,
unconscionable[,] and exorbitant."24 It instead ruled that a legal interest of 1% per month or 12% per
annum should apply from the judicial demand on November 21, 2003.25cralawred

On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October 26, 2011
Decision.26 He pointed out that not all the requisites of a valid mortgage contract were present since he
did not have free disposal of his property when he mortgaged it to Abuda. His transfer certificate of title
had an annotation by the National Housing Authority, which restricted his right to dispose or encumber the
property.27 The restriction clause provided that the National Housing Authority's consent must first be
obtained before he may dispose or encumber his property.28

Abuda, according to Vitug, failed to get the National Housing Authority's consent before the property was
mortgaged to him.

Vitug also argued in his Motion for Reconsideration that the property was exempt from execution because
it was constituted as a family home before its mortgage.

In the Resolution promulgated on March 8, 2012,29 the Court of Appeals denied Vitug's Motion for
Reconsideration.
Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals' October 26,
2011 Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:chanRoblesvirtualLawlibrary

First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National Housing
Authority's alleged lack of consent to the mortgage, as well as the exemption of his property from
execution;

Second, whether the restriction clause in petitioner's title rendered invalid the real estate mortgage he
and respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or
attachment under the Family Code.30

We deny the Petition.

Petitioner argues that not all the requisites of a valid mortgage are present. 31 A mortgagor must have free
disposal of the mortgaged property.32 The existence of a restriction clause33 in his title means that he does
not have free disposal of his property.34 The restriction clause does not allow him to mortgage the
property without the National Housing Authority's approval.35 Since the National Housing Authority never
gave its consent to the mortgage,36 the mortgage contract between him and respondent is invalid.37

On the other hand, respondent argues that the only issue in this case should be the validity of the real
estate mortgage executed by petitioner in her favor.38 Petitioner raised other issues, such as the alleged
lack of written consent by the National Housing Authority (and the property's exemption from execution),
only in his Motion for Reconsideration before the Court of Appeals. 39

Respondent also argues that the National Housing Authority issued a Permit to Mortgage the property.
This was formally offered in evidence before the Regional Trial Court as Exhibit "E." 40 The National Housing
Authority even accepted respondent's personal checks to settle petitioner's mortgage obligations to the
National Housing Authority.41 The National Housing Authority would have already foreclosed petitioner's
property if not for the loan that respondent extended to petitioner. 42

Petitioner counters that the Permit to Mortgage cited by respondent was only valid for 90 days and was
subject to the conditions that respondent failed to fulfill. These conditions are

(1) The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale so
that it can participate in the foreclosure sale of the property."
(2) The mortgage contract must be submitted to NHA for verification and final approval[.] 43

Thus, according to petitioner, there was neither written consent nor approval by the National Housing
Authority of the mortgage contracts.44cralawlawlibrary

Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a family
home, his property's exemption from execution) was raised in his Answer to respondent's complaint for
foreclosure filed before the Regional Trial Court, thus
20. Similarly, defendant has constituted their family home over said mortgage property and should that
property be sold, defendant and his family will be left with no place to reside with [sic] within Metro
Manila, hence, for humanitarian reason[s], the defendant prayed that he be given ample time within which
to settle his obligation with the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title prohibits her
from selling, encumbering, mortgaging, leasing, sub-leasing or in any manner altering or disposing the
lot or right thereon, in whole or in part within the period often (10) years from the time of issuance of said
title without first obtaining the consent of the NHA. As reflected in the title, the same was issued on 25
June 1997 hence, the mortgage executed even prior to the issuance of said title should be declared
void.45ChanRoblesVirtualawlibrary
cralawlawlibrary

Due process46 dictates that arguments not raised in the trial court may not be considered by the reviewing
court.47

Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent to the
mortgage and his property's alleged exemption from execution.

The records show that petitioner mentioned these issues as early as in his Answer to respondent's
Complaint48 and Pre-trial Brief.49 The trial court acknowledged these issues, but found that his defenses
based on these grounds could not be given credence

The defendant further stated that he is willing to pay the obligation is unconscionable. Further, the said
property constituted their family home. The defendant claimed that Memorandum of Encumbrance
prohibits her from selling, encumbering, mortgaging, leasing, subleasing or in any manner altering or
disposing the lot or right thereon in whole or in part within ten (10) years from the time of issuance of the
said title without obtaining the consent of the NHA.

. . . The court opines that the defendant has failed to raise a legitimate and lawful ground in order to bar
the herein plaintiff from asserting its lawful right under the law.

The contention of the defendant that the subject mortgaged property is their family home is irrelevant as
the debt secured by mortgages on the premises before or after the constitution of the family home does
not exempt the same from execution (Rule 106 of the Rules of Court).50cralawlawlibrary

Whether these arguments seasonably raised are valid is, however, a different matter.

II

All the elements of a valid mortgage contract were present. For a mortgage contract to be valid, the
absolute owner of a property must have free disposal of the property. 51 That property must be used to
secure the fulfillment of an obligation.52 Article 2085 of the Civil Code provides

Art. 2085. The following requisites are essential to contracts of pledge and mortgage

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and
in the absence thereof, that they be legally authorized for the purpose.

....
cralawlawlibrary

Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the property
to respondent to secure the payment of his loan of P600,000.00.

Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another mortgage
contract whose terms he did not agree to.

These claims were already found by the trial court and the Court of Appeals to be unsupported by
evidence. Petitioner's consent to the mortgage contract dated November 17, 1997 was not vitiated. He
voluntarily signed it in the presence of a notary public, his wife, and other witnesses.53

Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract represented the
initial loan of P250,000.00 and the subsequent loan amounts, which were found to have been actually
released to petitioner. The November 17, 1997 mortgage contract reflected the changes in the parties'
obligations after they executed the March 17, 1997 mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the Court of
Appeals are not reviewable and are binding upon this court54 unless the circumstances of the case are
shown to be covered by the exceptions.55 Petitioner failed to show any ground for this court to review the
trial court's and the Court of Appeals' finding that petitioner mortgaged his property in consideration of a
loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to give him free disposal of it. As
owner of the property, he has the right to enjoy all attributes of ownership including jus disponendi or the
right to encumber, alienate, or dispose his property "without other limitations than those established
by law."56

Petitioner's claim that he lacks free disposal of the property stems from the existence of the restrictions
imposed on his title by the National Housing Authority. These restrictions were annotated on his title, thus

Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not sell, encumber, mortgage,
lease, sub-let or in any manner, alter or dispose the lot or right therein at any time, in whole or in part
without obtaining the written consent of the Vendor. Other restrictions set forth in Doc. No. 287; Page No.
59; Book No. 250; SERIES of 1997 of Notary Public for Quezon City, Liberty S. Perez.

Date of instrument - June 24, 1997

Date of inscription- June 25, 1997- 11:39 a.m.57ChanRoblesVirtualawlibrary
cralawlawlibrary

The National Housing Authority's restrictions were provisions in a contract it executed with petitioner. This
contract bound petitioner to certain conditions before transferring or encumbering the property.
Specifically, when the National Housing Authority sold the property to petitioner, petitioner became
obligated not to sell, encumber, mortgage, lease, sublease, alter, or dispose the property without the
National Housing Authority's consent.

These restrictions do not divest petitioner of his ownership rights. They are mere burdens or limitations on
petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property. However, the
disposition or encumbrance of his property is subject to the limitations and to the rights that may accrue
to the National Housing Authority. When annotated to the title, these restrictions serve as notice to the
whole world that the National Housing Authority has claims over the property, which it may enforce
against others.
Contracts entered into in violation of restrictions on a property owner's rights do not always have the
effect of making them void ab initio.58 This has been clarified as early as 1956 in Municipality of Camiling
v. Lopez.59

The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of "certain
fisheries." As. a defense, Diego Z. Lopez invoked the alleged nullity of the lease contract he entered into
with the Municipality of Camiling.

Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled that the lease contract between the
Municipality of Camiling and Diego Z. Lopez was void since it "was not approved by the provincial
governor in violation of section 2196 of the Revised Administrative Code." 61 This court reversed the trial
court's Decision and noted the incorrect interpretation in Municipality of Hagonoy of the term "nulos"
under Article 4 of the then Civil Code: "Son nulos los actos ejecutados contra lo dispuesto en la ley, salvo
los casos en que la naisma ley or dene su validez."62

In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old Civil Code 63
refer to those made in violation of the law. Not all those acts are void from the beginning. Void acts may
be "those that are ipso facto void and those which are merely voidable."64

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated as ipso
facto void. Section 2196 of the Administrative Code required the provincial governor's approval before the
municipal council entered into contracts. However, the same provision did not prohibit the municipal
council from entering into contracts involving the properties of the municipality. 65 The municipal council's
exercise of power to enter into these contracts might have been limited, but its power was recognized.
This court found that aside from the lack of approval, the contract had no badge of illegality that would
make it ipso facto void. The execution of the contract was not tainted with violation of public order,
morality, or public policy. The contract could have been ratified. Hence, this court said that it was "merely
voidable at the option of the party who in law is granted the right to invoke its invalidity." 66

The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in Kamuning, Quezon
City. The property was sold by Philippine Homesite and Housing Corp. to Spouses Francisco and Marcelina
Sarmiento. The transfer certificate of title that covered the property contained an annotation stating that
the property was sold on the condition that it could not be resold within 25 years from contract date. Sale
could be made within the period only to People's Homesite and Housing Corporation. 68 Spouses Sarmiento
later mortgaged the property to Jorge Salud. Because Spouses Sarmiento failed to redeem the property,
the sheriff auctioned and sold the property to Jorge Salud, who was issued a certificate of sale.

Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for annulment of
the foreclosure proceedings, sale, and certificate of sale on the ground that the prohibition against sale of
the property within 25 years was violated.

This court did not declare the contract void for violating the condition that the property could not be resold
within 25 years. Instead, it recognized People's Homesite and Housing Corporation's right to cause the
annulment of the contract. Since the condition was made in favor of People's Homesite and Housing
Corporation, it was the Corporation, not Spouses Sarmiento, who had a cause of action for annulment. 69
In effect, this court considered the contract between Spouses Sarmiento and Jorge Salud as merely
voidable at the option of People's Homesite and Housing Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab initio or voidable. 70 Contracts
that lack consideration,71 those that are against public order or public policy,72 and those that are attended
by illegality73 or immorality74 are void ab initio.

Contracts that only subject a property owner's property rights to conditions or limitations but otherwise
contain all the elements of a valid contract are merely voidable by the person in whose favor the
conditions or limitations are made.75

The mortgage contract entered into by petitioner and respondent contains all the elements of a valid
contract of mortgage. The trial court and the Court of Appeals found no irregularity in its execution. There
was no showing that it was attended by fraud, illegality, immorality, force or intimidation, and lack of
consideration.

At most, therefore, the restrictions made the contract entered into by the parties voidable 76 by the person
in whose favor they were made—in this case, by the National Housing Authority. 77 Petitioner has no
actionable right or cause of action based on those restrictions.78

Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the
National Housing Authority may seek the annulment of the mortgage contract.79 Without any action from
the National Housing Authority, rights and obligations, including the right to foreclose the property in case
of non-payment of the secured loan, are still enforceable between the parties that executed the mortgage
contract.

The voidable nature of contracts entered into in violation of restrictions or conditions necessarily implies
that the person in whose favor the restrictions were made has two (2) options. It may either: (1) waive 80
its rights accruing from such restrictions, in which case, the duly executed subsequent contract remains
valid; or (2) assail the subsequent contract based on the breach of restrictions imposed in its favor.

In Sarmiento, this court recognized that the right to waive follows from the right to invoke any violation of
conditions under the contract. Only the person who has the right to invoke this violation has the cause of
action for annulment of contract. The validity or invalidity of the contract on the ground of the violation is
dependent on whether that person will invoke this right. Hence, there was effectively a waiver on the part
of People's Homesite and Housing Corporation when it did not assail the validity of the mortgage in that
case

It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale violated
the condition in the Sarmiento contract, only the PHHC was entitled to invoke the condition
aforementioned, and not the Sarmientos. The validity or invalidity of the sheriffs foreclosure sale to
appellant Salud thus depended exclusively on the PHHC; the latter could attack the sale as violative of its
right of exclusive reacquisition; but it (PHHC) also could waive the condition and treat the sale as good, in
which event, the sale can not be assailed [for] breach of the condition aforestated. Since it does not
appear anywhere in the record that the PHHC treated the mortgage and foreclosure sale as an
infringement of the condition, the validity of the mortgage, with all its consequences, including its
foreclosure and sale thereat, can not be an issue between the parties to the present case. In the last
analysis, the appellant, as purchaser at the foreclosure sale, should be regarded as the owner of the lot,
subject only to the right of PHHC to have his acquisition of the land set aside if it so
desires.81cralawlawlibrary

There is no showing that the National Housing Authority assailed the validity of the mortgage contract on
the ground of violation of restrictions on petitioner's title. The validity of the mortgage contract based on
the restrictions is not an issue between the parties. Petitioner has no cause of action against respondent
based on those restrictions. The mortgage contract remains binding upon petitioner and respondent.

In any case, there was at least substantial compliance with the consent requirement given the National
Housing Authority's issuance of a Permit to Mortgage. The Permit reads

25 November 1997

MR. FLORANTE VITUG

901 Del Pan Street
Tondo, Manila

PERMIT TO MORTGAGE

Dear Mr. Vitug,

Please be informed that your request dated 20 November 1997 for permission to mortgage Commercial
Lot 5, Block 1, Super Block 3, Area I, Tondo Foreshore Estate Management Project covered by TCT No.
234246 is hereby GRANTED subject to the following terms and conditions

1. The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale so
that it can participate in the foreclosure sale of the property."

2. The mortgage contract must be submitted to NHA for verification and final approval; and

3. This permit shall be good only for a period of ninety (90) days from date of receipt hereof.

Very truly yours,

(Signed)
Mariano M. Pineda
General Manager82
cralawlawlibrary

Petitioner insists that the Permit cannot be treated as consent by the National Housing Authority because
of respondent's failure to comply with its conditions.

However, a reading of the mortgage contract executed by the parties on November 17, 1997 shows
otherwise. The November 17, 1997 mortgage contract had references to the above conditions imposed by
the National Housing Authority, thus

It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the principal
obligations hereon within the period of the Contract, the Mortgage shall be foreclosed according to law
and in which case the NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final approval in
accordance with NHA permit to mortgage the property.83(Emphasis supplied)cralawlawlibrary

Assuming there was non-compliance with the conditions set forth in the Permit, petitioner cannot blame
respondent. The restrictions were part of the contract between the National Housing Authority and
petitioner. It was petitioner, not respondent, who had the obligation to notify and obtain the National
Housing Authority's consent within the prescribed period before sale or encumbrance of the property.

Petitioner cannot invoke his own mistake to assail the validity of a contract he voluntarily entered into. 84

III

Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the contract's
validity as against the other because they were equally at fault.85 This is the principle of in pari delicto (or
in delicto) as embodied in Articles 1411 and 1412 of the Civil Code

Art. 1411. 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 action against each
other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by
virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply his promise.cralawlawlibrary

Under this principle, courts shall not aid parties in their illegal acts.86 The court shall leave them as they
are.87 It is an equitable principle that bars parties from enforcing their illegal acts, assailing the validity of
their acts, or using its invalidity as a defense.88

In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a promise to
marry based on the consideration of "carnal connection." This court ruled that whether or not such
consideration was a crime, neither of the parties can recover because the acts "were common to both
parties."90

In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of sale that
was not only simulated but also executed to defeat any attempt by a husband to recover properties from
his wife.

Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a deed of
donation executed in her favor when she was 16 years old. The heirs of the donor assailed the donation on
the ground of having an illicit causa.

The donor in that case was found to have had sexual relations with the claimant. The donation was done
to secure the claimant's continuous cohabitation with the donor, as well as to gratify the donor's sexual
impulses. At the time of the donation, the donor was married to another woman. The donated property
was part of their conjugal property.

This court held that the donation was founded on an illicit causa. While this court found the principle of in
pari delicto inapplicable in that case given the claimant's minority at the time of donation, it had the
occasion to say that the parties were barred "from pleading the illegality of the bargain either as a cause
of action or as a defense."93 The claimant was declared entitled to the donated property, without prejudice
to the share and legitimes of the donor's forced heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in that case
were not entitled to relief because they did not come to court with clean hands.

This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and offered no
objection when their original loan of P350,000.00 was divided into small separate loans not exceeding
P50,000.00 each."95 They and respondent bank were in pari delicto. They could not be given affirmative
relief against each other.96 Hence, Spouses Villegas may not seek the annulment of the loan and mortgage
contracts they voluntarily executed with respondent bank on the ground that these contracts were
simulated to make it appear that the loans were sugar crop loans, allowing respondent bank to approve it
pursuant to Republic Act No. 720, otherwise known as the Rural Banks Act.

The principle of in pari delicto admits exceptions. It does not apply when the result of its application is
clearly against statutory law, morals, good customs, and public policy.97
In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She,98 this court
refused to apply the principle of in pari delicto. Applying the principle meant that this court had to declare
as valid between the parties a 50-year lease contract with option to buy, which was executed by a Filipino
and a Chinese citizen. This court ruled that the policy to conserve land in favor of Filipinos would be
defeated if the principle of in pari delicto was applied instead of setting aside the contracts executed by
the parties.99

Petitioner in this case did not come to this court with clean hands. He was aware of the restrictions in his
title when he executed the loan and mortgage contracts with respondent. He voluntarily executed the
contracts with respondent despite this knowledge. He also availed himself of the benefits of the loan and
mortgage contract. He cannot now assail the validity of the mortgage contract to escape the obligations
incurred because of it.100

Petitioner also failed to show that upholding the validity of the mortgage contract would be contrary to
law, morals, good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or
encumbrance of his property. It does not render subsequent transactions involving the property a violation
of morals, good customs, and public policy. Violation of its terms does not render subsequent transactions
involving the property void ab initio.101 It merely provides the National Housing Authority with a cause of
action to annul subsequent transactions involving the property.

IV

Petitioner argues that the property should be exempt from forced sale, attachment, and execution, based
on Article 155 of the Family Code.102 Petitioner and his family have been neighbors with respondent since
1992, before the execution of the mortgage contract.103

Even though petitioner's property has been constituted as a family home, it is not exempt from execution.
Article 155 of the Family Code explicitly provides that debts secured by mortgages are exempted from the
rule against execution, forced sale, or attachment of family home

Art. 155. The family home shall be exempt from execution, forced sale or attachment except

(3) For debts secured by mortgages on the premises before or after such constitution[.]cralawlawlibrary

Since petitioner's property was voluntarily used by him as security for a loan he obtained from
respondent, it may be subject to execution and attachment.

The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on
petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on interest effective January 1, 1983.104

The freedom to stipulate interest rates is granted under the assumption that we have a perfectly
competitive market for loans where a borrower has many options from whom to borrow. It assumes that
parties are on equal footing during bargaining and that neither of the parties has a relatively greater
bargaining power to command a higher or lower interest rate. It assumes that the parties are equally in
control of the interest rate and equally have options to accept or deny the other party's proposals. In
other words, the freedom is granted based on the premise that parties arrive at interest rates that they
are willing but are not compelled to take either by force of another person or by force of circumstances. 105

However, the premise is not always true. There are imperfections in the loan market. One party may have
more bargaining power than the other. A borrower may be in need of funds more than a lender is in need
of lending them. In that case, the lender has more commanding power to set the price of borrowing than
the borrower has the freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections resulting from
unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and
welfare106chanroblesvirtuallawlibrary

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.cralawlawlibrary

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable.
Iniquitous or unconscionable interest rates are illegal and, therefore, void for being against public
morals.107 The lifting of the ceiling on interest rates may not be read as "grant[ing] lenders carte blanche
[authority] to raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."108

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid.109 In Castro
v. Tan

110
chanroblesvirtuallawlibrary

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation
of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in
the human conscience nor is there any reason whatsoever which may justify such imposition as righteous
and as one that may be sustained within the sphere of public or private morals. 111cralawlawlibrary

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to
equitably reduce it if it is later found to be iniquitous or unconscionable.112 Courts approximate what the
prevailing market rate would have been under the circumstances had the parties had equal bargaining
power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become unconscionable in
light of the context in which they were imposed or applied. In Medel v. Court of Appeals,113 this Court
ruled that the stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals.
It was declared void. This court reduced the interest rate to 1% per month or 12% per annum. 114

This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable, thus
justifying the need to reduce the interest rates to 12% per annum.115

On the other hand, despite rulings that interest rates of 3% and 5% per month are unconscionable, this
court in Toledo v. Hydenu116 found that the interest rate of 6% to 7% per month was not unconscionable.
This court noted circumstances that differentiated that case from Medel and found that the borrower in
Toledo was not in dire need of money when she obtained a loan; this implied that the interest rates were
agreed upon by the parties on equal footing. This court also found that it was the borrower in Toledo who
was guilty of inequitable acts

Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness
from the very beginning and when their obligations ballooned into a staggering sum, the creditors filed a
collection case against them. In this case, there was no urgency of the need for money on the part of
Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from
the loans to make advance payments for prospective clients of educational plans offered by her employer.
In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This is
the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of
this nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the
agreed amount of interest until she ordered for stop payment on some of the checks issued to Marilou.
The checks were in fact sufficiently funded when she ordered the stop payment and then filed a case
questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable
and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried
with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said
loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never
uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month
and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the
ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the
conscience of man. "This is so because among the maxims of equity are (1) he who seeks equity must do
equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated
maxim which is also expressed in the principle that he who has done inequity shall not have equity. It
signifies that a litigant may be denied relief by a court of equity on the ground that his conduct has been
inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue."

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It
is patently clear from the above summary of the facts that the conduct of Jocelyn can by no means be
characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before
filing the case with the RTC. In September 1998, she requested Marilou not to deposit her checks as she
can cover the checks only the following month. On the next month, Jocelyn again requested for another
extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had
no money at that time. But as testified by Serapio Romarate, an employee of the Bank of Commerce
where Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latter's account
and yet she ordered for the stop payments of the seven checks which can actually be covered by the
available funds in said account. She then caught Marilou by surprise when she surreptitiously filed a case
for declaration of nullity of the document and for damages.117 (Emphases supplied, citations
omitted)cralawlawlibrary

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5% to
10% per month on petitioner's loan. Petitioner obtained the loan out of extreme necessity. As pointed out
by respondent, the property would have been earlier foreclosed by the National Housing Authority if not
for the loan. Moreover, it would be unjust to impose a heavier burden upon petitioner, who would already
be losing his and his family's home. Respondent would not be unjustly deprived if the interest rate is
reduced. After all, respondent still has the right to foreclose the property. Thus, we affirm the Court of
Appeals Decision to reduce the interest rate to 1% per month or 12% per annum.

However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery Frames

118
chanroblesvirtuallawlibrary

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6%
 per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.119cralawlawlibrary

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July 1, 2013
until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and its
Resolution dated March 8, 2012 are AFFIRMED. The interest rate for the loan of P600,000.00 is further
reduced to 6% per annum from July 1, 2013 until fully paid.

SO ORDERED

G.R. No. 158040 April 14, 2008

SPOUSES ONESIFORO and ROSARIO ALINAS, petitioner,

vs.
SPOUSES VICTOR and ELENA ALINAS, respondents.

DECISION
AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the Decision1 of the Court of
Appeals (CA) dated September 25, 2002, and the CA Resolution2 dated March 31, 2003, denying petitioners' motion for
reconsideration, be reversed and set aside.

The factual antecedents of the case are as follows.

Spouses Onesiforo and Rosario Alinas (petitioners) separated sometime in 1982, with Rosario moving to Pagadian City and Onesiforo
moving to Manila. They left behind two lots identified as Lot 896-B-9-A with a bodega standing on it and Lot 896-B-9-B with
petitioners' house. These two lots are the subject of the present petition.

Petitioner Onesiforo Alinas (Onesiforo) and respondent Victor Alinas (Victor) are brothers. Petitioners allege that they entrusted their
properties to Victor and Elena Alinas (respondent spouses) with the agreement that any income from rentals of the properties should
be remitted to the Social Security System (SSS) and to the Rural Bank of Oroquieta City (RBO), as such rentals were believed
sufficient to pay off petitioners' loans with said institutions. Lot 896-B-9-A with the bodega was mortgaged as security for the loan
obtained from the RBO, while Lot 896-B-9-B with the house was mortgaged to the SSS. Onesiforo alleges that he left blank papers
with his signature on them to facilitate the administration of said properties.

Sometime in 1993, petitioners discovered that their two lots were already titled in the name of respondent spouses.

Records show that after Lot 896-B-9-A was extra-judicially foreclosed, Transfer Certificate of Title (TCT) No. T-11853 3 covering said
property was issued in the name of mortgagee RBO on November 13, 1987. On May 2, 1988, the duly authorized representative of
RBO executed a Deed of Installment Sale of Bank's Acquired Assets 4 conveying Lot 896-B-9-A to respondent spouses. RBO's TCT
over Lot 896-B-9-A was then cancelled and on February 22, 1989, TCT No. T-126645 covering said lot was issued in the name of
respondent spouses.

Lot 896-B-9-B was also foreclosed by the SSS and on November 17, 1986, the Ex-Oficio City Sheriff of Ozamis City issued a
Certificate of Sale6 over said property in favor of the SSS. However, pursuant to a Special Power of Attorney 7 signed by Onesiforo in
favor of Victor, dated March 10, 1989, the latter was able to redeem, on the same date, Lot 896-B-9-B from the SSS for the sum of
P111,110.09. On June 19, 1989, a Certificate of Redemption8 was issued by the SSS.

Onesiforo's signature also appears in an Absolute Deed of Sale9 likewise dated March 10, 1989, selling Lot 896-B-9-B to respondent
spouses. The records also show a notarized document dated March 10, 1989 and captioned Agreement10 whereby petitioner Onesiforo
acknowledged that his brother Victor used his own money to redeem Lot 896-B-9-B from the SSS and, thus, Victor became the owner
of said lot. In the same Agreeement, petitioner Onesiforo waived whatever rights, claims, and interests he or his heirs, successors and
assigns have or may have over the subject property. On March 15, 1993, by virtue of said documents, TCT No. 1739411 covering Lot
896-B-9-B was issued in the name of respondent spouses.

On June 25, 1993, petitioners filed with the Regional Trial Court (RTC) of Ozamis City a complaint for recovery of possession and
ownership of their conjugal properties with damages against respondent spouses.

After trial, the RTC rendered its Decision dated November 13, 1995, finding that:

1. Plaintiffs have not proven that they entrusted defendant spouses with the care and administration of their properties. It was
Valeria Alinas, their mother, whom plaintiff Onesiforo requested/directed to "take care of everything and sell everything" and
Teresita Nuñez, his elder sister, to whom he left a "verbal" authority to administer his properties.

2. Plaintiffs have not proven their allegation that defendant spouses agreed to pay rent of P1,500.00 a month for the
occupancy of plaintiffs' house, which rent was to be remitted to the SSS and Rural Bank of Oroquieta to pay off plaintiffs'
loan and to keep for plaintiffs the rest of the rent after the loans would have been paid in full.

3. Plaintiff Onesiforo's allegation that defendants concocted deeds of conveyances (Exh. "M", "N" & "O") with the use of his
signatures in blank is not worthy of credence. Why his family would conspire to rob him at a time when life had struck him
with a cruel blow in the form of a failed marriage that sent him plummeting to the depths of despair is not explained and
likewise defies comprehension. That his signatures appear exactly on the spot where they ought to be in Exhs. "M", "N" &
"O" belies his pretension that he affixed them on blank paper only for the purpose of facilitating his sister Terry's acts of
administration.
 This Court, therefore, does not find that defendant spouses had schemed to obtain title to plaintiffs' properties or enriched
themselves at the expense of plaintiffs.12

with the following dispositive portion:

WHEREFORE, this Court renders judgment:

1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing
thereon and affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring [petitioners] Onesiforo and Rosario Alinas owners of Lot 896-B-9-B with the house standing thereon,
plaintiff Onesiforo's sale thereof to defendants spouses without the consent of his wife being null and void and
defendant spouses' redemption thereof from the SSS not having conferred its ownership to them;

3. ordering [petitioners] to reimburse [respondents] Victor Jr. and Elena Alinas the redemption sum of P111,100.09,
paid by them to the SSS (without interest as it shall be compensated with the rental value of the house they occupy)
within sixty days from the finality of this judgment;

4. ordering [respondents] to vacate the subject house within thirty days from receiving the reimbursement mentioned
in No. 3 above; and

5. reinstating TCT No. T-7248 in the name of [petitioners] and cancelling TCT No. T-17394 in the name of
[respondents].

No costs.

SO ORDERED.13

Only respondent spouses appealed to the CA assailing the RTC's ruling that they acquired Lot 896-B-9-B from the SSS by mere
redemption and not by purchase. They likewise question the reimbursement by petitioners of the redemption price without interest.

On September 25, 2002, the CA promulgated herein assailed Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing disquisitions, the first paragraph of the dispositive portion of the assailed decision is
AFFIRMED and the rest MODIFIED as follows:

1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing
thereon and affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to [respondents] in so far as
Rosario Alinas, his wife's share of one half thereof is concerned, of no force and effect;

3. ordering [petitioners] Rosario Alinas to reimburse [respondents] the redemption amount of P55,550.00 with
interest of 12% per annum from the time of redemption until fully paid.

4. ordering the [respondents] to convey and transfer one half portion of Lot 896-B-9-B unto Rosario Alinas, which
comprises her share on the property simultaneous to the tender of the above redemption price, both to be
accomplished within sixty (60) days from finality of this judgment.

5. in the event of failure of [respondents] to execute the acts as specified above, [petitioner] Rosario Alinas may
proceed against them under Section 10, Rule 39 of the 1997 Rules of Civil Procedure.

6. on the other hand, failure of [petitioner] Rosario Alinas to reimburse the redemption price within sixty (60) days
from the finality of this decision will render the conveyance and sale of her share by her husband to [respondents],
of full force and effect.

No costs.
 SO ORDERED.14

Petitioners moved for reconsideration but the CA denied said motion per herein assailed Resolution dated March 31, 2003.

Hence, the present petition on the following grounds:

The Honorable Court of Appeals abuse [sic] its discretion in disregarding the testimony of the Register of Deeds, Atty. Nerio
Nuñez, who swore that the signatures appearing on various TCTs were not his own;

The Honorable Court of Appeals manifestly abuse [sic] its discretion in declaring the respondents to be the owners of Lot
896-B-9-A with the building (bodega) standing thereon when they merely redeemed the property and are therefore mere
trustees of the real owners of the property;

It was pure speculation and conjecture and surmise for the Honorable Court of Appeals to impose an obligation to reimburse
upon petitioners without ordering respondents to account for the rentals of the properties from the time they occupied the
same up to the present time and thereafter credit one against the other whichever is higher. 15

The first issue raised by petitioners deserves scant consideration. By assailing the authenticity of the Registrar of Deeds' signature on
the certificates of title, they are, in effect, questioning the validity of the certificates.

Section 48 of Presidential Decree No. 1529 provides, thus:

Sec. 48. Certificate not subject to collateral attack. - A certificate of title shall not be subject to collateral attack. It cannot be
altered, modified, or cancelled except in a direct proceeding in accordance with law.

Pursuant to said provision, the Court ruled in De Pedro v. Romasan Development Corporation16 that:

It has been held that a certificate of title, once registered, should not thereafter be impugned, altered, changed, modified,
enlarged or diminished except in a direct proceeding permitted by law. x x x

The action of the petitioners against the respondents, based on the material allegations of the complaint, is one for recovery
of possession of the subject property and damages. However, such action is not a direct, but a collateral attack of TCT
No. 236044.17 (Emphasis supplied)

As in De Pedro, the complaint filed by herein petitioners with the RTC is also one for recovery of possession and ownership. Verily,
the present case is merely a collateral attack on TCT No. T-17394, which is not allowed by law and jurisprudence.

With regard to the second issue, petitioners’ claim that it was the CA which declared respondent spouses owners of Lot 896-B-9-A
(with bodega) is misleading. It was the RTC which ruled that respondent spouses are the owners of Lot 896-B-9-A and, therefore,
since only the respondent spouses appealed to the CA, the issue of ownership over Lot 896-B-9-A is not raised before the appellate
court. Necessarily, the CA merely reiterated in the dispositive portion of its decision the RTC's ruling on respondent spouses'
ownership of Lot 896-B-9-A.

It is a basic principle that no modification of judgment or affirmative relief can be granted to a party who did not appeal. 18 Hence, not
having appealed from the RTC Decision, petitioners can no longer seek the reversal or modification of the trial court's ruling that
respondent spouses had acquired ownership of Lot 896-B-9-A by virtue of the sale of the lot to them by RBO.

Furthermore, the CA did not commit any reversible error in affirming the trial court's factual findings as the records are indeed bereft
of proof to support the petitioners’ allegations that they left the care and administration of their properties to respondent spouses; and
that there is an agreement between petitioners and respondent spouses regarding remittance to the SSS and the RBO of rental income
from their properties. Thus, respondent spouses may not be held responsible for the non-payment of the loan with RBO and the
eventual foreclosure of petitioners' Lot 896-B-9-A.

Petitioners do not assail the validity of the foreclosure of said lot but argues that respondent spouses merely redeemed the property
from RBO. This is, however, belied by evidence on record which shows that ownership over the lot had duly passed on to the RBO, as
shown by TCT No. T-11853 registered in its name; and subsequently, RBO sold the lot with its improvements to respondent spouses.
Needless to stress, the sale was made after the redemption period had lapsed. The trial court, therefore, correctly held that respondent
spouses acquired their title over the lot from RBO and definitely not from petitioners.
However, with regard to Lot 896-B-9-B (with house), the Court finds it patently erroneous for the CA to have applied the principle of
equity in sustaining the validity of the sale of Onesiforo’s one-half share in the subject property to respondent spouses.

Although petitioners were married before the enactment of the Family Code on August 3, 1988, the sale in question occurred in 1989.
Thus, their property relations are governed by Chapter IV on Conjugal Partnership of Gains of the Family Code.

The CA ruling completely deviated from the clear dictate of Article 124 of the Family Code which provides:

Art. 124. The administration and enjoyment of the conjugal partnership property shall belong to both spouses jointly. x x x

In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal
properties, the other spouse may assume sole powers of administration. These powers do not include the powers of
disposition or encumbrance which must have the authority of the court or the written consent of the other spouse. In the
absence of such authority or consent the disposition or encumbrance shall be void . x x x (Underscoring and emphasis
supplied)

In Homeowners Savings & Loan Bank v. Dailo,19 the Court categorically stated thus:

In Guiang v. Court of Appeals, it was held that the sale of a conjugal property requires the consent of both the husband and
wife. In applying Article 124 of the Family Code, this Court declared that the absence of the consent of one renders the
entire sale null and void, including the portion of the conjugal property pertaining to the husband who contracted the
sale. x x x

xxxx

x x x By express provision of Article 124 of the Family Code, in the absence of (court) authority or written consent of the
other spouse, any disposition or encumbrance of the conjugal property shall be void. 20

Thus, pursuant to Article 124 of the Family Code and jurisprudence, the sale of petitioners' conjugal property made by petitioner
Onesiforo alone is void in its entirety.

It is true that in a number of cases, this Court abstained from applying the literal import of a particular provision of law if doing so
would lead to unjust, unfair and absurd results.21

In the present case, the Court does not see how applying Article 124 of the Family Code would lead to injustice or absurdity. It should
be noted that respondent spouses were well aware that Lot 896-B-9-B is a conjugal property of petitioners. They also knew that the
disposition being made by Onesiforo is without the consent of his wife, as they knew that petitioners had separated, and, the sale
documents do not bear the signature of petitioner Rosario. The fact that Onesiforo had to execute two documents, namely: the
Absolute Deed of Sale dated March 10, 1989 and a notarized Agreement likewise dated March 10, 1989, reveals that they had full
knowledge of the severe infirmities of the sale. As held in Heirs of Aguilar-Reyes v. Spouses Mijares,22 "a purchaser cannot close his
eyes to facts which should put a reasonable man on his guard and still claim he acted in good faith." 23 Such being the case, no injustice
is being foisted on respondent spouses as they risked transacting with Onesiforo alone despite their knowledge that the subject
property is a conjugal property.

Verily, the sale of Lot 896-B-9-B to respondent spouses is entirely null and void.

However, in consonance with the salutary principle of non-enrichment at another’s expense, the Court agrees with the CA that
petitioners should reimburse respondent spouses the redemption price paid for Lot 896-B-9-B in the amount of P111,110.09 with legal
interest from the time of filing of the complaint.

In Heirs of Aguilar-Reyes, the husband's sale of conjugal property without the consent of the wife was annulled but the spouses were
ordered to refund the purchase price to the buyers, it was ruled that an interest of 12% per annum on the purchase price to be refunded
is not proper. The Court elucidated as follows:

The trial court, however, erred in imposing 12% interest per annum on the amount due the respondents. In Eastern Shipping
Lines, Inc. v. Court of Appeals, it was held that interest on obligations not constituting a loan or forbearance of money is six
percent (6%) annually. If the purchase price could be established with certainty at the time of the filing of the complaint, the
six percent (6%) interest should be computed from the date the complaint was filed until finality of the decision. In Lui vs.
Loy, involving a suit for reconveyance and annulment of title filed by the first buyer against the seller and the second buyer,
 the Court, ruling in favor of the first buyer and annulling the second sale, ordered the seller to refund to the second buyer
(who was not a purchaser in good faith) the purchase price of the lots. It was held therein that the 6% interest should be
computed from the date of the filing of the complaint by the first buyer. After the judgment becomes final and executory until
the obligation is satisfied, the amount due shall earn interest at 12% per year, the interim period being deemed equivalent to a
forbearance of credit.

Accordingly, the amount of P110,000.00 due the respondent spouses which could be determined with certainty at the
time of the filing of the complaint shall earn 6% interest per annum from June 4, 1986 until the finality of this
decision. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate
shall be twelve percent (12%) per annum computed from the time the judgment becomes final and executory until it is
fully satisfied.24

Thus, herein petitioners should reimburse respondent spouses the redemption price plus interest at the rate of 6% per annum from the
date of filing of the complaint, and after the judgment becomes final and executory, the amount due shall earn 12% interest per annum
until the obligation is satisfied.

Petitioners pray that said redemption price and interest be offset or compensated against the rentals for the house and bodega.

The records show that the testimonial evidence for rentals was only with regard to the bodega. 25 However, the Court has affirmed the
ruling of the RTC that Lot 896-B-9-A with the bodega had been validly purchased by respondent spouses from the RBO and a TCT
over said property was issued in the name of respondent spouses on February 22, 1989. Testimonial evidence shows that the bodega
was leased out by respondent spouses only beginning January of 1990 when ownership had been transferred to them.26 Hence, any
rentals earned from the lease of said bodega rightfully belongs to respondent spouses and cannot be offset against petitioners'
obligation to respondent spouses.

As to rentals for Lot 896-B-9-B and the house thereon, respondent Victor testified that they never agreed to rent the house and when
they finally took over the same, it was practically inhabitable and so they even incurred expenses to repair the house. 27 There is
absolutely no proof of the rental value for the house, considering the condition it was in; as well as for the lot respondent spouses are
occupying.

Respondent spouses, having knowledge of the flaw in their mode of acquisition, are deemed to be possessors in bad faith under Article
52628 of the Civil Code. However, they have a right to be refunded for necessary expenses on the property as provided under Article
54629 of the same Code. Unfortunately, there is no credible proof to support respondent spouses' allegation that they spent more than
P400,000.00 to repair and make the house habitable.

Set-off or compensation is governed by Article 1279 of the Civil Code which provides, thus:

Article 1279. In order that compensation may be proper, it is necessary:

1. That each one of the obligors be bound principally, and that he be at the 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.

Therefore, under paragraph 4 of the foregoing provision, compensation or set-off is allowed only if the debts of both parties against
each other is already liquidated and demandable. To liquidate means "to make the amount of indebtedness or an obligation clear and
settled in the form of money."30 In the present case, no definite amounts for rentals nor for expenses for repairs on subject house has
been determined. Thus, in the absence of evidence upon which to base the amount of rentals, no compensation or set-off can take
place between petitioners and respondent spouses.

While the courts are empowered to set an amount as reasonable compensation to the owners for the use of their property, this Court
cannot set such amount based on mere surmises and conjecture
WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals dated September 25, 2002 is
MODIFIED to read as follows:

1. declaring respondent spouses Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building (bodega) standing thereon and
affirming the validity of their acquisition thereof from the Rural Bank of Oroquieta, Inc.;

2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to respondent spouses null and void ab
initio;

3. ordering petitioners to jointly and severally reimburse respondent spouses the redemption amount of P111,110.09 with interest at
6% per annum from the date of filing of the complaint, until finality of this decision. After this decision becomes final, interest
at the rate of 12% per annum on the principal and interest (or any part thereof) shall be imposed until full payment;

4. ordering the respondent spouses to convey and transfer Lot 896-B-9-B to petitioners and vacate said premises within fifteen (15)
days from finality of this Decision; and

5. in the event of failure of respondent spouses to execute the acts as specified above, petitioners may proceed against them under
Section 10, Rule 39 of the 1997 Rules of Civil Procedure.

No costs.

SO ORDERED