respondents failed to make timely payment.

But as admitted by private respondents

VOL. 377, FEBRUARY 15, 2002
BPI Investment Corporation vs. Court of Appeals
G.R. No. 133632. February 15, 2002.
117
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.
*

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS
and ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
Obligations and Contracts; Loans; A loan contract is not a consensual contract but a real
contract, perfected only upon the delivery of the object of the 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. Peitioner 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.
Same; Same; While a perfected loan contract can give rise to an action for damages, 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.—In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44
SCRA 445, petitioner applied for a loan of P500,000 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.
Same; Same; A contract of loan involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other; 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.—We also agree with private
respondents that a contract of loan involves a reciprocal
______________
Same; Same; Same; Same; The negligence of the creditor-mortgagor 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 the borrower and the date when it was released, which
negligence resulted in damages to the latter, entitles the borrower to an award of nominal
damages in recognition of its rights which were violated.—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
119
VOL. 377, FEBRUARY 15, 2002 119
BPI Investment Corporation vs. Court of Appeals
recognition of their rights which were violated by BPIIC. For this purpose, the amount of
P25,000 is sufficient.
Same; Same; Same; Same; Attorney’s Fees; An award of attorney’s fees is warranted where
a party was compelled to litigate.—As in SSS where we awarded attorney’s fees because private
respondents were compelled to litigate, we sustain the award of P50,000 in favor of private
respondents as attorney’s fees.
PETITION for review on certiorari of a decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Benedicto, Tale, Versoza & Associates for petitioner.
Vicente B. Chuidian for private respondent.

*SECOND DIVISION.
118

1 SUPREME COURT REPORTS ANNOTATED

18
BPI Investment Corporation vs. Court of Appeals
obligation, wherein the obligation or promise of each party is the consideration for that of
the other. 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. 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.
Same; Same; Foreclosure of Mortgage; Damages; Where the borrower was irregular in the
payment of its monthly amortization, it may not claim moral and exemplary damages due to the
erroneous foreclosure proceedings initiated by the creditor-mortgagor.—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
 G.R. No. 133632. February 15, 2002. * Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and
ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
Topic: Simple Loan
Ponente: Quisumbing, J.
SUMMARY:
Petitioner: BPI Investment Corporation (BPIIC)
- Predecessor of petitioner BPIIC: Ayala Investment and Development Corporation (AIDC)
Respondent: ALS Management & Development Corporation
Roa obtained a loan at an interest rate of 16 ¼ % per annum from AIDC, for the construction of a
house on his lot, this house & lot were mortgaged to AIDC to secure the loan; Roa sold the house &
lot to private respondents ALS and Litonjua for P850,000 wherein the latter paid P350K cash and
assumed P500K balance of Roa’s indebtedness with AIDC.
AIDC was not willing to extend the old interest rate to ALS and Litonjua and porposed to grant them
new loan of P500K to be applied to Roa’s debt and secured by the same property:
- Interest rate of 20% per annum
- Service fee of 1% per annum on the outstanding principal balance
- Payable within 10 years in equal monthly amortization of P9,996.58
- Penalty interest at the rate of 21% per annum per day from the date the amortization
became due & payable
March 31 1981 - ALS and Litonjua executed a mortgage deed with provision that payment of
monthly amortization shall commence on May 1 1981; ALS and Litonjua updated Roa’s arrearages
by paying BPIIC which reduced Roa’s principal balance
Sept 13 1982 – BPIIC released ALS & Litonjua P7,146.87 purporting to be what was left of their loan
after full payment of Roa’s loan.
June 1984 – BPIIC instituted foreclosure proceedings against ALS & Litonjua on the ground that
they failed to pay mortgage indebtedness from May 1 1981 to June 30 1984 (amounted to
P475,585.31); hence, on Feb 28 1985, ALS & Litonjua filed Civil Case against BPIIC.
ISSUES:
(1) WON contract of loan is a consensual contract in the light of the rule laid down in Bonnevie vs.
CA
(NO. CONTRACT OF LOAN IS A REAL CONTRACT)
(2) WON BPI should be held liable for moral & exemplary damages and attorney’s fees in the fact of
irregular payments made by ALS and opposed to the rule laid down in SSS v. CA
(NO, but award of nominal damages & atty’s fees should be given to PRs)
SC:
Petitioner BPIIC contends: CA erred in ruling that because a simple loan is perfected upon delivery
of the object of contract, the loan contract in this case was perfected only on Sept 13 1982 because
contract of loan is consensual and is perfected at the time the contract of mortgage is executed
hence, contract was perfected on March 31 1981, when BPIIC issued cancellation of mortgage of
Roa’s loan.
Private respondents ALS & Litonjua contend: Based on Art 1934 of CC, a simple loan is perfected
upon 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 Sept 13 1982, when the full loan
was released to them.
SC agreed with ALS & Litonjua, 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.
contract falls under the 1st clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way
of simple loan
A perfected consensual contract 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 2nd release of the loan.
Following the intentions of the parties on the commencement of the monthly amortization, as found
by the CA, private respondents’ obligation to pay commenced only on October 13, 1982, a
month after the perfection of the contract. 7
Contract of loan involves a reciprocal obligation, wherein the obligation/ promise of each party is
the consideration for that of the other.
- 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, 1 month after the
supposed release of the loan. BPIIC 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.
- BPIIC not in bad faith; private respondents themselves admitted that they were irregular in payment
of monthly amortization. Hence, ruled out the award of moral & exemplary damages.
- BPIIC was negligent in relying merely on the entries found in deed of mortgage, without checking
and adjusting records on the amount actually released to private respondents and date when it was
released. Hence, award of nominal damages should be given; award of attorney’s fees sustained.
FACTS:
This petition for certiorari assails the decision dated Feb 28, 1997, of the CA and its resolution dated April 21,
1998, in CA-G.R. CV No. 38887.
- The appellate court affirmed the judgment of the RTC 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, consolidated with (b) Civil
1
Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
- The TC 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 P300,000 for moral damages, P50,000 for exemplary damages, and P50,000
for attorney’s fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
- 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 P850,000.
- They paid P350,000 in cash and assumed the P500,000 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 P500,000 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 10 years
in equal monthly amortization of P9,996.58 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
P190,601.35.
 - This reduced Roa’s principal balance to P457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents’ loan of P500,000.
- On September 13, 1982, BPIIC released to private respondents P7,146.87, 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 P475,585.31. 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 P500,000 loan in August and September 1982.
- Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to
private respondents. Hence, applying the effects of legal compensation, the balance of
P35,648.23 should be applied to the initial monthly amortization for the loan.
TC: Judgment rendered in favor of private respondents (ALS & Litonjua)
[Aug 31 1988]
On August 31, 1988, the TC 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 10 years or 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:
1. P300,000 for and as moral damages;
2. P50,000 as and for exemplary damages;
3. P50,000 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 CA
CA: Dismissed private respondents’ appeal for non-payment of docket fees
[Feb 28 1997]
- Affirmed TC
- CA 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 Sept 13,
1982, the date when BPIIC released the purported balance of the P500,000 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 P194,960.43.
- Evidence showed that private respondents had an overpayment, because as of June
1984, they already paid a total amount of P201,791.96.
- 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.
Petitioner BPIIC filed MR but was denied.
ISSUES:
(1) WON contract of loan is a consensual contract in the light of the rule laid down in Bonnevie vs.
CA (NO. CONTRACT OF LOAN IS A REAL CONTRACT)
(2) WON BPI should be held liable for moral & exemplary damages and attorney’s fees in the fact of
irregular payments made by ALS and opposed to the rule laid down in SSS v. CA (NO, but award of
nominal damages & attorney’s fees should be given to PRs)
HELD: CA decision affirmed with modification.
WHEREFORE, the decision dated February 28, 1997, of the CA 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 P50,000 is
UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs
against petitioner.
SO ORDERED.
RULING:
1ST ISSUE:
Petitioner’s contentions:
- The CA 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 P500,000 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.
Private respondents’ contentions:
- In their comment, private respondents assert that based on Article 1934 of the CC, a simple loan
4
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.
SC:
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 - Counter that BPIIC was guilty of bad faith and should be liable for said damages because it insisted
- Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the 1st 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. DBP: petitioner applied for a loan of P500,000 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
Private respondents:
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.
SC:
- 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

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
- 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. For this purpose, the amount of P25,000 is
12

borrower. 6 sufficient.
- Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled
- In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the to litigate, we sustain the award of P50,000 in favor of private respondents as attorney’s fees.
other, was perfected only on September 13, 1982, the date of the 2nd release of the loan.
Following the intentions of the parties on the commencement of the monthly amortization, as found
by the CA, 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. Only when a 9

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 1st 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, factual matters need not tarry us now. On these points we are bound by the findings of
10

the appellate and trial courts.

2nd ISSUE:

Petitioner’s contention:
- 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. 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 CA “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 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.
 [ No. 32644 . October 4, 1930 ]
Cu UNJIENG E HIJOS , plaintiff and appellee, vs. THE MABALACAT SUGAR Co. ET
AL., Defendants. THE MABALACAT SUGAR Co. , appellant.

1. 1,INTEREST ; COMPOUND INTEREST ; STIPULATION FOR PAYMENT OF INTEREST

AT STATED INTERVALS DURING YEAR. - A stipulation to the effect that interest shell
be at the rate of 12 per centum per annum payable at the end of each month upon the
unpaid capital of the loan, does not authorize the compounding of interest payments at
intervals of one month.

1. 2.USURY ; INTEREST IN EXCESS OF LEGAL RATE ; VOLUNTARY PAYMENT NOT

BINDING ON DEBTOR. - Where interest is charged at an unlawful rate, in excess of the
limit allowed by the Usury Law, the mere voluntary payment of it to the creditor by the
debtor is not binding.
 [ No. 32644 . October 4, 1930 ]
Cu UNJIENG E HIJOS , plaintiff and appellee, vs. THE MABALACAT SUGAR Co. ET
AL., Defendants. THE MABALACAT SUGAR Co. , appellant.
Topic: Interest & The Usury Law (Act 2655, as amended)
Ponente: Street, J.
SUMMARY:
Plaintiff Cu Unjieng e Hijos filed this action for the purpose of recovering from Mabalacat Sugar
Company an indebtedness amounting to more than P163,000 with interest, and to foreclose a
mortgage given by debtor to secure the same, as well as to recover stipulated attorney’s fee and
sum of P1,206 paid by plaintiff for insurance upon the mortgaged property; Suiliong & Co., Inc.
(surety of Mabalacat) and Philippine National Bank (with interest as 2nd mortgagee of land covered
by mortgage to plaintiff) were joined as defendant.
Mabalacat Sugar Company appealed from the judgment [di ko maintindihan kasi Spanish siya -
see full Facts below for the orig Spanish decision]
SC:
1. WON the action was prematurely started (No) - [baka lang itanong, mas related ung 2nd issue]
Mortgage executed by Mabalacat Sugar Company:
Paragraph 5 - Non-compliance on the part of the mortgage debtor with any of the obligations
assumed in virtue of this contract will cause the entire debt to become due and give
occasion for the foreclosure of the mortgage.
- (As provided under paragraph 5 of mortgage contract)
Debtor party failed to comply with the obligation, therefore creditor was justified in treating the entire
mortgage debt as having been accelerated by such failure of debtor in paying installments/
- It appears, however, than on/ about Oct 20 1928, mortgage creditor, Cu unjieng e Hijos, agreed to
extend the time for payment of mortgage indebtedness until June 30 1929, with certain interim
payments to be made upon specified dates prior to the contemplated final liquidation of the whole
indebtedness.
- But the debtor party failed to make the interim payments due on Feb 25, 1929, March 25,
1929, and April 25, 1929, and failed altogether to pay the balance due, according to the terms of this
extension, on June 30, 1929
- Debtor party: Notwithstanding the failure of the debtor to comply with the terms of this extension, it
is insisted for the appellant that this agreement for the extension of the time of payment had the
effect of abrogating the stipulation of the original contract with respect to the acceleration of
the maturity of the debt by non-compliance with the terms of the mortgage
- SC: The agreement to extend the time of payment was voluntary and without consideration so far
as the creditor is concerned; and the failure of the debtor to comply with the terms of the extension
justified the creditor in treating it as of no effect.
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
- On the propriety of interest charges made by plaintiff in estimating the amount of the indebtedness:
2nd clause of mortgage contract:
- Interest should be calculated upon indebtedness at the rate of 12% per annum
2nd clause of mortgage contract (different paragraph) - [In Spanish – translated into English]
"Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly,
at the end of each month."
SC:
- It is well settled that, under article 1109 of the CC, as well as under section 5 of the Usury Law (Act
No. 2655), the parties may stipulate that interest shall be compounded; and rests for the
computation of compound interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express stipulation for the accumulation of
compound interest, no interest can be collected upon interest until the debt is judicially
claimed, and then the rate at which interest upon accrued interest must be computed is fixed
at 6 % per annum
- In the present case, however, the language which we have quoted above does not justify the
charging of interest upon interest, so far as interest on the capital is concerned. The provision
quoted merely requires the debtor to pay interest monthly at the end of each month, such
interest to be computed upon the capital of the loan not already paid. Clearly this provision does
not justify the charging of compound interest upon the interest accruing upon the capital
monthly.
It is true that in subsections (a), (&) and (c) of article IV of the mortgage, it is stipulated that the
interest can be thus computed upon sums which the creditor would have to pay out
(a) to maintain insurance upon the mortgaged property,
(b) to pay the land tax upon the same property, and
(c) upon disbursements that might be made by the mortgagee to maintain the property in good
condition.
- But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing
upon the capital of the debt.
- The TC was of the opinion that Interest could be so charged, because of the Exhibit 1 of the
Mabalacat Sugar Company, which the court considered as an interpretation by the parties to the
contract and a recognition by the debtor of the propriety of compounding the interest earned by the
capital.
- But the exhibit referred to is merely a receipt showing that the sum of P256.28 was, on
March 19, 1928, paid by the debtor to the plaintiff as interest upon interest.
But where interest is improperly charged, at an unlawful rate, the mere voluntary payment of
it to the creditor by the debtor is not binding. Such payment, in the case before us, was
usurious, being in excess of 12 % which is allowed to be charged, under section 2 of the
Usury Law, when a debt is secured by mortgage upon real property.
The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon interest
can be accumulated in the manner adopted by the creditor in this case.
FACTS:
- This action was instituted in the CFI of Pampanga by Cu Unjieng e Hijos, for the purpose of
recovering from the Mabalacat Sugar Company an indebtedness amounting to more than
P163,000, with interest, and to foreclose a mortgage given by the debtor to secure the same, as well
as to recover stipulated attorney's fee and the sum of P1,206, paid by the plaintiff for insurance upon
the mortgaged property, with incidental relief.
- In the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the Mabalacat Sugar
Company, and as having a third mortgage on the mortgaged property.
- The Philippine National Bank was also joined by reason of its interest as second mortgagee of
the land covered by the mortgage to the plaintiff
After the cause had been brought to issue by the answers of the several defendants, the
cause was heard and judgment rendered, the dispositive portion of the decision being as
follows:
[[ HAHA BAKA GUSTO NYO LANG BASAHIN ]]
"Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a pagar a la
demandante la suma de P163,534.73, con sus intereses de 12 por ciento al año, compuestos mensualmente
desde el 1.° de mayo de 1929. También se le condena a pagar a dicha demandante la suma de P2,412 por las
primas de seguros abonadas por ésta, con sus intereses de 12 por ciento al año, compuestos también
mensualmente desde el 15 de mayo de 1928, más la de P7,500 por honorarios de abogados y las costas del
juicio. Y si esta deuda no se pagare dentro del plazo de tres meses, se ejecutarán los bienes hipotecados de
acuerdo con la ley.
"Si del producto de la venta hubiese algún remanente, éste se destinará al pago del crédito del Banco
Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al año desde el 7 de junio de 1929, sin perjuicio
de la orden de ejecución que pudiera expedirse en el asunto No. 26435 del Juzgado de Primera Instancia de
Manila.
"Se condena además a The Mabalacat Sugar Company al pago de la suma de P3,205.78 reclamada por
Siuliong & Co., con sus intereses de 9 por ciento al año desde el 29 de julio de 1926 hasta su completo pago,
ordenándola que rinda cuentas del azúcar por ella producido y pague la comisión correspondiente bajo la base de
5 por ciento de su valor, descontándose, desde luego, las cantidades ya pagadas.
"Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc."
- From this judgment the defendant, the Mabalacat Sugar Company, appealed.
ISSUES:
1. WON the action was prematurely started (No)
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
WON the payment was usurious (Yes, being in excess of 12% which is allowed to be charged,
under Sec 2 of Usury Law)
3. WON the attorney’s fees allowed by court in accordance with stipulation in the mortgage was
excessive (No)
4. WON the TC erred in not permitting an amendment to be filed by debtor to its answer (No)
HELD:
From what has been stated, it follows that the appealed judgment must be modified by deducting
the sum of P1,136.12 from the principal debt, so that the amount of said indebtedness shall be
P162,398,61, with interest at 12% per annum, from May 1, 1929.
- In other respects the judgment will be affirmed, and it is so ordered, with costs against the
appellant.
RULING:
1. WON the action was prematurely started (No)
- In this connection we note that the mortgage executed by the Mabalacat Sugar Company contains,
in paragraph 5, a provision to the effect that non-compliance on the part of the mortgage debtor with
any of the obligations assumed in virtue of this contract will cause the entire debt to become due
and give occasion for the foreclosure of the mortgage.
- The debtor party failed to comply with the obligation, imposed upon it in the mortgage, to pay
the mortgage debt in the stipulated installments at the time specified in the contract. It results that
the creditor was justified in treating the entire mortgage debt as having been accelerated by such
failure of the debtor in paying the installments.
- It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e
Hijos, agreed to extend the time for payment of the mortgage indebtedness until June 30,
1929, with certain interim payments to be made upon specified dates prior to the contemplated final
liquidation of the whole indebtedness. But the debtor party failed to make the interim payments
due on February 25, 1929, March 25, 1929, and April 25, 1929, and failed altogether to pay the
balance due, according to the terms of this extension, on June 30, 1929. Notwithstanding the failure
of the debtor to comply with the terms of this extension, it is insisted for the appellant that this
agreement for the extension of the time of payment had the effect of abrogating the
stipulation of the original contract with respect to the acceleration of the maturity of the debt
by non-compliance with the terms of the mortgage. As the trial court pointed out, this contention
is untenable.
The agreement to extend the time of payment was voluntary and without consideration so far as the
creditor is concerned; and the failure of the debtor to comply with the terms of the extension justified
the creditor in treating it as of no effect.
- The first error is therefore without merit.
2. WON the interest charges made by plaintiff in estimating the amount of indebtedness was justified
(No, compound interest should be eliminated from judgment)
The second error is directed to the propriety of the interest charges made by the plaintiff in estimating the amount
of the indebtedness.
- In this connection we note that, under the 2nd clause of the mortgage, interest should be calculated
upon the indebtedness at the rate of 12% per annum.
In the same clause, but in a separate paragraph, there is another provision with respect to the
payment of interest expressed in Spanish in the following words:
"Los intereses serán pagados mensualmente a fin de cada mes, computados teniendo en
cuenta el capital del préstamo aún no pagado."
Translated into English this provision reads substantially as follows:
"Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly, at the
end of each month."
- It is well settled that, under article 1109 of the CC, as well as under section 5 of the Usury
Law (Act No. 2655), the parties may stipulate that interest shall be compounded; and rests for
the computation of compound interest can certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of express stipulation for the accumulation of
compound interest, no interest can be collected upon interest until the debt is judicially
claimed, and then the rate at which interest upon accrued interest must be computed is fixed
at 6 % per annum
- In the present case, however, the language which we have quoted above does not justify the
charging of interest upon interest, so far as interest on the capital is concerned. The provision
quoted merely requires the debtor to pay interest monthly at the end of each month, such
interest to be computed upon the capital of the loan not already paid. Clearly this provision does
not justify the charging of compound interest upon the interest accruing upon the capital
monthly.
It is true that in subsections (a), (&) and (c) of article IV of the mortgage, it is stipulated that the
interest can be thus computed upon sums which the creditor would have to pay out
(a) to maintain insurance upon the mortgaged property,
(b) to pay the land tax upon the same property, and
(c) upon disbursements that might be made by the mortgagee to maintain the property in good
condition.
- But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing
upon the capital of the debt.
- The TC was of the opinion that Interest could be so charged, because of the Exhibit 1 of the
Mabalacat Sugar Company, which the court considered as an interpretation by the parties to the
contract and a recognition by the debtor of the propriety of compounding the interest earned by the
capital.
- But the exhibit referred to is merely a receipt showing that the sum of P256.28 was, on
March 19, 1928, paid by the debtor to the plaintiff as interest upon interest.
But where interest is improperly charged, at an unlawful rate, the mere voluntary payment of
it to the creditor by the debtor is not binding. Such payment, in the case before us, was
usurious, being in excess of 12 % which is allowed to be charged, under section 2 of the
Usury Law, when a debt is secured by mortgage upon real property.
The Exhibit 1 therefore adds no support to the contention of the plaintiff that interest upon interest
can be accumulated in the manner adopted by the creditor in this case.
- The point here ruled is in exact conformity with the decision of this court in Bachrach Garage and
Taxicab Co. vs. Golingco, where this court held that interest cannot be allowed in the absence of
stipulation, or in default thereof, except when the debt is judicially claimed; and when the debt is
judicially claimed, the interest upon the interest can only be computed at the rate of 6% per annum
- It results that the appellant's 2nd assignment of error is well taken, and the compound interest must
be eliminated from the judgment.
With respect to the amount improperly charged, we accept the estimate submitted by the
president and manager of the Mabalacat Sugar Company, who says that the amount improperly
included in the computation made by the plaintiff's bookkeeper is P879.84, in addition to the amount
of P256.28 covered by Exhibit 1 of the Mabalacat Sugar Company.
- But the plaintiff creditor had the right to charge interest, in the manner adopted by it, upon
insurance premiums which it had paid out; and if any discrepancy of importance is discoverable by
the plaintiff in the result here reached, it will be at liberty to submit a revised computation in this
court, upon motion for reconsideration, wherein interest shall be computed in accordance with this
opinion, that is to say, that no accumulation of interest will be permitted at monthly intervals, as
regards the capital of the debt, but such unpaid interest shall draw interest at the rate of 6 % from the
date of the institution of the action.

3. WON the attorney’s fees allowed by court in accordance with stipulation in the mortgage was
excessive (No)

- In the 3rd assignment of error the appellant complains, as excessive, of the attorney's fees allowed
by the court in accordance with stipulation in the mortgage.
- The allowance made on the principal debt was around 4%, and about the same upon the fee
allowed to the bank.
Under the circumstances we think the debtor has no just cause for complaint upon this score.

4. WON the TC erred in not permitting an amendment to be filed by debtor to its answer (No)

- The 4th assignment of error complains of the failure of the trial court to permit an amendment to be
filed by the debtor to its answer, the application therefor having been made on the day when the
cause had been set for trial, with notice that the period was non-extendible.
- The point was a matter in the discretion of the court, and no abuse of discretion is shown.