Saura Import and Export Co. vs.

DBP

Facts: In July 1953 Saura Import and Export Co. applied to the Rehabilitation Finance Corporation
(RFC), before its conversion into DBP, for an industrial loan of P500,000.00.

The jute mill machinery had already been purchased by Saura on the strength of a letter of credit
extended by the Prudential Bank and Trust Co., and that to secure its release without first paying the
draft, Saura, Inc. executed a trust receipt in favor of the said bank.

On January 7, 1954 the loan application was approved, to be secured by a first mortgage on the
factory building to be constructed, the land site thereof, and the machinery and equipment to be
installed, subject to availability of funds. However, Saura, Inc. wrote a letter to RFC, requesting a
modification of the terms laid down by it.

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-
signer for the loan. It appears, however, that despite the formal execution of the loan agreement it
was decided to reduce the loan from P500,000.00 to P300,000.00.

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the
loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter
dated July 2 requested RFC that the registration of the mortgage be withdrawn.

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount
of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes
jointly with the borrower-corporation".

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the
first place, and to require, in its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local raw materials to provide adequately
for the requirements of the factory.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between
the parties and that the defendant was guilty of breach thereof.

Issue:

1. WON there was a perfected consensual contract.

2. WON there was a real contract of loan.

Ruling:

1.) Yes. There was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides: ART. 1954. An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall
not be perferted until the delivery of the object of the contract. There was undoubtedly offer and
acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by
resolution of the defendant, and the corresponding mortgage was executed and registered.

2.) No. There was no real contract of loan. The defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages. In the case at bar, Saura, Inc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature
cf mutual desistance — what Manresa terms "mutuo disenso"1 — which is a mode of extinguishing
obligations. It is a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment.
BPI INVESTMENT CORPORATION, PETITIONER, VS. HON. COURT OF APPEALS AND ALS
MANAGEMENT & DEVELOPMENT CORPORATION, RESPONDENTS.
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 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.
Facts: 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 ten 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 Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100
Pesos (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.

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 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.

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

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.

No.
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 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 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.

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]
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. 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
P25,000 is sufficient.

Lastly, as in SSS where we awarded attorney’s fees because private respondents were
compelled to litigate, we sustain the award of P50,000 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 P50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner.
Bonnevie v. CA
Facts: Lozano spouses were the owners of the property which they mortgaged on December 6,
1966 to secure the payment of the loan in the principal amount of P75,000.00, which they were
about to obtain from defendant-appellee Philippine Bank of Commerce (PBC).
On December 8, 1966 they executed in favor of Honesto Bonnevie the Deed of Sale with
Assumption of Mortgage, for and in consideration of the sum of P100,000.00, P25,000.00 of
which amount being payable to the Lozano spouses upon the execution of the document, and
the balance of P75,000.00 being payable to the bank.
When the mortgage was executed on December 6, 1966 by the Lozano spouses in favor of the
bank, the loan of P75,000.00 was not yet received by them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that amount.
From April 28, 1967 to July 12, 1968, Honesto Bonnevie made payments to the bank on the
mortgage. On May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul Bonnevie.
On June 10, 1968, the bank applied for the foreclosure of the mortgage. The auction sale was
conducted on August 19, 1968, and the property was sold to the bank for P84,387.00. Offers
from plaintiff-appellant to repurchase the property failed, and on October 9, 1969, he caused
an adverse claim to be annotated on the title of the property.
Petitioner assailed, among others, the validity of the deed of mortgage. They contended that
when it was executed on December 6, 1966, there was yet no principal obligation to secure as
the loan of P75,000.00 was not received by the Lozano spouses "so much so that in the absence
of a principal obligation, there is want of consideration in the accessory contract, which
consequently impairs its validity and fatally affects it very existence.”
On the other hand, the answer of defendant Bank, now private respondent herein, specifically
denied most of the allegations in the complaint and raised the following affirmative defense,
among others, that the defendant has not given its consent, much less the requisite written
consent, to the sale of the mortgaged property to plaintiff and the assumption by the latter of
the loan secured thereby.
RTC ruled in favor of the bank, IAC affirmed.
Issues: Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed
Ruling: Yes. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage
deed was executed for and on condition of the loan granted to the Lozano spouses. The fact
that the latter did not collect from the respondent Bank the consideration of the mortgage on
the date it was executed is immaterial. A contract of loan being a consensual contract, the
herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and
does not indicate lack of consideration of the mortgage at the time of its execution.

Garcia v. Thio
In February 1995, respondent Rica Marie S. Thio received from petitioner a crossed check dated
February 24, 1995 in the amount of US$100,000 payable to the order of a certain Marilou
Santiago. Thereafter, petitioner received from respondent every month (specifically, on March
24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 and P76,500 on July 26,
August 26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check [9] dated June 29,
1995 in the amount of P500,000, also payable to the order of Marilou Santiago.[10]
Consequently, petitioner received from respondent the amount of P20,000 every month on
August 5, September 5, October 5 and November 5, 1995.
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a
complaint for sum of money and damages in the RTC of Makati City against respondent, seeking
to collect the sums of US$100,000, with interest thereon at 3% and P500,000, with interest
thereon at 4% plus attorney's fees and actual damages.

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on
October 26, 1995.[13] The amount of this loan was covered by the first check. On June 29,
1995, respondent again borrowed the amount of P500,000 at an agreed monthly interest of
4%, the maturity date of which was on November 5, 1995.[14] The amount of this loan was
covered by the second check. For both loans, no promissory note was executed since petitioner
and respondent were close friends at the time.[15] Respondent paid the stipulated monthly
interest for both loans but on their maturity dates, she failed to pay the principal amounts
despite repeated demands.

Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by
petitioner to give the crossed checks to Santiago.[17] She issued the checks for P76,000 and
P20,000 not as payment of interest but to accommodate petitioner's request that respondent
use her own checks instead of Santiago's.
RTC ruled in favor of the petitioner.
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties.
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent]
received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00,
payable to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in
the amount of P500,000.00, again payable to the order of Marilou Santiago, both of which were
issued by [petitioner]. The checks received by [respondent], being crossed, may not be
encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago
herself.
Issue: Were there contracts of loan between petitioner and respondent? Who borrowed money
from the petitioner?
Ruling: Yes. A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract. This is evident in Art. 1934 of the Civil Code which
provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
Upon delivery of the object of the contract of loan (in this case the money received by the
debtor when the checks were encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount.
It is undisputed that the checks were delivered to respondent. However, these checks were
crossed and payable not to the order of respondent but to the order of a certain Marilou
Santiago.
Petitioner insists that it was upon respondent's instruction that both checks were made payable
to Santiago. She maintains that it was also upon respondent's instruction that both checks were
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago.
Furthermore, she argues that once respondent received the checks, the latter had possession
and control of them such that she had the choice to either forward them to Santiago (who was
already her debtor), to retain them or to return them to petitioner.
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed
within the actual or constructive possession or control of another. Although respondent did not
physically receive the proceeds of the checks, these instruments were placed in her control and
possession under an arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago. It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as
much as promissory notes or any written acknowledgment of the debt considering that the
amounts involved were quite big. Respondent, on the other hand, already had transactions
with Santiago at that time.
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in
both parties' list of witnesses) testified that respondent's plan was for petitioner to lend her
money at a monthly interest rate of 3%, after which respondent would lend the same amount
to Santiago at a higher rate of 5% and realize a profit of 2%. This explained why respondent
instructed petitioner to make the checks payable to Santiago. Respondent has not shown any
reason why Ruiz' testimony should not be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of
P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For
the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four
months.[34] According to respondent, she merely accommodated petitioner's request for her
to issue her own checks to cover the interest payments since petitioner was not personally
acquainted with Santiago.[35] She claimed, however, that Santiago would replace the checks
with cash.[36] Her explanation is simply incredible. It is difficult to believe that respondent
would put herself in a position where she would be compelled to pay interest, from her own
funds, for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for
evidence to be believed, it must not only proceed from the mouth of a credible witness, but
must be credible in itself such as the common experience of mankind can approve as probable
under the circumstances. We have no test of the truth of human testimony except its
conformity to our knowledge, observation, and experience. Whatever is repugnant to these
belongs to the miraculous, and is outside of juridical cognizance.[37]
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant
to Article 2209 of the Civil Code. It is well-settled that:
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.[41]
Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioner's demand letter.[42] From the
finality of the decision until it is fully paid, the amount due shall earn interest at 12% per
annum, the interim period being deemed equivalent to a forbearance of credit.[43]
Naguiat v. CA
Facts:
Queano applied with Naguiat for a loan in the amount of P200,000.00, which Naguiat granted.
On 11 August 1980, Naguiat indorsed to Queano Associated Bank Check dated 11 August 1980
for the amount of P95,000.00, which was earlier issued to Naguiat by the Corporate Resources
Financing Corporation. She also issued her own Filmanbank Check No. 065314, to the order of
Queao, also dated 11 August 1980 and for the amount of P95,000.00. The proceeds of these
checks were to constitute the loan granted by Naguiat to Queao.
To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August 1980 in
favor of Naguiat, and surrendered to the latter the owners duplicates of the titles covering the
mortgaged properties. On the same day, the mortgage deed was notarized, and Queao issued
to Naguiat a promissory note for the amount of P200,000.00, with interest at 12% per annum,
payable on 11 September 1980. Queao also issued a Security Bank and Trust Company check,
postdated 11 September 1980, for the amount of P200,000.00 and payable to the order of
Naguiat.

Upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds. On the following day, 12 September 1980, Queao requested Security
Bank to stop payment of her postdated check, but the bank rejected the request pursuant to its
policy not to honor such requests if the check is drawn against insufficient funds.

On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding settlement of
the loan. Shortly thereafter, Queao and Ruebenfeldt met with Naguiat. At the meeting, Queao
told Naguiat that she did not receive the proceeds of the loan, adding that the checks were
retained by Ruebenfeldt, who purportedly was Naguiats agent.

Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal
Province, who then scheduled the foreclosure sale on 14 August 1981.Three days before the
scheduled sale, Queao filed the case before the Pasay City RTC, seeking the annulment of the
mortgage deed. The trial court eventually stopped the auction sale.

On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null
and void, and ordering Naguiat to return to Queao the owners duplicates of her titles to the
mortgaged lots. Naguiat appealed the decision before the Court of Appeals, making no less
than eleven assignments of error. CA promulgated the decision now assailed before us that
affirmed in toto the RTC decision.

Issues:
I. Whether or not Queao had actually received the loan proceeds which were supposed to be
covered by the two checks Naguiat had issued or indorsed
II. Whether or not there is the admissibility of various representations and pronouncements of
Ruebenfeldt, invoking the rule on the non-binding effect of the admissions of third persons.

Held:
The Court held that the presumption of truthfulness engendered by notarized documents is
rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this case.

On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued
or endorsed were actually encashed or deposited. The mere issuance of the checks did not
result in the perfection of the contract of loan. For the Civil Code provides that the delivery of
bills of exchange and mercantile documents such as checks shall produce the effect of payment
only when they have been cashed. It is only after the checks have produced the effect of
payment that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code
provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.

A loan contract is a real contract, not consensual, and, as such, is perfected only upon the
delivery of the object of the contract. The objects of the contract are the loan proceeds which
Queao would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If
indeed the checks were encashed or deposited, Naguiat would have certainly presented the
corresponding documentary evidence, such as the returned checks and the pertinent bank
records. Since Naguiat presented no such proof, it follows that the checks were not encashed or
credited to Queaos account.
On the second issue, CA rejected the argument, holding that since Ruebenfeldt was an
authorized representative or agent of Naguiat the situation falls under a recognized exception
to the rule.

The existence of an agency relationship between Naguiat and Ruebenfeldt is supported by

ample evidence. Naguiat instructed Ruebenfeldt to withhold from Queao the checks she issued
or indorsed to Queao, pending delivery by the latter of additional collateral. Ruebenfeldt served
as agent of Naguiat on the loan application of Queaos friend, Marilou Farralese, and it was in
connection with that transaction that Queao came to know Naguiat. It was also Ruebenfeldt
who accompanied Queao in her meeting with Naguiat and on that occasion, on her own and
without Queao asking for it, Reubenfeldt actually drew a check for the sum of P220,000.00
payable to Naguiat, to cover for Queaos alleged liability to Naguiat under the loan agreement.

The Court of Appeals recognized the existence of an agency by estoppel citing Article 1873 of
the Civil Code. Apparently, it considered that at the very least, as a consequence of the
interaction between Naguiat and Ruebenfeldt, Queao got the impression that Ruebenfeldt was
the agent of Naguiat, but Naguiat did nothing to correct Queaos impression. In that situation,
the rule is clear. One who clothes another with apparent authority as his agent, and holds him
out to the public as such, cannot be permitted to deny the authority of such person to act as his
agent, to the prejudice of innocent third parties dealing with such person in good faith, and in
the honest belief that he is what he appears to be. CA is correct in invoking the said rule on
agency by estoppel.

More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is
irrelevant in the face of the fact that the checks issued or indorsed to Queao were never
encashed or deposited to her account of Naguiat.
Republic v. Bagtas
On May 8, 1948 Bagtas borrowed from the Bureau of Animal Industry three bulls of different
breeds, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject
to a government charge of breeding fee of 10% of the book value of the bulls.
Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for
another period of one year. However, the Secretary of Agriculture and Natural Resources
approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950
and requested the return of the other two.
In March 1950 Bagtas wrote to the Director of Animal Industry that he would pay the value of
the three bulls. In October 1950, he reiterated his desire to buy them at a value with a
deduction of yearly depreciation to be approved by the Auditor General.
On 19 October 1950 the Director of Animal Industry advised him that the book value of the
three bulls could not be reduced and that they either be returned or their book value paid not
later than 31 October 1950.
Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December
1950 in the CFI Manila the Republic of the Philippines commenced an action against him
praying that he be ordered to return the three bulls loaned to him or to pay their book value.
Bagtas answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of
Agriculture and Natural Resources and the President of the Philippines from the refusal by the
Director of Animal Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did
not object, he could not return the animals nor pay their value and prayed for the dismissal of
the complaint.
CFI ruled against Bagtas. Bagtas died on 23 October 1951.
On 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned two of
the bulls to Bureau of Animal Industry, Bayombong, Nueva Viscaya. The appellant contends that
the remaining one bull was accidentally killed during a raid by the Huks and that as such death
was due to force majeure, she is relieved from the duty of the returning the bull or paying its
value to the appellee.
Issue: Whether the appellants are relieved from the liability
Ruling: No. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for
breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed
for another year as regards one bull, was subject to the payment by the borrower of breeding
fee of 10% of the book value of the bulls. The appellant contends that the contract was
commodatum and that, for that reason, as the appellee retained ownership or title to the bull it
should suffer its loss due to force majeure. A contract of commodatum is essentially gratuitous.
If the breeding fee be considered a compensation, then the contract would be a lease of the
bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession of the bull after the expiry of the
contract. And even if the contract be commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract of commodatum—
* * * is liable for loss of the thing, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated. * * *
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event.
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased husband of the appellant the bulls had each an
appraised book value. It was not stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt from liability.
Tan v. Valdehueza
Facts:.

Tan instituted a civil action against Valdehueza for (a) declaration of ownership and recovery of
possession of the parcel of land described in the first cause of action of the complaint, and (b)
consolidation of ownership of two portions of another parcel of (unregistered) land described
in the second cause of action of the complaint, purportedly sold to the plaintiff in two separate
deeds of pacto de retro.
Concerning the first cause of action, defendant Arador Valdehueza failed to redeem the parcel
of land within the period of one year. As a result, Provincial Sheriff of Misamis Occidental
executed an absolute sale of said property in favor of Tan herein at a public auction sale.
Concerning the second cause of action, defendants have executed two documents of DEED OF
PACTO DE RETRO SALE in favor of Tan, of two portions of a parcel of land with the total amount
of P1,500.00. One document was registered with the Registry of Deeds, while the other was
not. From the execution of the Deed of Sale with right to repurchase mentioned in the second
cause of action, defendants remained in the possession of the land; that land taxes to the said
land were paid by the same said defendants.
As regards the land covered by deed of pacto de retro, RTC ruled in favor of Tan, ordering the
defendants to pay the plaintiff the amount of P300 with legal interest of 6% from August 15,
1966, the said land serving as guaranty of the said amount of payment.
Tan filed a complaint for injunction on July 24, 1957 against the Valdehuezas, to enjoin them
"from entering the above-described parcel of land and gathering the nuts therein x x x" This
complaint and the counterclaim were subsequently dismissed for failure of the parties "to seek
for the immediate trial thereof, thus evincing lack of interest on their part to proceed with the
case."[1]
The RTC

The Valdehuezas appealed, assigning the following errors:

"That the lower court erred in making a finding on the second cause of action that the
transactions between the parties were simple loan, instead, it should be declared as equitable
mortgage."
We affirm in part and modify in part.

2. The trial court treated the registered deed of pacto de retro as an equitable mortgage but
considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by
the property thus sold under pacto de retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge had not updated himself on law
and jurisprudence: he cited, in support of his ruling, article 1875 of the old Civil Code and
decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the
validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code
(in effect since August 30, 1950), this is no longer so.
"If the instrument is not recorded, the mortgage is nonetheless binding between the parties."
(Article 2125, 2nd sentence)
The Valdehuezas having remained in possession of the land and the realty taxes having been
paid by them, the contracts which purported to be pacto de retro transactions are presumed to
be equitable mortgages, whether registered or not, there being no third parties involved.

ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the amounts of P1,200
and P300 mentioned in Annexes E and D shall bear interest at six percent per annum from the
finality of this decision; and (b) the parcel of land covered by Annex D shall be treated in the
same manner as that covered by Annex E, should the defendants fail to pay to the plaintiff the
sum of P300 within 90 days from the finality of this decision. In all other respects the judgment
is affirmed. No costs.
Producers Bank v. CA
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services). Specifically, Sanchez asked private respondent to
deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he could withdraw his money from said
account within a month’s time.
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronilla’s private secretary, met and discussed the matter. Thereafter, relying on the
assurances and representations of Sanchez and Doronilla, private respondent issued a check in
the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela.
Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check.
Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant
manager, who informed them that part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that
Mrs. Vives could not withdraw said remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez
opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for
Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated checks, all of which were dishonored.
Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 10-
1567 because he was the sole proprietor of Sterela.
Private respondent tried to get in touch with Doronilla through Sanchez to demand the return
of his money, but Doronilla on several occasions failed to do so.
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. RTC ruled in
favor of Vives, and the CA affirmed the same in toto.
Petitioner contends, among others, that the transaction between private respondent and
Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what
was delivered by private respondent to Doronilla was money, a consumable thing; and second,
the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check
issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private
respondent deposited in Sterela’s bank account. Moreover, the fact that private respondent
sued his good friend Sanchez for his failure to recover his money from Doronilla shows that the
transaction was not merely gratuitous but “had a business angle” to it. Hence, petitioner argues
that it cannot be held liable for the return of private respondent’s P200,000.00 because it is not
privy to the transaction between the latter and Doronilla.

Private respondent, on the other hand, argues that the transaction between him and Doronilla
is not a mutuum but an accommodation, since he did not actually part with the ownership of
his P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so
that a certification can be issued to the effect that Sterela had sufficient funds for purposes of
its incorporation but at the same time, he retained some degree of control over his money
through his wife who was made a signatory to the savings account and in whose possession the
savings account passbook was given.
Issue: Whether or not CA erred when it ruled that the transaction between private respondent
and Doronilla was a commodatum and not a mutuum
Ruling: No. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this
wise: By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which case the contract is
simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be
gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end
of the period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration
in determining the actual character of a contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination.
Evidence- shows that private respondent agreed to deposit his money in the savings account of
Sterela specifically for the purpose of making it appear “that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned within
thirty days.” Private respondent merely “accommodated” Doronilla by lending his money
without consideration, as a favor to his good friend Sanchez. It was however clear to the parties
to the transaction that the money would not be removed from Sterela’s savings account and
would be returned to private respondent after thirty (30) days.
Doronilla’s attempts to return to private respondent the amount of P200,000.00 which the
latter deposited in Sterela’s account together with an additional P12,000.00, allegedly
representing interest on the mutuum, did not convert the transaction from a commodatum into
a mutuum because such was not the intent of the parties and because the additional
P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil
Code expressly states that “[t]he bailee in commodatum acquires the use of the thing loaned
but not its fruits.” Hence, it was only proper for Doronilla to remit to private respondent the
interest accruing to the latter’s money deposited with petitioner.
Mina vs Pascual
Facts: Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired
during his lifetime, on March 12, 1874, a lot.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of
the said lot, embracing 14 meters of its frontage by 11 meters of its depth. Francisco Fontanilla,
the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were
recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children of
Ruperta Pascual were recognized, though it is not said how, and consequently are entitled to
the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of
it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-
seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva.
Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the
Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of
the warehouse, of 14 by 11 meters, together with its lot.The warehouse, together with the lot
on which it stands, was sold to Cu Joco, the other defendant in this case
Issue: WoN there exist a contract of commodatum
Held: Although both litigating parties may have agreed in their idea of the commodatum, on
account of its not being, as indeed it is not, a question of fact but of lawContracts are not to be
interpreted in conformity with the name that the parties thereto agree to give them, but must
be construed, duly considering their constitutive elements, as they are defined and
denominated by law.By the contract of loan, one of the parties delivers to the other, either
anything not perishable, in order that the latter may use it during the certain period and return
it to the former, in which case it is called commodatumIt is, therefore, an essential feature of
the commodatum that the use of the thing belonging to another shall BE for a certain period.
Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could
have the use of the lot whereon the latter was to erect a stone warehouse of considerable
value, and so it is that for the past thirty years of the lot has been used by both Andres and his
successors in interest.It would seem that the Supreme Court failed to consider the possibility of
a contractof precardium between Francisco and Andres. Precardium is a kind of commodatum
Kitem Duque Kadatuan Jr.
wherein the bailor may demand the object at will if the contract does not stipulate aperiod or
use to which the thing is devoted.
Quintos Ansaldo v. Beck
Facts: The defendant was a tenant of the plaintiff. The latter gratuitously granted to the former
the use of the furniture subject to the condition that the defendant would return them to the
plaintiff upon the latter's demand. The plaintiff sold the property. There after the plaintiff
required the defendant to return all the furniture transferred to him for the new owners in the
house where they were found.

On November 5, 1936, the defendant wrote to the plaintiff reiterating that she may call for the
furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote
another letter to the plaintiff informing her that he could not give up the three gas heaters and
the four electric lamps because he would use them until the 15th of the same month when the
lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the
defendant had declined to make delivery of all of them. On November 15th, before vacating the
house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and
they are now on deposit in the custody of the sheriff.

ISSUE: Whether or not defendant complied with his obligation to return the furniture upon
the plaintiff’s demand.
HELD: NO.
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph
1, and 1741 of the Civil Code).
The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or
house. The defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric
lamps.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand, the Court could not legally compel her to bear the expenses occasioned by
the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to
place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return
the furniture, because the defendant wanted to retain the three gas heaters and the four
electric lamps.
Pajuyo v. CA
Facts:
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the
rights over a 250- square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to
7 December 1985.

On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed a
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
for free provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyos demand.

In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.

Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 (MTC).

In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor
Pajuyo has valid title to the lot.

MTC: The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the
house and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the
house only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.

RTC: The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.

CA: Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally occupied the contested lot
which the government owned.

Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right
or title over the lot because it is public land. Pajuyo and Guevarra are in pari delicto or in equal
fault. The court will leave them where they are.

Kasunduan is not a lease contract but a commodatum because the agreement is not for a price
certain.

Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
court held that Guevarra has a better right over the property under Proclamation No. 137.
President Corazon C. Aquino issued Proclamation No. 137 on 7 September 1987. At that time,
Guevarra was in physical possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in the National Housing
Project (the Code), the actual occupant or caretaker of the lot shall have first priority as
beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the hierarchy
of priority.

Issue:
Whether or not the CA erred or abused its authority and discretion tantamount to lack of
jurisdiction in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in
holding that the ejectment case filed against defendant-appellant is without legal and factual
basis.
Held:
The Court do not subscribe to the CA’s theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. An essential
feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use
of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the
return of the thing loaned until after expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is constituted. If the bailor should have
urgent need of the thing, he may demand its return for temporary use. If the use of the thing is
merely tolerated by the bailor, he can demand the return of the thing at will, in which case the
contractual relation is called a precarium. Under the Civil Code, precarium is a kind of
commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of
permission would result in the termination of the lease. The tenants withholding of the
property would then be unlawful. This is settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum. These contracts
certainly involve the obligation to deliver or return the thing received.

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.

Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has
a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Republic v. Grualdo
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank
of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are evidenced by five promissory notes executed
by the appellant in favor of the Bank of Taiwan, all notes without due dates. But because the
loans were crop loans, it was considered that the loans were due one year after they were
incurred. To secure the payment of the loan the appellant executed a chattel mortgage on the
standing crops on his land.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided
for in the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of
Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine
Property Act of 1946 of the United States, these assets, including the loans in question, were
subsequently transferred to the Republic of the Philippines by the Government of the United
States under Transfer Agreement dated July 20, 1954.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman
of the Board of Liquidators demanded a payment from the loan but the appellant defaulted.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of
Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in question but
the same was dismissed on the ground that the action had prescribed.
The appellee appealed to the CFI, which rendered a decision in its favor.
The appellant appealed directly to this Court. During pendency of this appeal the appellant Jose
Grijaldo died and was subsequently substituted by his legal heirs.
The appellant maintains, in support of his contention that the appellee has no cause of action,
that because the loans were secured by a chattel mortgage on the standing crops on a land
owned by him and those crops were lost or destroyed through enemy action his obligation to
pay the loans was thereby extinguished.
Issue: Whether or not the Republic of the Philippines has cause of action against Jose Grualdo
Ruling: Yes.
The terms of the promissory notes and the chattel mortgage that the appellant executed in
favor of the Bank of Taiwan, Ltd. do not support the claim of appellant. The obligation of the
appellant under the five promissory notes was not to deliver a determinate thing; namely, the
crops to be harvested from his land, or the value of the crops that would be harvested from his
land. Rather, his obligation was to pay a generic thing the amount of money representing the
total sum of the five loans, with interest. The transaction between the appellant and the Bank
of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of
(simple) loan, one of the parties delivers to another . . . money or other consumable thing upon
the condition that the same amount of the same kind and quality shall be paid." (Article 1933,
Civil Code.) The obligation of the appellant under the five promissory notes evidencing the
loans in question is to pay the value thereof; that is, to deliver a sum of money—a clear case of
an obligation to deliver a generic thing. Article 1263 of the Civil Code provides: "In an obligation
to deliver a generic thing, the loss or destruction of anything1 of the same kind does not
extinguish the obligation".
The chattel mortgage on the crops growing on appellant's land simply stood as a security for
the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of
the crops did not extinguish his obligation to pay, because the account could still be paid from
other sources aside from the mortgaged crops.
LUCIA TAN, plaintiff-appellee, vs.ARADOR VALDEHUEZA and REDICULO VALDEHUEZA,
defendants-appellants.
Facts: An action instituted by the plaintiff-appellee Lucia Tan against the defendants-
appellantsArador Valdehueza and Rediculo Valdehueza for (a) declaration of ownership and
recovery ofpossession of the parcel of land described in the first cause of action of the
complaint, and (b)consolidation of ownership of two portions of another parcel of
(unregistered) land described inthe second cause of action of the complaint, purportedly sold
to the plaintiff in two separatedeeds of pacto de retro.Parcel of land described in the first cause
of action was the subject matter of the public auctionsale in Oroquieta, Misamis Occidental,
wherein the TAN was the highest bidder .Due to the failure of defendant Arador Valdehueza to
redeem the said land within the period ofone year as being provided by law, MR. VICENTE D.
ROA who was then the Ex-Officio ProvincialSheriff executed an ABSOLUTE DEED OF SALE in
favor of the plaintiff LUCIA TAN.Civil case 2002 was a complaint for injunction filed by Tan on
July 24, 1957 against theValdehuezas, to enjoin them "from entering the above-described
parcel of land and gatheringthe nuts therein ...." This complaint and the counterclaim were
subsequently dismissed The Valdehuezas appealed to the lower court alleging that it erred in
making a finding on thesecond cause of action that the transactions between the parties were
simple loan, instead, itshould be declared as equitable mortgage.
Held: The trial court treated the registered deed of pacto de retro as an equitable mortgage
butconsidered the unregistered deed of pacto de retro "as a mere case of simple loan, secured
bythe property thus sold under pacto de retro," on the ground that no suit lies to foreclose
anunregistered mortgage. It would appear that the trial judge had not updated himself on
lawand jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil Code
anddecisions of this Court circa 1910 and 1912.Under article 1875 of the Civil Code of 1889,
registration was a necessary requisite for thevalidity of a mortgage even as between the
parties, but under article 2125 of the new CivilCode (in effect since August 30,1950), this is no
longer so. 4If the instrument is not recorded, the mortgage is nonetheless binding between the
parties.(Article 2125, 2nd sentence).The Valdehuezas having remained in possession of the land
and the realty taxes having beenpaid by them, the contracts which purported to be pacto de
retro transactions are presumed tobe equitable mortgages, 5 whether registered or not, there
being no third parties involved.
JARDENIL V. SOLAS
G.R. No. L-47878
24 July 1942
Article 1956: No interest shall be due unless it has been expressly stipulated in writing. (1755a)

FACTS:
The case is an action for foreclosure of mortgage. Paragraph 4 of the mortgage deed between
the parties states that Solas agrees to pay Jardenil on or before 31 March 1934 the amount of P
2,400 with the interests of the sum at the rate of 12% per year starting from the date of
execution until its maturity date on 31 March 1934. The mortgage also includes an extension
note of one year from the date of maturity within which to make payment, without making any
mention of any interest which the mortgagor should pay during the additional period.

ISSUE:
Whether or not defendant-appellee (Solas) is bound to pay the stipulated interest
continuously up to the date of payment, regardless whether the actual date of payment is
beyond the stipulated maturity date

HELD/RATIO:
No.
The Court ruled that Solas clearly agreed to pay interest only up to the date of maturity,
or until March 31, 1934. As the contract is silent as to whether after that date, in the event of
non-payment, the debtor would continue to pay interest, the Court cannot in law, indulge in
any presumption as to such interest; otherwise, the Court would be imposing upon the debtor
an obligation that the parties have not chosen to agree upon. Article 1755 of the (old) Civil Code
provides that "interest shall be due only when it has been expressly stipulated."
There is nothing in the mortgage deed to show that the terms stipulated go against the
intention of the parties. Neither has either of the parties shown that, by mutual mistake, the
deed of mortgage fails to express their agreement since the plaintiff, Jardenil, did not adduce
evidence to establish such mistake. Since the parties included an extension note of one year
within which to make payment without mentioning that additional interests should be paid
during that extended period, it can be deduced that parties intended that no interest should be
paid during the period of grace.
The contract is clear and unmistakable and the terms employed therein have not been shown
to belie or otherwise fail to express the true intention of the parties and that the deed has not
been assailed on the ground of mutual mistake which would require its reformation, same
should be given its full force and effect.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of
P2,400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial
demands have been made on the expiration of the year of grace, he shall be entitled to legal
interest upon the principal and the accrued interest from April 1, 1935, until full payment.
Bobie Rose V. Frias vs Flora San Diego-Sison
FACTS: Bobie Rose Frias owns a house and lot acquired from Island Masters Reality and
Development Corporation (IMRDC) through a Deed of Sale and covered by transfer certificate
of title (TCT) in the name of IRMDC.
Frias, as the First Party, and Dra. Flora San Diego-Sison as the Second Party, entered into a
Memorandum of Agreement (MOA) over the property with the following terms and conditions:
“xxx for and in consideration of the sum of P3,000,000.00 receipt of which is hereby
acknowledged by the FIRST PARTY from the SECOND PARTY, the parties have agreed as follows:
That the SECOND PARTY has a period of 6 months from the date of the execution of this
contract xxx to notify the FIRST PARTY of her intention to purchase xxx at a price of
P6,400,000.00 xxx another six months within which to pay the remaining balance of P3.4
million.
xxx
That in case the FIRST PARTY has no other buyer within the first six months from the six months
from the execution of this contract, no interest shall be charged by the SECOND PARTY on the
P3million however, in the event that on the sixth month the SECOND PARTY would decide not
to purchase the aforementioned property, the FIRST PARTY has a period of another six months
within which to pay the sum of P3 million pesos provided that the said amount shall earn
compounded bank interest for the last six months only. Under this circumstance, the amount of
P3 million given by the SECOND PARTY shall be treated as a loan and the property shall be
considered as the security for the mortgage which can be enforced in accordance with law.”
Frias received from San Diego-Sison P2million cash and P1million post-dated check dated
February 28, 1990, instead of 1991, which rendered the check stale. Frias then gave the TCT in
the name of IRMDC and the Deed of Absolute Sale over the property between Frias and IRMDC.
San Diego-Sison decided not to purchase the property and informed Frias through a letter
reminding of the agreement that the amount of P2Million be considered as a loan payable
within 6 months. However, Frias failed to pay San Diego-Sison who later filed a complaint for
sum of money with preliminary attachment. Also, San Diego-Sison averred that Frias tried to
deprive her of the security for the loan when Frias made a false report of the loss of her
owner’s copy of the TCT and be issued a new owner’s duplicate copy of said title.
The trial court ordered Frias to pay San Diego-Sison the sum of P2million plus interest at the
rate of 32% per annum beginning December 7, 1991 due to the compounded interest stipulated
in the MOA. The appellate court affirmed the trial court’s decision but modified the rate of
interest from 32% to 25% effective June 7, 1991 when the interest rate prevailing in 1991
ranged from 25% to 32% per annum and that the P2Million was considered as a loan in June
1991.
Frias argued that the interest rate was contrary to the MOA because it provided that if San
Diego-Sison would decide not to purchase the property, Frias has the period of another six
months to pay the loan with compounded bank interest for the last six months only.
ISSUES: Whether the compounded bank interest should be limited to 6 months only as
stipulated in the contract.
Whether CA committed error in awarding 25% interest per annum on the 2million peso loan
even beyond the second 6 months stipulated period.
Whether San Diego-Sison is entitled to moral damages.

HELD:
The Court said that the phrase “for the last six months only” should be taken in the context of
the entire agreement. It agreed with CA’s interpretation of the phrase:

“Their agreement speaks of two periods of six months each. The first six- month period was
given to plaintiff-appellee (respondent) to make up her mind whether or not to purchase
defendant-appellant’s (petitioner’s) property. The second six-month period was given to
defendant-appellant to pay the P2 million loan in the event that plaintiff-appellee decided not
to buy the subject property in which case interest will be charged “for the last six months only”,
referring to the second six-month period. This means that no interest will be charged for the
first six-month period while appellee was making up her mind whether to buy the property, but
only for the second period of six months after appellee had decided not to buy the property.
This is the meaning of the phrase “for the last six months only”. Certainly, there is nothing in
their agreement that suggests that interest will be charged for six months only even if it takes
defendant-appellant an eternity to pay the loan.”

Having considered it as a loan, the monetary interest for the last six months continued to
accrue until actual payment of the loaned amount.
The court further explained why interest must be paid:

“ The payment of regular interest constitutes the price or cost of the use of money and thus,
until principal sum due is returned to the creditor, regular interest continues to accrue since the
debtor continues to use such principal amount. It has been held that for a debtor to continue
in possession of the principal of the loan and to continue to use the same after maturity of the
loan without payment of the monetary interest, would constitute unjust enrichment on the
part of the debtor at the expense of the creditor.”

The Court found no error in awarding 25% interest per annum on the P2Million loan even
beyond the six months stipulated period. “The general rule is that if the terms of an agreement
are clear and leave no doubt as to the intention of the contracting parties, the literal meaning
of its stipulations shall prevail. It is further required that the various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may result from
all of them taken jointly.” Besides, Frias and San Diego-Sison agreed and as stipulated in the
contract that the loaned amount shall earn compounded bank interests.

Yes. The court agreed with “the findings of the trial court and the CA that petitioner’s act of
trying to deprive respondent of the security of her loan by executing an affidavit of loss of the
title and instituting a petition for the issuance of a new owner’s duplicate copy of TCT No.
168173 entitles respondent to moral damages. Moral damages may be awarded in culpa
contractual or breach of contract cases when the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud.” Xxx
“Petitioner’s actuation would have deprived respondent of the security for her loan were it not
for respondent’s timely filing of a petition for relief whereby the RTC set aside its previous order
granting the issuance of new title. Thus, the award of moral damages is in order