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Inciong v CA; PBCom Inciong, Naybe and Pantanosas all signed a PN for P50T in favor of Philippine Bank of Communications

for a P50T loan (with Naybe as the principal debtor and Inciong and Pantasonas as co-makers.) When the note fell due and despite demands, they were unable to pay the amount owed. This prompted PBCom to file a collection case against them before the RTC averring that the note imposed a solidary obligation on all of the signatories thereto. The note reads: "Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate of SIXTEEN (16) per cent per annum until fully paid." Inciong averred that he merely signed the note as a co-maker to the extent of P5T. He also said that the notes were in blank and even specified in one of the notes that his liability was limited to only 5T. Thus, it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00. The case was primarily dismissed for failure to prosecute. However the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. The lower court dismissed the case against defendant Pantanosas as prayed for by PBCom herein. Meanwhile, only the summons addressed to Inciong was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia. The RTC held that Inciong was solidarily liable with his co-makers. This was affirmed by the CA. the lower court noted that the typewritten figure "P50,000-" clearly appears directly below the admitted signature of the petitioner in the promissory note. 3 Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity and fairness of the transaction, under the Rules of Court. The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was supposed to take due care of his concerns. Issue Is Inciong solidarily liable? Held Inciong is solidarily liable. He contends that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the motion of PBCom itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that: "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter." It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. Article 2047 of the Civil Code states: "By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such a case the contract is called a suretyship." While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. As Tolentino explains:

"A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fianza; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code." Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires. Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor to determine against whom he will enforce collection. Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law. Vizconde v CA; Pp Vizconde and a certain Pagulayan were charged and found guilty of the felony of estafa for having appropriated for themselves a P85K worth diamond ring belonging to a certain Dr. Perlas. As an accessory penalty, they were held to be solidarily liable to indemnify the offended party in the sum of P55,000.00 for the unaccounted balance of the value of the ring with legal interest. On appeal, the CA affirmed the decision of the trial court. The solicitor general on this appeal recommends the acquittal of Vizconde on the estafa case but civilly liable on the payment of the balance. As culled from the records, Dr. Perlas contacted Vizconde to sell her 8-carat diamond ring. Vizonde asked for the ring claiming that a certain Pagulayan has found a sure-buyer of said ring. Perlas was hesitant at first but she acceded when she was given a postdated check for the price (P85,000.00) and, together with Vizconde, signed a receipt prepared by Perlas. This receipt reads as follows: "RECEIPT Received from Dra. Marylou Javier-Perlas one (1) solo 8 karat diamond ring, white, double cut, brilliant cut with multiple brilliantitos, which I agree to sell for P85,000.00 (eighty-five thousand pesos) on commission basis and pay her in the following manner: P85,000.00 postdated check PNB check 730297 dated April 26, 1975 for P85,000.00 It is understood that in the event the above postdated check is dishonored for any reason whatsoever on its due date, the total payment of the above item, shall become immediately due and demandable without awaiting further demand. I guarantee that the above check will be sufficiently funded on the respective due date. Quezon City, Philippines 22 April 1975 (SGD.)PILAR A. PAGULAYAN PILAR A. PAGULAYAN

16 Rd. 8 Project 6 I guarantee jointly and severally (SGD.)CORAZON J. VIZCONDE CORAZON J. VIZCONDE" After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila Bank. It was dishonored for the reason, "No arrangement," stated in the debit advice. Perlas then demanded for Vizconde and Pagulayan to return the ring or pay P85,000.00. Vizconde and Pagulayan were able to pay 30T but both reneged on the balance of 55T. Thus, the estafa case. Issue Was an agency between Vizconde and Dr. Perlas established based on the foregoing agreements and instruments as to warrant the conviction of estafa against Vizconde? Held No. Vizconde is acquitted from estafa but held liable for the balance of P55T. Reference to what may be taken for an agency agreement appears in the clause ". . . which I agree to sell . . . on commission basis" in the main text of that document. But it is clear that if any agency was established it was one between Perlas and Pagulayan only, this being the only logical conclusion from the use of the singular "I" in said clause, in conjunction with the fact that the part of the receipt in which the clause appears bears only the signature of Pagulayan. As the Solicitor General correctly puts it, the joint and several undertaking assumed by Vizconde in a separate writing below the main body of the receipt, merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the event of her (Pagulayan's) failure to return said article. It cannot, in any sense, be construed as assuming any criminal responsibility consequent upon the failure of Pagulayan to return the ring or deliver its value. It is fundamental that criminal responsibility is personal and that in the absence of conspiracy, one cannot be held criminally liable for the act or default of another. Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation more than merely civil in character, and staked her very liberty on Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence of guaranty (or suretyship) as creating purely civil obligations on the part of the guarantor or surety. To render Vizconde criminally liable for the misappropriation of the ring, more than her mere guarantee written on the first reecipt is necessary. At the least, she must be shown to have acted in concert and conspiracy with Pagulayan, either in obtaining possession of the ring, or in undertaking to return the same or deliver its value, or in the misappropriation or conversion of the same. The second receipt must be taken in the context of the subsequent events that transpired. That the complainant then already entertained serious apprehensions about the fate of the ring is evident in her having had her lawyers send Vizconde and Pagulayan demands for restitution or payment, with threat of legal action. Given that situation, the second receipt, insofar as it purports to confirm that Vizconde had also received the ring in trust, cannot be considered as anything other than an attempt to "cure" the lack of mention of such an entrustment in the first receipt, and thereby bind Vizconde to a commitment far stronger and more compelling than a mere civil guarantee for the value of the ring. There is otherwise no explanation for requiring Vizconde and Pagulayan to sign the receipt, which needed only the signature of Perlas as an acknowledgment of the P5,000.00 given in part payment, and the delivery of the land titles to secure the balance. Atok Finance v CA; SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI Atok and Sanyu Chemical entered into a Continuing Suretyship Agreement in favor of Atok Finance with the latter being the creditor and Sanyu Chemical and several stockholders as sureties. Sanyu Chemical, in consideration of receipt from Atok Finance of the amount of P105,000.00, assigned several receivables in favor of Atok. Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

Atok Finance commenced action against Sanyu Chemical, and the sureties before the RTC to collect the sum of P120,240.00. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under the trade receivables. Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. It is the contention of respondents that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract: first, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered 'future debt' as envisioned by this law. Issue 1. May a surety agreement, being an accessory contract, be effected to secure future (nonexisting) debts? May the continuing suretyship agreement be declared null and void for alleged lack of consideration since there was still no pre-existing obligation for the surety to attach to? 2. Whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned. Held 1. Surety agreements may secure future debts. It is true that a guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. The argument of respondents has been debunked in the cases of National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc. and in Rizal Commercial Banking Corporation v. Arro. In NARIC v Fojas: This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that 'a guaranty may also be given as security for future debts the amount of which is not yet known. In RCBC v Arro: The surety agreement which was earlier signed by Enrique Go., Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code.

Thes cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar 2. They are liable. The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased based on article 1629: In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), ALSO became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code. Fortune Motors; RODRIGUEZA v CA; FILINVEST CREDIT CORPORATION Facts Chua and Rodrigueza (as sureties of Fortune Motors) each executed a "Surety Undertaking" whereunder they "absolutely, unconditionally and solidarily guaranteed" to Filinvest Credit Corporation and its affiliated and subsidiary companies the "full, faithful and prompt performance, payment and discharge of any and all obligations and agreements" of Fortune Motors (Phils.) Corporation. Fortune, Filinvest and CARCO entered into an "Automotive Wholesale Financing Agreement" under which CARCO will deliver motor vehicles to Fortune for the purpose of resale in the latter's ordinary course of business; Fortune, in turn, will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which will discount the same together with the trust receipts and invoices and

assign them in favor of Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement, Fortune, as trustee of the motor vehicles, was to report and remit proceeds of any sale for cash or on terms to Filinvest immediately without necessity of demand. (Supplier: CARCO, Seller: Fortune, Capital: Filinvest) Several motor vehicles were delivered by CARCO to Fortune, and trust receipts covered by demand drafts and deeds of assignment were executed in favor of Filinvest. However, when the demand drafts matured, not all the proceeds of the vehicles which Fortune had sold were remitted to Filinvest. Fortune likewise failed to turn over to Filinvest several unsold motor vehicles covered by the trust receipts. After unheeded demands, Filinvest filed in the RTC a complaint for a sum of money with preliminary attachment against Fortune, Chua and Rodrigueza. Defendants Chua and Rodrigueza, instead of presenting their evidence, filed a "Motion for Judgment on Demurrer to Evidence" anchored principally on the ground that the Surety Undertakings were null and void because, at the time they were executed, there was no principal obligation existing. The RTC ruled in favor of Filinvest, ordering Fortune, Chua and Rodrigueza to pay Filinvest, jointly and severally the amounts due it. This was affirmed by the CA. Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil Code refer only to "debts existing at the time of the constitution of the guaranty but the amount thereof is unknown," and that a guaranty being an accessory obligation cannot exist without a principal obligation. Petitioners claim that the surety undertakings cannot be made to cover the Financing Agreement executed by Fortune, Filinvest and CARCO since the latter contract was not yet in existence when said surety contracts were entered into. Issue In the event the car dealer defaults in paying the financing company, may the surety escape liability on the legal ground that the obligations were incurred subsequent to the execution of the surety contract? Held No. A Surety May Secure Future Obligations. The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals which reiterated our rulings in National Rice and Corn Corporation (NARIC) vs. Court of Appeals and Rizal Commercial Banking Corporation vs. Arro. In Atok: x x x a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. Also, In Dio vs. Court of Appeals: A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made 'from time to time' the guaranty will be construed to be a continuing one. We have no reason to depart from our uniform ruling in the abovecited cases. The facts of the instant case bring us to no other conclusion than that the surety undertakings executed by Chua

and Rodrigueza were continuing guaranties or suretyships covering all future obligations of Fortune Motors (Phils.) Corporation with Filinvest Credit Corporation. This is evident from the written contract itself which contained the words "absolutely, unconditionally and solidarily guarantee(d)" to Respondent Filinvest and its affiliated and subsidiary companies the "full, faithful and prompt performance, payment and discharge of any and all obligations and agreements" of Petitioner Fortune "under or with respect to any and all such contracts and any and all other agreements (whether by way of guaranty or otherwise)" of the latter with Filinvest and its affiliated and subsidiary companies "now in force or hereafter made." Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the time they executed their respective surety undertakings in favor of Fortune. Rodrigueza and Chua were fully aware of the business of Fortune, an automobile dealer; Chua being the corporate president of Fortune and even a signatory to the Financial Agreement with Filinvest. Both sureties knew the purpose of the surety undertaking which they signed and they must have had an estimate of the amount involved at that time. Their undertaking by way of the surety contracts was critical in enabling Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the business of Fortune. Filinvest, for its part, relied on the surety contracts when it agreed to be the assignee of CARCO with respect to the liabilities of Fortune with CARCO. After benefiting therefrom, petitioners cannot now impugn the validity of the surety contracts on the ground that there was no preexisting obligation to be guaranteed at the time said surety contracts were executed. They cannot resort to equity to escape liability for their voluntary acts, and to heap injustice to Filinvest, which relied on their signed word. This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it can collect from Chua and/or Rodrigueza in case of Fortune's default. Filinvest relied upon the surety contracts when it demanded payment from the sureties of the unsettled liabilities of Fortune. JACINTO UY DIO and NORBERTO UY, petitioners, vs. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company. To secure the aforementioned credit accommodations, Norberto Uy and Jacinto Uy Dio executed separate Continuing, dated 25 February 1977, in favor of the MBTC. This credit accommodation has been fully paid. Subsequent transactions flowed smoothly until UTEFS executed and delivered to METROBANK a Trust Receipt whereby the former acknowledged receipt in trust from the latter of the received goods from Planters Products which amounted to P815,600.00. Being the entrustee, the UTEFS agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979. However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. They denied liability on the transaction. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977. On demand, UTEFS paid some of the outstanding amount. As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Since it could no longer collect the balance of amount due, METROBANK thus filed a complaint for collection of a sum of money. Norberto Uy and Jacinto Uy Dio (sureties-defendants) filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to

secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they cannot be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation. METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the comprehensive suretyships separately executed by sureties-defendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and future ones. The RTC and the CA ruled in favor of MBTC and held the sureties solidarily liable. Issues 1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977; and 2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations. Held 1. Yes, they are still liable. Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as a continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It s prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. Paragraph IV of both agreements stipulate that: "VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the SURETY from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt of such notice. x x x The foregoing stipulations unequivocally reveal that the suretyship agreements in the case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly. Article 2052 speaks about a valid obligations, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads: "Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation."

2. By express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interests, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due. Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides: "ARTICLE 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. The limit of the petitioners' respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. WILLEX PLASTIC INDUSTRIES, CORPORATION, vs. CA and INTERNATIONAL CORPORATE BANK Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled "Continuing Surety Agreement", whereby they bound themselves solidarily to pay Manilabank. Thereafter, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guarantee "the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified." Following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing InterResin Industrial's outstanding obligation. Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic. Inter-Resin Industrial paid some of the amounts due. Willex Plastic denied the material allegations of the complaint. It argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. Issue Whether under the "Continuing Guaranty" signed on April 2, 1979, Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount by Interbank to Manilabank. Held

Yes. Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was executed. Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to InterResin Industrial. Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation." Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty. Willex Plastic admitted that it was "to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a 'Continuing Guaranty' was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]." Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal." CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner, vs. Hon. ALBERTO Q. UBAY as Judge of the Court of First Instance of Rizal, Caloocan City, Branch XXXII and ONG CHI, doing business under the Firm Name. "TABLERIA DE LUXE," respondents. Ong Chi, doing business under the firm name "Tableria de Luxe", sued Francisco Reyes, Jr. for a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment and upon filing a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed in custodia legis. Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of P6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The condition of the counterbond is that "in consideration of the dissolution of said attachment, [Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby jointly and severally, bind ourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY FIVE ONLY (P6,465.00) Philippine Currency, under the condition that in the case the plaintiff recovers judgment in the action the defendant will on demand redeliver the attached property so released to the officer of the Court to be applied to the payment of the judgment or in default thereof that the defendant and surety will on demand pay to the plaintiff the full value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted and the jeep was returned to Reyes. In the course of time, the City Court rendered judgment as follows: "WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering said defendant to pay plaintiff the sum of P6,964.18, with legal interests thereon from the date of the filing of this complaint until fully paid, plus the sum of P500.00, as and by way of attorney's fees, and the costs of the suit." (Id., p. 14.) Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the judgment in toto. (Rollo, p. 16.) Upon finality of the judgment, a writ of execution was issued against Reyes. The jeep which was the object of the attachment was sold by the sheriff for P4,000.00 and the amount was credited against the judgment in partial satisfaction thereof.

Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel the counterbond. Ong Chi not only opposed the motion but he also asked that the surety company pay the deficiency on the judgment in the amount of P5,730.00 (P9,730.00 as of the filing of the motion, less P4,000.00 the proceeds of the sale of the jeep). The motion for a deficiency judgment was opposed by the surety on the ground that it had fulfilled the condition of the counterbond. Despite the opposition, the court ordered the surety to pay. A motion for reconsideration was denied which accounts for the instant petition. The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner urges a negative answer; it relies on the terms of the counterbond. Upon the other hand, the private respondent claims that an affirmative answer is proper, he relies on Section 17 of Rule 57, Rules of Court which stipulates thus: "SEC. 17. When execution returned unsatisfied, recovery had upon bond. If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action." The petition is highly impressed with merit. The stipulation in the counterbond executed by the petitioner is the law between the parties in this case and not the provisions of the Rules of Court. Under the counterbond, the petitioner surety company bound itself solidarily with the principal obligor "in the sum of P6,465.00 under the condition that in case the plaintiff recovers judgment in the action, the defendant will, on demand, redeliver the attached property so released to the officer of the court to be applied to the payment of the judgment or in default thereof that the defendant and surety will, on demand, pay to the plaintiff the full value of the property released." The main obligation of the surety was to redeliver the jeep so that it could be sold in case execution was issued against the principal obligor. The amount of P6,465.00 was merely to fix the limit of the surety's liability in case the jeep could not be reached. In the instant case, the jeep was made available for execution of the judgment by the surety. The surety had done its part; the obligation of the bond had been discharged; the bond should be cancelled. The impropriety of the orders of the respondent judge is made more manifest by still another circumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on the assumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00, the surety can be held liable at most for P2,465.00. But the respondent judge ordered the surety to pay P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is axiomatic that the obligation of a surety cannot extend beyond what is stipulated. WHEREFORE, the petition is granted; the questioned orders of the respondent judge are hereby set aside and in lieu thereof another is entered cancelling the petitioner's counterbond, with costs against the private respondent. SO ORDERED. BPI v ALS Roa loaned from AIDC for the construction of a house and lot which was mortgaged to secure the loan. Roa sold the same to ALS for 850T: 350T in cash and 500T assumption of the mortgage indebtedness. Instead of assuming the balance, AIDC instead proposed a new 500T loan to be applied to the 500T loan balance of Roa. They agreed to this on March 1981. On August 13, 1982, ALS 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 P500T. 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. ALS opposed this and alleged that it in fact made an overpayment as of June 30, 1984. It maintained that it should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Petitioner contends that the loan was perfected on March 1981, not on September 1982, averring that a loan is a consensual contract. Issue When was the contract of loan perfected? Held On September 13, 1982. 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. In the present case, the loan contract between BPI, on the one hand, and ALS, 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, private respondents' obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. 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. 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. 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. Naguiat v CA Q loaned from N P200T. N issued 2 checks worth 95T each. The loan was secured by a post dated check issued by Q in favor of N, a REM and a PN. When the loan was due, N deposited the postdated check issued by Q. It was dishonored by the bank. N demanded that Q pay his indebtedness. When said demand remained unheeded, N sought for the foreclosure of the mortgage. Q enjoined N from proceeding with the foreclosure contending in main that he never received the proceeds of the loan in the first place. Issue Was the loan herein perfected when N delivered the checks to Q? Held No. The loan was never perfected since the checks were never proven to have been encashed by Q. Absolutely no evidence was submitted by N 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. In this case, the objects of the contract are the loan proceeds which Q would enjoy only upon the encashment of the checks signed or indorsed by N. If indeed the checks were encashed or deposited, N would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records. Since N presented no such proof, it follows that the checks were not encashed or credited to Qs account. The Court finds no compelling reason to disturb the finding of the courts a quo that the lender did not remit and the borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage which is supposed to secure the loan is null and void. The consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. Pajuyo v CA Pajuyo, as owner of a house, allowed Guevarra to live in the house for free via a Kasunduan provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyo's demand. Pajuyo eventually informed Guevarra of his need of the house and demanded that Guevarra vacate the house. Guevarra refused. Pajuyo contends that he can do so since the same was a lease. Guevarra contends that the contract was a commodatum. What contract was perfected between them? May Pajuyo unilaterally eject Guevarra from the premises? The Kasunduan is not 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 tenant's 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. Producers Bank v CA

V was asked by S to aid Ss friend D in forming a corporation by depositing in the account of D in Producers Bank a certain amount for purposes of the incorporation. S assured V that he could withdraw his money from said account within a month's time. V deposited 200T in said account. V eventually discovered that D withdrew the amount and only 90T remained. V demanded the return of the funds from D. D issued several checks which were all dishonored. This prompted V to file an action for recovery of sum of money before the RTC. The trial court ruled in favor of V and ordered S, D and Producers Bank to return the amount lent. The bank contends that the transaction between V and D is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to D was money, a consumable thing; and second, the transaction was onerous as D was obliged to pay interest, as evidenced by the check issued by D in the amount of P212,000.00, or P12,000 more than what V deposited in Ds account. Moreover, the fact that V sued his good friend S for his failure to recover his money from S shows that the transaction was not merely gratuitous but "had a business angle" to it. Hence, it argues that it cannot be held liable for the return V P200,000.00 because it is not privy to the transaction between the latter and D. V, on the other hand, argues that the transaction between him and D 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 D so that a certification can be issued to the effect that D had sufficient funds for purposes of 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 Is the contract herein a commodatum or a mutuum? Held Commodatum. No error was committed by the Court of Appeals when it ruled that the transaction between V and D was a commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a commodatum. 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. As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that V agreed to deposit his money in the savings account of D specifically for the purpose of making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days. V merely "accommodated" D by lending his

money without consideration, as a favor to his good friend S. It was however clear to the parties to the transaction that the money would not be removed from Ds account and would be returned to V after thirty (30) days. Ds attempts to return to V the amount of P200,000.00 which the latter deposited in Ds 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 D to remit to V the interest accruing to the latter's money deposited with the bank. Neither does the Court agree with the banks contention that it is not solidarily liable for the return of V's money because it was not privy to the transaction between D and V. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of the banks liability for the return of Vs money because the factual circumstances of the case clearly show that the bank, through its employee, was partly responsible for the loss of Vs money and is liable for its restitution. Biesterbos v CA L advanced 600T to the spouses B without any agreement as to the interest on April 1992. The amount remained unpaid prompting L to demand the payment thereof on May 18, 1993. The spouses contended that they had already tendered P518,791.76 in trust for L at the PNB since July 3, 1993. The court ordered the spouses to reimburse the remaining balance of the amount advanced by L. This was affirmed by the CA and it added a 12% interest from the time of demand until paid. The spouses question the imposition of this interest since they agreed to none and the ruling thus violated Art. 2209 of the NCC. They also allege that they had already paid the amount since July 3, 1993 via the deposit in favor of L with the PNB. Issues What was the contract entered into by the parties? Was the imposition of the CA of the interest, where none was agreed on by the parties, valid? Held The contract is one of a loan or a forbearance of money. The deposit with the bank, although did not strictly constitute a valid tender of payment and consignation, could be considered an act of good faith on the part of petitioners to fully settle their obligation. Equity and justice would demand that such an act, placing at the disposal of respondent the deposited sum, should have the effect of suspending the running of the interest on said outstanding amount. With regard the payment of interest, the ruling of this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals should be worthwhile reiterating for guidance. Thus "I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on 'Damages' of the Civil Code govern in determining the measure of recoverable damages. "II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: "1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

"2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. "3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit." Thus, the Court holds that the legal interest to be paid on the principal amount of P518,791.76 is TWELVE PERCENT (12%) per annum which shall commence from May 18 1993 when extrajudicial demand was made on petitioners up until July 3 1993 when the spouses notified L that the amount of P521,691.76 had been deposited in his name with the PNB withdrawable by him at any time during banking hours. Another 12% interest per annum shall be paid on the amount due and owing as of, and from, the date of finality of this decision until full payment would have actually been made. DBP v COA The DBP established a Special Loan Program (SLP) availed thru the facilities of the DBP Provident Fund and funded the placements from the Gratuity Plan Fund. Under the SLP, a prospective retiree is allowed the option to utilize in the form of a loan a portion of his "outstanding equity" in the gratuity fund and to invest it in an undertaking specified by the DBP. The earnings thereof shall be applied to the interest due on the gratuity loan and the excess shall then be distributed to the investor-members. Does this SLP cover normal loan transactions? No. In a loan transaction or mutuum, the borrower or debtor acquires ownership of the amount borrowed. As the owner, the debtor is then free to dispose of or to utilize the sum he loaned, subject to the condition that he should later return the amount with the stipulated interest to the creditor. In contrast, the amount borrowed by a qualified employee under the SLP is not even released to him. In the present case, the Fund allowed the debtor-employee to "borrow" a portion of his gratuity fund credit solely for the purpose of investing it in certain instruments specified by DBP. The debtor-employee could not dispose of or utilize the loan in any other way. These instruments were, incidentally, some of the same securities where the Fund placed its investments. At the same time the Fund obligated the debtor-employee to assign immediately his loan to DBPTSD so that the amount could be commingled with the loans of other employees. The DBP-TSD the same department which handled and had custody of the Fund's accounts then purchased or re-allocated existing securities in the portfolio of the Fund to correspond to the employees' loans. Simply put, the amount ostensibly loaned from the Fund stayed in the Fund, and remained under the control and custody of the DBP-TSD. The debtor-employee never had any control or custody over the amount he supposedly borrowed. However, DBP-TSD listed new or existing investments of the Fund corresponding to the "loan" in the name of the debtor-employee, so that the latter could collect the interest earned from the investments. Tanzo v Drilon T was convinced by S to invest money in the latters business. S represented that Ts money will be held in trust and administered by both S and his brother for the exclusive use of their forwarding and transporting business. T further alleged that S promised him a return on his investment equivalent to ten per centum (10%) for one month, at the end of which his money plus interest earned shall be returned to him. After some time, T demanded from S proper accounting of his financial investment and/or the return of his capital plus interest earned. This was not

heeded by S. When S continued to ignore Ts demand for the return of his money, the latter filed a complaint-affidavit for estafa against S. This was dismissed by the prosecutor and the Justice Secretary Drilon as the elements of estafa were not present; and that the transaction was but simple loan not a trust agreement as alleged by T. Is the transaction a loan or a trust agreement? Simple loan. Ts contention that S has committed the crime of estafa with unfaithfulness or abuse of confidence under A 315 of the RPC fails. A 315 (b) provides: By misappropriating or converting, to the prejudice of another, money, goods or any other personal property received by the offender in trust, or on commission, or for administration, or under any other obligation involving the duty to make delivery of, or to return the same, even though such obligation be totally or partially guaranteed by a bond, or by denying having received such money, goods, or other property. This Court has ruled that when the relation is purely that of debtor and creditor, the debtor cannot be held liable for the crime of estafa, under the above quoted provision, by merely refusing to pay or by denying the indebtedness. The reason behind this rule is simple. In order that a person can be convicted of estafa under Article 315, par. 1(b) of the Revised Penal Code, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he has received. The obligation to deliver exactly the same money, that is, bills or coins, is non-existent in a simple loan of money because in the latter, the borrower acquires ownership of the money borrowed. Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof. Liwanag v CA L was charged with the crime of Estafa before the RTC for defrauding one R in the amount of P536,650.00. It appears therein that L received in trust from R the aforesaid cash money with the express obligation involving the duty to act as R's agent in purchasing local cigarettes, to resell them to several stores, to give her commission corresponding to 40% of the profits and to return the aforesaid amount of private complainant. Unfortunately, L was remiss in her obligation. After trial on the merits, the trial court rendered a decision finding L guilty as charged. On appeal to the Court of Appeals, said decision was affirmed. L then filed her appeal before the Court alleging that the appellate court erred in affirming her conviction for the crime of estafa, when clearly the contract that existed between them was either that of a simple loan or that of a partnership or joint venture, hence purely civil in nature and not criminal. Is she correct? No. The elements of estafa are present, as follows: (1) that the accused defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third party, 5 and it is essential that there be a fiduciary relation between them either in the form of a trust, commission or administration. The receipt signed by Liwanag states thus: Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarettes (Philip & Marlboro) to be sold to customers. In the event the said cigarettes are not sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988. The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold, the money must be returned to Rosales. Neither can the transaction be considered a loan, since in a contract of loan once the money is received by the debtor, ownership over the same is transferred. Being the owner, the borrower can dispose of it for whatever purpose he may deem proper. In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case

there was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. 1(b) of the Revised Penal Code. Yong Chan Kim v Pp Y was granted P6,438.00 under Travel Order No. 2222 as cash advance to defray his travel expenses as an employee of SEAFDEC. . When the Travel Expense Reports were audited, it was discovered that there was an overlap of four days in the two travel orders for which Y collected per diems twice. In sum, the total amount in the form of per diems and allowances charged and collected by Y under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation papers, was P1,230.00. He was charged and found guilty with the felony of estafa under A. 315 1(b) of the RPC. Is estafa committed by an employee when he fails to liquidate his cash advances? No. A. 315 1(b) of the RPC provides the ground for estafa committed by abuse of confidence: By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of; or to return, the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property." In order that a person can be convicted under the abovequoted provision, it must be proven that he had the obligation to deliver or return the same money, goods or personal property that he had received. Was petitioner under obligation to return the same money (cash advance) which he had received? No. Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash advance he received is less than the amount he spent for actual travel . . . he has the right to demand reimbursement from his employer the amount he spent coming from his personal funds." In other words, the money advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or money, i.e., the bills or coins, which he received from the private respondent. The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner. Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created. Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa. Consolidated Bank v CA LC has a current account with Solidbank. It instructed one of its employees to deposit a certain amount. Said employee brought LCs passbook. Since the transaction took some time, the employee had to go and left the passbook with Solidbank. When said employee returned to Solidbank to retrieve the passbook, the teller informed him that "somebody got the passbook. LC then discovered that there was an unauthorized withdrawal from its account using the same passbook. LC through its counsel demanded from Solidbank the return of its money. Solidbank refused. On appeal, the CA ruled that Solidbank's negligence was the proximate cause of the unauthorized withdrawal of P300,000 from the savings account of LC. The appellate court reached this conclusion after applying the provision of the Civil Code on quasi-delict for the negligence of its employees. Should Solidbank be held liable under culpa aquilana or culpa contractual? Culpa contractual. We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. Article 1980 of the Civil Code expressly provides that ". . . savings . . . deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." There is a debtor-creditor relationship between the bank and its

depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties. However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of nonbank debtors under a similar contract of simple loan. The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. Article 1172 of the Civil Code provides that "responsibility arising from negligence in the performance of every kind of obligation is demandable." For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to its depositor. This fiduciary relationship means that the bank's obligation to observe "high standards of integrity and performance" is deemed written into every deposit agreement between a bank and its depositor. The bank must not only exercise "high standards of integrity and performance," it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its fiduciary duty. However, under Article 1172, "liability (for culpa contractual) may be regulated by the courts, according to the circumstances." This means that if the defendant exercised the proper diligence in the selection and supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced. Samsung v Far East Bank A certain Roberto Gonzaga presented before respondent bank a check worth P999,500.00, purportedly signed by Samsungs Project Manager Jong, payable to cash, drawn from the account of Samsung, for encashment. As a standard operating procedure, the bank teller compared the signature of Jong on the check with his specimen signature. The teller was satisfied as to its authenticity. As the amount exceeded P100,000.00, the teller had the check further inspected by 2 bank officers. The officers were also satisfied. One of the officers saw a certain Sempio, the assistant of Samsungs accountant Kyu, within the bank and the latter vouched for the genuineness of Jongs signature. It was later found out that the check was never authorized by Samsung and that Jongs signature therein was allegedly forged. Samsung filed before the RTC a claim against FEBTC for damages for violation of the NIL. Samsung presented an NBI expert who corroborated the claim of forgery. The RTC ruled in favor of Samsung. This was reversed by the CA on appeal relying mainly on the contrary expert opinion from the PNP presented by FEBTC. 1. In case of forgery of the signature of the drawer without negligence on its part, who bears the loss? 2. What are the factual findings as to the negligence of the drawee bank? Held 1. The drawee bears the loss. If a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in paying a forged check. The general rule is to the effect that a forged signature is "wholly inoperative", and payment made "through or under such signature" is ineffectual or does not discharge the instrument. If payment is made, the drawee cannot charge it to the drawer's account. The traditional justification for the

result is that the drawee is in a superior position to detect a forgery because he has the maker's signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance. Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged. On the premise that Jong's signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. 2. The bank has been remiss in its duties as shown by the following: A. The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher degree of caution on the part of the bank. In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check for such large amount to be made payable to cash or to bearer, instead of to the order of a specified person. B. The check was presented for payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction. Thus, it was not sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor. C. According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong over the phone to verify the check. She added that calling the issuer or drawer of the check to verify the same was not part of the standard procedure of the bank, but an extra effort. Even assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the check was presented. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their clients account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check was his. Sesbreno v CA Fifty-two employees sued the Province of Cebu and then Governor Rene Espina for reinstatement and backwages. They were represented by Raul H. Sesbreo.Thirty-two of the fifty-two employees signed two documents whereby the former agreed to pay petitioner 30% as attorney's fees and 20% as expenses to be taken from their back salaries. A compromise agreement was entered into by the parties whereby the former employees waived their right to reinstatement among others. Also, the trial court fixed petitioner's attorney's fees at 40% of back salaries, terminal leave, gratuity pay and retirement benefits and 20% as expenses, or a total of 60% of all monies paid to the employees.

Private respondent's motion for reconsideration was granted and the trial court modified the award after noting that petitioner's attorney's lien was inadvertently placed as 60% when it should have been only 50%. It was reduced accordingly. Obviously not satisfied with the attorney's fees fixed by the trial court, petitioner appealed to the CA claiming additional fees for legal services before the Supreme Court, reimbursement for expenses and a clear statement that the fee be likewise taken from retirement pay awarded to his clients. Unfortunately, the respondent appellate court did not agree with him as the generous awards further reduced to 20%. Was the CA correct in reducing the fees? Yes. Fifty per cent of all monies which private respondents may receive from the provincial government is excessive and unconscionable, not to say, contrary to the contract of professional services. After considering the facts and the nature of the case, as well as the length of time and effort exerted by petitioner, respondent court reduced the amount of attorney's fees due him. It is a settled rule that what a lawyer may charge and receive as attorney's fees is always subject to judicial control. A lawyer is primarily an officer of the court charged with the duty of assisting the court in administering impartial justice between the parties. When he takes his oath, he submits himself to the authority of the court and subjects his professional fees to judicial control. When the courts find that the stipulated amount is excessive or the contract is unreasonable or unconscionable, or found to have been marred by fraud, mistake, undue influence or suppression of facts on the part of the attorney, public policy demands that said contract be disregarded to protect the client from unreasonable exaction. Stipulated attorney's fees are unconscionable whenever the amount is by far so disproportionate compared to the value of the services rendered as to amount to fraud perpetrated upon the client. This means to say that the amount of the fee contracted for, standing alone and unexplained would be sufficient to show that an unfair advantage had been taken of the client, or that a legal fraud had been perpetrated on him. CF Sharp v Northwest Airlines CF and NA had an agreement authorizing CF to sell its air transport tickets of NA. When this contract was breached, NA filed a case in Japan and won. The Japanese court ordered CF to the amount of "83,158,195 Yen and damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment is completed." Unable to execute the decision in Japan, respondent filed a case to enforce said foreign judgment with the RTC. It ruled in favor of NA and ordered CF to pay the NA the sum of 83,158,195 Yen at the exchange rate prevailing on the date of the foreign judgment on January 29, 1981, plus 6% per annum until May 19, 1983; and from said date until full payment, 12% per annum (6% by way of damages and 6% interest) until the entire obligation is fully satisfied. CF contends before the CA that it had already made partial payments; hence, it was liable only for the amount of 61,734,633 Yen. Moreover, it argued that it was not liable to pay additional interest on top of the 6% interest imposed in the foreign judgment. The CA sustained the imposition of additional interest on the liability of petitioner as adjudged in the foreign judgment. The appellate court likewise corrected the reckoning date of the imposition of the interests but lowered the additional interest from 12% to 6% per annum. Further, it ruled that the basis of the conversion of petitioner's liability in its peso equivalent should be the prevailing rate at the time of payment and not the rate on the date of the foreign judgment. Is the conversion and the imposition of additional rates proper? Yes. In ruling that the applicable conversion rate of petitioner's liability is the rate at the time of payment, the Court of Appeals cited the case of Zagala v. Jimenez, interpreting the provisions of Republic Act No. 529, as amended by R.A. No. 4100. Under this law, stipulations on the satisfaction of obligations in foreign currency are void. Payments of monetary obligations, subject to certain exceptions, shall be discharged in the currency which is the legal tender in the Philippines. But since R.A. No. 529 does not provide for the rate of exchange for the payment of foreign currency obligations incurred after its enactment, the Court held in a number of cases 11 that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of

payment. Petitioner, however, contends that with the repeal of R.A. No. 529 by R.A. No. 8183, the jurisprudence relied upon by the Court of Appeals is no longer applicable. Petitioner is WRONG. Pertinent portion of Republic Act No. 8183 states: SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions may now be paid in the currency agreed upon by the parties. Just like R.A. No. 529, however, the new law does not provide for the applicable rate of exchange for the conversion of foreign currencyincurred obligations in their peso equivalent. It follows, therefore, that the jurisprudence established in R.A. No. 529 regarding the rate of conversion remains applicable. Thus, in Asia World Recruitment, Inc. v. National Labor Relations Commission, the Court, applying R.A. No. 8183, sustained the ruling of the NLRC that obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment. Petitioner's contention that it is Article 1250 of the Civil Code that should be applied is untenable. The rule that the value of the currency at the time of the establishment of the obligation shall be the basis of payment finds application only when there is an official pronouncement or declaration of the existence of all extraordinary inflation or deflation. In the case at bar, the Court of Appeals' failure to apply the correct legal rate of interest, to which respondent is lawfully entitled, amounts to a "plain error." In Eastern Shipping Lines, Inc. v. Court of Appeals, it was held that absent any stipulation, the legal rate of interest in obligations which consists in the payment of a sum of money, as in the present case, is 12% per annum. As stated in the decision of the Court in G.R. No. 112573, which is final and executory, petitioner is liable to pay respondent the amount adjudged in the foreign judgment, with "interest thereon at the legal rate [12% per annum] from the filing of the complaint therein [on August 28, 1980] until the said foreign judgment is fully satisfied." Since petitioner already made partial payments, his obligation was reduced to 61,734,633 Yen. Thus, petitioner should pay respondent the amount of 61,734,633 Yen plus "damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment is completed," with interest thereon at the rate of 12% per annum from the filing of the complaint on August 28, 1980, until fully satisfied. Cebu International v CA, Alegre Cebu International Finance Corp v CA, Alegre Alegre invested with petitioner P500T. The placement was covered with a 20.5% interest for 32 days. Petitioner, after maturity of the investment, issued a BPI check worth P514,390.94 as proceeds of the money market placement. When Alegre sought to deposit the check, it was dishonored by BPI with the annotation, that the "Check (is) Subject of an Investigation." BPI took custody of the CHECK pending an investigation of several counterfeit checks drawn against CIFC's aforestated checking account. BPI used the check to trace the perpetrators of the forgery. Thereafter, Alegre demanded CIFC that he be paid the amount due him. CIFC refused and requested that they wait for the result of the investigation by the BPI. Eventually, Alegre filed a suit for collection of a sum of money while CIFC filed an action against BPI to recover its lost funds. The collection suit alleged that BPI unlawfully deducted from CIFC's checking account several amounts for alleged counterfeit checks. The RTC rendered judgment in favor of Alegre ordering CIFC to pay him the sum owed plus legal interest. The CA affirmed the decision of the lower court. In this petitioner CIFC claims that it should now be absolved from liability since under section 137 of the NIL, the banks acceptance of the check operated as a transfer of liability from it to BPI and thus the bank became primarily liable for the payment of the check, and consequently, petitioner as drawer, was discharged from its liability thereon. It also claimed that when the bank debited the

amount due from its current account and credited the same to respondents account, the obligation was immediately extinguished. What is the nature of the obligation of CIFC with Alegre? A money market placement. It is similar to a loan. Alegres right to collect arose when he was issued the check as payment for the placement and when it was subsequently dishonored. In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized. Whether CIFCs obligation was extinguished when the bank debited its account and credited the proceeds to Alegres account. No. when the bank deducted the amount of the CHECK from CIFC's current account, this did not ipso facto operate as a discharge or payment of the instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it incurred from forgeries of CIFC checks, allegedly committed by Alegre by virtue of the compromise agreement entered by CIFC and the bank, excluding Alegre. Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an agreement between CIFC and BPI. Although Alegre's money was in custody of the bank, the bank's possession of it was not in the concept of an owner. BPI cannot validly appropriate the money as its own. Decision of the CA is affirmed. Shoemart v CA After Shoemart and Ansons lease contract was purportedly violated by the latter, Shoemart sued it. The trial court ruled in favor of Shoemart and imposed a 1% interest on Anson on the damages payable to the former. Is the 1% interest rate imposition by the court valid? No. As regards the imposition of one (1%) percent interest on unpaid rentals, respondent court committed no error in eliminating the same not only because it was not prayed for in the complaint but also because Art. 1956 (Civil Code) so provides "(n)o interest shall be due unless it has been expressly stipulated in writing". While the one (1%) percent interest on delayed payment of rentals may have been provided in the original written contract of lease, it must be noted that said contract has already been terminated as of August 1, 1973. By the time petitioner filed its complaint for ejectment in 1977, there was no longer any written contract to speak of, much less a written stipulation on payment of interest. Sangrador v Valderrama V loaned 500T from a certain Asencio secured by a REM. When V realized he would not be able to pay said loan, he sought to loan 1M from S. They received the amount. In exchange, they issued a PN which provided that the actual amount loaned was 1.4M plus a REM on several properties of V. When the loan stated in the PN matured (1.4M), V failed to pay. This prompted S to foreclose the mortgaged properties after she demanded payment. V denied that the loan was P1,400,000. He alleged that it was only P1,000,000.00 and that the additional P400,000 represented usurious interest. S, however, testified that the sum of P1,400,000 was received by V. V testified that he thought all along that the PN and deed of real estate mortgage provided for a loan of only P1 million since that was the amount which he borrowed and received from S. He allegedly did not notice that both documents provided for a loan of P1,400,000. Issue

Whether the loan obtained by V from S was in the amount of P1,400,000.00 or P1,000,000.00 only. Held 1M only. The Promissory Note and the Deed of Real Estate Mortgage executed by the respondents in favor of the petitioners indeed state that the loan is in the amount of P1,400,000.00. However, the other documents executed by the parties contemporaneously with said Promissory Note and Deed of Real Estate Mortgage clearly show that the actual loan, i.e. the amount received by V, was only P1,000,000.00. We agree with the finding of the Court of Appeals that the disputed amount of P400,000.00 was a hidden interest that the S had required V to pay at the maturity of the loan, but said amount of P400,000.00 was not received by or delivered to V. This conclusion is strengthened by the fact that the promissory note and the deed of real estate mortgage, strangely enough, do not contain any express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedly P1,400,000.00. S may conceivably argue that, granting that the disputed amount of P400,000.00 is interest on the loan of P1,000,000.00, yet, in line with this Court's decision in Liam Law vs. Oriental Sawmill Co., et al., there is no longer any ceiling on interest or interest rates on loans. This may be so in a situation where the parties openly and expressly agree on a specific rate of interest to accrue on the loan but, as the Court of Appeals in its decision under review correctly pointed out, in the case at bar, no interest rate is expressly stipulated in the promissory note and deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides: "Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury law, as amended. "Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (12%) per annum." (Emphasis supplied). The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall continue therefore to be twelve per cent (12%) per annum. Thus, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%) interest per annum computed from 6 April 1984 when the loan was obtained by V from S until paid. As for the escalation clause which provided that in case extraordinary inflation intervened during the period of the loan and that the same must be borne by V, the Court nullified the same since no extraordinary inflation supervened. Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Since S failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984 no proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period an extraordinary inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of Vs obligation. PNB v CA P applied for, and was granted by petitioner PNB, a credit line of 321.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. P executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage Contract. The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum "within the limits allowed by law at any time depending on whatever policy PNB may

adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." The Real Estate Mortgage Contract likewise provided that: "(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors." PNB increased the interest three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. P, having substantially paid the loan, filed in the RTC a complaint questioning the validity of the interest rate increases. He claims that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48% are illegal, not valid nor binding on him, and that an adjustment of his interest rate from 18% to 24% is reasonable, fair and just. PNB denied that the increases in interest rates were illegal, unilateral excessive and arbitrary and recited the reasons justifying said increases. Issue Whether the bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased. Held No. Although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made oftener than once every twelve months." In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent's loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board. Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Ex's. 2, 3, and 4), no law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. In Banco Filipino Savings and Mortgage Bank vs. Navarro (1987), this Court disauthorized the bank from raising the interest rate on the borrowers' loan from 12% to 17% despite an escalation clause in the loan agreement signed by the debtors authorizing Banco Filipino "to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of interest, including commissions premiums, fees and other charges on loans with a maturity of more than 730 days by banking institution . . . shall be 19%." This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the effect of law is not a law."

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board. CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates ". . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law." but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of PD. 116 which limits such changes to "once every twelve months." Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code: "ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. PNB'S successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing." The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that. That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable. Sps Barrera v Sps Lorenzo B borrowed from L P325,000.00 secured by a REM. The mortgage contract provides, among others, that the new loan shall be payable within three (3) months, or until August 14, 1991; that it shall earn interest at 5% per month; and that should B fail to pay their loan within the said period, the mortgage shall be foreclosed. When B failed to pay his loan in full on August 14, 1991, L allowed B to complete his payment until December 23, 1993. On this date, he made a total payment of P687,000.00. L wrote B demanding payment of P325,000.00, plus interest, otherwise L would foreclose the mortgage. In turn, Bresponded, claiming that he has overpaid his obligation and demanding the return of his land title and refund of thhiseir excess payment. This prompted L to file a petition for extrajudicial foreclosure of mortgage. The trial court held that the stipulated 5% monthly interest to be paid by B corresponds only to the period from May 14, 1991 up to August 14, 1991, the term of the loan. Thereafter, the monthly interest should be 12% per annum. The trial court concluded that B made an overpayment of P214,750.00. This was reversed by the CA, ruling that the stipulated monthly interest of 5% was not to apply only to the 3-month effectivity period of the loan. Thus, until such time that the B has fully paid his total indebtedness, the 5% monthly interest subsists, there being no stipulation to the contrary. Issue Whether the 5% monthly interest on the loan was only for three (3) months, or from May 14, 1991 up to August 14, 1991 or until the loan was fully paid.

Held 3 months only. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. It is clear from the contract stipulations that the loan shall be payable within three (3) months, or from May 14, 1991 up to August 14, 1991. During such period, the loan shall earn an interest of 5% per month. Furthermore, the contract shall have no force and effect once the loan shall have been fully paid within the three-month period, otherwise, the mortgage shall be foreclosed extrajudicially. Records show that upon maturity of the loan on August 14, 1991, B failed to pay his entire obligation. Instead of exercising his right to have the mortgage foreclosed, L allowed B to pay the loan on a monthly installment basis until December, 1993. It bears emphasis that there is no written agreement between the parties that the loan will continue to bear 5% monthly interest beyond the agreed three-month period. Article 1956 of the Civil Code mandates that "(n)o interest shall be due unless it has been expressly stipulated in writing." Applying this provision, the trial court correctly held that the monthly interest of 5% corresponds only to the three-month period of the loan, or from May 14, 1991 to August 14, 1991, as agreed upon by the parties in writing. Thereafter, the interest rate for the loan is 12% per annum. Thus, 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. Fidelity Savings v Cenzon C had an aggregate deposit with Fidelity amounting to 100T. On February 18, 1969, the Monetary Board, after finding the report of the Superintendent of Banks, that the condition of the defendant Fidelity Savings and Mortgage Bank is one of insolvency. The Monetary Board issued Resolution No. 350 deciding, among others, as follows to forbid the Fidelity Savings Bank to do business in the Philippines. After C was given 10T by the PDIC as provided by law, C sued Fidelity for the balance of 90T. The trial court ruled in Cs favor and ordered it to pay him P90,000.00 with accrued interest in accordance with Exhibits A and B until fully paid; P30,000.00 as exemplary damages; and P10,000.00 as and for attorney's fees. Fidelity Bank now contests the imposition of interest on the balance and the damages rewarded. Issues Whether an insolvent bank like the Fidelity Savings and Mortgage Bank may be adjudged to pay interest on unpaid deposits even after its closure by the Central Bank by reason of insolvency without violating the provisions of the Civil Code on preference of credits; and Whether an insolvent bank like the Fidelity Savings and Mortgage Bank may be adjudged to pay moral and exemplary damages, attorney's fees and costs when the insolvency is caused by the anomalous real estate transactions without violating the provisions of the Civil Code on preference of credits. Held 1. No, an insolvent bank may not be ordered to pay interest. It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently ordered closed by the Central Bank of the Philippines cannot be held liable to pay interest on bank deposits which accrued during the period when the bank is actually closed and non-operational. In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia: "It is a matter of common knowledge, which We take Judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money,

engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank." From the aforecited authorities, it is manifest that petitioner cannot be held liable for interest on bank deposits which accrued from the time it was prohibited by the Central Bank to continue with its banking operations, that is, when Resolution No. 350 to that effect was issued on February 18, 1969. The order, therefore, of the Central Bank as receiver/liquidator of petitioner bank allowing the claims of depositors and creditors to earn interest up to the date of its closure on February 18, 1969, is in line with the doctrine laid down in the jurisprudence above cited 2. There is no valid basis for the award of exemplary damages which is supposed to serve as a warning to other banks from dissipating their assets in anomalous transactions. It was not proven by private respondents, and neither was there a categorical finding made by the trial court, that petitioner bank actually engaged in anomalous real estate transactions. The same were raised only during the testimony of the bank examiner of the Central Bank, 10 but no documentary evidence was ever presented in support thereof. Hence, it was error for the lower court to impose exemplary damages upon petitioner bank since, in contracts, such sanction requires that the offending party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Neither does this case present the situation where attorney's fees may be awarded. In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may, therefore, not be held responsible for damages which may be reasonably attributed to the non-performance of the obligation. Consequently, we reiterate that under the premises and pursuant to the aforementioned provisions of law, it is apparent that private respondents are not justifiably entitled to the payment of moral and exemplary damages and attorney's fees. Ramos v Central Bank The Tapia ruling stands: the bank is not liable for interest on the Central Bank loans and advances during the period of its closure from August 2, 1968 to January 8, 1981." In the Tapia ruling (105 SCRA 49, June 11, 1981), the Court held that "the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank," and that "for the guidance of those who might be concerned, and so that unnecessary litigations may be avoided from further clogging the dockets of the courts, that in the light of the considerations expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure." Respondents have failed to adduce any cogent argument to persuade the Court to reconsider its Resolution at bar that the Tapia ruling as reaffirmed by the aforecited cases is fully applicable to the non-payment of interest, during the period of the bank's forcible closure, on loans and advances made by respondent Central Bank. Sps Puerto v CA The P loaned from C 200T secured by a REM. This mortgage deed provides that P obtained from C a loan in the amount of P200,000 payable within one year from the date of the execution thereof. Ostensibly, the mortgage contract did not provide for any stipulated interest. P was unable to pay the loan prompting C to foreclose the mortgage. The property was foreclosed and sold to C as the highest bidder.

P sought for the nullification of the deed of mortgage. According to P, the Deed of Mortgage did not reflect the true intent of the parties, as in fact, the consideration of the mortgage was only P150,000. She claims that the one year interest was added to the P150,000, the additional P50,000 as prepaid interest, hence, the amount of P200,000 was stated in the deed. P alleged that when she failed to pay the loan, C demanded a monthly interest of P4,000. When P failed to pay said interest for four months, C foreclosed the mortgage. After the expiration of the redemption period, C acquired full title to the property. P claims that from October 1973 until December 1975, they continued to pay the monthly interest of P4,000, but without receipts because of their verbal agreement to conceal the usurious nature of the transaction. Sometime in January 1976, according to P, she appealed to C to reduce the interest rate to P3,000 per month. C agreed on the condition that they sign a lease contract, whereby C would appear as lessors and petitioners as lessees, and P3,000 interest would be denominated as "rent". The trial court nullified the deed. On appeal, the CA reversed the decision but it reversed itself on MFR by C. Issues Whether the contract between the parties, which is a loan secured by the deed of real estate mortgage, violated the Usury Law (P.D. 116). If yes, what is its effect upon the real estate mortgage that secured the loan and its subsequent foreclosure. Held 1. Usurious. At the time of the questioned transaction, Act No. 2655, as amended by P.D. 116, known as the Usury Law, was in full force and effect. It is elementary that the laws in force at the time the contract was made generally govern the effectivity of its provision. Usury may be defined as contracting for or receiving something in excess of the amount allowed by law for the forbearance of money, goods or things in action. The Usury Law prescribed that the legal rate of interest for the loan or forbearance of any money, goods or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, in the absence of express contract as to such rate of interest, shall be 12% per annum. Any amount of interest paid or stipulated to be paid in excess of that fixed by law is considered usurious, therefore unlawful. Indeed, the mortgage contract did not stipulate for payment of any interest. However, to conceal usury various devices have been adopted whereby the substance of the true agreement is withheld from what may be viewed on the written document. The natural inclination of parties to an illegal act is to conceal such illegality, making it extremely difficult to prove its existence by documentary evidence.The real intention of the parties at the time the written instrument was made must be ascertained from the circumstances surrounding the transaction and from the language of the document itself. It will be noted that the usury law was in effect at the time P obtained the loan from C. P needed financial assistance badly. The two women had known each other for a long time. The language of the contract leaves no doubt that the P200,000 was a loan secured by a mortgage on a house and lot owned by the Puertos. There was no interest stipulated on the loan and there was a provision to appoint the mortgagees as receiver of the property in case of foreclosure. In fine, we find that indeed the contract of loan secured by the deed of real estate mortgage is usurious. Under Section 2 of the Usury Law, the maximum rate of interest on a loan or forbearance of money secured by a mortgage upon real estate the title to which is duly registered, shall be 12 percent per annum. In the instant case, the P50,000 interest is clearly in excess of that which the law allows. Thus, the agreement for the payment of interest is void. Section 7 of the same law further provides that: All covenants and stipulations contained in conveyances, mortgages . . . and other contracts or evidences of debts . . . whereupon or whereby there shall be stipulated, charged, demanded,

reserved, secured, taken or received, directly or indirectly, a higher rate or greater sum or value for the loan . . . than is hereinbefore allowed, shall be void. As for the principal obligation: In a simple loan with a stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract, is not illegal. The illegality lies only in the stipulated interest. Being separable, only the latter should be deemed void. To discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without a stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. 2. Going into the matter of the validity of the foreclosure, we find the foreclosure invalid as it stemmed from the enforcement of a usurious mortgage contract. Since the mortgage contract is void, the foreclosure of the property provided for in said deed is ineffectual as well. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The parties then must restore what each had received from the other. P must pay the principal loan of P150,000 with legal interest at 12 percent per annum from the date of demand by way of damages. C must return Ps property that had been invalidly foreclosed. Herrera v Petrophil H and P entered into a lease agreement whereby the former leased to the latter a portion of his property for a period of twenty (20) years from said date. Pursuant to said contract, the P paid to H advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as constituting the interest or discount for the first eight years, in the total sum P180,288.47. On October 14, 1974, H sued P for the sum of P98,828.03, with interest, claiming this had been illegally deducted from him in violation of the Usury Law. H admitted the factual allegations of the complaint but argued that the amount deducted was not usurious interest but a discount given to it for paying the rentals in advance for eight years. The trial court ruled in favor of P. H insists that the lower court erred in the computation of the interest collected out of the rentals paid for the first eight years; that such interest was excessive and violative of the Usury Law. P maintains that the correct amount of the discount is P98,828.03 and that the same is not excessive and above that allowed by law. Issue Does the Usury Law apply to lease contracts? Held No. As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because there was no grant or forbearance of money as to constitute an indebtedness on the part of the lessor. There is no usury in this case because no money was given by H to P, nor did it allow him to use its money already in his possession. There was neither loan nor forbearance but a mere discount which the H allowed the P to deduct from the total payments because they were being made in advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law. The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury. To constitute usury, "there must be loan or forbearance; the loan must be of money or something circulating as money; it must be repayable absolutely and in all events; and something must be exacted for the use of the money in excess of and in addition to interest allowed by law."

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the parties that the money lent shall or may be returned; (3) that for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be declared. Sps Solangon v Salazar Petitioners obtained from respondent three separate loans of P60,000.00, P136,512.00 and P230,000.00 secured by real estate mortgage with an interest of 6% per month or 72% per annum. For failure of petitioners to pay their third loan obligation in the amount of P230,000.00 plus the stipulated interest, respondent foreclosed the mortgage. Hence, petitioners filed a complaint for annulment of mortgage before the RTC. Petitioners contended, among others, that the real estate mortgage was executed to secure payment of the P60,000.00 loan and that the subsequent mortgages were merely continuations of the first one, which were null and void because it provided for unconscionable rate of interest. The trial court did not give credence to the testimonies of the petitioners. Hence, it dismissed the complaint. On the Court of Appeals, the appellate court affirmed the decision of the trial court, ruling, among others, that the stipulated interest rate of 72% per annum or 6% per month was not unconscionable. In sustaining the stipulated interest, the appellate court, ratiocinated that since the Usury Law had been repealed by Central Bank Circular No. 905, there is no more maximum rate of interest and the rate will just depend on the mutual agreement of the parties. Hence, this petition. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. The Court, in the Medel case (299 SCRA 481), decreed that the 5.5% per month on a loan amounting to P500,000.00 was not usurious, but ordered that the same be equitably reduced for being iniquitous, unconscionable and exorbitant. In the case at bar, petitioners were required to pay the stipulated interest rate of 6% per month or 72% per annum, which the Court found to be definitely outrageous and inordinate. Hence, the Court ordered that the interest be reduced equitably to 12% per annum. Is the rate usurious? Held No. The stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we cannot consider the rate 'usurious' because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now 'legally inexistent.' In Security Bank and Trust Company vs. RTC the Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity. Indeed, we have held that 'a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that 'by virtue of CB Circular 905, the Usury Law has been rendered ineffective.' 'Usury Law has been legally nonexistent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.' Nevertheless, we find the interest herein stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals ('contra bonos mores'), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable." In the case at bench, they are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable. WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12% per annum. Imperial v Jaucian

Respondent Alex A. Jaucian filed a collection case against petitioner Restituta Imperial for Collection of Sum of Money before the RTC. Petitioner, however, claimed that she has already fully paid the loan and that the rate of interest due on the loan were unconscionable and more than that could be legally charged. The trial court declared as unconscionable, iniquitous and in violation of Act No. 2665, otherwise known as the Usury Law, the rate of interest of sixteen (16) percent per month, and reduced the rate of interest from 16 percent to 1.167 or 14 percent per annum. On appeal, the Court of Appeals affirmed the judgment of the trial court, holding that the latter's clear and detailed computation of petitioner's outstanding obligation to respondent was convincing and satisfactory. Hence, the present petition. Petitioner argued that she has already fully paid the loan and alleged that the trial and appellate courts misappreciated the facts when they ruled that she still had an outstanding balance of P208,430.00. Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12 percent per annum only. Issue Was the interest rate herein usurious? Held No, since the Usury Law has been rendered legally ineffective. However, the reduction of the rate by the lower court is in accord with existing jurisprudence since the rates were unconscionable. The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. "While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." In Medel v. CA, the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is void." Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts. LBP v David LBP loaned to David a certain sum secured by a REM with interest at 17% per annum and a penalty charge of 12% per annum in case of default. David defaulted and LBP foreclosed her properties. David moved for the nullity of the foreclosure averring in main that the interest and the penalty charges were usurious. This was denied by the trial court. On appeal, the CA noting that the loan extended to David was part of the social assistance program to improve the plight of farmers, found the interest rate of 17% per annum and the penalty charge of 12% per annum exorbitant and thus reduced them to 12% per annum and 5% per annum, respectively. And it nullified the sale at public auction of the mortgaged property. Issues 1. WHETHER OR NOT THE INTEREST RATE OF 17% PER ANNUM, AS PROVIDED IN THE RESTRUCTURING AGREEMENT, AS WELL AS THE PENALTY CHARGES OF 12% PER ANNUM CAN BE CONSIDERED AS EXORBITANT AND UNCONSCIONABLE. 2. WHETHER OR NOT THE FORECLOSURE PROCEEDINGS CAN BE NULLIFIED ON THE GROUND THAT THE INTEREST RATES IMPOSED BY LAND BANK WAS UNCONSCIONABLE. Held

1. Not usurious but considering the factual milieu of this case, the same was correctly reduced by the CA. Whether an interest rate or penalty charge is reasonable or iniquitous is addressed to the sound discretion of the courts. In determining what is iniquitous and unconscionable, courts must consider the circumstances of each case, for what may be just in one case may be iniquitous and unconscionable in another. Thus, while this Court sustained the validity of a 21% per annum interest in Spouses Bautista v. Pilar Development Corporation, it reduced an 18% per annum interest rate to 12% per annum in Trade & Investment Development Corporation of the Phils. v. Roblett: Section 24 of R.A. No. 8435 (The Agriculture and Fisheries Modernization Act of 1997) provides that "[t]he Land Bank of the Philippines shall, in accordance with its original mandate, focus primarily on plans and programs in relation to the financing of agrarian reform and the delivery of credit services to the agriculture and fisheries sectors, especially to small farmers and fisherfolk." In the case at bar, the purpose of the loan was to finance the construction of two broiler houses and a feeds warehouse. The observation by the Court of Appeals that the loan extended to respondent was part of the social assistance program to improve the plight of farmers is thus well-taken. Given the business losses that respondent suffered, coupled with the fact that she had made partial payments on both the original loan and the restructured loan, the reduction by the appellate court of the interest rate and penalty charge is justified. 2. Void. While, as petitioner argues, the nullity of the interest rate and penalty charge does not affect its right to recover the principal amount of the loan, the public auction of the mortgaged property is nevertheless void, the amount indicated as mortgage indebtedness having included excessive, iniquitous, and exorbitant interest rate and penalty charge. The nullity of the stipulation on the usurious interest does not affect the lender's right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. The foreclosure proceedings cannot be considered valid since the total amount of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous, and exorbitant. David is, however, directed to PAY appellee LBP the amount of Five Hundred Ninety Two Thousand and Seven Hundred Ninety Two Pesos and 42/100 (P592,792.42) with interest at the legal rate from March 29, 1999, upon payment of which appellee LBP shall RETURN title of the mortgaged property to plaintiff-appellant and RESTORE her in possession thereof. Macalinao v BPI Macalinao was sued by the BPI for unpaid credit card charges. Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month. In the complaint, BPI prayed for the payment of the amount of one hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP154,608.78) plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total amount due as attorney's fees, and of the cost of suit. The MeTC ruled in favor of respondent BPI and ordered petitioner Macalinao and her husband to pay the amount of PhP141,518.34 plus interest and penalty charges of 2% per month. This was affirmed by the RTC. On appeal to the CA, the appellate court increased the rate: The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004 until fully paid. The CA also emphasized that respondent BPI should not compound the interest in the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general public.

Issue Are the increased rates proper? Held No. The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI. In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card. We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum. Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs. Timan: The stipulated interest rates of 7% and 5% per month imposed on respondents' loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per mouth and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states: Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another. In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable. Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%

monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code. Asian Cathay v Sps Gravador Asian Cathay granted a loan to the Sps G for 800T secured by a REM and a PN. The Sps G paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1, 2000, they received a letter demanding payment of P1,871,480.00 within five (5) days from receipt thereof. The properties were eventually foreclosed. The sps filed a suit for annulment of real estate mortgage. This was denied by the RTC. On appeal to the CA, the appellate court reversed the RTC ruling that the amount of P1,871,480.00 demanded by ACFLC from the sps is unconscionable and excessive. Thus, it declared the sps principal loan to be P800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not insist on the interest rate provided on the note because it failed to provide the sps with the disclosure statement prior to the consummation of the loan transaction. Issue Was the CA correct in replacing the interest rates in the transaction for being unconscionable? Held Yes. Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of P1,871,480.00. In a span of three months, respondents' obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable. The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. The nullity of the stipulation on the usurious interest does not, however, affect the lender's right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error. Insular Bank v Sps Salazar The sps Salazar obtained a P42,050.00 loan from Insular Bank secured by a PN. This loan transaction was evidenced by a promissory note where the sps bound themselves jointly and severally to pay the amount with interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an attorney for collection, the sps were also bound to pay 25% of any amount due as attorney's fees plus expenses of litigation and costs. The sps were able to pay, little by little, a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges. Since the principal remained unpaid, Insular filed a complaint with the RTC alleging that the sps were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984, including interest at 21% per annum, penalty charges, and attorney's fees. The RTC reduced the amounts payable by the sps to P11,253.25, with interest thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiff attorney's fees in the amount of One Thousand Pesos( P1,000.00) and to pay the costs.

Issues Was the CA correct in ignoring the escalation clause and the other stipulated rates in the loan contract by the parties herein? Held Yes. Escalation clause In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28, 1987), the interest rate may not be increased by the plaintiff-appellant in the instant case. It is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. However, the enforceability of such stipulations is subject to certain conditions. In the light of Central Bank Circulars Nos. 492-498: "1. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existing as of January 2, 1976, provided that: "a. The pertinent loan contract documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and "b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and "2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date." The Central Bank took the position that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that (1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity or the law or regulation authorizing such an increase. In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, Insular Bank's second assignment of error is without merit. Penalty Clause With respect to the penalty clause, we have upheld the validity of such agreements in several cases. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to make good their promise. Furthermore, we agree with the trial court that the bank has already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by P26,626.75. The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous.

Attys Fees With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand (P1,000.00) pesos by the trial court appears to be enough. Llorin v CA L loaned from Apex a certain amount. Their agreement reads: 'I/We hereby authorize APEX MORTGAGE AND LOAN CORPORATION to accordingly increase the rate of interest and/or service charges stipulated in this contract without notice to me/us in the event of a law or any applicable Presidential Decree and/or Central Bank regulation which should be enacted increasing the lawful rate of interest and/or service charges that may be charged on this particular kind of loan.' Pursuant to this agreement, Apex increased the interest rate and thereafter decreased the same after the reduced interest rates prescribed by the Central Bank. L eventually failed to pay despite demands, prompting Apex to file a collection case against it. One of the issues in the case was the validity of the escalation clause in light of the rulings in Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, and Florante Valle and Insular Bank of Asia and America vs. Spouses Salazar. The trial court ruled in favor of Apex and ordered L to pay his obligations. It apparently upheld the validity of the escalation clause. L now asseverates that the escalation clause should not be given effect because of (1) its one-sidedness in favor of the lender, and (2) the absence of a de-escalation clause. Hence, he argues, the same should likewise be declared null and void. Issue Is the escalation clause herein valid? Held Yes. The legality of the escalation clause, as in the case at bar, has been recognized in this jurisdiction. In the aforecited case of Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et al., supra, we declared such clause to be valid and held that: Some contracts contain what is known as an `escalator clause,' which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may increase the price up to a fixed percentage of the base. Attacks on such a clause nave usually been based on the claim that, because of the open price provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful. However, it is pointed out that Section 2 of Presidential Decree No. 1684, which further amended the Usury Law, provides: Sec. 2. x x x That such stipulation (escalation clause) shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board x x x Accordingly, for a stipulation on an escalation clause to be valid, it should specifically provide (1) that there can be an increase in interest if increased by law or by the Monetary Board, and (2) it must include a provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. The purpose of the law in mandating the inclusion of a de-escalation clause is to prevent onesidedness in favor of the lender which is considered repugnant to the principle of mutuality of contracts. The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the validity and enforceability of an escalation clause in the contract. In other words,

in the absence of a corresponding de-escalation clause, the escalation clause shall be considered null and void. We are fully persuaded, however, to take particular exception from said ruling insofar as the case at bar is concerned, considering the peculiar circumstances obtaining herein. There is no dispute that the escalation clause in the promissory note involved in this case does not contain a correlative de-escalation clause or a provision providing for the reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. Notwithstanding the absence of such stipulation, however, it is similarly not controverted but, as a matter of fact, specifically admitted by petitioner that respondent APEX unilaterally and actually decreased the interest charges it imposed on herein petitioner on three occasions. Consequently, we hold that with this actuality, the escalation clause involved in this case remains valid and enforceable. There is a significant difference between the two escalation clauses in this case and in Banco Filipino; specifically that the escalation clause found in the Banco Filipino case refers only to a `law' increasing the lawful rates of interest that may be charged, whereas the escalation clause found in this case refers not only to a law but also `to any Presidential Decree or Central Bank Regulation' which increases such rate of interest and/or service charges. T the escalation clause in question by speaking of 'a law or any applicable Presidential Decree and/or Central Bank Regulation' which would increase the lawful rate of interest and fees chargeable on loans of this nature necessarily included Central Bank Circular(s) Nos. 721.There existed legal basis for the increases in the interest rate chargeable against petitioner's account made by the respondent Apex. Sps Florendo v CA, LBP F, an employee of LBP and prior to her resignation therefrom, applied for a housing loan with said bank with an interest of 9% per annum (benefit as an employee). It is not contested that the loan was actually given to F in her capacity as employee of LBP. When she resigned, however, the bank thereafter charged her with the normal interest rate of 17% as a non-employee. This was pursuant to a ManCom Resolution issued by the bank. F contests this unilateral increase as an invalid escalation clause and violative of the principle of mutuality of contracts. Issue Does the increase in the rate violate the principle of mutuality of contracts? Held Yes. It will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application. To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be

totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts not to agreements already validly entered into. Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. Consolidated Bank v CA Respondents Continental Cement Corporation and Gregory T. Lim obtained from petitioner Consolidated Bank And Trust Corporation (CBTC) a letter of credit in the amount of P1,068,150.00. The Corporation paid a marginal deposit of P320,445.00 to the petitioner. In relation to the same transaction, the Corporation, with Lim as signatory, executed a trust receipt for the amount of Pl,001,520.93. The petitioner filed a complaint for sum of money against respondents herein on the claim that they failed to turn over the goods covered by the trust receipt or the proceeds thereof. The respondents averred that the transaction between them was a simple loan and not a trust receipt and the amount claimed did not account for the payments already made. Lim questions the validity of the interest stipulation in the contract and the nature of the contract itself. Issue Whether the transaction involved is a loan transaction or a trust receipt transaction; Whether the interest rates charged against the defendants by the plaintiff are proper under the letter of credit, trust receipt and under existing rules or regulations of the Central Bank; Held 1. The floating rate of interest is invalid. The pertinent provision in the trust receipt agreement of the parties fixing the interest rate states: I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid. 9 We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner. While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. A stipulation ostensibly signifying an agreement to "any increase or decrease in the interest rate," without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate to charge against an outstanding loan. 2. Also, the transaction herein is a simple loan, not a trust receipt arrangement. In the case at bar, the delivery to respondent Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself was executed. Inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former. Pilipinas Hino v CA May the interest paid by the debtors heiren be retained by PH? No. An examination of the pertinent paragraphs of the memorandum of agreement between the parties is in order: 6. Where the buyer fails to deliver the check(s) due under paragraph 2 thereof, an interest equivalent to three percent (3%) per thirty (30) days period shall be imposed on the amount due for the duration of the delay. 7. The owners shall have the right to terminate or rescind this agreement, and to forfeit the downpayment where the buyer fails to pay any of the first six (6) installments. The buyer shall have a grace period of sixty (60) days within which to pay the installments and the interest due for the reason of the delay. The owners may thereafter forfeit the downpayment and sell the property to other parties without need of notice to the buyer, the owner shall not have other obligations to the buyer relating to the property subject of the right of first refusal by the buyer, as contained in the lease contract between the owner and the buyers. xxx xxx xxx

9. When the owners exercise their option to forfeit the downpayment, they shall return to the buyer any amount paid by the buyer in excess of the downpayment with no obligation to pay interest thereon. This shall be done within a period not later than one hundred twenty days (120) days from notice by the owner to the buyer of the forfeiture of the downpayment. In holding the petitioner liable for the amount of P924,000.00 representing interest earned for the unpaid installments, the trial court rationalized: For failure of the plaintiff to pay the installments on September 14, 1990, September 28, 1990, October 15, 1990 and October 30, 1990, the defendants were consequently deprive of the productive use of the supposed money they should have received as per contract. The 'Agreement' of both parties leaves no room for further explanation. It categorically states that in case of default the defendant will charge interest for the delay. It is worthy of note to believe that when the defendants terminated their contract to sell on November 20, 1990, the plaintiff was already in default from the September 14, 1990 to October 30, 1990. Thus, defendants have a valid reason to retain the amount of P924,000.00 representing interest due of the unpaid installments. As expressly provided for in Article 1159 of the Civil Code: Obligation arising from contracts have the force of law between the contracting parties and should be complied with in good faith. . We disagree. In justifying the withholding of the amount of P924,000.00 representing interest due of the unpaid installments, both the trial and the appellate court relied on paragraph 6 of the memorandum of agreement entered into by the parties. Surprisingly, both courts failed to consider paragraph 9 contained in the same memorandum of agreement. Said paragraph provides in very clear terms

that "when the owners exercise their option to forfeit the downpayment, they shall return to the buyer any amount paid by the buyer in excess of the downpayment with no obligation to pay interest thereon." This should include all amounts paid, including interest. Had it been the intention of the parties to exclude interest from the amount to be returned to the buyer in the event that the owner exercises its option to terminate or rescind the agreement, then such should have been stated in categorical terms. We find no basis in the conclusion reached by the lower courts that "interest paid" should not be returned to the buyer. It may be conceded, as the trial court endeavored to rationalize, that for failure of the buyer to pay the installments, private respondents "were consequently deprived of the productive use of the supposed money they should have received as per contract." However, the private respondents' withholding of the amount corresponding to the interest violated the specific and clear stipulation in paragraph 9 of the memorandum of agreement that except for the downpayment, all amounts paid shall be returned to the buyer "with no obligation to pay interest thereon." The parties are bound by their agreement. Thus, Article 1159 of the Civil Code expressly provides: Obligation arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Paragraph 9 of the memorandum of agreement between the parties, not being contrary to law, morals, good customs, public policy, or public order has therefore the force of law between the parties. Aside from equity considerations, the lower courts failed to provide a basis for the retention by the respondent of the interest. Equity is applied only in the absence of, and never against, statutory law or judicial rules of procedure. The memorandum of agreement, being the law between the parties, must therefore, govern. Both the private respondents and trial court quote our ruling in Luzon Brokerage Company v. Maritime Building Inc. in order to justify retention of said interest: The distinction between contracts of sale and contracts to sell with reserved title has been recognized by this Court in repeated decisions upholding the power of promisors under contracts to sell in case of failure of the other part to complete payment, to extrajudicially terminate the operation of the contract, refuse conveyance and retain the sums or installments already received, where such rights are expressly provided for, as in the case at bar. Sadly for private respondents, our ruling in the above case defeats rather than sustains their claim. While this Court recognizes that in contracts to sell even if the contract is terminated the seller can retain the sums already received or paid, such can be done only if it is expressly provided for in the contract. Such proviso is not contained in the memorandum of agreement, as what is merely provided for in paragraphs 7 and 9 is the retention of the downpayment. PNB v CA As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its account with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals Laboratories, a business operated by private respondent Ibarrola. The checks were delivered to the seller's agents 1 who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines, Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an "action for a sum of money and damages. The trial court ordered all the defendants in said civil case, except the treasurer who died in the meantime, to "jointly and solidarily" pay Ibarrola several amounts, among which is: P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until the entire amount is fully paid. The court, however, did not specify whether the legal rate of interest referred to in the judgment is 6% or 12%.

At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12% which PNB opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same RTC which promulgated the decision. Said court issued an order clarifying that the rate is 12%. PNB's direct appeal to this court from that order was referred to the CA which affirmed the RTC order. Issues (1) whether in an action for damages, the legal rate of interest is 6% as provided by Article 2209 of the New Civil Code or 12% as provided by CB Circular 416 series of 1974, and (2) whether such rate shall be computed from the filing of the complaint until fully paid? Held 1. 6%. The case at bench does not involve a loan, forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for her merchandise. When an obligation arises "from a contract of purchase and sale and not from a contract of loan or mutuum," the applicable rate is "6% per annum, as provided in Article 2209 of the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416." 11 Indeed, PNB's liability is based only on the RTC's judgment where it was held solidarily liable with the other defendants due to its negligence when it "failed to assure itself" if the Provincial Treasurer was "properly authorized" by Ibarrola to "make endorsement" of said checks. The rate of 12% interest referred to in Cir. 416 applies only to: "[L]oan or forbearance of money, or cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent." Applying the aforequoted rule, therefore, the proper rate of interest referred to in the judgment under execution is only 6%. 2. This 6% interest shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit." Thus, in accordance with the pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the time the judgment became final and executory until fully satisfied. Consolidated Bank Compounding of Interest The 14% interest rate charged by petitioner was within the limits set by Section 3 of the Usury Law, as amended. The charging of compounded interest has been held as proper as long as the payment thereof has been agreed upon by the parties. In Mambulao Lumber Company v. Philippine National Bank, 22 SCRA 359 (1968), we ruled that the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest. In the instant case, private respondents agreed to the payment of 14% interest per annum, compounded monthly, should they fail to pay the principal loan on the date of maturity. Handling Charges

All banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of Republic Act No. 3765 otherwise known as the "Truth in Lending Act" and shall make the true and effective cost of borrowing an integral part of every loan contract. The promissory notes signed by private respondents do not contain any stipulation on the payment of handling charges. Petitioner bank cannot, therefore, charge private respondents such handling charges. Penalty Stipulations The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable (Equitable Banking Corporation v. Liwanag, 32 SCRA 293 [1970]). The payment of penalty was provided for under the terms and conditions of the promissory notes for Loans B and C of George and George Trade, Inc. The penalty actually imposed, being only 3% per annum of the unpaid balance of the principal of said Loan B, is considered reasonable and proper.