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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No.

113236 March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents. QUISUMBING, J.: This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages. The facts of this case, adopted by the CA and based on findings by the trial court, are as follows: . . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca. In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products. On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products. On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:

DATE June 15, 1978 July 15, 1978 Aug. 15, 1978 Sep. 15, 1978

WITHDRAWAL SLIP NO. 42127 42128 42129 42130

AMOUNT P1,198,092.80 940,190.00 880,000.00 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of FojasArca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B"). However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence. On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant. Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 13, Dec.; pp. 368-370, id).3 Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips. On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits. Hence, the instant petition, alleging the following assignment of error: 25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the twointermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New Civil Code.8 The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips. The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention arose. On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action. At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this case. 10Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks. In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."

and any drawer or indorser to whom such notice 9 10 . notice of dishonor must be given to the drawer and to each indorser. Whoever by act or omission causes damage to another. Id. 13. p. and the amount of the deposit either in cash or in check. is called a quasi-delict and is governed by the provisions of this Chapter. those who have no visible means of income or whose income is insufficient for their subsistence. be issued free of charge to indigent parties. paragraph 34. A bank is under obligation to treat the accounts of its depositors with meticulous care. current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor. The license shall be valid in any part of the Philippines for a period of one hundred twenty days from the date of issue. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake.15 The withdrawal slips deposited with petitioner's current account with Citibank were not checks. if there is no pre-existing contractual relation between the parties. is obliged to pay for the damage done. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. the name of the depositor or current account holder. — Except as otherwise provided. WHEREFORE. No other sum shall be collected in the nature of a fee or tax of any kind for the issuance of said license. 7 ARTICLE 20. 2031 SECTION 89. NEGOTIABLE INSTRUMENTS LAW — ACT NO. It shall.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately.It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The expiry date shall be stamped in bold characters on the face of every license issued. subparagraph B. that is. 8 Rollo. By doing so. But having erroneously accepted them as such. CV No. whether such account consists only of a few hundred pesos or of millions of pesos. 6 ARTICLE 19. however. The local civil registrar shall require the payment of the fees prescribed by law or regulations before the issuance of the marriage license. Petition. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. there being fault or negligence. SO ORDERED. Costs against petitioner. 5 ARTICLE 2176. To whom notice of dishonor must be given. the date of the deposit. it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care. who indicates therein the current account number to which the deposit is to be credited. and shall be deemed automatically cancelled at the expiration of said period if the contracting parties have not made use of it. Such fault or negligence.12 The withdrawal slips in question lacked this character. or the latter's agent or representative. 29546 is AFFIRMED. when a negotiable instrument has been dishonored by non-acceptance or non-payment. at 19.R. the petition is DENIED and the decision of the Court of Appeals in CA-G. a fact established by their affidavit or by their oath before the local civil registrar. Citibank — and petitioner as account-holder — must bear the risks attendant to the acceptance of these instruments. 14 In the ordinary and usual course of banking operations. as petitioner admits.

then within the time that notice would have been received in due course of mail if it had been deposited in the post-office within the time specified in the last subdivision.is not given is discharge. by the next mail thereafter. — Where the person giving and the person to receive notice reside in the same place. Where parties reside in different places. SECTION 104. it must be given before the usual hours of rest on the day following. notice must be given within the following times: (a) If given at the place of business of the person to receive notice. SECTION 103. (b) If given otherwise than through the post-office. (b) If given at his residence. . or if there be no mail at a convenient hour on that day. (c) If sent by mail. the notice must be given within the following times: (a) If sent by mail. Where parties reside in same place. it must be given before the close of business hours the day following. — Where the person giving and the person to receive notice reside in different places. it must be deposited in the post-office in time to reach him in usual course on the day following. it must be deposited in the post-office in time to go by mail the day following the day of dishonor.

etc. 1985 of the Regional Trial Court. in Civil Case No. the name of the depositor or current account holder. which is detached and given to the depositor or his agent. THE COURT OF APPEALS. with the Pasig Branch of PBC in connection with its business of selling appliances. the date of the deposit. ROMMEL'S MARKETING CORP. 53-01980-3 and 53-01748-7. MARIA ANGELITA PASCUAL. No. while the duplicate copy is returned or given to the depositor. current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor.R. however. National Capital Judicial Region. Pasig City. and were instead deposited to the account of one Bienvenido Cotas. In some instances. the lower portion is retained by the bank. Philippine Bank of Commerce. or the latter's agent or representative. 27288 entitled "Rommel's Marketing Corporation. The deposit slip has an upper portion or stub.. respondents. ROGELIO LACSON. allegedly due to the gross and inexcusable negligence of the petitioner bank. In the ordinary and usual course of banking operations. et al. and the amount of the deposit either in cash or checks.74 representing various deposits it had made in its current account with said bank but which were not credited to its account. Branch CLX (160). .. vs. 1991 1 rendered by public respondent Court of Appeals which affirmed the Decision dated November 15. 97626 March 14.. who indicates therein the current account number to which the deposit is to be credited. to recover from the former Philippine Bank of Commerce (PBC for brevity). its President & General Manager. JR. now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL BANK. represented by its President and General Manager Romeo Lipana.979. DIGNA DE LEON. the deposit slips are prepared in duplicate by the depositor. the sum of P304. HERMOSISIMA.: Challenged in this petition for review is the Decision dated February 28. now absorbed by the Philippine Commercial International Bank. represented by ROMEO LIPANA. now absorbed by Philippine Commercial and Industrial Bank.Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G. J." The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC for brevity). RMC maintained two (2) separate current accounts. Current Account Nos. v. The original of the deposit slip is retained by the bank. petitioners. 1997 PHILIPPINE BANK OF COMMERCE.

and without prejudice to any criminal action which may be instituted if found warranted: 1.72. however. The second copy was kept by Irene Yabut allegedly for record purposes. The original showed the name of her husband as depositor and his current account number. been regularly furnishing private respondent with monthly statements showing its current accounts balances. PBC's teller. 1976. Yabut and submitted to private respondent RMC together with the validated duplicate slips with the latter's name and account number. in truth and in fact. The sum of P304. 3. No. as exemplary damages. Bienvenido Cotas who likewise maintains an account with the same bank. 2 On appeal. Irene Yabut's modus operandi is far from complicated. now absorbed by defendant Philippine Commercial & Industrial Bank. On the duplicate copy was written the account number of her husband but the name of the account holder was left blank. She would accomplish two (2) copies of the deposit slip. During this period. which is that of her husband's. however. appellants are ordered to pay plaintiff. and make it appear to be RMC's account number. C. Branch 160. viz: WHEREFORE. that these deposits. representing plaintiffs lost deposit. i. they were being deposited by her and credited by the petitioner bank in the account of Cotas. it had never been the practice of Romeo Lipana to check these monthly statements of account reposing complete trust and confidence on petitioner bank. 2. Azucena Mabayad. judgment is hereby rendered sentencing defendant Philippine Bank of Commerce. After validation. the decision appealed from herein is MODIFIED in the sense that the awards of exemplary damages and attorney's fees specified therein are eliminated and instead. Defendants' counterclaim is hereby dismissed for lack of merit. however. Unfortunately. Upon discovery of the loss of its funds. jointly and severally.74 to his secretary. but as its demand went unheeded. on all occasions. for the purpose of depositing said funds in the current accounts of RMC with PBC. Irene Yabut. it filed a collection suit before the Regional Trial Court of Pasig. petitioner Romeo Lipana claims to have entrusted RMC funds in the form of cash totalling P304. in addition to the principal sum of P304.979. With the daily remittance records also prepared by Ms. This went on in a span of more than one (1) year without private respondent's knowledge. Costs. and 4.979. validate and stamp both the original and the duplicate of these deposit slips retaining only the original copy despite the lack of information on the duplicate slip. an original and a duplicate. RMC demanded from petitioner bank the return of its money. plus interest thereon at the legal rate from the filing of the complaint.. A sum equivalent to 25% of the total amount due. 1975 to July 16. A sum equivalent to 14% thereof. 53-01734-7 of Yabut's husband.979. The trial court found petitioner bank negligent and ruled as follows: WHEREFORE. and defendant Azucena Mabayad to pay the plaintiff. would. Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and change the account number written thereon. were not credited to RMC's account but were instead deposited to Account No. as and for attorney's fees. petitioner bank had. she made her company believe that all the while the amounts she deposited were being credited to its account when.From May 5.e. It turned out.74 representing plaintiff's lost deposit plus legal interest thereon from the .A. 53-01980-3. the appellate court affirmed the foregoing decision with modifications.

Mabayad. We sustain the private respondent. Whoever by act or omission causes damage to another. suffered by the private respondent RMC — petitioner bank's negligence or that of private respondent's? Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. if there is no pre-existing contractual relation between the parties. neither was the bank forewarned by RMC that Yabut will be depositing cash to its account. it was impossible for the bank to know that the money deposited by Ms. Our law on quasi-delicts states: Art. . 4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut. 4 The petition has no merit. in validating the deposit slips. 2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut.000. Thus. Bienvenido Cotas. Irene Yabut would be irregular. P25. is called a quasi-delict and is governed by the provisions of this Chapter. thru its teller Ms. and not as records of deposits she made with the bank. Simply put. 3) The duplicate copies of the deposit slips presented by respondent Rommel Marketing Corporation are falsified and are not proof that the amounts appearing thereon were deposited to respondent Rommel Marketing Corporation's account with the bank. 5 According to them. 6 Private respondent. Irene Yabut to cover up her fraudulent acts against respondent Rommel Marketing Corporation. both original and duplicate. notwithstanding the fact that one of the deposit slips was not completely accomplished. For the bank to inquire into the ownership of the cash deposited by Ms.979. Irene Yabut the opportunity to defraud RMC. maintains that the proximate cause of the loss was the negligent act of the bank. also maintained an account with the bank. it was RMC's negligence in entrusting cash to a dishonest employee which provided Ms. this petition anchored on the following grounds: 1) The proximate cause of the loss is the negligence of respondent Rommel Marketing Corporation and Romeo Lipana in entrusting cash to a dishonest employee.74. 2176. there being fault or negligence.00 attorney's fees and costs in the lower court as well as in this Court. it was impossible for the bank to know the fraudulent design of Yabut considering that her husband. to the tune of P304. the main issue posited before us is: What is the proximate cause of the loss. Such fault or negligence.filing of the complaint. Otherwise stated. 3 Hence. presented by Ms. Irene Yabut belong to RMC. Azucena Mabayad. on the other hand. is obliged to pay for the damage done. Yabut to Ms.

was negligent in validating. The law considers what would be reckless. despite the glaring fact that the duplicate copy was not completely accomplished contrary to the self-imposed procedure of the bank with respect to the proper validation of deposit slips. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. or negligent in the man of ordinary intelligence and prudence and determines liability by that. Mrs. the date. yet still relevant. Q: Now in the handling of current account deposits of bank clients. case of Picart v. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. guided by those considerations which ordinarily regulate the conduct of human affairs. Ms.74. there is no dispute as to the damage suffered by the private respondent (plaintiff in the trial court) RMC in the amount of P304. original or duplicate. Applying the above test.There are three elements of a quasi-delict: (a) damages suffered by the plaintiff. and (c) the connection of cause and effect between the fault or negligence of the defendant and the damages incurred by the plaintiff. and the check number. Pasig Branch. what do you issue to the depositor to evidence the deposit made? . the amount and then he signs the deposit slip. Q: Now in accomplishing current account deposits from your clients. Mabayad herself. or the doing of something which a prudent and reasonable man would do. Yabut. 7 In the case at bench. thus: Q: Now.979. the account number. could you tell us the procedure you follow? A: The client or depositor or the authorized representative prepares a deposit slip by filling up the deposit slip with the name. It is in ascribing fault or negligence which caused the damage where the parties point to each other as the culprit. or some other person for whose acts he must respond. then he is guilty of negligence. Mabayad? A: The bank requires only one copy of the deposit although some of our clients prepare the deposit slip in duplicate. The seventy-eight (78)-year-old. will you please tell us Mrs. officially stamping and signing all the deposit slips prepared and presented by Ms. Q: Now. how many deposit slips do you normally require in accomplishing current account deposit. if it is deposited for cash. Azucena Mabayad. as testified to by Ms. as teller of PCIB. the cash breakdown. Negligence is the omission to do something which a reasonable man. it appears that the bank's teller. 8 provides the test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not. Mabayad your important duties and functions? A: I accept current and savings deposits from depositors and encashments. would do. (b) fault or negligence of the defendant. Smith. blameworthy.

Mabayad. she would simply fill up the blank space later on. Irene Yabut to the effect that since the duplicate copy was only for her personal record. while he ordered the investigation of the incident. The fact that the duplicate slip was not compulsorily required by the bank in accepting deposits should not relieve the petitioner bank of responsibility. and you can detach the bank's copy from the depositor's stub by tearing it sir. Rather than readily validating the incomplete duplicate copy. In a deposit slip. this was not how bank teller Mabayad proceeded thus resulting in huge losses to the private respondent. line and sinker the too shallow excuse of Ms. sir. She should not have been so naive in accepting hook. Q: Now what do you do upon presentment of the deposit slip by the depositor or the depositor's authorized representative? A: We see to it that the deposit slip 9 is properly accomplished and then we count the money and then we tally it with the deposit slip sir. Mabayad on guard. he never came to know that blank deposit slips were validated in total disregard of the bank's validation procedures. viz: Q: Did he ever tell you that one of your cashiers affixed the stamp mark of the bank on the deposit slips and they validated the same with the . she should have proceeded more cautiously by being more probing as to the true reason why the name of the account holder in the duplicate slip was left blank while that in the original was filled up. Mabayad but also on the part of the bank itself in its lackadaisical selection and supervision of Ms. Unfortunately. 11 A "reasonable man of ordinary prudence" 12 would not have given credence to such explanation and would have insisted that the space left blank be filled up as a condition for validation.A: We issue or we give to the clients the depositor's stub as a receipt of the deposit. Mabayad failed to observe this very important procedure. The odd circumstance alone that such duplicate copy lacked one vital information — that of the name of the account holder — should have already put Ms. Ms. is it with the deposit slip? A: The depositor's stub is connected with the deposit slip or the bank's copy. Mabayad. Romeo Bonifacio. Negligence here lies not only on the part of Ms. Q: Now is the depositor's stub which you issued to your clients validated? A: Yes. to the effect that. the upper portion is the depositor's stub and the lower portion is the bank's copy. Q: And who prepares the deposit slip? A: The depositor or the authorized representative sir? Q: Where does the depositor's stub comes (sic) from Mrs. then Manager of the Pasig Branch of the petitioner bank and now its Vice-President. 10 [Emphasis ours] Clearly. This was exemplified in the testimony of Mr.

which was the proximate cause of the loss suffered by the private respondent. and the failure of plaintiff to discover the same soon enough by failing to scrutinize . unbroken by any efficient intervening cause. it was not the cashier but the teller. coupled by the negligence of the petitioner bank in the selection and supervision of its bank teller. Apropos. once again. Azucena Mabayad. . is there any report similar to that? A: No. wanton. 17 defines proximate cause as "that cause. . this is gross. in natural and continuous sequence." In this case. . 1983. The latter's negligence was thus the proximate. the fact that those deposit slips were unfilled up. Ms. to wit: . had it not been for bank teller Mabayad's aforesaid gross and reckless negligence. 1976) that bank manager Bonifacio admittedly became aware of the practice of his teller Mabayad of validating blank deposit slips. . and without which the result would not have occurred. Q: You did not know that any one in the bank tellers or cashiers validated the blank deposit slip? A: I am not aware of that. which. 16 reiterated in the case of Bank of the Phil. Medina. 14 It was this negligence of Ms. public respondent Court of Appeals aptly observed: xxx xxx xxx It was in fact only when he testified in this case in February. absent the act of Ms. . . Q: It is only now that you are aware of that? A: Yes.machine. sir. and then make plaintiff believe that it was in the latter's accounts wherein she had deposited them. Q: The teller validated the blank deposit slip? A: No it was not reported. immediate and efficient cause that brought about the loss claimed by plaintiff in this case. 13 Prescinding from the above. 15 Vda. Mabayad in negligently validating the incomplete duplicate copy of the deposit slip. Undoubtedly. Proximate cause is determined on the facts of each case upon mixed considerations of logic. Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to her by plaintiff. produces the injury. Irene Yabut would not have the facility with which to perpetrate her fraudulent scheme with impunity. Islands v. de Bataclan v. or after the lapse of more than seven (7) years counted from the period when the funds in question were deposited in plaintiff's accounts (May. and not the latter's act of entrusting cash to a dishonest employee. 1975 to July. common sense. she would not have been able to deposit those funds in her husband's current account. and inexcusable negligence in the appellant bank's supervision of its employees. is the pronouncement made by the respondent appellate court. Court of Appeals. as insisted by the petitioners. policy and precedent.

The point is that as a business affected with public interest and because of the nature of its functions. or when it is impossible to determine whose fault or negligence should be attributed to the incident. the rule would also mean that an antecedent negligence of a person does not preclude the recovery of damages for the supervening negligence of. that which is expected of a good father of a family shall be required. banks are duty bound to treat the accounts of their clients with the highest degree of care. the degree of diligence required is more than that of a good father of a family. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons. 20 Here. the one who had the last clear opportunity to avoid the impending harm and failed to do so is chargeable with the consequences thereof. however. shall apply. 21 As elucidated in Simex International (Manila). or bar a defense against liability sought by another. assuming that private respondent RMC was negligent in entrusting cash to a dishonest employee. 22 in every case. At this juncture. whether such account consists only of a few hundred pesos or of millions. yet it cannot be denied that the petitioner bank. it is worth to discuss the degree of diligence ought to be exercised by banks in dealing with their clients. of the time and of the place. in essence. could have avoided the impending harm by the exercise of due diligence. This doctrine. 18 Furthermore. always having in mind . under the doctrine of "last clear chance" (also referred to. paragraph 2. When negligence shows bad faith. and as promptly as possible. simply by faithfully observing their self-imposed validation procedure. 19 Stated differently. but the negligent act of one is appreciably later in time than that of the other. thru its teller. such as the failure to duly credit him his deposits as soon as they are made. had the last clear opportunity to avert the injury incurred by its client. petitioner bank was indeed the culpable party. thus providing the latter with the opportunity to defraud the company. can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation. Court of Appeals. the bank is under obligation to treat the accounts of its depositors with meticulous care. v. The New Civil Code provides: Art. if the latter. Considering the fiduciary nature of their relationship with their depositors. the depositor expects the bank to treat his account with the utmost fidelity.the monthly statements of account being sent to it by appellant bank could not have prevented the fraud and misappropriation which Irene Yabut had already completed when she deposited plaintiff's money to the account of her husband instead of to the latter's accounts. states that where both parties are negligent. who had the last fair chance. A blunder on the part of the bank. confident that the bank will deliver it as and to whomever he directs. The bank must record every single transaction accurately. Inc. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose as he sees fit. at times as "supervening negligence" or as "discovered peril"). (1104a) In the case of banks. the provisions of articles 1171 and 2201. down to the last centavo. as advanced by the petitioner. If the law or contract does not state the diligence which is to be observed in the performance. 1173.

Considering. such cannot be used by the petitioners to escape liability.. In all other respects. only the balance of 60% needs to be paid by the petitioners. had exercised even a little vigilance in their financial affairs. the company would have been alerted to the series of frauds being committed against RMC by its secretary. This omission by RMC amounts to contributory negligence which shall mitigate the damages that may be awarded to the private respondent 23 under Article 2179 of the New Civil Code. WHEREFORE. Irene Yabut.the fiduciary nature of their relationship. the plaintiff may recover damages.000. indeed. the petitioners are entitled to claim reimbursement from her for whatever they shall be ordered to pay in this case. Ms. Mabayad was negligent in the performance of her duties as bank teller nonetheless. We do not agree. The foregoing notwithstanding. it cannot be denied that. But if his negligence was only contributory. Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of account with its own records during the entire period of more than one (1) year is the proximate cause of the commission of subsequent frauds and misappropriation committed by Ms. the immediate and proximate cause of the injury being the defendant's lack of due care. that the fraud was committed in a span of more than one (1) year covering various deposits. Petitioners may recover from Ms. concur . . Thus.00 attorney's fees. JJ. the decision of the respondent Court of Appeals is modified by reducing the amount of actual damages private respondent is entitled to by 40%. . Vitug and Kapunan. Irene Yabut. In view of this. the latter would have discovered the loss early on. it is apparent that the petitioner bank was remiss in that duty and violated that relationship. Thus. but the courts shall mitigate the damages to be awarded. Proportionate costs. In the case before us. except the award of P25. private respondent was likewise negligent in not checking its monthly statements of account. however. he cannot recover damages. Irene Yabut. While it is true that had private respondent checked the monthly statements of account sent by the petitioner bank to RMC. we believe that the demands of substantial justice are satisfied by allocating the damage on a 60-40 ratio. to wit: . the appellate court's decision is AFFIRMED. Azucena Mabayad the amount they would pay the private respondent. SO ORDERED. particularly Romeo Lipana. The damage would definitely not have ballooned to such an amount if only RMC. common human experience dictates that the same would not have been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. The award of attorney's fees shall be borne exclusively by the petitioners. Bellosillo. Private respondent shall have recourse against Ms. When the plaintiff's own negligence was the immediate and proximate cause of his injury. the loss would not have occurred. This omission on the part of the private respondent does not change the fact that were it not for the wanton and reckless negligence of the petitioners' employee in validating the incomplete duplicate deposit slips presented by Ms. 40% of the damage awarded by the respondent appellate court. Had it done so. shall be borne by private respondent RMC.

aside from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for damages. . who indicated therein the current account number to which the deposit was to be credited. I find it difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this case. Interestingly. Irene Yabut. In the earlier days before the age of full computerization. RMC's own employee. it is not disputed that each time Yabut would transact business with PBC's tellers. the usual bank procedure then was for the teller to count whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. Even private respondent RMC. 137) Since Yabut deposited money in cash. p. In fact. Mabayad was just unfortunate that private respondent's documentary evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank. Irene Yabut. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC. the records are silent on whether RMC had ever filed any criminal case against Ms.. it was only after the transaction was posted in the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction. dissenting: I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. see also Rollo pp. (See Annex B. The upper part was called the depositor's stub and the lower part was called the bank copy. then the teller proceeded to verify whether the current account number matched with the current account name as written in the deposit slip. Rollo p. The deposit slip was prepared and signed by the depositor or his representative. it is not completely accurate to state that from 5 May 1975 to 16 July 1976." It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. the date of the deposit. (Rollo. in its Comment. If it did. p. 22 and 47). "their negligence cannot but be gross. Moreover. when RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal. PBC's deposit slip." (Rollo. This rules out the possibility that there may have been some form of collusion between Yabut and bank teller Mabayad. Irene Yabut" (Decision. Both parts were detachable from each other. maintains that "when the petitioner's tellers" allowed Irene Yabut to carry out her modus operandi undetected over a period of one year. and the amount of the deposit either in cash or in checks. Going back to Yabut's modus operandi. who should have been charged with estafa or estafa through falsification of private document.Separate Opinions PADILLA. J. her employer? To set the record straight. Why is RMC insulating Ms. a bank normally maintained a ledger which served as a repository of accounts to which debits and credits resulting from transactions with the bank were posted from books of original entry. Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. Thus. 58 to 59). p. 55. had two parts. the name of the depositor or current account holder. she would accomplish two (2) copies of the current account deposit slip. 15). it indicted all the tellers of PCIB in the branch who were accused of conspiracy to defraud RMC of its current account deposits. as issued in 1975.

Coming now to the doctrine of "last clear chance. there was no way for PBC's bank tellers to reasonably foresee that Yabut might or would use the duplicate deposit slip to cover up her crime. when there is a clear evidence of tampering with any of the material entries in a deposit slip. on the assumption that it would serve no other purpose but for a personal record to complement the original validated depositor's stub.It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut. the original deposit slip would nonetheless still be validated under the account of Yabut's husband. It is then entirely left to speculation what Yabut would have done afterwards — like tampering both the account number and the account name on the stub of the original deposit slip and on the duplicate copy — in order to cover up her crime. the bank tellers were absolutely unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to RMC." it is my considered view that the doctrine assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate cause of the injury. Thus. Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had no choice but to accept and validate the deposit as written in the original deposit slip under the account number and name of Yabut's husband. however. not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her husband's name and to his account. In fine. and superimposed RMC's account number. Hence. Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip. Stated otherwise. detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the original deposit slip. the genuineness and due execution of the document become an issue in resolving whether or not the transaction had been fair and regular and whether the ordinary course of business had been followed by the bank. there must be a last and a clear chance. It is logical. That explains why Yabut still had to tamper with the account number of the duplicate deposit slip after filling in the name of RMC in the blank space. said act only served to cover-up the loss already caused by her to RMC. therefore. its employee. the act of validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish something which was not the probable or natural effect thereof. the rightful owner of such deposited funds. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the resulting damage to himself. Precisely. In the first place. deposited the money of RMC in her husband's name and account number instead of that of RMC. Under the circumstances in this case. her employer. In short. it was the criminal act of Yabut that directly caused damage to RMC. when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit slip. the damage had already been done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank. not a last possible chance. to conclude that the legal or proximate cause of RMC's loss was when Yabut. . tampered with its account number. The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices. or after the deposit slip was validated by the teller in favor of Yabut's husband. The teller. to avoid the accident or injury. but with the account name purposely left blank by Yabut.

aside from the fact that she does not appear to have been impleaded even as a party defendant in any civil case for damages. The deposit slip was prepared and signed by the depositor or his representative. Irene Yabut. Both parts were detachable from each other. I find it difficult to agree with the ruling that "petitioners are entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay in this case. Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of Azucena Mabayad. as issued in 1975.." (Rollo. "their negligence cannot but be gross. p. Separate Opinions PADILLA. I vote to grant the petition. as what the law presumes. the records are silent on whether RMC had ever filed any criminal case against Ms. it indicted all the tellers of PCIB in the branch who were accused of conspiracy to defraud RMC of its current account deposits. she would accomplish two (2) copies of the current account deposit slip. the bank was not remiss in its duty of sending monthly bank statements to private respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest opportunity. p.In the case at bar. is not contributory but the immediate and proximate cause of its injury. Mabayad was just unfortunate that private respondent's documentary evidence showed that she was the attending teller in the bulk of Yabut's transactions with the bank. therefore." It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. private respondent should. Its negligence. It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Irene Yabut" (Decision. PBC's deposit slip. her employer? To set the record straight. 58 to 59). 22 and 47). who should have been charged with estafa or estafa through falsification of private document. maintains that "when the petitioner's tellers" allowed Irene Yabut to carry out her modus operandi undetected over a period of one year. J. it is not completely accurate to state that from 5 May 1975 to 16 July 1976. In fact. Irene Yabut. it is not disputed that each time Yabut would transact business with PBC's tellers. Moreover. (See Annex B. 15). Rollo p. Interestingly. at least. in its Comment. Since a sizable amount of cash was entrusted to Yabut. had two parts. This rules out the possibility that there may have been some form of collusion between Yabut and bank teller Mabayad. when RMC filed a complaint for estafa before the Office of the Provincial Fiscal of Rizal. Why is RMC insulating Ms. Even private respondent RMC. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC. have taken ordinary care of its concerns. The upper part was called the depositor's stub and the lower part was called the bank copy. see also Rollo pp. dissenting: I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. 55. Private respondent failed to examine these bank statements not because it was prevented by some cause in not doing so. RMC's own employee. Going back to Yabut's modus operandi. but because it was purposely negligent as it admitted that it does not normally check bank statements given by banks. who indicated therein the current account number to which the deposit was .

the original deposit slip would nonetheless still be validated under the account of Yabut's husband. p. Thus. its employee. detached the validated depositor's stub on the original deposit slip and allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account number as the original deposit slip. it was the criminal act of Yabut that directly caused damage to RMC. however. but with the account name purposely left blank by Yabut. It is then entirely left to speculation what Yabut would have done afterwards — like tampering both the account number and the account name on the stub of the original deposit slip and on the duplicate copy — in order to cover up her crime. In the first place. the genuineness and due execution of the document become an issue in resolving whether or not the transaction had been fair and regular and whether the ordinary course of business had been followed by the bank. and the amount of the deposit either in cash or in checks. it was only after the transaction was posted in the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature or initial to serve as proof of the completed transaction. Under the circumstances in this case. deposited the money of RMC in her husband's name and account number instead of that of RMC. a bank normally maintained a ledger which served as a repository of accounts to which debits and credits resulting from transactions with the bank were posted from books of original entry. If it did. or after the deposit slip was validated by the teller in favor of Yabut's husband. to conclude that the legal or proximate cause of RMC's loss was when Yabut. Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip. the bank tellers were absolutely unaware that a crime had already been consummated by Yabut when her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her husband's account even if the funds deposited belonged to RMC. the name of the depositor or current account holder. In the earlier days before the age of full computerization. when there is a clear evidence of tampering with any of the material entries in a deposit slip. In fine. Stated otherwise. It is logical. (Rollo. the usual bank procedure then was for the teller to count whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. and superimposed RMC's account number. tampered with its account number. . there was no way for PBC's bank tellers to reasonably foresee that Yabut might or would use the duplicate deposit slip to cover up her crime. therefore. her employer. said act only served to cover-up the loss already caused by her to RMC. It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy on the lower portion on both the original and duplicate copies of the deposit slips presented by Yabut. Thus. when Yabut wrote the name of RMC on the blank account name on the validated duplicate copy of the deposit slip. the rightful owner of such deposited funds. the date of the deposit. 137) Since Yabut deposited money in cash. on the assumption that it would serve no other purpose but for a personal record to complement the original validated depositor's stub. the damage had already been done to RMC when Yabut deposited its funds in the name and account number of her husband with petitioner bank. then the teller proceeded to verify whether the current account number matched with the current account name as written in the deposit slip. Precisely. The teller. not the validation of the deposit slip by the teller as the deposit slip was made out by Yabut in her husband's name and to his account.to be credited.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act because the teller(s) simply had no choice but to accept and validate the deposit as written in the original deposit slip under the account number and name of Yabut's husband. Hence, the act of validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote cause which an independent cause or agency merely took advantage of to accomplish something which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with the account number of the duplicate deposit slip after filling in the name of RMC in the blank space. Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and the same must be the proximate cause of the injury. In short, there must be a last and a clear chance, not a last possible chance, to avoid the accident or injury. It must have been a chance as would have enabled a reasonably prudent man in like position to have acted effectively to avoid the injury and the resulting damage to himself. In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private respondent RMC so that any error or discrepancy in the entries therein could be brought to the bank's attention at the earliest opportunity. Private respondent failed to examine these bank statements not because it was prevented by some cause in not doing so, but because it was purposely negligent as it admitted that it does not normally check bank statements given by banks. It was private respondent who had the last and clear chance to prevent any further misappropriation by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence, therefore, is not contributory but the immediate and proximate cause of its injury. I vote to grant the petition.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 108052 July 24, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ, 1 doing business under the name and style SAPPHIRE SHIPPING, respondents.

PANGANIBAN, J.:p Does a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual with another local bank, and apply the said funds to certain obligations owed to it by the said individual? Assailed in this petition is the Decision of respondent Court of Appeals 2 in CA-G.R. CV No. 27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the dispositive portion of which read: 3 WHEREFORE, judgment is hereby rendered: 1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private respondent herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal rate from January 13, 1987, the date of judicial demand; 2) The plaintiff's supplemental complaint is hereby dismissed (sic); 3) The defendant's counterclaims are likewise dismissed. The Facts The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being undisputed by the parties: 4

The body of the decision reads: After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes the following conclusions: (a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defense of compensation for what is owing to it on the principle of solution (sic) indebiti. (b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to the credited to his account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the plaintiff's account with the defendant, No. 830-2410; (c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of $2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference; (d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He claims, however, that plaintiff's claim has prescribed. (e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11 months from November 1980, and 5 years and 9 months from January 1981. Such letter was answered by the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the defendant through Exh. 13; (f) The deduction of P34,340.58 was made by the defendant not without the knowledge and consent of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant. There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981 created an extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle of solutio indebiti, as follows: If something is received when there is no right to demand it, and it was unduly delivered through (sic) mistake, the obligation to return it arises. (Article 2154, Civil Code of the Phil.) Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified in making the compensation or set-off against the two remittances coursed through it in favor of private respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the principlesolutio indebiti, and second, whether or not petitioner's claim is barred by the statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows: 5

and also of the same quality if the latter has been stated. Thus. quoted as follows: When the property is conveyed to a person in reliance upon his declared intention to hold it for. and that he be at the same time a principal creditor of the other. vs. et. or transfer it to another or the grantor. (Bank of America NT & SA vs. (b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local bank asking the latter to pay an amount to a beneficiary is a stipulation pourautrui. liquidated and demandable. is.al. Mora. (2) That both debts consists in a sum of money. became obligated to the defendant to return what he unduly received. and was each one of them a debtor and creditor of the other at the same time? Analyzing now the relationship between the parties. there is created an implied trust pursuant to Art. or of debtor and creditor under a quasicontract. there was created between them a relationship of obligor and obligee. (5) That over neither of them there by any retention or controversy. 2 through 5 are apparently present. 30 Phils. for both debts consist in a sum of money. 20 SCRA 261.e. they be of the same kind. although he had no right to demand it). 2154. 128 SCRA 577). Bonifacio Brothers vs. (c) By the principle of solutio indebiti (Art. In the case of the $2. al. . the plaintiff who unduly. requisites Nos.. Uy Tam vs. it is necessary: (1) That each one of the obligors be bound principally. received something (sic) by mistake (i.627. The question. 79 SCRA 193. the 2 double credits.Article 1279 of the Civil Code provides: In order that compensation may prosper.11. et. Civil Code). are both due. commenced by third persons and communicated in due time to the debtor. City Fiscal. 145 SCRA 419). 1453 of the Civil Code. there is an implied trust in favor of the person whose benefit is contemplated (sic). however. A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. or if the things due are consumable. IAC. it appears that: (a) With respect to the plaintiff's being a depositor of the defendant bank. 475). Leonard. (4) That they be liquidated and demandable. Encarnacion. they are creditor and debtor respectively (Guingona. and over neither of them is there a retention or controversy commenced by third persons and communicated in due time to the debtor. (3) That the two debts be due.. Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the plaintiff as beneficiary. where both of the obligors bound principally.

179. On this point.00 in "full settlement of accounts receivables with RICB Fund Transfer Department.11 supposed to be remitted to another bank is not only improper. and the defendant as agent on the other.11 from Jeddah. it is submitted that the set-off or compensation of $2. who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of $2.340. The plaintiff's Exh. which is a receipt issued to the plaintiff by the defendant for the amount of P34.38 erroneously doubly credited to his account. .627. 830-2410 with the defendant bank. They are debtor and creditor only with respect to the double payments. On the other hand.11. However.340. "E". but are trustee-beneficiary as to the fund transfer of $2. of defendant's Answer with Compulsary Counterclaim.11. Hence. On the other hand. as follows: The retention and application of the amount of P34.11 to plaintiff's account with Citibank. in relation to plaintiff's Complaint).627. Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5. For one thing. for the reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of $2. 1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last paragraph of defendant's memorandum.627. in case of violation of the agency. On the contrary.340. 6 of defendant's Memorandum). the defendant was an implied trustee. There was neither any allegation thereof in its pleadings. as matters stand. p.885.In view of the foregoing. see par. the Court finds the plaintiff's theory of agency to be untenable. see par. neither are they at the same time principal creditor of the other. 1279 of the Civil Code. between the National Commercial Bank of Jeddah as principal on the one hand.627. Therefore. San Juan. the parties' obligations are not subject to compensation or set off under Art. the defendant admitted that the telex advice was for credit of the amount of $2.11 to plaintiff's account No. the defendant alleged this for the first time in its Memorandum (Pls. the defendant's actuation in intercepting the amount of $2. Thus.627. Metro-Manila (Pls.23 and $5.627. PNB-Escolta base on Legal Department Memo dated February 28.58 was done in a manner consonant with basic due process considering that plaintiff was not only furnished documented proof of the cause but was also given the opportunity to con(tro)vert such proof .627. were we to infer that there was an implied agency. Greenhills. The P34.11 is concerned. something we can ill afford at this time when we need to attract and invite deposits of foreign currencies. but rather.38 subject of the supplemental complaint is quite another thing. nor was there any evidence to prove such fact. the same would not be between the plaintiff and defendant. it will also erode the trust and confidence of the international banking community in the banking system of the country. Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. there was no express contract of agency.627. the cause of action would accrue to the NCB and not to the plaintiff. 16.11 against the double payments to plaintiff's account is not in accordance with law. the Court is of the opinion that the parties are not both principally bound with respect to the $2. It would have been different has the telex advice from NCB of Jeddah been for deposit of $2. The same is in accordance with the defendant's answer.

saying: The telegraphic money transfer was sent by the IBN. as provided under Art. or simply telegraphic transfer(. 1149 as cited by the plaintiff is not applicable in this case.11 or its peso equivalent. 1279 of the Civil Code are present (insofar as the amount of P34. as debtor. This conclusion is borne by the fact that the receipt is in the hands of the plaintiff. albeit only partial with respect to plaintiff's indebtedness of P7. Greenhills Branch. 1. Rather. The respondent Court of Appeals rejected such argument. and. Saudi Arabia (NCB. through counsel. thru the National Commercial Bank of Jeddah. Withal the telegraphic money transfer. 1145.38 is concerned. communicated his unequivocal and unconditional consent to the retention and application of the amount in question. Memorandum for the plaintiff). indicating that such receipt was handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28. the trial court ruled that the herein petitioner was obligated to pay private respondent the amount of US$2.Moreover. coursed thru the PNB's head office. 1279 of the Civil Code. defendant's Answer with Compulsary Counterclaim to Plaintiff's Supplemental Complaint). petitioner bank continued to insist that it validly retained the US$2.11 in payment of the private respondent's indebtedness by way of compensation or set-off.38 from Libya.392. page 2. on the question of prescription. San Juan. or simply account means that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citibank.340.627. the Court believes that Art. in that sense. with interest at the legal rate. Some such responsibility of the . there is created between the two banks a sort of communication exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Now. Saudi Arabia. 1286. no such creditor-debtor relationship could have been created between the plaintiff and defendant. On appeal to the respondent Court. plaintiff.380.).44.627. the NCB's corresponden(t) bank in the Philippines. 830-2410 (per par. the plaintiff in his Memorandum. And since all the requisites of Art. presupposes a creditor-debtor relationship between the plaintiff. the Court believes that insofar as the amount of P34.38 was deducted) was intended for credit and deposit in plaintiff's account at the defendant's Bank CA No. which fixes the prescriptive period for actions upon a quasi contract (such as solution indebiti) at six years. Such being the case. all the requirements of Art. The credit account. for the credit/account of plaintiff with the Citibank. for short). the applicable law is Art. see paragraphs 8-9. Ibid.) was purchased by the IBN from the NCB in Saudi Arabia. 1279 of the Civil Code are present. Metro Manila. In the dispositive portion of its decision.38 is concerned). The court dismissed all other claims and counterclaims. and since the PNB is the NCB's corresponden(t) bank in the Philippines. and the said amount may properly be the subject of compensation or set-off. plaintiff's principal in Jeddah. The telegraphic money transfer. compensation takes place by operation of law (Art.392.340. stated that the subsequent fund transfer from Brega Petroleum Marketing Company of Libya (from where the P34. as creditor and the Citibank. (Pls. At any rate.

." (emphasis ours) Hence.corresponden(t) bank is akin to section 7 of the Rules and Regulations Implementing E. the respondent Court affirmed the trial court's holding in toto. as amended by E. trade and commerce of all countries and communities are carried on. thereby making a mockery of the entire judicial process of this country.O. the (h)onorable respondent court should have ordered private respondent to pay PNB what the latter is bound by the trial court's decision to return the former. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE. That is all that the PNB can do under the remittance arrangement that it has with the NCB. that is. and because respondent Court order petitioner bank to return intercepted amount to said . petitioner in effect seeks to render nugatory the decisions of the trial court and the appellate Court. 925. With its responsibility as defined as well as by the nature of its banking business and the responsibility attached to it. IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME AMOUNT.11 or its peso equivalent. we find no reversible error whatsoever in either ruling.627. has become an obligor of private respondent (resulting in legal compensation). and through which the industry.O. petitioner bank comes before this Court seeking a review of the assailed Decision. 857. the petitioner implicity admits the correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to private respondent for the sum of US$2. and have this Court validate its original misdeed. But petitioner has adopted a novel theory. to take charge of the prompt payment" of the telegraphic transfer." 7 By this simplistic approach. . After a careful scrutiny of both the decision of the trial court and that of the appellate court. The Issue Petitioner's arguments revolve around one single issue: 6 WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2.627. by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to the account of the plaintiff with the said bank. And it could not have done otherwise. contending that since respondent Court found that private respondent is "an obligor of PNB and the latter. AND WOULD PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME AMOUNT FROM PRIVATE RESPONDENT. The Court's Ruling We note that in framing the issue in the manner aforecited. What the petitioner bank is effectively saying is that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply intercept fundsbeing coursed through it. as aforesaid. the PNB's liability as corresponden(t) bank continues until it has completely (sic) performed and discharged it(s) obligation thereunder. ".11. and eventually to be deposited to the account of an individual who happens to owe some amount of money to the petitioner. for transmittal to another bank. Dissatisfied. and see no need to add to the extensive discussions already made regarding the non-existence of all the requisites for legal compensation to take place.

with the not impossible intention of using this case as a precedent for similar acts of interception in the future. WHEREFORE. who in turn was found by the appellate Court to be indebted to petitioner bank. Costs against petitioner. The litigation could have ended there.individual. that petitioner bank ends up in exactly the same position as when it first took the improper and unwarranted shortcut by intercepting the said money transfer. the instant petition is herewith DENIED for being plainly unmeritorious. . SO ORDERED. there is no need for petitioner bank to actually return the amount. and the assailed Decision is AFFIRMED in toto. Instead. notwithstanding the assailed Decision saying that this could not be done! We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner bank. THEREFORE. this plainly unmeritorious case had to clog our docket and take up the valuable time of this Court. particularly since we are aware that if the petitioner bank had been in good faith. it could have easily disposed of this controversy in ten minutes flat by means of an exchange of checks with private respondent for the same amount. This piratical attitude of the nation's premier bank deserves a warning that it should not abuse the justice system in its collection efforts. and hence. but it did not. and finally. there must now be legal compensation of the amounts each owes the other.

As culled from the records and the pleadings of the parties. Sometime in March 1975.522. entitled Bank of the Philippine Islands (successor-in-interest of Commercial Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Constante A. No. the outstanding balance of the account stood at P662. The money therein was placed in the money market. 104612 May 10.Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G. Ramirez & Associates for petitioner. by virtue of an Indemnity Undertaking executed by Lim for himself and as President and General Manager of Eastern. an officer and stockholder of Eastern. JR. J. The Court of Appeals had affirmed the dismissal of the complaint but had granted the defendants' counterclaim for P331.87. Leonen. 2 one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. and BENIGNO D. held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co.). vs. HON.G. the following facts were duly established: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. a joint checking account ("and" account) with Lim in the amount of P120. the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). LIM. 3 . On 5 May 1977. 25739 which modified the Decision of 15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No.R. Velasco died on 7 April 1977.44 which represents the outstanding balance of their account with the plaintiff. EASTERN PLYWOOD CORP.000. CV No.. respondents.interest of COMMERCIAL AND TRUST CO.R. 1994 BANK OF THE PHILIPPINE ISLANDS (successor-in.261. (CBTC). 87-42967.: The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of respondent Court of Appeals in CA. DAVIDE. petitioner. COURT OF APPEALS. Ancheta for private respondents. Lim (Lim). At the time of his death.

9 On 2 December 1987. ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest. then presided over by Judge Wenceslao M. Eastern and Lim. in turn.261. The complaint was docketed as Civil Case No.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate.00 payable on demand to the order of CBTC with interest at 14% per annum. No reference to any security for the loan appears on the note. while the line with the words "this loan is wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A No. as its President and General Manager. 5 The note was signed by Lim both in his own capacity and as President and General Manager of Eastern. CBTC was merged with BPI. nor shall the existence hereof and the non-resolution of the dispute between the contending parties in respect of entitlement to the Account Balance. and CBTC signed another document entitled "Holdout Agreement. In the said case. 6 wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-001-42." evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager.00. the box with the printed word "UNSECURED" was marked with "X" — meaning unsecured. Ceferino Jimenez. the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time. 4 The loan was payable on demand with interest at 14% per annum. the whole balance of P331. Polo. 87. Defendants Lim and Eastern. BPI filed with the RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73." 7 Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. entitled "In re Intestate Estate of Mariano Velasco.00 from CBTC as "Additional Working Capital.000." also dated 18 August 1978. Lim shall default in payment of all obligations and liabilities thereunder. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto. 8959. In addition. In the Disclosure Statement. Eastern obtained a loan of P73. Eastern issued on the same day a negotiable promissory note for P73. through Lim." which refers to the joint account of Velasco and Lim with a balance of P331. For this loan. and Eastern. Proc. Lim hereby confer upon Comtrust [CBTC]. preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. In the meantime." and docketed as Sp.44. On 9 September 1986. . when and if their alleged interests in the Account Balance shall have been established with finality.42967 and was raffled to Branch 19 of the said court. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. on 18 August 1978. No. a case for the settlement of Velasco's estate was filed with Branch 152 of the RTC of Pasig. 8 Sometime in 1980. filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.000.000.261.Thereafter.

the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73. the trial court rendered its decision on 15 November 1990 dismissing the complaint because BPI failed to make out its case. Their appeal was docketed as CA-G.R.00 covered by the promissory note. the petitioner can only hold the amount of P73. It then ordered BPI "to pay defendants the amount of P331. 8959. No. 12 Both parties appealed from the said decision to the Court of Appeals. and that the defendants." And because the latter are the rightful owners of the money in question. 25739.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto. hence. Private respondents Eastern and Lim dispute the "suspensive condition" argument of the petitioner. No. the Court of Appeals rendered a decision affirming the decision of the trial court. They interpret the findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as a finding that the money deposited in the joint account of Lim and Velasco "rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim.000.261. the Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case." 10 and that based on this agreement. that the "P331.00 representing the security required for the note and must return the rest. as depositors of CBTC/BPI. It.261. it ruled that "the promissory note in question is subject to the 'hold-out' agreement. the trial court. viz. CBTC/BPI should have protected the defendants' interest in Sp. The private respondents filed a Rejoinder thereto.. denied it because the "said claim cannot be awarded without disturbing the resolution" of the intestate court. hence. however." 11 As to the defendants' counterclaim. Furthermore. are the latter's creditors. On 23 January 1991.00 despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. failed to rule on the defendants' (private respondents') partial appeal from the trial court's denial of their counterclaim. . BPI asserts. the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan." 14 On 22 April 1992." 15 Hence.After due proceedings. Proc. 8959 when the said account was claimed by Velasco's estate. Proc.000. BPI filed the instant petition alleging therein that the Holdout Agreement in question was subject to a suspensive condition stated therein. CV No.000. 16 The petitioner filed a Reply to the aforesaid Comment. "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under the promissory note to set off the loan even though the same has no fixed maturity. They add that the ruling of the lower court that they own the disputed amount is the final and definitive judicial action required by the Holdout Agreement. Upon their motion for reconsideration. The key issues in this case are whether BPI can demand payment of the loan of P73. We gave due course to the petition and required the parties to submit simultaneously their memoranda. recognizing the fact that the entire amount in question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in Sp.44 representing the outstanding balance in the bank account of defendants.

BPI was not specifically ordered to release the account to the said heirs. CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. or BPI as its successor-in-interest." In Serrano vs. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. Generally. 8959 merely authorized the heirs of Velasco to withdraw the account. savings. and as stated by the respondent Court of Appeals. Article 1980 of the Civil Code expressly provides that "[f]ixed. the order of the court in Sp. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. Proc.000. took the note subject to the Holdout Agreement. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. therefore. CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan.00. with the Court of Appeals in its interpretation of the Holdout Agreement. hence." 17 It further correctly ruled that BPI was not a holder in due course because the note was not indorsed to BPI by the payee. 18 To apply the deposit to the payment of a loan is a privilege. 21 we held that bank deposits are in the nature of irregular deposits.The collection suit of BPI is based on the promissory note for P73. BPI. We have ruled that when the ownership . therefore. "[t]here is no question that the promissory note is a negotiable instrument. paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 19 Also. the note is an unconditional promise to pay the said amount. The "suspensive condition" theory of the petitioner is. however. BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit. had every right to demand that Eastern and Lim settle their liability under the promissory note. It is clear from paragraph 02 thereof that CBTC. it was payable on demand of the depositor.261.00. The Court of Appeals also erred in affirming such dismissal. We disagree. it was under no judicial compulsion to do so. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. 22 The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. 2310-001-42 which BPI should have debited. As early as 12 May 1979. What it provides is an alternative. On its face. Central Bank of the Philippines. method of enforcing its claim on the note. What the agreement conferred on CBTC was a power. untenable. they are really loans because they earn interest. hence. The counterclaim of Eastern and Lim for the return of the P331. 23 Moreover. not an exclusive. and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. not a duty.000. a right of set-off which the bank has the option to exercise. As the real creditor of the bank. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. a bank is under no duty or obligation to make the application. No. Eastern has the right to withdraw it or to demand payment thereof. When it demanded payment of the debt directly from Eastern and Lim. CBTC. The Court of Appeals correctly decided on the counterclaim. It acquired the note from CBTC by the contract of merger or sale between the two banks.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank.

had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. the instant petition is partly GRANTED. computed from that date until payment pursuant to Article 2212 of the Civil Code. The award on the counterclaim is sustained subject to a modification of the interest.264. BPI. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence.00 with interest at: (a) 14% per annum on 18 August 1978 until payment. or through error induced by fraud of a third person. . WHEREFORE. The challenged amended decision in CA-G. even if done in good faith. did not extinguish its obligation to the true depositor. CV No. as the debtor with respect thereto. the dismissal of the petitioner's complaint is reversed and set aside. SO ORDERED.of a particular property is disputed. 24 Because the ownership of the deposit remained undetermined. even if the debtor acted in utmost good faith and by mistake as to the person of the creditor. the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution.R.000. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25735 is hereby MODIFIED. In the light of the above findings.44 in favor of the private respondents shall bear interest at the rate of 12% per annum computed from the filing of the counterclaim. Eastern. computed from (b) 12% per annum on the interest which had accrued up to the date of the filing of the complaint. No pronouncement as to costs. (2) The award of P331. As modified: (1) Private respondents are ordered to pay the petitioner the promissory note for P73. the principal. 26 The payment then by BPI to the heirs of Velasco.

073. as quoted from the respondent court's decision are as follows: in that sale that should a receivable remain unpaid. 1978. 1979 September 1978 P371. 1978 P371.R.319. plaintiff. vs. on March 9.319. National Capital region.00 (Exhs.58 September 9. the Malonjaos also executed in favor of plaintiff. and RUFINO MALONJAO.75 (Exhs. 83-18464 for a sum of money. 2001 STATE INVESTMENT HOUSE INC. (162775) S-65585 (Exh. To secure the payment of the receivables. respondents. . 112590* July 12. "C-1". 1978 and July 19. may impose a penalty fee of 3% per month. "B").58 December 9.: This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial Court. 1979 P371. a real estate mortgage over their real property covered by Transfer Certificates of Title Nos. Pursuant to their agreement. "E-1".000.319. INC.558. LOMUYON TIMBER INDUSTRIES. "C". AMANDA MALONJAO. KAPUNAN. COURT OF APPEALS. The undisputed facts. branch 38 in Civil Case No.319. petitioner.58 March 9.319. Lomuyon sold to plaintiff for a total consideration of P2. various receivables consisting of checks as follows: TCBTC 618821 TCBTC 618820 TCBTC 618819 TCBTC 618818 TCBTC 618817 TCBTC 618816 TCBTC 618814 TCBTC 618828 MBTC 06659490 June 9. 10 and 15. 60. "F-1" and "G" to "G-7").319.. 1978 June 9.Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G. "D". D-1". No.58 September 9.319. (445856) S-65586 and No.58 P371.319.58 30. 1979 P371. "E" and "F").. 1979 P371.58 March 9.58 December 9. 1978 P371. 1978 P371. at its discretion. J.

1982. "L-1". On October 6. that as of said date.TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of payee Lomuyon which in turn. the same were dishonored for having been drawn against insufficient funds (Exhs.147. by way of special affirmative defenses.187. As an alternative cause of action.00. September 28. "O"). "M" and "N").874. attorney's fees and litigation expenses (Records.12 and not P2. "13. defendants alleged that: "12. defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor of the checks. the Provincial Sheriff issued a Certificate of Sale (Exh. is P4.601. indorsed said check to plaintiff. 1981 (sic) was P4. On June 27. "L".233.12 (Exh. indorsed the checks to plaintiff. "H" and "H-7") except for TCBTC 618821.27 inclusive of interest and charges. 1-38). the Provincial Sheriff sold at public auction.601. Assuming for the sake of argument. The following day. However. plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to P2. pp. the deficiency would only be P575. "14.876. 1983. plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties from defendants' outstanding obligation. 1981. On February 14.10. "16. 1983. Plaintiff thus decided to undertake foreclosure of the real estate mortgage. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low. In said petition. inclusive of interest and charges. "15. (Exhs. "K". In their answer. which as of May 31. "P"). The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the defendants. The complaint states no cause of action.00. The MBTC (Metropolitan Bank and Trust Company) check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in turn. defendants' outstanding obligation. x x x. 1983 amounted to P2. Thus.809.187.233. "I". Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the penalty charges it has imposed thereon.237. "J". Defendants failed to pay the value of the checks.874. When plaintiff presented the checks for payment to the drawee banks.62 as of February 14.929. Plaintiff further prayed that it be awarded exemplary damages. there remains a deficiency of P2. plaintiff alleged among others. plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real estate mortgage dated September 28. . that the outstanding obligation of the defendants as of September 26.62 as erroneously alleged in the complaint.239.12 per statement of account as alleged in the complaint and the alleged purchase price at public auction wasP4. 1983. 1981.809.147.313. defendants mortgaged properties to plaintiff who was the highest bidder for P4. defendants contended that plaintiff's computation of their outstanding obligation is erroneous.

833.233. 1981.874. petitioner filed the instant petition raising the sole issue that: THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE.601. II. 1981. petitioner reiterated its position in a motion for reconsideration. petitioner was still entitled to a deficiency of about P2. averring that the respondent court and the trial court failed to reconcile the figures due it.4 In disallowing the claim for deficiency. The interest and charges made by plaintiff is usurious and unconscionable" (id. Undaunted by the disallowance of its claim in the August 27. likewise. 91-92). THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS.187. private respondent's obligation amounted to P4.601.. 1992. The subsequent motion for reconsideration was.12. denied. SO ORDERED. pp. Ordering the plaintiff and defendants to pay the costs of suit. petitioner assigned the following errors committed by the trial court: I.233. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.62 inclusive of interest and penalty charges.3 On August 17. THE BALANCE WOULD BE P2.2 On appeal."17. Hence.141. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES' OBLIGATION TO SIHI AS OF THE TIME OF FORE-CLOSURE AUCTION SALE AMOUNTED TO P6. the obligation to SIHI was computed to be P6. "18.874.021. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants. 2.021. private respondent's outstanding . III. the respondent court found that the proceeds of the auction sale was sufficient to cover the principal obligation of the private respondent including interest. the respondent court rendered the assailed decision disallowing the claim for deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and unconscionable. 1992 decision. Petitioner further added that until the original obligation is fully paid. Dismissing defendants' counterclaim. and 3. 1982. Considering that the bid price of the foreclosed properties was only P4. penalty and other charges.00. the trial court rendered its decision with the following dispositive portion: WHEREFORE.62 THUS.835.147.62.00. At that time of the foreclosure sale on February 14. Both the respondent court and the trial court took particular attention on the penalty charge of 3% a month which was imposed on the principal obligation as a result of their default in payments. AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4. Petitioner asserts that as of September 26. in view of all the foregoing. No demand was ever made upon the defendant. judgment is hereby rendered: 1.809.62.1 On January 11.

is P2. 1981. the total amount purchased by plaintiff was only for P2. there would therefore be a balance of only about P575.00.970.5 Petitioner argues that while it recognizes the authority of the court to reduce the penalty if it is iniquitous or unconscionable.809.500.12. the court.00 with the petitioner as the highest bidder. 1983.00 from P2.929.651.64. the properties were sold in the amount of P4.313.601. the respondent court acted in accordance to of Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14.630.000. There is no dispute that the payment of penalty is sanctioned by the law.000. x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions.27). does not have the authority to delete the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of contracts between the parties.809.00. 1983.1991 if not for the penalty charge of 3% per month or 36% per annum. the obligation of the private respondent was computed to be P4. private respondent's outstanding obligation to SIHI rose to P7.601.187. although the penalty may be reduced by the courts if it is iniquitous or unconscionable. Since the private respondent failed to fulfill its obligation.970. 1978 to March 9.l2.147. 1983 (P2. 1âwphi1. however. the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2.62 as claimed by petitioner was of no moment. 1988 in the RTC.nêt Whether or not the alleged deficiency from the foreclosure sale was P575.62) up to the filing of the complaint for the deficiency claim on May 31.969.41. The trial court justified. 1980 and up to September 26.obligation continue to earn interest and penalty charges from day to day. Court of Appeals. As alleged in plaintiff's complaint.566.48. Thus.64 represented by the various checks include therein.12 or P2. and up to the trial on June 3.313. For a two year period from June 9. In the case of Rizal Commercial Banking Corporation vs.12 inclusive of interest and penalty charges. 1981 the amount grew to P4. the money of the plaintiff has already earned interests and other charges to more or less P1.000. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner. Deducting the amount of P2.6 Contrary to petitioner's contention. There is reason to believe that the P2.970.147.500. Per Statement of Account dated September 21. At the time of the auction sale on February 14.223.874.556.1983 (P2. The respondent court disallowed the payment of the deficiency altogether because it found that tile principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.566.12 as stipulated in the Statement of Account. the interest and other charges upon their maturity dates. petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent.000. it is shown that the amount including interests and other charges. In other words.556.64 is P420. to wit. from the time of the foreclosure sale on February 14.876.809.64.7 we held that: xxx .638.187. Deducting this amount from the outstanding obligation of P4. This contention is not well-taken.8M as of September 21. In brief.187.

073. it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2. x x x9 While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and obligations. We do not agree. After due consideration and reflection on all the factual circumstances obtaining in the case at bar. covered by Section 4.835. the two courts below found the penalty charge of 3% a month or 36% per annum inquitious and unconscionable. rules the surcharges rates ranging. 2227.75 is rather unwarranted.969. we party agree that GOYU's pitiful situation must be taken into account.21 at the time of the foreclosure sale in 1983.187.On the issue of payment of surcharges and penalties. p. far and above the amount it had originally given to the defendants which was only over P2. Petitioner computed the amount of P4. 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments. The Court allowed to temper interest rates when necessary. Liquidated damages. shall be equitably reduced if they are iniquitous and unconscionable.00. Although petitioner claims that the penalty charge was well within the banking and business practice.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2. to be definitely inquitious and unconscionable. or P7. This provision of law will have to be applied to the established facts of any given case.12. We quote with favor the respondent court's ratiocination: The lower court did not err in its ruling under its statement that "since plaintiff had already recovered fully the receivables from the defendants. as the outstanding obligation of the petitioner as of September 21. the Court. Notwithstanding the balance of P575. To allow the petitioner to recover the amount of P6. whether intended as an indemnity or penalty. What may be iniquitous and unconscionable in one case.223.00.313.651. the Court must consider the circumstances of each case.12. the court. anywhere from 9% to 27%.000. obtaining a sum of about P4.00.874. In exercising this vested power to determine what is iniquitous and unconscionable. plus the penalty charges of 36%.021. no proof was adduced thereof. Given the circumstances under which GOYU found itself after the occurrence of the fire.000. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. These foreclosed properties located in Makati8 are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. Title XVIII of the Civil Code. however. that payment of any amount as surcharges and penalties should altogether be deleted.62 with 3% penalty charges.601.558. 8).809. x x x Likewise. may be totally just and equitable in another.233. it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed" (Decision. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983. this rule is not absolute. considering that the plaintiff or the two properties foreclosed by it bidded the amount of P4. in the case at bar. x x x Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages. Article 2227 thereof provides: ART. Chapter 3.874. Article 1229 of tile New Civil Code clearly provides: . petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-1981) by way of penalty charges.147.

. whether intended as an indemnity or penalty. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. shall be equitably reduced if they are iniquitous and unconscionable. the judgment appealed from is hereby AFFIRMED. the penalty may also be reduced by the courts if it is iniquitous or unconscionable. 2227. 1229. Liquidated damages. ACCORDINGLY. Article 2227 provides: ART.ART. Likewise. Even if there has been no performance. SO ORDERED.

plaintiff Security Bank & Trust Company the sum of P39..129. and every doubt is resolved in favor of the solidary debtor. the dispositive portion of which reads as follows: WHEREFORE. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement. Petitioner assails the December 22. This is especially true where. 1997 Decision[4 of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. Ines Melale Corporation and Rodolfo M. DECISION PANGANIBAN. 138544. which disposed as follows: WHEREFORE. Respondent. The Case This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. J. respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement. No.R.: Being an onerous undertaking.[3 which denied petitioners Motion for Reconsideration. 2000] SECURITY BANK AND TRUST COMPANY. 1998 Decision[1 of the Court of Appeals (CA) in CA-GR CV No. vs. [Respondent] Rodolfo M. 93-1925. Modified by the CA was the March 6. jointly and severally. Hence. absent any clear stipulation showing that the latter waived his right to be notified thereof. or at least to notify it thereof. RODOLFO M.THIRD DIVISION [G. Furthermore.[2 Also challenged is the April 14. Cuenca to pay. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment. as in this case. 56203. the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations. Petitioner. CUENCA. a surety agreement is strictly construed against the creditor. In all other respect[s]. or to give consent thereto.73 .124. judgment is hereby rendered ordering defendants Sta. the decision appealed from is AFFIRMED. Inc. 1999 CA Resolution. Cuencas counterclaim is hereby DISMISSED for lack of merit. October 3.

amendments. 3. 1994 plus 12% interest per annum until fully paid. indicating therein the companys duly authorized signatory/ies. [Respondent] Rodolfo M. granted appellant Sta. (Emphasis supplied).000. Cuenca. As additional security for the payment of the loan. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M.000. a Makati account shall be opened prior to availment on lines. 1981. [Petitioner] Security Bank and Trust Co. and the sum of P100. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.000. (Emphasis supplied.00) to assist the latter in meeting the additional capitalization requirements of its logging operations. 2. extensions. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8. in this connection. . SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981: JOINT CONDITIONS: 1. conversions and revivals of the aforesaid credit accommodation(s) x x x . Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows: xxx Rodolfo M. Ines Melale (Sta. and 5. Lines shall expire on November 30. SO ORDERED.representing the balance of the loan as of May 10. 4. The Facts The facts are narrated by the Court of Appeals as follows:[5 The antecedent material and relevant facts are that defendant-appellant Sta. upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions. renewals. On 10 November 1980.) To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR). increases. Ines) is a corporation engaged in logging operations.00 as attorneys fees and litigation expenses and to pay the costs. Reasonable/compensating deposit balances in current account shall be maintained at all times. Submission of an appropriate Board Resolution authorizing the borrowings. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment.

appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6. agreed to restructure the past due obligations of defendant-appellant Sta. II. Ines. at Vol. P. Ines the following loans: a. i. and Rodolfo M. 333 to 335) obtained by defendant-appellant Sta.00). to be applied to liquidate the principal portion of defendant-appellant Sta. but was instead lumped together with. to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. DLS/74/760/85 DLS/74/12/86. p.000. p. II. DLS/74/28/86 and DLS/74/47/86 (Exhibits D. and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line. Promissory Note No. Appellant SIMC. Ines were sold at a public auction relative to Civil Case No. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Universal Holdings.000.00). It should be pointed out that in restructuring defendant-appellant Sta. TD/TLS-3599-81 for said amount (Exhibit C). 33 to 34). Promissory Notes Nos. Exhibit G. Exhibit 5-B-Cuenca. Expediente.019. Ines. DLS/74/760/85.369. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3. II.100. p. p. at Vol.00). Accordingly. 33 to 34) and b. encountered difficulty[6 in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. DLS/74/78/85.800. Ines. SIMC executed Promissory Notes Nos. 331). 1 of Exhibit G. was not segregated from. Expediente. II. 336. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction. Ines which were not secured by said Indemnity Agreement. pp. the other loans. pp. Expediente. without notice to or the prior consent of [Respondent] Cuenca. Exhibit 5-BCuenca. defendantappellant Sta. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6. Expediente. AMOUNT . at Vol. Ines obligations to [Petitioner] Security Bank. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Cuenca.400. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank. To cover said drawdown. Inc. Expediente. both dated 09 March 1988 in favor of [Petitioner] Security Bank: PROMISSORY NOTE NO. at Vol. appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6. 336. [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. II. Sometime in 1985. which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3Cuenca.00). Subsequently. the shareholdings of [Respondent] Cuenca in defendantappellant Sta.e. and F. 18021 entitled Adolfo A. E. et Vol I.On 26 November 1981.000.. Expediente.100. DLS/74/12/86. four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility. DLS/74773/85. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8. Ines to [Petitioner] Security Bank (cf. Ines thus executed the following promissory notes. Angala vs. however.50).000. Subsequently. at Vol. SIMC duly executed promissory Note No.

00 (Exhibits H and I. defendant-appellant Sta.000. Appellants individually and collectively refused to pay the [Petitioner] SBTC. 33) From 08 April 1988 to 02 December 1988. It noted that the 1989 Loan Agreement had been executed without notice to. . Accordingly.00 RL/74/597/88 P3. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1. p. resulting after trial on the merits in a decision by the court a quo. 1 of Exhibit 5-Cuenca. Expediente.The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12. The loan shall be released in two (2) tranches of P8.000. I.00 ------------------TOTAL P12. Philippines [c]urrency (the Loan). Cuenca who at the time was no longer a stockholder of the corporation. and that its expiry date was November 30. Ines. at Vol. 1. II. Purpose .000. such novation extinguished the Indemnity Agreement.000. I.400. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca.01 of the said Loan Agreement dated 31 October 1989 provides: 1.) (cf. at Vol. 33 to 41). Ines.00 for the first tranche (the First Loan) and P3. pp.RL/74/596/88 P8. by which Cuenca. and only for an amount not exceeding P8 million.000. Thus. Section 1.02. had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. (Underscoring supplied. Expediente.00). 1981. II. SBTC filed a complaint for collection of sum of money on 14 June 1993. x x x from which [Respondent] Cuenca appealed. it ruled that Cuenca was liable only for loans obtained prior to November 30. the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L).800. at Vol. [Petitioner] Security Bank and defendant-appellant Sta.000. The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8 million.200. Hence. 9-P-SIMC up to 9-GG-SIMC. p. much less consent from. 70 to 165) Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA. Ruling of the Court of Appeals In releasing Respondent Cuenca from liability.757. pp. Ines. who was then the Board chairman and president of Sta.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow. 338 to 343). at Vol. the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta.200. respectively. Expediente. To formalize their agreement to restructure the loan obligations of defendant-appellant Sta.00) (Exhibits 8.000. 1981.400. pp.800. 38.01 Amount . Expediente.

It further held that the restructuring of Sta. RL/74/597/88 dated 9 March 1988. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent. increase. RL/74/596/88 dated 9 March 1988 and Promissory Note No. B. i. extension. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation. ii. iii. thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code.000. The Courts Ruling . D. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12.00) and made on or before 30 November 1981.[7 The Issues In its Memorandum.000. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation. conversion or revival of the said credit accommodation. Distilling the foregoing.00) under Promissory Note No. The CA also opined that the surety was entitled to notice. and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution. renewal. penalties and other charges due thereon. plus stipulated interests. the procedural questions raised by respondent will also be addressed. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC. this recourse to this Court. in case the bank and Sta. Whether or not petitioners Motion for Reconsideration was pro-forma.200. Under Article 2079 of the Civil Code. Whether or not service of the Petition by registered mail sufficiently complied with Section 11. amendment. Hence. such extension extinguished the surety. Rule 13 of the 1997 Rules of Civil Procedure. C. thus extinguishing Respondent Cuencas liability under the indemnity agreement. petitioner submits the following for our consideration:[8 A. As preliminary matters.000.

The Court has explained that a movant may raise the same arguments.The Petition has no merit. Rule 13 of the 1997 Rules of Court.Whenever practicable. the Petition does state that it was served on the respective counsels of Sta.[11 Moreover. the service and filing of pleadings and other papers shall be done personally. our Court has refused to characterize the motion as simply pro forma. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits. the Petition was filed out of time. Priorities in modes of service and filing. In any event. Flojo. that doctrine should be applied reasonably. rather than literally. rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.[10 We disagree. The right to appeal. we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.[14 This explanation sufficiently shows that personal service was not practicable. it did not toll the period for filing the present Petition for Review. -. is an important and valuable right. In Marikina Valley Development Corporation v. a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. In this case. We do not think so. Ricafort[13 that the aforecited rule was mandatory. It held: We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal. and that only when personal service or filing is not practicable may resort to other modes be had. . Hence. that as such. provides as follows: SEC. where it exists.[9Consequently. there is no clear showing of intent on the part of petitioner to delay the proceedings. precisely to convince the court that its ruling was erroneous. in merely rehashing the arguments already passed upon by the appellate court. where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings. 11.[12 the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Except with respect to papers emanating from the court. Service by Registered Mail Sufficiently Explained Section 11. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail. which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with. A violation of this Rule may be cause to consider the paper as not filed. Preliminary Matters: Procedural Questions Motion for Reconsideration Not Pro Forma Respondent contends that petitioners Motion for Reconsideration of the CA Decision. was pro forma. The Court held in Solar Entertainment v.

(3) the old contract is extinguished. It adds that the terms of the 1989 Contract were not more onerous. Ines undertook from time to time and upon request by the Lender. It has been held that [i]n the absence of an express agreement. Clearly. As an example of a positive covenant. Purpose. (2) the parties concerned agree to a new contract. which reads as follows: ART. nor would it participate in any merger or consolidation. [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23 Likewise. This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness.[22 the 1989 Agreement provided that the loan was P12. We reject these contentions. and that the latter did not extinguish the earlier one. the following requisites must be established: (1) there is a previous valid obligation.[15 Indeed. was necessarily extinguished also. and (4) there is a valid new contract. Sta. Likewise. In order that an obligation may be extinguished by another which substitute the same. pursuant to Article 1296 of the Civil Code.[17 Since the original credit accomodation was not extinguished. novation takes place only when the old and the new obligations are incompatible on every point. an accessory obligation.02. or that the old and the new obligations be on every point incompatible with each other.[21 Furthermore. the Indemnity Agreement. the later contract contained conditions.First Issue: Original Obligation Extinguished by Novation An obligation may be extinguished by novation. The 1989 Loan Agreement extinguished the obligation[18 obtained under the 1980 credit accomodation.[19 (Italics supplied.[24 Since the 1989 Loan Agreement had extinguished the original credit accommodation. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.[16 Petitioner contends that there was no absolute incompatibility between the old and the new obligations. pursuant to Article 1292 of the Civil Code. Novation of a contract is never presumed. it concludes that Cuenca is still liable under the Indemnity Agreement. the requisites of novation are present in this case. The periods for payment were also different. SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired. it is imperative that it be so declared in unequivocal terms. as the following shows: 1. 1292.) The testimony of an officer[20 of the bank that the proceeds of the 1989 Loan Agreement were used to payoff the original indebtedness serves to strengthen this ruling.2 million. positive covenants and negative covenants not found in the earlier obligation. which provides: . It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million. several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist.

000. When the principal obligation is extinguished in consequence of a novation. respondent did not sign or consent to the 1989 Loan Agreement. Binding Nature of the Credit Approval Memorandum As noted earlier. the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate. accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. It adds that it was merely for its internal use.ART. To begin with. the Bank issued a Credit Approval Memorandum dated 10 November 1980. Alleged Extension Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation. while denying those that are disadvantageous.1 On 10 November 1980.[26 the Court explained the rationale of this provision in this wise: The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditors remedies against the principal debtor upon the maturity date. which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. his obligation as a surety should be deemed extinguished. 1981. or to give consent to. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8. For this purpose. in its Petition before this Court. petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of. We disagree.[28 Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement. Hence. the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million. which had allegedly extended the original P8 million credit facility. It was petitioner itself which presented the said document to prove the accommodation. Moreover. pursuant to Article 2079 of the Civil Code. it alluded to the Credit Approval Memorandum in this wise: 4.[25 This argument must be rejected. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. Clearly. respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. x x x. contending that it was not a binding agreement because it was not signed by the parties. in . Sta. and that it was for a period of one year ending on November 30.[27 Moreover. In an earlier case.000. Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation. 1296. it was not a novation. Petitioner objects to the appellate courts reliance on that document. Second Issue: Alleged Waiver of Consent Pursuing another course. the outstanding indebtedness. not to renew or extend. the same. Indeed.

amendments. which is reproduced hereunder: Rodolfo M.[31 Likewise. without the consent of the surety. as appears in the accounts. executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment . will release the surety from liability.[29 At the outset. Ines Malale Forest Products Corp. Indeed. increases.which he held himself liable for the credit accommodation including [its] substitutions. we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. It did not give the bank or Sta. with the stipulated interests and charges thereon. including the substitutions. petitioners assertion . Metro Manila hereinafter referred to as the BANK in favor of STA. renewals.. evidenced by that/those certain PROMISSORY NOTE[(S)]. made. extensions. upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions.[30 [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract. it has been held that a contract of surety cannot extend to more than what is stipulated. Ines any license to modify the nature and scope of the original credit accommodation. renewals. a commercial bank duly organized and existing under and by virtue of the laws of the Philippine. . It is strictly construed against the creditor. As the Court held in National Bank v. principal or secondary.. Taking the banks submission to the extreme. Cuenca of legal age. 391 Buendia Avenue Ext. x x x ---. or may hereafter be executed by and between the parties thereto. conversions and revivals of the aforesaid credit accommodation(s). conversions and revival. all of which are incorporated herein and made part hereof by reference. 1981 term. we cannot sustain petitioners view that there was such a waiver. plus interest and expenses arising from any agreement or agreements that may have heretofore been made. with postal address c/o Sta. without informing or getting the consent of respondent who was solidarily liable. amendment.finds no support in the text of the Indemnity Agreement. 6778 Ayala Avenue. say. INES MELALE FOREST PRODUCTS CORP..00) granted by the SECURITY BANK AND TRUST COMPANY. as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK.hereinafter referred to as the CLIENT. Alco Bldg. extensions. on the ground that he consented to all alterations and extensions thereof.that respondent consented to the alterations in the credit accommodation . It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal. books and records of the BANK. extensions. Makati. Ambiguous contracts are construed against the party who caused the ambiguity. such clause should be understood in the context of the P8 million limit and the November 30. the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement. the doubt should be resolved in favor of the surety x x x. In this case. whether direct or indirect. increases. While respondent held himself liable for the credit accommodation or any modification thereof. every doubt being resolved against enlarging the liability of the surety.[32 In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation. amendments. P100 billion obtained 100 years after the expiration of the credit accommodation. Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8.000. respondent (or his successors) would be liable for loans even amounting to. conversions and revivals of the aforesaid credit accommodation(s).000. increases.. and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s). Veraguth. renewals. which connotes cessation of an old contract and birth of another one x x x.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. including those arising in the future. 1981. In the present case. which are within the description or contemplation of the contract of guaranty.[34 Following the banks reasoning.1 million obtained on November 26. the alleged basis of respondents waiver is vague and uncertain. This argument is incorrect. The latters liability would thus be more burdensome than that of the former. the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million. he could not have guaranteed the 1989 Loan Agreement. which was executed after November 30.[38 the Court held that a continuing guaranty is one which covers all transactions. In that case. was entitled to be notified of any modification in the original loan accommodation. it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately. pursuant to this condition: 5. Certainly. It confers no clear authorization on the bank or Sta. there is no such express stipulation.[35 The present controversy must be distinguished from Philamgen v. Ines to modify or extend the original obligation without the consent of the surety or notice thereto. such modification would not be valid as to Sta. At most. 1991. the surety of Cuenca secured only the first loan of P6. Mutuc. and (2) that the accommodation should expire not later than November 30. that were obtained in 1986. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal. . CA. petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement. Hence. To repeat. Continuing Surety Contending that the Indemnity Agreement was in the nature of a continuing surety. Ines if no notice were given. but would still be valid as to respondent to whom no notice need be given. an extension x x x that could be had without his having to be notified. Accordingly. but to any extension thereafter made.[37 In Dino v. purportedly under the 1980 credit accommodation. Ines as the borrower. the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the bond. not respondent. until the expiration or termination thereof. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[36 in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period. It did not secure the subsequent loans. 1981 and which exceeded the stipulated P8 million ceiling. Indeed. in the present case. we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.[33 We reject petitioners submission that only Sta. it may do so only upon notice to the borrower.

we reject petitioners submission that respondent waived his right to be notified of. the spirit of fair play should have impelled Sta. In sum. Second. who was the chairman and president of Sta. would extend to the personal assets of the surety. Ines in 1980 when the credit accommodation was granted. because at that time. as an additional security for loans granted to corporations. the stipulation in the 1989 Loan Agreement providing for the surety of respondent. No similar provision is found in the present case. Special Nature of the JSS It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer. however. Following this practice. we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. There was no reason or logic. we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid. cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one. Furthermore. it was therefore logical and reasonable for the bank to have required the JSS of respondent. in case of default.Petitioner. . Neither did he have any reason to bind himself further to a bigger and more onerous obligation. Since the bank had not been notified of such revocation. Verily. the old loan having been already liquidated. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. the Indemnity Agreement. Since that Loan Agreement constituted a new indebtedness. such surety would be compelled to ensure that the loan would be used for the purpose agreed upon. the Petition is DENIED and the assailed Decision AFFIRMED. On the contrary. Hence. As it is. In this light. respondents liability was confined to the 1980 credit accommodation. smacks of negligence on the part of the bank and bad faith on that of the principal debtor. the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. Costs against petitioner. WHEREFORE. for the bank or Sta. For its defeat in this litigation. the bank has only itself to blame. which had been an accessory to the 1980 credit accommodation. however. which was covered by a continuing surety agreement. the amount and the expiry date of which were set down in the Credit Approval Memorandum. we hold that in Dino. There are at least two reasons for this. was also extinguished. Indeed. a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. First. any modification or extension of the 1980 credit accommodation. without even informing him. Ines to ask somebody else to act as a surety for the new loan. the surety was held liable even for the subsequent obligations of the principal borrower. In the same vein. the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement. and that it would be paid by the corporation. or to give consent to. the creditors recourse. which is normally limited to the corporate properties under the veil of separate corporate personality. At the risk of being repetitious. he was no longer an officer or a stockholder of the debtor-corporation. he was not in a position then to ensure the payment of the obligation.

BRANCH 61.00). TL74/1491/83 was executed on August 31. as stipulated in a contract. 113926 October 23. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. 1993.respondents. which found private respondent Eusebio liable to petitioner for a sum of money. far in excess of the ceiling prescribed under or pursuant to the Usury Law. 3 .000. 1983. Respondent bound himself to pay the sum of One Hundred Thousand Pesos (P100. 1996 SECURITY BANK AND TRUST COMPANY. The undisputed facts are as follows: On April 27. 2 Finally. vs. Interest was lowered by the court a quo from 23% per annum as agreed upon the parties to 12% per annum. Gorospe of the Regional Trial Court of Makati. another Promissory Note No. respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor of petitioner SBTC.:p Questions of law which are of first impression are sought to be resolved in this case: Should the rate of interest on a loan or forbearance of money. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans.00) in six (6) monthly installments plus 23% interest per annum. 1 On July 28.000. 1983.00) payable in six monthly installments with a stipulated interest of 23% per annum up to the fifth installment.000. J. 1983 in the amount of Sixty Five Thousand Pesos (P65. MAGTANGGOL EUSEBIO and LEILA VENTURA. Branch 61. JR. prevail over Section 2 of Central Bank Circular No. No.R. in the absence of evidence justifying the imposition of a higher rate? This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge Fernando V.Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G. dated March 30. private respondent Magtanggol Eusebio executed Promissory Note No. petitioner. goods or credits. (SBTC) in the total amount of One Hundred Thousand Pesos (P100. Respondent agreed to pay this note in six (6) monthly installments plus interest at the rate of 23% per annum. REGIONAL TRIAL COURT OF MAKATI. HERMOSISIMA.

premises above-considered.00. Pay the sum of P16. Pay the costs of this suit. plus interest of 12% per annum starting 27 September 1983. and holding defendant Leila Ventura jointly and severally liable with co-defendants Eusebio.665. 2.000. (2) the interests awarded should be compounded quarterly from due date as provided in the three (3) promissory notes.00 as of August 1983. this petition. plus interest of 12% per annum starting 28 August 1983. . TL/74/748/83 — P16. Pay the sum of P83. Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable. 1993. TL/74/1991/83 — P65. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of attorney's fees. 7 Consequently. SO ORDERED. private respondent Leila Ventura had signed as co-maker. and plaintiff's claim having been duly proven. judgment is hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to: 1. 1983. until fully paid.00 as of September 2) PN No.00. an Order was issued by the court a quo denying the motion to grant the rates of interest beyond 12% per annum. TL/74/1296/83 — P83. Pay the sum of P65. 6 On August 6. the dispositive portion which reads: WHEREFORE. until fully paid.00 as of August 3) PN No.000.00. is liable jointly and severally with defendant Eusebio without a need for demand upon her. a motion for partial reconsideration was filed by petitioner SBTC contending that: (1) the interest rate agreed upon by the parties during the signing of the promissory notes was 23%per annum. and to 5. (3) defendants Leila Ventura should likewise be held liable to pay the balance on the promissory notes since she has signed as co-maker and as such. Hence. 1983. 4 Upon maturity which fell on the different dates below.On all the abovementioned promissory notes. 1993.333. the court a quo rendered a judgment in favor of petitioner SBTC. the principal balance remaining on the notes stood at: 1) PN No.333. 5 On March 30. a collection case was filed in court by petitioner SBTC. plus interest of 12% per annum starting 31 August 1983. until fully paid. 3. 4.655.

goods or credits. That changes in such rate or rates may be effected gradually on scheduled dates announced in advance. shall not be subject to any ceiling prescribed under or pursuant to the Usury Law. therefore. were already covered by CB Circular No. as amended. including commissions. the interest previously stipulated. The Monetary Board is also authorized to prescribed different maximum rate or rates for different types of borrowings. In fine. it appears that indeed the agreed rate of interest as stipulated on the three (3) promissory notes is 23% per annum. Section 1-a of Act No. the Monetary Board may prescribe higher maximum rates for loans of low priority. The rate of interest. including deposits and deposit substitutes. 2. as amended.D. goods or credits.B.The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law. on a loan or forbearance of any money. . such as consumer loans or renewals thereof as well as such loans made by pawnshops. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money. is hereby amended to read as follows: Sec. fees and other charges. or loans of financial intermediaries. 1684 empowering them to prescribe the maximum rates of interest for loans and certain forbearances. finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform.D. they can agree to adjust. 1. that may be charged or collected by any person. and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided. goods or credits and the rate allowed in judgments. this circular did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity. premiums. Contrary to the claim of respondent court. 905 which took effect on December 22. to wit: Sec. particularly Sections 1 and 2 which state: 9 Sec. From the examination of the records. 1684 and C. All the promissory notes were signed in 1983 and. upward or downward. The rate of interest for the loan or forbearance of any money. whether natural or judicial. 1. goods or credits. In the exercise of the authority herein granted. 1-a. in the absence of express contract as to such rate of interest. The Monetary Board is hereby authorized to prescribe the maximum rate of interest for the loan or renewal thereof or the forbearance of any money. regardless of maturity and whether secured or unsecured. Court of Appeals 11 that: P. No. shall continue to be twelve per cent (12%) per annum. 2655. 8 The applicable provision of law is the Central Bank Circular No. 1982. CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P. Sec. We find merit in this petition. 905. 10 The court has ruled in the case of Philippine National Bank v.

Therefore. Furthermore. The promissory notes were signed by both parties voluntarily. terms and conditions as they may deem convenient. In a loan or forbearance of money. he chose not to question the decision and instead expressed his desire to negotiate with the petitioner bank for "terms within which to settle his obligation. In fact. the interest due should be that stipulated in writing. good customs. only in the absence of a stipulation can the court impose the 12% rate of interest. . interpretation being called for only when such literal application is impossible. is hereby AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be 23% per annum. No process of interpretation or construction need be resorted to where a provision of law peremptorily calls for application. SO ORDERED. no discretion is left to the judiciary. clauses. 13 Hence. We find no valid reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by respondent in the presence of a valid stipulation. The rate of interest was agreed upon by the parties freely.Basic is the rule of statutory construction that when the law is clear and unambiguous. and in the absence thereof. public order. . respondent did not question that rate. Article 1306 of the New Civil Code provides that contracting parties may establish such stipulations. likewise. provided they are not contrary to law. It is not for respondent court a quo to change the stipulations in the contract where it is not illegal. It must see to it that is mandate is obeyed." 14 IN VIEW OF THE FOREGOING. or public policy. the rate shall be 12% per annum. morals. As we have held in the case of Quijano v. did not question any of the stipulations therein. the decision of the respondent court a quo. in the Comment filed by respondent Eusebio to this court. Respondent Eusebio. Where a requirement or condition is made in explicit and unambiguous terms. We cannot see any room for interpretation or construction in the clear and unambiguous language of the above-quoted provision of law. the court is left with no alternative but to apply the same according to its clear language. stipulations therein are binding between them.Development Bank of the Philippines: 12 . This Court had steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms. . Significantly.

To secure the payment of the receivables. INC. a real estate mortgage over their real property covered by Transfer Certificates of Title Nos. 1979 P371. J.58 P371.319. vs. "C".. and RUFINO MALONJAO.319.75 (Exhs.073. the Malonjaos also executed in favor of plaintiff.319. 1978 P371.58 March 9. 1979 September 1978 P371. "D".58 December 9. 112590* July 12. Pursuant to their agreement. 1979 P371. KAPUNAN.58 December 9. 1978 and July 19.319.58 March 9. The undisputed facts.319. (162775) S-65585 (Exh. branch 38 in Civil Case No. 83-18464 for a sum of money. 1978.: This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of the Regional Trial Court. 1978 June 9.000.R. 1979 P371. as quoted from the respondent court's decision are as follows: in that sale that should a receivable remain unpaid. 60.319. Lomuyon sold to plaintiff for a total consideration of P2. 2001 STATE INVESTMENT HOUSE INC. plaintiff. (445856) S-65586 and No. National Capital region. 1978 P371. petitioner. respondents. at its discretion. LOMUYON TIMBER INDUSTRIES.58 September 9. No. COURT OF APPEALS. on March 9.58 September 9.00 . 1978 P371. may impose a penalty fee of 3% per month.558.319. "E" and "F"). AMANDA MALONJAO. 10 and 15.. "B").58 30.Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G. various receivables consisting of checks as follows: TCBTC 618821 TCBTC 618820 TCBTC 618819 TCBTC 618818 TCBTC 618817 TCBTC 618816 TCBTC 618814 TCBTC 618828 MBTC 06659490 June 9.319.

defendants' outstanding obligation. The complaint states no cause of action. 1981 (sic) was P4. TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by Amanda Malonjao to the order of payee Lomuyon which in turn.27 inclusive of interest and charges.809. there remains a deficiency of P2.10. Plaintiff further prayed that it be awarded exemplary damages.929. 1981.874. 1981. that as of said date. the Provincial Sheriff sold at public auction. "I". the Provincial Sheriff issued a Certificate of Sale (Exh.00. The alleged purchase price of the mortgaged properties sold at public auction is unconscionably very very low. 1983 amounted to P2.876. 1983. 1982. "13. plaintiff alleged among others. "K". The following day. 1983. "14. plaintiff filed with the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of real estate mortgage dated September 28. Defendants failed to pay the value of the checks. Plaintiff made repeated written demands on defendants to make good the checks they indorsed and to pay the penalty charges it has imposed thereon. "M" and "N").62 as of February 14.809.239. by way of special affirmative defenses.237. D-1". "H" and "H-7") except for TCBTC 618821. "E-1". plaintiff filed the complaint alleging that after deducting the price of the mortgaged properties from defendants' outstanding obligation.187. Thus. pp. On October 6. defendants contended that plaintiff's computation of their outstanding obligation is erroneous. "J". Plaintiff thus decided to undertake foreclosure of the real estate mortgage. "C-1". September 28. As an alternative cause of action. the same were dishonored for having been drawn against insufficient funds (Exhs. "P"). which as of May 31. inclusive of interest and charges. However. In their answer. "F-1" and "G" to "G-7"). defendants mortgaged properties to plaintiff who was the highest bidder for P4.233.12 (Exh. defendants admitted having incurred the obligation with the plaintiff brought about by the dishonor of the checks. "L". "O"). "15. (Exhs.12 per statement of account as alleged in the complaint and . is P4.187.147. 1-38).(Exhs. The value of the mortgaged properties sold at public auction is more than sufficient to cover the obligation of the defendants. indorsed said check to plaintiff. Assuming for the sake of argument. In said petition. that the outstanding obligation of the defendants as of September 26. "L-1".601. defendants alleged that: "12. 1983. plaintiff alleged that it is entitled to recover from the defendant the total value of the checks amounting to P2. indorsed the checks to plaintiff. The MBTC (Metropolitan Bank and Trust Company) check was drawn by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in turn. attorney's fees and litigation expenses (Records. On June 27. When plaintiff presented the checks for payment to the drawee banks. x x x. On February 14. "16.

233. AFTER DEDUCTING THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT OF P4. petitioner assigned the following errors committed by the trial court: I. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants. pp.874. Undaunted by the disallowance of its claim in the August 27. Ordering the plaintiff and defendants to pay the costs of suit.62 as erroneously alleged in the complaint.601.00.. 2.835.021. private respondent's obligation amounted to P4.141.313. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.809. 91-92). denied. averring that the respondent court and the trial court failed to reconcile the figures due it. The subsequent motion for reconsideration was. the respondent court found that the proceeds of the auction sale was sufficient to cover the principal obligation of the private respondent including interest.4 In disallowing the claim for deficiency.12 and not P2. II.147. Hence.62 THUS. petitioner reiterated its position in a motion for reconsideration. "17. No demand was ever made upon the defendant.874. The interest and charges made by plaintiff is usurious and unconscionable" (id.2 On appeal. Petitioner asserts that as of September 26. the deficiency would only be P575. Both the respondent court and the trial court took particular attention on the penalty charge of 3% a month which was imposed on the principal obligation as a result of their default in payments. At that time of the foreclosure sale on February 14. SO ORDERED. and 3. 1992. petitioner filed the instant petition raising the sole issue that: THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE AUCTION SALE. penalty and other charges.233.601. Dismissing defendants' counterclaim.12. 1981. the respondent court rendered the assailed decision disallowing the claim for deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were highly iniquitous and unconscionable. 1982. 1981.1 On January 11.the alleged purchase price at public auction wasP4.187. likewise. the obligation to SIHI was computed to be . "18.00. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-APPELLEES' OBLIGATION TO SIHI AS OF THE TIME OF FORE-CLOSURE AUCTION SALE AMOUNTED TO P6.62. 1992 decision. judgment is hereby rendered: 1.3 On August 17. THE BALANCE WOULD BE P2. in view of all the foregoing. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS. the trial court rendered its decision with the following dispositive portion: WHEREFORE. III.

00. Since the private respondent failed to fulfill its obligation. The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14.601. to wit.809.556. At the time of the auction sale on February 14. the respondent court acted in accordance to of Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. In brief.809.929.500.64. 1988 in the RTC. 5 Petitioner argues that while it recognizes the authority of the court to reduce the penalty if it is iniquitous or unconscionable.64 is P420.64. petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent.313.1983 (P2. the interest and other charges upon their maturity dates.12 or P2. private respondent's outstanding obligation continue to earn interest and penalty charges from day to day.833. 1âwphi1. Deducting this amount from the outstanding obligation of P4.000. the obligation of the private respondent was computed to be P4. 1983 (P2.233. Deducting the amount of P2.P6.62) up to the filing of the complaint for the deficiency claim on May 31. Court of Appeals. does not have the authority to delete the payment of the penalty charges altogether for this is in clear contravention of Article 1229 and the law of contracts between the parties.62 as claimed by petitioner was of no moment.970.313.630.969.000. 1980 and up to September 26.12 as stipulated in the Statement of Account.7 we held that: . 1978 to March 9. the money of the plaintiff has already earned interests and other charges to more or less P1. it is shown that the amount including interests and other charges.147. For a two year period from June 9.147.223.638.000.64 represented by the various checks include therein. and up to the trial on June 3.1991 if not for the penalty charge of 3% per month or 36% per annum. the court.48.187. the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2. is P2. 1981. There is no dispute that the payment of penalty is sanctioned by the law.62 inclusive of interest and penalty charges. 1983.021. The trial court justified.874.00 with the petitioner as the highest bidder. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner.62. As alleged in plaintiff's complaint.566. private respondent's outstanding obligation to SIHI rose to P7.187.nêt Whether or not the alleged deficiency from the foreclosure sale was P575. Per Statement of Account dated September 21. petitioner was still entitled to a deficiency of about P2. Petitioner further added that until the original obligation is fully paid. 1983. In other words.876.651.500.809.l2.12. 1981 the amount grew to P4.00. however. the properties were sold in the amount of P4.8M as of September 21.566. Thus.970. from the time of the foreclosure sale on February 14. The respondent court disallowed the payment of the deficiency altogether because it found that tile principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.147.187. the total amount purchased by plaintiff was only for P2.874. This contention is not well-taken.601.27).000. In the case of Rizal Commercial Banking Corporation vs.12 inclusive of interest and penalty charges.556.6 Contrary to petitioner's contention. there would therefore be a balance of only about P575. although the penalty may be reduced by the courts if it is iniquitous or unconscionable.00. There is reason to believe that the P2. Considering that the bid price of the foreclosed properties was only P4.41.601. x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions.00 from P2.970.

xxx On the issue of payment of surcharges and penalties. however. covered by Section 4. the two courts below found the penalty charge of 3% a month or 36% per annum inquitious and unconscionable. obtaining a sum of about P4. the Court must consider the circumstances of each case.558. Chapter 3. Article 2227 thereof provides: ART.187. x x x Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages. This provision of law will have to be applied to the established facts of any given case. rules the surcharges rates ranging. far and above the amount it had originally given to the defendants which was only over P2. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983. in the case at bar. shall be equitably reduced if they are iniquitous and unconscionable.073.000. the Court. considering that the plaintiff or the two properties foreclosed by it bidded the amount of P4. it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable.223.835. Notwithstanding the balance of P575. 8). petitioner has clearly recouped its investment and earned more than enough profit in two years (1978-1981) by way of penalty charges.874. x x x9 . In exercising this vested power to determine what is iniquitous and unconscionable. We do not agree. 2227.969.000. it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2.874. These foreclosed properties located in Makati8 are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. anywhere from 9% to 27%.233. no proof was adduced thereof. Petitioner computed the amount of P4. Title XVIII of the Civil Code. or P7. as the outstanding obligation of the petitioner as of September 21.147.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. Given the circumstances under which GOYU found itself after the occurrence of the fire.00. Although petitioner claims that the penalty charge was well within the banking and business practice. the court. 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments.651. Liquidated damages. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed" (Decision.313.601. we party agree that GOYU's pitiful situation must be taken into account.809.12. x x x Likewise. We quote with favor the respondent court's ratiocination: The lower court did not err in its ruling under its statement that "since plaintiff had already recovered fully the receivables from the defendants. to be definitely inquitious and unconscionable. may be totally just and equitable in another.21 at the time of the foreclosure sale in 1983.75 is rather unwarranted.12. To allow the petitioner to recover the amount of P6.021. What may be iniquitous and unconscionable in one case. After due consideration and reflection on all the factual circumstances obtaining in the case at bar. p.00.62 with 3% penalty charges. that payment of any amount as surcharges and penalties should altogether be deleted. plus the penalty charges of 36%. whether intended as an indemnity or penalty.00.

the penalty may also be reduced by the courts if it is iniquitous or unconscionable. ACCORDINGLY. 1229. Article 1229 of tile New Civil Code clearly provides: ART. Likewise. Liquidated damages. The Court allowed to temper interest rates when necessary. . the judgment appealed from is hereby AFFIRMED. Article 2227 provides: ART. 2227. this rule is not absolute. shall be equitably reduced if they are iniquitous and unconscionable. whether intended as an indemnity or penalty. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor.While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and obligations. SO ORDERED. Even if there has been no performance.

Pertinent portions of the said agreement are quoted below: SPECIAL CONDITIONS xxx xxx xxx The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum. A credit agreement embodying the terms and conditions of the loan was executed between the parties.R. 113412 April 17.0 Million pesos payable in a period of six years at an interest rate of 21% per annum.500 square meter parcel of land. Makati. THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due. ALMEDA. Almeda and Eufemia P. the spouses Ponciano L. No.:p On various dates in 1981. the spouses Almeda executed a Real Estate Mortgage Contract covering a 3. Metro Manila. xxx xxx xxx III. respondents. To secure the loan. J. vs.Republic of the Philippines SUPREME COURT Baguio City FIRST DIVISION G. 1996 Spouses PONCIANO ALMEDA and EUFEMIA P. payable semi-annually in arrears. together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo. Almeda several loan/credit accommodations totaling P18. petitioner. the Philippine National Bank granted to herein petitioners. the first interest payment to become due and payable six (6) months from date of initial release of the loan. KAPUNAN. OTHER CONDITIONS (c) Interest and Charges (1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the .

000. Upon motion by petitioners. On January 15. The PNB refused to accept the payment. By this time the spouses were already in default of their loan obligations. For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30. P7. respondent bank. 4 Petitioner protested the increase in interest rates. raised the interest rate to 28%.D.future. granted a supplemental writ of preliminary injunction. 1 Between 1981 and 1984. Civil Case No. consisting of the principal (P18. the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September. on March 3. 1989. the spouses filed on February 6. the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14.004. petitioners tendered to respondent bank the amount of P40. assailing the following orders of the Regional Trial Court: . presided by Judge Teofilo Guadiz. 1990. 18872. respondent bank filed a petition for Certiorari. docketed as Civil Case No.735. over petitioners' protestations. On March 15. They prayed therein for a writ of preliminary injunction with a temporary restraining order. 1989. the lower court. petitioners made several partial payments on the loan totaling. 1984. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12. allegedly pursuant to Section III-c (1) of its credit agreement. respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12. 1990.000. formally consigned the amount of P40.518.00. Petitioners filed a motion for reconsideration. on April 5. which was raffled to Branch 134 presided by Judge Ignacio Capulong. upon the posting of a counterbond by the PNB. 3 On March 31. Before the loan was to mature in March. respondent bank sought the dismissal of the case. 1990. 90-663. 1990 Judge Guadiz in Civil Case No. On April 17. the trial court dissolved the supplemental writ of preliminary injunction. 1988. In said petition. Prior to the scheduled date. 905. the lower court. provided.00 with the Regional Trial Court in Civil Case No. 5 As a result of PNB's refusal of the tender of payment. 385). that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. to no avail. In the interim. 1990. 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati. 2 a substantial portion of which was applied to accrued interest. petitioners. 1990. Invoking the Law on Mandatory Foreclosure (Act 3135.142. The case was raffled to Branch 147. 1991. the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.66. On August 16. In either case.518.00) and accrued interest calculated at the originally stipulated rate of 21%. on March 8. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong. however.142. issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. As a preliminary measure. 1990 respondent bank filed a motion for reconsideration of the said order. pursuant to the credit agreement's escalation clause. as amended and P. On March 30. 1990. however. 1986. 1988. staying the public auction of the mortgaged property. Prohibition and Mandamus with respondent Court of Appeals. and in relation to Central Bank Circular No.

1993. 385." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest. Order of Judge Ignacio Capulong dated January 10. the manner of agreement is itself explicitly stipulated by the Civil Code when it provides. 1992 denying respondent bank's motion for reconsideration. It is plainly obvious. it argues that the escalated rates of interest it imposed was based on the agreement of the parties. 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12. 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P. Order dated March 30. respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135. 1990. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. dated September 15. The instant petition is impressed with merit. as amended and P. . Order of Judge Capulong dated July 3. after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984. excessive and arbitrary. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties. 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction. 1993. respectively. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties. invalid. This appeal by certiorari from the respondent court's decision dated August 27. On August 27. 385. 385. 3. from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. 1993 and October 28. and 3) upon agreement. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P. is likewise. in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing. 2.1. 1994. subject to a possible escalation or deescalation. 1994. In fact. Order of Judge Capulong dated October 20. Hence the instant petition. when 1) the circumstances warrant such escalation or de-escalation. were denied by respondent court in its resolution dated January 10.D. therefore. unilateral. and 4. and (2) that there must be mutuality between the parties based on their essential equality. respondent bank vigorously denied that the increases in the interest rates were illegal.D. 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement.D. 2) within the limits allowed by law. 90-663. In its comment dated April 19.

The Court held: CB Circular No. 21 SCRA 555). violated the mutuality of contracts ordained in Article 1308 of the Civil Code: Art.D.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. to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months. 85). 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%. the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. its validity or compliance cannot be left to the will of one of them. where the parties do not bargain on equal footing. . It would have invested the loan agreement with the character of a contract of adhesion.. . The interest provision states: (c) interest and Charges (1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future. 11) removed the Usury Law ceiling on interest rates — . In order that obligations arising from contracts may have the force of law between the parties. the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. 116 which limits such changes to once every twelve months." in reference to the original 21% interest rate. there must be mutuality between the parties based on their essential equality. the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. in violation of P. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon. Law Union & Rock Insurance Co. that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. 116.D. the unilateral action of the PNB in increasing the interest rate on the private respondent's loan. or any bank for that matter. increases in interest rates are not subject to any ceiling prescribed by the Usury Law. 308. 905.Indeed. Series of 1982 (Exh. Rita Legarda. Hence. In either case. but it did not authorize the PNB. that license would have been null and void for being violative of the principle of mutuality essential in contracts. Court of Appeals. 41% and 48% partly because the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. even assuming that the P1. The contract must bind both contracting parties. Inc. Besides violating P.. In Philippine National Bank v. is void (Garcia vs. provided. . 95 Phil.

The Escalation Clause reads as follows: . the galloping increases in interest rate imposed by respondent bank on petitioners' loan. however. there is authority for disallowing the interest rates imposed by respondent bank. Circular No.B. the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law.B. That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive. Apart from violating the principle of mutuality of contracts. Circular 905.PNB's successive increases of the interest rate on the private respondent's loan. this Court clearly emphasized that C. respondent bank's reliance on C. or any lending institution for that matter." refers only to the escalation clause. Circular No. True. Court of Appeals. Furthermore. (as are stipulations in other contracts) are nonetheless still subject to laws and provisions governing agreements between parties. while the Usury Law ceiling on interest rates was lifted by C." The increases imposed by PNB also contravene Art.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. However. 905. It is our considered opinion that it may not. which agreements — while they may be the law between the contracting parties — implicitly incorporate provisions of existing law. over the latter's vehement protests. for the credit agreement specifically requires that the increase be "within the limits allowed by law". Moreover. were arbitrary. Consequently. the same agreement allows reduction on the basis of law or the Monetary Board. he is not bound to pay a higher rate than that. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. not being a grant of specific authority. 905 could not be properly invoked to justify the escalation clauses of such contracts. is indisputable. nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Series of 1982 did not authorize the bank. escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Clearly." obviously referring specifically to legislative enactments not administrative circulars. to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. In the case of PNB v. over the latter's protest. This would not.B. Navarro 8 where the Court held that: What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. were arbitrary as they violated an express provision of the Credit Agreement (Exh. be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. hence. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing. the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. cited above. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances. 1) Section 9. as found by the Court of Appeals. Such clauses. Note that the phrase "limits imposed by law. obviously." The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per annum.

is not a law." To quote: Sec. According to the guidelines. adding section 7-a to the Usury Law. although it has the effect of law. 494. CIRCULAR No." (Emphasis supplied). 7-a. That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. 1976 (supra)." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law. providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board. Paderes of September 24. goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided. promulgated on March 17. for a loan's interest to be subject to the increases provided in CIRCULAR No. the force and effect of law. 494. there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum rate for loans. 1980. 1684. ." The distinction is again recognized by P. "Although a circular duly issued is not strictly a statute or a law. "An administrative regulation adopted pursuant to law has the force and effect of law.D." The Escalation Clause was dependent on an increase of rate made by "law" alone. it has. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." "That administrative rules and regulations have the force of law can no longer be questioned. Parties to an agreement pertaining to a loan or forbearance of money." The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms.I/We hereby authorize Banco Filipino to correspondingly increase. No. however. a law increasing the lawful rates of interest that may be charged on this particular kind of loan. the interest rate stipulated in this contract without advance notice to me/us in the event.

00 in settlement of their obligations.D.518. we held that: We cannot. That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan. and ordinary fairness and decency under the due process clause of the Constitution. the foreclosure provisions of P. but also there are no valid and reasonable standards upon which the increases are anchored. Between 1981 and 1984. not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable. because of the dispute regarding the interest rate increases. conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P. petitioners had paid an amount equivalent to virtually half of the entire principal (P7. even if only in part. then the foreclosure of the petitioner's properties under the provisions of P. Intermediate Appellate Court. 11 In the first place. In Filipinas Marble Corporation v. an issue which was never settled on merit in the courts below. By the time the spouses tendered the amount of P40. respondent bank was demanding P58.Provided. the government is however.D. It is now clear that from March 17. as clearly demonstrated above." Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. Presidential Decree No.D. and only after the spouses refused to meet their obligations following such determination.66) which was applied to interest alone.10 In facilitating collection of debts through its automatic foreclosure provisions. and (2) in order for such stipulation to be valid. It would unduly prejudice the petitioner. further. 12 involving P. 9 Here. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 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. 1980. its employees and their families.D. at this point. Pending the outcome of such litigation.' (Paragraphing and emphasis supplied).004.377.142. not exempted from observing basic principles of law.487. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans. . the exact amount of petitioner's obligations could not be determined. We find respondent's pretense untenable. Thus.00 over and above those amounts already previously paid by the spouses. 385 to satisfy the whole amount of the loan would be a gross mistake.D. P. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. 385's provisions on mandatory foreclosure. escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board. 385.735. This matter should rightfully be litigated below in the main action.

The case is remanded to the Regional Trial Court of Makati for further proceedings. held: The enforcement of P.D. For the benefit of future generations. all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation. in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith. 1994 is hereby REVERSED AND SET ASIDE. to gain the upper hand over petitioners. This we can not allow to happen.D. In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing. the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P. That these increases. in good faith and in compliance with the letter of the Credit Agreement. occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed. SO ORDERED. as well as the resolution dated February 10. 1993. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers.D. 385 will have to await the presentation of evidence in a trial on the merits.Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not. . that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P. WHEREFORE. In Republic Planters Bank v. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. Consequently. Furthermore. the decision of the Court of Appeals dated August 27. we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. It is of paramount national interest. 385 through its legal machinations in the courts below. for the benefit of the petitioner be determined. PREMISES CONSIDERED. honestly believed to be the real amount of their remaining obligations with the respondent bank. petitioners made a valid consignation of what they.

J. JJ) barring petitioner from foreclosing the subject realty on account of prescription.500. Guarin in favor of defendant bank on 16 February 1967. of respondent Court of Appeals which petitioner seeks to rectify via the petitioner forcertiorari before us refers to respondent court's major conclusion arrived at in CA-G. and bank charges due thereon. Resty R. Guarin and Liwayway J. as successor-in-interest of the spouses Guarin. and. petitioner. (3) pay plaintiff-appellant P20. Gonzales.: The error. if error it be.500.00 payable on or before 20 June . Batiller. (2) return to surrender to plaintiff-appellant. insisting that the period during which it was placed under receivership by the Central Bank is akin to a caso fortuito and should not thus be reckoned against it.00 as and for attorney's fees. in Civil Case No. Guarin (Guarins) obtained a loan from defendant-appellant in the amount of P62. the latter's Owner's Duplicate of Title No. 97218 May 17. Former SPECIAL EIGHTH DIVISION and WILSON CHUA. Petitioner begs to differ. 21312 (Javellana (P). together with the interest. the spouses Lorenzo K.R. 177014. (4) pay the costs of suit. respondents.R. vs. Villanueva for private respondent. The established fact are: On 16 February 1967. MELO.000. Dayrit. to wit: This an appeal by both plaintiff and defendant from the decision of the Regional Trial Court of the National Capital Judicial 29 September 1988. and ordering defendant-appellant thereafter to: (1) release the real estate mortgage executed by the spouses Lorenzo K. Bilog & Associates for petitioner. CV No. Kalalo. which directed plaintiff-appellant to pay defendant-appellant the personal obligation of the spouses Guarin to defendant-appellant in the amount of P62. penalties. Guarin and Liwayway J. Both petitioner and private respondent accepted the synthesized factual backdrop formulated by respondent court. No. 977-NW. COURT OF APPEALS.Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.00. 1993 PROVIDENT SAVINGS BANK.

they executed a real estate mortgage in favor of defendantappellant over a parcel of land covered by TCT No. the Guarins received a Statement of Account from defendant-appellant showing two outstanding accounts as of 15 February 1986.00 and plaintiff-appellant undertook to assume the mortgaged obligation of the Guarins with defendant-appellant which as of 15 February 1985 amounted to P591. on 11 August 1986. Guarin. defendant-appellant was placed under receivership by the Central Bank of the Philippines until 27 July 1981 when the receivership was set aside by the Honorable Supreme Court. 4) On 10 July 1986.K. the Guarins and plaintiff-appellant executed a Deed of Absolute Sale With Assumption of Mortgaged whereby the Guarins sold the mortgaged property to Guarins sold the appellant for the sum of P250. Lorenzo K. and requesting for defendant-appellant's conformity to the assignment and expressing his willingness to pay for the obligation of Mr..80. in reply to the letter of latter's counsel informing that the mortgaged property would be sold at public auction on 27 December 1984. He requested that he be allowed to pay the loan secured by the mortgaged. As security for the loan. 5) In reply. Inc. On 10 February 1986.380.000. (Exh. Guarin in his personal capacity and as president of the corporation. 2) On 26 February 1986. 1). plaintiff-appellant wrote defendant-appellant saying that the mortgaged property of the Guarins had been offered to him as payment of the judgment he obtained against the Guarins in Civil Case No. Guarin so that the title could be released by defendant-appellant. Q-47465 entitled.088. as evidenced by the Deed of Sale enclosed for guidance and information of defendantappellant. Guarin in the amount of P591. informed plaintiff-appellant that his request could be granted if . the mortgaged property had been sold to him by the Guarins. otherwise. to defendant-appellant which was undertaken by Lorenzo K.1967. B). (Exhs. Guarin may make payment at its office in Makati. (Exh. One was account of Lorenzo K. but that the mortgaged title could not be released to him even after the payment of the obligation of P591. (Exh. "Wilson Chua vs. 2) Defendant-appellant replied on 27 February 1986 that Lorenzo K. 177014. (Exh. 3) On 20 May 1986.. Metro Manila. 1972. Lorenzo K. Inc. he would be constrained to bring the matter to court. defendantappellant. assured he and his wife had every intention of paying their obligation and requesting for a recomputation of their account and a postponement of the foreclosure sale.088.27 (Attachment to Exh.. C and D). Lorenzo K. plaintiff-appellant informed defendant-appellant that as a result of the judgment in Civil Case No.(Exh.287.80 as recomputed by defendant-appellant whenever defendant-appellant was already to receive the payment and inquiring as to when his mortgaged title would be available for him to pick up. in the amount of P6. Guarin Manufacturing Co. and the other was the account of L. On 11 December 1984.80. Guarin". Guarin Manufacturing Co.088. (Exh.088. Q-47645. On 5 August 1986.80 as it also served as security for the indebtedness of L. In September.Y. Guarin wrote defendant-appellant stating that he was ready and willing to pay his obligation in the total amount of P591.

. said respondent court.000. 177014 in the possession of defendant-appellant be released to him so that he can register the sale and have the title to the property transferred in his name. Defendant-appellant answered the complaint thereof and setting up special and affirmative defenses.he would settle the obligation of L.1981. (pp. Guarin dated 27 February 1986. and (3) pay plaintiff-appellant P2. respondent court reversed the decision of the trial court insofar as it ordered Wilson Chua to pay the sum of P591. Inc.00. Rollo). as successor-in-interest of the Guarins. counsel for plaintiff-appellant addressed a letter to defendant-appellant informing that plaintiff-appellant had purchased the mortgaged property from the Guarin's and requesting that the owner's copy of TCT No. F) On 21 August 1986. 42.088. 177014. Rollo. respondent court gave a negative response on account of the absence of proof to indicate that the bank was precluded from collecting indebtedness while it was under receivership from September. 35-37.00.K. 6) On 3 August 1987. (Exh. E) Defendant-appellant replied on 10 August 1987 stating the reasons why they could not comply with plaintiff-appellant's demands. which intervened between June 20.00 as actual and/or consequential damages. . Following the unfavorable judgment. Guarin Manufacturing Co. To the question of whether petitioner can still foreclose the subject realty. (Exh. there was no legal interruption of the pres-criptive period to speak of. As a result of these observations.750. exemplary damages as may be reasonably assessed by the court. the latter's owner's duplicate of TCT No. the date the mortgage matured. 1977 the last day within which petitioner could have foreclosed the mortgage. the bank filed a motion for reconsideration and a motion for new trial premised on newly discovered evidence relative to a statement of account unearthed by the bank's liaison . respondent court noted that Wilson Chua can be considered a real-property-in-interest because he is the successor-in-interest of the Guarins who is naturally entitled to the realty as against the socalled right of Provident Savings Bank. which act was construed as equivalent to consent. as mortgagee. and June 20. Respondent court did not also heed the suggestion of the petitioner bank to interpret Wilson Chua's assumption of the mortgage on July 10. moral damages as may be proved during the trial. (2) return or surrender to plaintiff-appellant.. Thus. plaintiff-appellant filed a complaint against defendant-appellant to compel the latter to: (1) release the real estate mortgaged executed by the Guarins in favor of defendant-appellant on 16 February 1967.) Concerning the challenge posed by Provident Saving Bank against the personality of Wilson Chua to initiate the action to compel the release of the real estate mortgage and the delivery of the owner's duplicate copy of the certificate of title. as well and defendantappellant's letter to Mr. . He likewise.80 to the bank and affirmed the other dispositions made the court of origin (p. 1967. 1972 until July 20. and attorney's fees of P50. 1986 as tantamount to an explicit acknowledgement that the obligation was outstanding and had not yet prescribed. The matter of novation in the form of substitution of the debtor without corresponding acquiesence of the mortgagee was viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin. to foreclose the mortgage which had become stale through sheer lapse of time. (Exh. . posterior to the change of obligors. After trial. judgment was rendered as stated in the opening paragraph hereof from which both parties appealed . informed defendant-appellant that it had lost whatever right or action had against the Guarins because of prescription.

et al. Commentaries and Jurisprudence on the Commercial Laws of the Philippines. HSBC (67 Phil. considering that the statement of account sprouted the same day the liaison officer was advised to take an inventory of the records ( p. observing that the vital piece of document could have been located in the course of trial had the slightest degree of prudence been exercised. Philippine Law Dictionary.) Withal. Agbayani. to grant new loans or to accept new deposits. and in progressive prosecution of.1981 the decision of the Court of Appeals annulling the proscription against petitioner in Central Bank vs. i. Like any other banking institution.. 1990 ed.e. Commentaries and Jurisprudence on the Philippine Commercial Laws. p. the receiver of the bank is obliged to collect debts owing to the bank. or failure to act. However. Accordingly. The question which immediately crops up is whether a foreclose proceeding falls within the purview of the phrase "doing business". we believe that a foreclose is deemed embraced by the phrase "doing business" as a preparatory measure to acquiring or holding property for petitioner as a saving bank under Section 34 of the General Banking Act. petitioner insists that it can not be blamed for not lifting a finger. at p. 45. When a bank is prohibited to do business by the Central Bank and a receiver is appointed for such bank. Second ed. This is not to ignore The Philippine Trust Co. the purpose ands object of its organizations. Rollo). Moreno. vs. Hence.. p. 1990 ed. 325). 1972 through Monetary Board Resolution No. the Court simply rejected the objections of certain creditors to the report of a receiver. Court of Appeals (106 SCRA 143 [1981]. emphasis supplied... which debts form part of the assets of the bank. for in that case. Consistent with its theory premised on fuerza major. The prerogative of a bank to foreclose is implicit from and is even necessary to enforce collection of secured debts under Section 36(11) and 45 of the Corporation Code. 1972. the receiver is liable to the bank for culpable or negligent failure to collect the assets of such bank and to safeguard said assets.125) that the appointment of a receiver does not dissolve the corporation nor does it interfere with the exercise of its corporate rights. vs. But respondent court was unperturbed..officer from the loose folders on October 18. objections that the receiver did not report the collection made before the beginning of his receivership. and contemplates to that extent. vs. petitioner is vested with the usual attributes and powers of a corporation under Section 36 of the Corporation Code (Vitug. applicable to a situation where there is no restraint imposed on the corporation. in conjunction with Section 29 of the General Banking Act (6 Fletcher. 1986 Revised ed. The receiver must assemble the assets and pay the obligation of the bank under receivership. It would follow that the bank is bound by the acts. and take steps to prevent dissipation of such assets. during the period when it was enjoined by the Central Bank on September 15. (p. 1766 until 1981 when the decision in Central Bank vs. Martin. unlike in the case at bar where petitioner Provident Savings Bank was specifically forbidden and immobilized from doing business in the Philippines on September 15. Court of First Instance of Manila (51 Phil. But this principles is... 528. that bank would not be able to do new business. p. . the the receiver of the bank is obliged to collect preexisting debts due to the bank. 1990 which it believed to be of legal significance to the case. At the same time. 206. et al. 549 [1928]. 186). Inc. the petitioner at bar. Court of Appeals (supra. 204 [1939]. of the receiver. that is. (72 Phil. . 1972 from transacting business until this Court affirmed on July 27. Mangaliman. the exercise of some of the words or the normally incident to. the term was construed by Justice Laurel to refer to: . p. 475). a continuity of commercial dealings and arrangements. Pandect of Commercial Law and Jurisprudence. 150) was rendered. . of course. We are not unaware of the rule laid down in Teal Motor Co. and in connection therewith. so speak. In Mentholatum Co. 524 [1941]. to foreclose mortgages securing debts.

39. concurs in the result. we are thus convinced that the prescriptive period was legally interrupted by fuerza mayor in 1972 on account on the prohibition imposed by the Monetary Board against petitioner from transacting business. including the resolution dated February 6. 1986 (pp. This concept should not be equated with suspension where the past period is included in the computation being added to the period after prescription is resumed (4 Tolentino. 13. the period during which the obligee was prevented by a caso fortuito from enforcing his right is not reckoned against him (Article 1154. 50). when the closure of was set aside in 1981. Indeed. pp. the period of ten years within which to foreclose under Article 1142 of the New Civil Code began to run again and. Rollo).. JJ. p. the petition is hereby GRANTED. The consent of the petitioner to the substitution. this written communication is synonymous to an express acknowledgment of the obligation and had the effect of interrupting the prescription for the second time (Article 1155. it will be entirely a new one. When prescription is interrupted.Having arrived at the conclusion that the foreclosure is part of bank's business activity which could not have been pursued by the receiver then because of the circumstances discussed in the Central Bank case.. Commentaries and Jurisprudence on the Civil Code of the Philippines. until the directive of the board was nullified in 1981. Rollo). Bidin. In point of law. J. we need not discuss the other issues raised in the petition. . the action filed on August 21.. therefore.37. The decision dated August 31. 19 and 58. 4 Tolentino. Rama. Jr. and Romero. Rollo). Davide. 1991 of respondent court are hereby set aside and another one entered dismissing Wilson Chua's complaint. 18-19).. concur. WHEREFORE. all the benefits acquired so far from the possession cease and when prescription starts anew. 7. What seems to have escaped respondent court's attention was the condition imposed by the petitioner that it will grant private respondent's request if the latter will also shoulder the obligation incurred by Lorenzo Guarin in his capacity as president of the corporation (p. Comment. 1986 that private respondent be allowed to pay the loan secured by the mortgage as the result of the Deed of Sale executed by the Guarins in his favor on July 10. the evidence at hand does not buttress a finding along this line from the mere fact that petitioner supposedly did not question the substitution when the bank reacted to private respondent's offer to pay the loan (p. 1986 to compel petitioner to release the mortgage carried with it the mistaken notion that petitioner's own suit foreclosure had prescribed. 99 [1909]. as creditor. New Civil Code. supra at p. 1991 ed. Rollo). Consequently. What exacerbates the situation is the letter of private respondent requesting petitioner on August 6. No special pronouncement is made to costs. Osmeña vs. 1990. Feliciano. was thus erroneously appreciated. New Civil Code). Petition. And this piece of document necessarily estops private respondent from setting up prescription vis-a-vis his unfounded supposition that acknowledgment of the debt is of no moment because the right of the petitioner to foreclose had long prescribed in 1977 (p. 14 Phil. With the conclusions reached. pp. 36-37. Contrary to respondent court's prescription of the existence of novation.