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G.R. No.


November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee, vs. GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendantappellant. J. Lopez Vito, for appellant. Arroyo and Horrilleno, for appellee.

MORELAND, J.: This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of the action. It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital and that father Agustin de la Pea was the duly authorized representative of the plaintiff to receive the legacy. The defendant is the administrator of the estate of Father De la Pea. In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested by the military authorities as a political prisoner, and while thus detained made an order on said bank in favor of the United States Army officer under whose charge he then was for the sum thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in the bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was confiscated and turned over to the Government. While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion that said trust funds were a part of the funds deposited and which were removed and confiscated by the military authorities of the United States. That branch of the law known in England and America as the law of trusts had no exact counterpart in the Roman law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Pea's liability is determined by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.) Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.) By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility.

The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by depositing the money in the bank than he would if he had left it in his home; or whether he was more or less negligent by depositing the money in his personal account than he would have been if he had deposited it in a separate account as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise question is not one of negligence. There was no law prohibiting him from depositing it as he did and there was no law which changed his responsibility be reason of the deposit. While it may be true that one who is under obligation to do or give a thing is in duty bound, when he sees events approaching the results of which will be dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in choosing between two means equally legal, he is culpably negligent in selecting one whereas he would not have been if he had selected the other. The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States during the war of the insurrection; and that said Father De la Pea was not responsible for its loss. The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint. Arellano, C.J., Torres and Carson, JJ., concur.

G.R. No. 90027 March 3, 1993 CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Dolorfino & Dominguez Law Offices for petitioner. Danilo B. Banares for private respondent.


Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? This is the crux of the present controversy. On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4 In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint. On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8 In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the property leased during the period of the contract and Article 1975 of the Civil Code which provides: Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law. The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as contrary to law, public order and public policy."12 The appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13 Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989,15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing rule in the United States, to wit: The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted). and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to simultaneously submit their respective Memoranda. The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted) In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . . 24 (emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the

contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present. Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified. WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit. No pronouncement as to costs. SO ORDERED.

G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET AL., defendants-appellants. R. Zaldarriaga for appellants. B. Montinola for appellee. TORRES, J.: The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full payment should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay the costs of the proceedings. Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the plaintiff reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo Lim. That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages. A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants answered the original complaint before its amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but on account of the principal, and denied that there had been any agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the complaint, and also denied all the other statements contained therein. As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the complaint, the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with the costs. Evidence was adduced by both parties and, upon their exhibits, together with an account book having been made of record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.

The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was also excepted to by them; the bill of exceptions presented by the appellants having been approved, the same was in due course submitted to this court. The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that The depository can not make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages. Article 1768 also provides that When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit; and the creditor, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the amount stated as having bee deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of

the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document, Exhibit 1. If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established, such is not the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and the defendants, who call themselves creditors for the said amount have not proven in a satisfactory manner that the plaintiff had received partial payments on account of the same; the latter alleges with good reason, that they should produce the receipts which he may have issued, and which he did issue whenever they paid him any money on account. The plaintiffs allegation that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in evidence by the defendants, had been received from Ceferino Domingo Lim on account of other debts of his, has not been contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on account of interest on the amount deposited according to documents No. 2 and letter "B" above referred to, was due to a mistake. Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or proven in the proceedings that the creditor had released Joe Lim from complying with his obligation in order that he should not be sued for or sentenced to pay the amount of capital and interest together with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory evidence against the pretension of Jose Lim, and it further appears that document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet been settled, took steps to secure an extension of the time for payment, and consented to pay interest in return for the concession requested from the creditor. In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the same should be and is hereby affirmed with the costs of this instance against the appellant, provided that the interest agreed upon shall be paid until the complete liquidation of the debt. So ordered.

G.R. Nos. L-26948 and L-26949 SILVESTRA BARON, plaintiff-appellant, vs. PABLO DAVID, defendant-appellant. And

October 8, 1927

GUILLERMO BARON, plaintiff-appellant, vs. PABLO DAVID, defendant-appellant. Jose Gutierrez David for plaintiff-appellant in case of No. 26948. Gregorio Perfecto for defendant-appellant in both cases. Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiff-appellant in case No. 26949.

STREET, J.: These two actions were instituted in the Court of First Instance of the Province of Pampanga by the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the purpose of recovering from the defendant, Pablo David, the value of palay alleged to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact that the defendant is the same in both cases and that the two cases depend in part upon the same facts, the cases were heard together in the trial court and determined in a single opinion. The same course will accordingly be followed here. In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to recover of the defendant the sum of P5,238.51, with costs. From this judgment both the plaintiff and the defendant appealed. In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for him to recover of the defendant the sum of P5,734.60, with costs, from which judgment both the plaintiff and the defendant also appealed. In the same case the defendant interposed a counterclaim in which he asked credit for the sum of P2,800 which he had advanced to the plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and allowed by the trial court. But the defendant also interposed a cross-action against Guillermo Baron in which the defendant claimed compensation for damages alleged to have Ben suffered by him by reason of the alleged malicious and false statements made by the plaintiff against the defendant in suing out an attachment against the defendant's property soon after the institution of the action. In the same cross-action the defendant also sought compensation for damages incident to the shutting down of the defendant's rice mill for the period of one hundred seventy days during which the above-mentioned attachment was in force. The trial judge disallowed these claims for damages, and from this feature of the decision the defendant appealed. We are therefore confronted with five distinct appeals in this record. Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost constantly running. On the date stated a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the actions before us, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this, in connection with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No

compensation has ever been received by Silvestra Baron upon account of the palay delivered by Guillermo Baron, he has received from the defendant advancements amounting to P2,800; but apart from this he has not been compensated. Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921, already mentioned. The plaintiff further say that their palay was delivered to the defendant at his special request, coupled with a promise on his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and they say that in August of that year the defendant promised to pay them severally the price of P8.40 per cavan, which was about the top of the market for the season, provided they would wait for payment until December. The trial judge found that no such promise had been given; and the incredulity of the court upon this point seems to us to be justified. A careful examination of the proof, however, leads us to the conclusion that the plaintiffs did, some time in the early part of August, 1920, make demand upon the defendant for a settlement, which he evaded or postponed leaving the exact amount due to the plaintiffs undetermined. It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that when the fire occurred there could not have been more than about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurence of the fire. In the briefs before us it seems to have been assumed by the opposing attorneys that in order for the plaintiffs to recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary, the defendant should prove that the delivery was made in the character of deposit, the defendant should be absolved. But the case does not depend precisely upon this explicit alternative; for even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value. Under article 1768 of the Civil Code, when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely. In view of what has been said it becomes necessary to discover the price which the defendant should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not exactly in agreement with him as to the propriety of the method by which he arrived at this figure, we are nevertheless of the opinion that, all things considered, the result is approximately correct. It appears that the price of palay during the months of April, May, and June, 1920, had been excessively high in the Philippine Islands and even prior to that period the Government of the Philippine Islands had been attempting to hold the price in check by executive regulation. The highest point was touched in this season was apparently about P8.50 per cavan, but the market began to sag in

May or June and presently entered upon a precipitate decline. As we have already stated, the plaintiffs made demand upon the defendant for settlement in the early part of August; and, so far as we are able to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the defendant should be required to settle as of that date. It was the date of the demand of the plaintiffs for settlement that determined the price to be paid by the defendant, and this is true whether the palay was delivered in the character of sale with price undetermined or in the character of deposit subject to use by the defendant. It results that the plaintiffs are respectively entitle to recover the value of the palay which they had placed with the defendant during the period referred to, with interest from the date of the filing of their several complaints. As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and he held that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the plaintiffs their respective proportionate shares of this amount of palay. We are unable to see the propriety of this feature of the decision. There were many customers of the defendant's rice mill who had placed their palay with the defendant under the same conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did not belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The assignments of error of each of the plaintiffs-appellants in which this feature of the decision is attacked are therefore well taken; and the appealed judgments must be modified by eliminating the deductions which the trial court allowed from the plaintiffs' claims. The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167 cavans of palay, as indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These exhibits relate to transactions that occurred nearly two years after the transactions with which we are here concerned, and they were offered in evidence merely to show the character of subsequent transactions between the parties, it appearing that at the time said exhibits came into existence the defendant had reconstructed his mill and that business relations with Guillermo Baron had been resumed. The transactions shown by these exhibits (which relate to palay withdrawn by the plaintiff from the defendant's mill) were not made the subject of controversy in either the complaint or the cross-complaint of the defendant in the second case. They therefore should not have been taken into account as a credit in favor of the defendant. Said credit must therefore be likewise of course be without prejudice to any proper adjustment of the rights of the parties with respect to these subsequent transactions that they have heretofore or may hereafter effect. The preceding discussion disposes of all vital contentions relative to the liability of the defendant upon the causes of action stated in the complaints. We proceed therefore now to consider the question of the liability of the plaintiff Guillermo Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the defendant seek, as the stated in the third paragraph of this opinion, to recover damages for the wrongful suing out of an attachment by the plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and one-half months after said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be issued against the property of the defendant; and to procure the issuance of said writ the plaintiff made affidavit to the effect that the defendant was disposing, or attempting the plaintiff. Upon this affidavit an attachment was issued as prayed, and on March 27, 1924, it was levied upon the defendant's rice mill, and other property, real and personal.
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Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy. Operations were not resumed until September 13, 1924, when the attachment was dissolved by an order of the court and the defendant was permitted to resume control. At the time the attachment was levied there were, in the bodega, more than 20,000 cavans of palay belonging to persons who held receipts therefor; and in order to get this grain away from the sheriff, twenty-four of the depositors found it necessary to submit third-party claims to the sheriff. When these claims were put in the sheriff notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise the grain would be released. The plaintiff, being unable or unwilling to give this bond, the sheriff surrendered the palay to the claimants; but the attachment on the rice mill was maintained until September 13, as above stated, covering a period of

one hundred seventy days during which the mill was idle. The ground upon which the attachment was based, as set forth in the plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his property for the purpose of defrauding the plaintiff. That this allegation was false is clearly apparent, and not a word of proof has been submitted in support of the assertion. On the contrary, the defendant testified that at the time this attachment was secured he was solvent and could have paid his indebtedness to the plaintiff if judgment had been rendered against him in ordinary course. His financial conditions was of course well known to the plaintiff, who is his uncle. The defendant also states that he had not conveyed away any of his property, nor had intended to do so, for the purpose of defrauding the plaintiff. We have before us therefore a case of a baseless attachment, recklessly sued out upon a false affidavit and levied upon the defendant's property to his great and needless damage. That the act of the plaintiff in suing out the writ was wholly unjustifiable is perhaps also indicated in the circumstance that the attachment was finally dissolved upon the motion of the plaintiff himself. The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay per day, producing 225 cavans of rice of 57 kilos each. The price charged for cleaning each cavan rice was 30 centavos. The defendant also stated that the expense of running the mill per day was from P18 to P25, and that the net profit per day on the mill was more than P40. As the mill was not accustomed to run on Sundays and holiday, we estimate that the defendant lost the profit that would have been earned on not less than one hundred forty work days. Figuring his profits at P40 per day, which would appear to be a conservative estimate, the actual net loss resulting from his failure to operate the mill during the time stated could not have been less than P5,600. The reasonableness of these figures is also indicated in the fact that the twenty-four customers who intervened with third-party claims took out of the camarin 20,000 cavans of palay, practically all of which, in the ordinary course of events, would have been milled in this plant by the defendant. And of course other grain would have found its way to this mill if it had remained open during the one hundred forty days when it was closed. But this is not all. When the attachment was dissolved and the mill again opened, the defendant found that his customers had become scattered and could not be easily gotten back. So slow, indeed, was his patronage in returning that during the remainder of the year 1924 the defendant was able to mill scarcely more than the grain belonging to himself and his brothers; and even after the next season opened many of his old customers did not return. Several of these individuals, testifying as witnesses in this case, stated that, owing to the unpleasant experience which they had in getting back their grain from the sheriff to the mill of the defendant, though they had previously had much confidence in him. As against the defendant's proof showing the facts above stated the plaintiff submitted no evidence whatever. We are therefore constrained to hold that the defendant was damaged by the attachment to the extent of P5,600, in profits lost by the closure of the mill, and to the extent of P1,400 for injury to the good-will of his business, making a total of P7,000. For this amount the defendant must recover judgment on his cross-complaint. The trial court, in dismissing the defendant's cross-complaint for damages resulting from the wrongful suing out of the attachment, suggested that the closure of the rice mill was a mere act of the sheriff for which the plaintiff was not responsible and that the defendant might have been permitted by the sheriff to continue running the mill if he had applied to the sheriff for permission to operate it. This singular suggestion will not bear a moment's criticism. It was of course the duty of the sheriff, in levying the attachment, to take the attached property into his possession, and the closure of the mill was a natural, and even necessary, consequence of the attachment. For the damage thus inflicted upon the defendant the plaintiff is undoubtedly responsible. One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the sum of P20,000 as damages caused to the defendant by the false and alleged malicious statements contained in the affidavit upon which the attachment was procured. The additional sum of P5,000 is also claimed as exemplary damages. It is clear that with respect to these damages the cross-action cannot be maintained, for the reason that the affidavit in question was used in course of a legal proceeding for the purpose of obtaining a legal remedy, and it is therefore privileged. But though the affidavit is not

actionable as a libelous publication, this fact in no obstacle to the maintenance of an action to recover the damage resulting from the levy of the attachment. Before closing this opinion a word should be said upon the point raised in the first assignment of error of Pablo David as defendant in case R. G. No. 26949. In this connection it appears that the deposition of Guillermo Baron was presented in court as evidence and was admitted as an exhibit, without being actually read to the court. It is supposed in the assignment of error now under consideration that the deposition is not available as evidence to the plaintiff because it was not actually read out in court. This connection is not well founded. It is true that in section 364 of the Code of Civil Procedure it is said that a deposition, once taken, may be read by either party and will then be deemed the evidence of the party reading it. The use of the word "read" in this section finds its explanation of course in the American practice of trying cases for the most part before juries. When a case is thus tried the actual reading of the deposition is necessary in order that the jurymen may become acquainted with its contents. But in courts of equity, and in all courts where judges have the evidence before them for perusal at their pleasure, it is not necessary that the deposition should be actually read when presented as evidence. From what has been said it result that judgment of the court below must be modified with respect to the amounts recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to the disposition of the cross-complaint interposed by the defendant in case R. G. No. 26949, with the following result: In case R. G. No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the sum of P6,227.24, with interest from November 21, 1923, the date of the filing of her complaint, and with costs. In case R. G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David the sum of P8,669.75, with interest from January 9, 1924. In the same case the defendant Pablo David, as plaintiff in the cross-complaint, will recover of Guillermo Baron the sum of P7,000, without costs. So ordered.

G.R. No. L-7593

March 27, 1913

THE UNITED STATES, plaintiff-appellee, vs. JOSE M. IGPUARA, defendant-appellant. W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant. Office of the Solicitor-General Harvey for appellee. ARELLANO, C.J.: The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to be at the latter's disposal. The document setting forth the obligation reads: We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose Igpuara, for Ramirez and Co. The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and the costs. The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa.
A deposit is constituted from the time a person receives a thing belonging to another with the obligation of keeping and returning it. (Art. 1758, Civil Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they remained in his possession, which he could not have said had he not received them. They remained in his possession, surely in no other sense than to take care of them, for they remained has no other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a notarial instrument restitution of them, and to date he has not restored them. The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.) Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in the possession of the defendant, who drew up an instrument payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated like any other commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan. It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial instrument: First, because every commercial instrument is not negotiable; and second, because only

instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is not negotiable. It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safekeeping. In order that the depositary may use or dispose oft he things deposited, the depositor's consent is required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed. (Art. 309, Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into a loan, commission, or other contract. That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the next day after the certificate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of the things deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert the deposit into a loan. Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:
The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations that may be disastrous to the depositor, who is much better secured while the deposit exists when he only has a personal action for recovery. According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate or abstract for their own use money, goods, or other personal property which they may have received as a deposit, on commission, or for administration, or for any other purpose which produces the obligation of delivering it or returning it, and deny having received it, shall suffer the penalty of the preceding article," which punishes such act as the crime of estafa. The corresponding article of the Penal Code of the Philippines in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime of estafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant. Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In the first of said cases there was no evidence that the defendant had appropriated the grain deposited in his possession.
On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He was accused or refusing to restore, and it was held that the code does not penalize refusal to restore but denial of having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited would not constitute the crime of estafa. In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he turned over to the owner;" and there being no proof of the appropriation, the agent could not be found guilty of the crime of estafa. Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.



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This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982. On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18, 1983. As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners' obligation is civil in nature. For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment dated June 28,1982, as follows:

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8). In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the

records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00." Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated the following.

"That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and served as such until October 30, 1980, while Santos was General Manager up to November 1980; that because NSLA was urgently in need of funds and at David's insistence, his investments were treated as special- accounts with interest above the legal rate, an recorded in separate confidential documents only a portion of which were to be reported because he did not want the Australian government to tax his total earnings (nor) to know his total investments; that all transactions with David were recorded except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending transaction with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 821695 in the Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership, Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were civil in nature." Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:

"That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was provided that the mortgage over one (1) parcel shall be cancelled upon payment of one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land conveyed to David under second mortgages." At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8). But, after the presentation of David's principal witness, petitioners filed the instant petition because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of

Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 8-9). Petitioners alleged that they did not exhaust available administrative remedies because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.]. As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938. There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa. A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.). Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20. Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association. Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association. It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred

credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)." This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied). Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction. WE have already laid down the rule that:

In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the some money, goods or personal property that he received Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans. The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

"Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum. "Commodatum is essentially gratuitous. "Simple loan may be gratuitous or with a stipulation to pay interest. "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower.

"Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied). But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:

As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in the case at bar may convert the relation between the parties into an ordinary creditordebtor relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true nature" thereof. Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:

The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620). It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481). In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal. Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other related regulations regarding foreign exchange transactions by accepting foreign currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by respondent David for deposit were all converted into Philippine currency before acceptance and deposit into Nation Savings and Loan Association. Petitioners' contention is worthy of behelf for the following reasons: 1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations. 2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of Court). 3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his case, respondent David should have promptly denied petitioners' allegation. In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice. While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:


On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or injunction." Exceptions, however, are allowed in the following instances:

"1. for the orderly administration of justice; "2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner; "3. to avoid multiplicity of actions; "4. to afford adequate protection to constitutional rights; "5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93

SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]). Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the accused in the case could have appealed in due time from the order complained of, our action in the premises being based on the public welfare policy the advancement of public policy. InDimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted, they could have appealed. We gave due course to their petition for the orderly administration of justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended information was sustained despite the availability of appeal at the proper time. WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT. SO ORDERED.

G.R. No. 84281 May 27, 1994 CITYTRUST BANKING CORPORATION, petitioner, vs. THE INTERMEDIATE APPELLATE COURT and EMME HERRERO, respondents. Agcaoili and Associates for petitioner. David B. Agoncillo for private respondent. Humberto B. Basco, collaborating counsel for private respondent.

This case emanated from a complaint filed by private respondent Emme Herrero for damages against petitioner Citytrust Banking Corporation. In her complaint, private respondent averred that she, a businesswoman, made regular deposits, starting September of 1979, with petitioner Citytrust Banking Corporation at its Burgos branch in Calamba, Laguna. On 15 May 1980, she deposited with petitioner the amount of Thirty One Thousand Five Hundred Pesos (P31,500.00), in cash, in order to amply cover six (6) postdated checks she issued, viz: Check No. Amount 007383 P1,507.00 007384 1,262.00 007387 4,299.00 007387 2,204.00 007492 6,281.00 007400 4,716.00 When presented for encashment upon maturity, all the checks were dishonored due to "insufficient funds." The last check No. 007400, however, was personally redeemed by private respondent in cash before it could be redeposited. Petitioner, in its answer, asserted that it was due to private respondent's fault that her checks were dishonored. It averred that instead of stating her correct account number, i.e., 29000823, in her deposit slip, she inaccurately wrote 2900823. The Regional Trial Court (Branch XXXIV) of Calamba, Laguna, on 27 February 1984, dismissed the complaint for lack of merit; thus: WHEREFORE, judgment is hereby rendered in favor of the defendant and against the plaintiff, DISMISSING the complaint for lack of merit, plaintiff is hereby adjudged to pay the defendant reasonable attorney's fee in the amount of FIVE THOUSAND PESOS (P5,000.00) plus cost of suit. Private respondent went to the Court of Appeals, which found the appeal meritorious. Hence, it rendered judgment, on 15 July 1988, reversing the trial court's decision. The appellate court ruled: WHEREFORE, the judgment appealed from is REVERSED and a new one entered thereby ordering defendant to pay plaintiff nominal damages of P2,000.00, temperate and moderate damages of P5,000.00, and attorney's fees of P4,000.00.

The counterclaim of defendant is dismissed for lack of merit, with costs against him. Petitioner Citytrust Banking Corporation is now before us in this petition for review on certiorari. Petitioner bank concedes that it is its obligation to honor checks issued by private respondent which are sufficiently funded, but, it contends, private respondent has also the duty to use her account in accordance with the rules of petitioner bank to which she has contractually acceded. Among such rules, contained in its "brochures" governing current account deposits, is the following printed provision: In making a deposit . . . kindly insure accuracy in filing said deposit slip forms as we hold ourselves free of any liability for loss due to an incorrect account number indicated in the deposit slip although the name of the depositor is correctly written.

Exactly the same issue was addressed by the appellate court, which, after its deliberations, made the following findings and conclusions: 1
We cannot uphold the position of defendant. For, even if it be true that there was error on the part of the plaintiff in omitting a "zero" in her account number, yet, it is a fact that her name, "Emme E. Herrero", is clearly written on said deposit slip (Exh. "B"). This is controlling in determining in whose account the deposit is made or should be posted. This is so because it is not likely to commit an error in one's name than merely relying on numbers which are difficult to remember, especially a number with eight (8) digits as the account numbers of defendant's depositors. We view the use of numbers as simply for the convenience of the bank but was never intended to disregard the real name of its depositors. The bank is engaged in business impressed with public interest, and it is its duty to protect in return its many clients and depositors who transact business with it. It should not be a matter of the bank alone receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that all funds invested with it are properly accounted for and duly posted in its ledgers. In the case before Us, We are not persuaded that defendant bank was not free from blame for the fiasco. In the first place, the teller should not have accepted plaintiff's deposit without correcting the account number on the deposit slip which, obviously, was erroneous because, as pointed out by defendant, it contained only seven (7) digits instead of eight (8). Second, the complete name of plaintiff depositor appears in bold letters on the deposit slip (Exh. "B"). There could be no mistaking in her name, and that the deposit was made in her name, "Emma E. Herrero." In fact, defendant's teller should not have fed her deposit slip to the computer knowing that her account number written thereon was wrong as it contained only seven (7) digits. As it happened, according to defendant, plaintiff's deposit had to be consigned to the suspense accounts pending verification. This, indeed, could have been avoided at the first instance had the teller of defendant bank performed her duties efficiently and well. For then she could have readily detected that the account number in the name of "Emma E. Herrero" was erroneous and would be rejected by the computer. That is, or should be, part of the training and standard operating procedure of the bank's employees. On the other hand, the depositors are not concerned with banking procedure. That is the responsibility of the bank and its employees. Depositors are only concerned with the facility of depositing their money, earning interest thereon, if any, and withdrawing therefrom, particularly businessmen, like plaintiff, who are supposed to be always "on-the-go". Plaintiff's account is a "current account" which should immediately be posted. After all, it does not earn interest. At least, the forbearance should be commensurated with prompt, efficient and satisfactory service. Bank clients are supposed to rely on the services extended by the bank, including the assurance that their deposits will be duly credited them as soon as they are made. For, any delay in crediting their account can be embarrassing to them as in the case of plaintiff. We agree with plaintiff that

. . . even in computerized systems of accounts, ways and means are available whereby deposits with erroneous account numbers are properly credited depositor's correct account numbers. They add that failure on the part of the defendant to do so is negligence for which they are liable. As proof thereof plaintiff alludes to five particular incidents where plaintiff admittedly wrongly indicated her account number in her deposit slips (Exhs. "J", "L", "N", "O" and "P"), but were nevertheless properly credited her deposit (pp. 4-5, Decision). We have already ruled in Mundin v. Far East Bank & Trust Co., AC-G.R. CV No. 03639, prom. Nov. 2, 1985, quoting the court a quo in an almost identical set of facts, that Having accepted a deposit in the course of its business transactions, it behooved upon defendant bank to see to it and without recklessness that the depositor was accurately credited therefor. To post a deposit in somebody else's name despite the name of the depositor clearly written on the deposit slip is indeed sheer negligence which could have easily been avoided if defendant bank exercised due diligence and circumspection in the acceptance and posting of plaintiff's deposit. We subscribe to the above disquisitions of the appellate court. In Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, reiterated in Bank of Philippine Islands vs. Intermediate Appellate Court, 206 SCRA 408, we similarly said, in cautioning depository banks on their fiduciary responsibility, that In every case, the depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. We agree with petitioner, however, that it is wrong to award, along with nominal damages, temperate or moderate damages. The two awards are incompatible and cannot be granted concurrently. Nominal damages are given in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him (Art. 2221, New Civil Code; Manila Banking Corp. vs. Intermediate Appellate Court, 131 SCRA 271). Temperate or moderate damages, which are more than nominal but less than compensatory damages, on the other hand, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with reasonable certainty (Art. 2224, New Civil Code). In the instant case, we also find need for vindicating the wrong done on private respondent, and we accordingly agree with the Court of Appeals in granting to her nominal damages but not in similarly awarding temperate or moderate damages. WHEREFORE, the appealed decision is MODIFIED by deleting the award of temperate or moderate damages. In all other respects, the appellate court's decision is AFFIRMED. No costs in this instance. SO ORDERED.

G.R. No. 126490 March 31, 1998 ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

REGALADO, J.: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor?

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. 2 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter. In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan. During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability. 5 Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based on the findings of the court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay respondent corporation:

1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid; 2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance; 3. Attorney's fees at 25% of the total amount due per stipulations;

4. Plus costs of suit. 7

Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent. Hence this petition for review on certiorari wherein it is asserted that: A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note. 1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability. 2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor. 3. There is no sufficient basis for concluding that Palmares' liability is solidary. 4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation. 5. Palmares cannot be compelled to pay the loan at this point. B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note. The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future. The basis of petitioner Palmares' liability under the promissory note is expressed in this wise: ATTENTION TO CO-MAKERS: PLEASE READ WELL I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation to the third paragraph.

In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor. Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.

Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the penalty 10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.

At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides: Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations. 14 Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent than real.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the payment

and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor. 21 Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal. 22 In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning.23 The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. 25 This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal makers. In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal,26 and as such is deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety starts with the agreement, 29 which is precisely the situation obtaining in this case before the Court. It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct. 30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer. 31 A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. 32

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. 33 As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. 35 The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. 36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree.

A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 39 Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. 40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. 41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. 42 We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rightsvis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until

the principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47 The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 49 It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. 51 None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.

In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed. 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmea Azarraga. 10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate. 11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00.

12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending. 13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing. The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory. 1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay.

2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation requiring the express consent of the parties. 55 3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars.57 Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable. It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine. In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:

Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended that is, to punish the

obligor will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.

Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy. 61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case. 62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00. SO ORDERED.

G.R. No. 109941

August 17, 1999

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA TOMACRUZ, respondents. GONZAGA-REYES, J.: This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of Appeals1 dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the decision2 of the Regional Trial Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No. Q89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly narrated as follows: Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.3 Petitioner told private respondent that Luanzon has been engaged in business as a contractor for twenty years and she invited private respondent to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000. On June 22, 1987, Luanzon issued and signed a promissory note acknowledging receipt of the P150,000 from private respondent and obliging herself to pay the former the said amount on or before August 22, 1987.4 Petitioner signed the promissory note, affixing her signature under the word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.00.5 Subsequently, Luanzon replaced this check with another postdated Solidbank check no. 432945 dated December 22, 1987, in favor of the same payee and covering the same amount.6 Several check in the amount of P7,500 each were also issued by Luanzon and made payable to private respondent.7 Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an additional defendant. However, summons was never served upon Luanzon. In her answer, petitioner denied having guaranteed the payment of the promissory note issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as loan, but rather as an investment in Art Enterprises and Construction, Inc. the construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo that there was a loan and petitioner guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has she resorted to all the legal remedies against the principal debtor as required by law. Finally, petitioner claims that there was an extension of the maturity date of the loan without her consent, thus releasing from her obligation. 8 After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated June 14, 1990, it stated that
The evidence and the testimonies on record clearly established a (sic) fact that the transaction between the plaintiff and defendants was a loan with five percent (5%) monthly interest and not an investment. In fact they all admitted in their testimonies that they are not given any stock certificate but only promissory notes similar to Exhibit "B" wherein it was clearly stated that defendant Luanzon would

pay the amount of indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes to enable the plaintiff and others to withdraw their money on a certain fixed time. This shows that they were never participants in the business transaction of defendant Luanzon but were creditors. The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon because of the assurance of the monthly income of five percent (5%) of their money and that they could withdraw it anytime after the due date add to it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment of the amount loaned. xxx xxx xxx

WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00, with interest at the legal rate from the filing of this complaint until full payment thereof, to pay the total sum of P21,000.00 as attorney's fees and costs of suit.9

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present case wherein petitioner makes the following assignment of errors

At the outset, we note that petitioner's claim that the factual findings of the lower court, which were affirmed by the Court of Appeals, were based on a misapprehension of facts and contradicted by the evidence on records10 is a bare allegation and devoid of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive and cannot be reviewed on appeal by the Supreme Court.11 Although this rule admits of several exceptions,12 none of the exceptions are in point in the present case. The factual findings of the respondent court are borne out by the record and are based on substantial evidence. Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the amount of P150,000, not as a loan, but rather as an investment in the construction project of the latter. 13 In support of her claim, petitioner cites the use by private respondent of the words "investment," "dividends," and "commission" in her testimony before the lower court; the fact that private respondent received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on her investment; and the fact that other employees of the Development Bank of the Philippines made similar investments in Luanzon's construction business.14

However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay private respondent the amount of P150,000 on or before August 22, 1987. The promissory note states as follows:
June 22, 1987 To Whom It May Concern: For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22, 1987. The above amount is covered by __________ Check No. _______ dated August 22, 1987. (signed) ROSITA B. LUANZON GURARANTOR: (signed) PACIONARIA O. BAYLON Tel. No. 801-28-00 18 P. Mapa St., DBP Village Almanza, Las Pinas, M.M.15

If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control.16 Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the parties' intent when there is no ambiguity in the terms of the agreement.17Both petitioner and private respondent do not deny the due execution and authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering the real intention of the parties in executing the promissory note, but no amount of argumentation will change the plain import of the terms thereof, and accordingly, no attempt to read into it any alleged intention of the parties thereto may be justified.18 The clear terms of the promissory note establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at bench is therefore a loan, not an investment. It is petitioner's contention that, even though she is held to be a guarantor under the terms of the promissory note, she is not liable because private respondent did not exhaust the property of the principal debtor and has not resorted to all the legal remedies provided by the law against the debtor.19 Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that
The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

It is axiomatic that the liability of the guarantor is only subsidiary.20 All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of the principal's property' the benefit of which the guarantor claims cannot even begin to take place before judgment has been obtained."21 This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor.22 Under the circumstances availing in the present case, we hold that it is premature for this Court to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting that is, no

judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. We hold that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor. IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No pronouncement as to costs.
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