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CHAPTER I COMMODATUM
REPUBLIC v. BAGTAS
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a
Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May
1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls.
Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the
Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7
May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that
he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that
the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31
October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court
of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62,
both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order
situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of
Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct
from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in
the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11
November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a
special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas,
the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On
7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal
of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid
on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued.
On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February,
the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this
opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls
to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a
memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to
quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by
the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the
surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due
to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without
merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year
from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower
of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that
reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract
ofcommodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the
bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she
had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is
liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;

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The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one
year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by
stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book
value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of
loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a
money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not
altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the
case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal
representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or
within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death .
. . and to give the name and residence of the executory administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of
administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V.
Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and
expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order,
serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said
deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the
above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the
same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate.
The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration
proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its
attorney of such death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of
P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on
7 January 1959 by the appellant for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the
Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ
of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.
CATHOLIC VICAR v. CA
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be
considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of
Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of
Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and
Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain
Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of
the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay
costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the
Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the
ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of private respondents
under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in
commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just
been in possession as owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years
possession with just title and 30 years of possession without; that the principle of res judicata on these findings by the Court of
Appeals will bar a reopening of these questions of facts; and that those facts may no longer be altered.

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Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar
Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September
5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad,
Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto.
After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the
herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CAG.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration
court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent
and the second by the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration
of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed
their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez
and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan
Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied
that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals
dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic
of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs
of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No.
L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion
For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by
Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R.
No. 38870 did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed
as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May
16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24,
1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso
Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio
Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register
of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in
the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William
Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has
been in possession of Lot 3, for seventy-five (75) years continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of
whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in
effect declared the plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or
long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in
CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership

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have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion
of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3.
Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement
of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT
DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN
IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT
LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE
RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER
ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME
COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT
PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN
GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN
COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND
REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in
agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on
the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively
declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951.
Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its
name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of
owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title.
Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this
Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no
longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the
principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed
the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of
evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over
Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by
purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration.

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By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free
Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the
questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings
standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in
1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was
constructed only in 1951 and the new convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2
and 3 were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the
convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not
mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The
adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in
good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust
came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become
incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long
time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision
of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases
CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in
CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner.
REPUBLIC v. CA
QUINTOS v. BECK
The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use. She appealed
from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three has heaters and
the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by both
parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14,
1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the
latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant
would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and
on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under
one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to
him for them in the house where they were found. On
November 5, 1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant
wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because
he would use them until the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture in
view of the fact that the defendant had declined to make delivery of all of them. On
November 15th, before vacating the house,
the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse
situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the
contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering
the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture
from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the
furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying pay their respective legal
expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to
decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is
bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net

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The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of
the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return
the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the
Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he
should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when
he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore,
erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were
offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not
legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee,
was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his
inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to
nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be
latter determined by the trial Court through evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of
Civil Procedure). The defendant was the one who breached the contract of commodatum, and without any reason he refused to
return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence to return and
deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts
Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the
account of the defendant. the defendant shall pay the costs in both instances. So ordered.

DE LOS SANTOS v. JARRA


On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the estate of Magdaleno
Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used
at the animal-power mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use
thereof, under the sole condition that they should be returned to the owner as soon as the work at the mill was terminated; that
Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the
work at the mill was finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed
by the Court of First Instance of Occidental Negros administratrix of his estate and she took over the administration of the same and
is still performing her duties as such administratrix; that the plaintiff presented his claim to the commissioners of the estate of
Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners rejected his claim as appears in
their report; therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of the
deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the complaint on the ground
that it was vague; but on the 2d of October of the same year, in answer to the complaint, she said that it was true that the late
Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained three second-class animals, which were
afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations contained in paragraph 3 of the
complaint; for all of which she asked the court to absolve her of the complaint with the cost against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and her counsel, Matias Hilado,
that he had made an agreement with the plaintiff to the effect that the latter would not compromise the controversy without his
consent, and that as fees for his professional services he was to receive one half of the amount allowed in the judgment if the same
were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and either exhibits were made of record. On the 10th of January,
1907, the court below entered judgment sentencing Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return
to the plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or
a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19, moved for anew trial on the
ground that the findings of fact were openly and manifestly contrary to the weight of the evidence. The motion was overruled, the
defendant duly excepted, and in due course submitted the corresponding bill of exceptions, which was approved and submitted to
this court.

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The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos which are now claimed by the
latter, as shown by two letters addressed by the said Jimenea to Felix de los Santos; but in her answer the said defendant alleged
that the late Jimenea only obtained three second-class carabaos, which were subsequently sold to him by the owner, Santos;
therefore, in order to decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three carabaos
from his son-in-law Santos, and that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses that the plaintiff, Santos,
sent in charge of various persons the ten carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at
the trial by the plaintiff, and that Jimenea received them in the presence of some of said persons, one being a brother of said Jimenea,
who saw the animals arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and it is for this reason
that the judgment appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy documents such
as those of transfer, nor were the declarations of the witnesses presented by the defendant affirming it satisfactory; for said reason
it can not be considered that Jimenea only received three carabaos on loan from his son-in-law, and that he afterwards kept them
definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by means of official documents issued by the local authorities;
these documents constitute the title of ownership of the carabao or horse so acquired. Furthermore, not only should the purchaser
be provided with a new certificate or credential, a document which has not been produced in evidence by the defendant, nor has the
loss of the same been shown in the case, but the old documents ought to be on file in the municipality, or they should have been
delivered to the new purchaser, and in the case at bar neither did the defendant present the old credential on which should be
stated the name of the previous owner of each of the three carabaos said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the now deceased Magdaleno
Jimenea were ten in number; that they, or at any rate the six surviving ones, have not been returned to the owner thereof, Felix de
los Santos, and that it is not true that the latter sold to the former three carabaos that the purchaser was already using; therefore, as
the said six carabaos were not the property of the deceased nor of any of his descendants, it is the duty of the administratrix of the
estate to return them or indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum is derived,
establishes prescriptions in relation to the last-mentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that
the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money
or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case
it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use thereof, but not its
fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a
commodatum.
ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties,
unless the loan has been in consideration for the person of the bailee, in which case his heirs shall not have the right to
continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is under obligation
to indemnify the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any manner whatsoever
act in contravention of the stipulations of the same, shall be subjected to indemnify for the losses and damages caused
thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained by the supreme tribunal of
Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and at the
expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the
bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee the thing should have
been lost or injured, it is clear that where public securities are involved, the trial court, in deferring to the claim of the

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bailor that the amount loaned be returned him by the bailee in bonds of the same class as those which constituted the
contract, thereby properly applies law 9 of title 11 ofpartida 5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos had not appealed from the decision of the
commissioners rejecting his claim for the recovery of his carabaos, it is sufficient to estate that we are not dealing with a claim for
the payment of a certain sum, the collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his capital, of six carabaos which
did not belong to him, and which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and which did not form part of the property of the
deceased, must be the subject of a direct decision of the court in an ordinary action, wherein the right of the third party to the
property which he seeks to have excluded from the inheritance and the right of the deceased has been discussed, and rendered in
view of the result of the evidence adduced by the administrator of the estate and of the claimant, since it is so provided by the
second part of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the commissioners before whom the
plaintiff unnecessarily appeared can not affect nor reduce the unquestionable right of ownership of the latter, inasmuch as there is
no law nor principle of justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the prejudice of
Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the judgment appealed from have been refuted, and considering
that the same is in accordance with the law and the merits of the case, it is our opinion that it should be affirmed and we do hereby
affirm it with the costs against the appellant. So ordered.

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CHAPTER II SIMPLE LOAN OR MUTUUM


CHEE KIONG YAM v MALIK
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners alleged that respondent
Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion
when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda Amin, Tan Chu Kao and Augusto
Sajor against petitioners that there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed in his court as Criminal Cases No. M-111, M-183
and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion because the
facts recited in the complaints did not constitute the crime of estafa, and assuming they did, they were not within the jurisdiction of
the respondent judge.
In a resolution dated May 23, 1979, we required respondents to comment in the petition and issued a temporary restraining order
against the respondent judge from further proceeding with Criminal Cases Nos. M-111, M-183 and M-208 or from enforcing the
warrants of arrest he had issued in connection with said cases.
Comments by the respondent judge and the private respondents pray for the dismissal of the petition but the Solicitor General has
manifested that the People of the Philippines have no objection to the grant of the reliefs prayed for, except the damages. We
considered the comments as answers and gave due course to the petition.
The position of the Solicitor General is well taken. We have to grant the petition in order to prevent manifest injustice and the
exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong and Yam Yap Kieng with estafa
through misappropriation of the amount of P50,000.00. But the complaint states on its face that said petitioners received the
amount from respondent Rosalinda M. Amin "as a loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the
collection of the same amount filed by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on September 11,
1975, likewise states that the P50,000.00 was a "simple business loan" which earned interest and was originally demandable six (6)
months from July 12, 1973. (Annex E of the petition.)
In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose Y.C. Yam, Ampang Mah and Anita
Yam, alias Yong Tay, with estafa through misappropriation of the amount of P30,000.00. Likewise, the complaint states on its face
that the P30,000.00 was "a simple loan." So does the complaint in Civil Case No. N-8 filed by respondent Tan Chu Kao on April 6,
1976 with the Court of First Instance of Sulu for the collection of the same amount. (Annex D of the petition.).
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita Yam alias Yong Tai Mah, Chee Kiong
Yam and Richard Yam, with estafa through misappropriation of the amount of P20,000.00. Unlike the complaints in the other two
cases, the complaint in Criminal Case No. M-208 does not state that the amount was received as loan. However, in a sworn statement
dated September 29, 1976, submitted to respondent judge to support the complaint, respondent Augusto Sajor states that the
amount was a "loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do not constitute estafa through
misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph (b), of the Revised Penal Code as
follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein below shall be
punished by:
xxx xxx xxx
1. With unfaithfulness or abuse of confidence namely:
xxx xxx xxx

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10

b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by
the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make
delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property.
In order that a person can be convicted under the abovequoted provision, it must be proven that he has the obligation to deliver or
return the same 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 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 be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loam 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.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse to nay his debt or to deny its
existence.
We are of the opinion and so decide that when the relation is purely that of debtor and creditor, the debtor can not be held
liable for the crime of estafa, under said article, by merely refusing to pay or by denying the indebtedness.
It appears that respondent judge failed to appreciate the distinction between the two types of loan, mutuum and commodatum,
when he performed the questioned acts, He mistook the transaction between petitioners and respondents Rosalinda Amin, Tan Chu
Kao and Augusto Sajor to be commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the
duty to return the same thing to the lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the Municipal Court of Jolo is, has jurisdiction
over criminal cases where the penalty provided by law does not exceed prision correccional or imprisonment for not more than six
(6) years, or fine not exceeding P6,000.00 or both, The amounts allegedly misappropriated by petitioners range from P20,000.00 to
P50,000.00. The penalty for misappropriation of this magnitude exceeds prision correccional or 6 year imprisonment. (Article 315,
Revised Penal Code), Assuming then that the acts recited in the complaints constitute the crime of estafa, the Municipal Court of Jolo
has no jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of the Court of First Instance.
Respondents People of the Philippines being the sovereign authority can not be sued for damages. They are immune from such type
of suit.
With respect to the other respondents, this Court is not the proper forum for the consideration of the claim for damages against
them.
WHEREFORE, the petition is hereby granted; the temporary restraining order previously issued is hereby made permanent; the
criminal complaints against petitioners are hereby declared null and void; respondent judge is hereby ordered to dismiss said
criminal cases and to recall the warrants of arrest he had issued in connection therewith. Moreover, respondent judge is hereby
rebuked for manifest ignorance of elementary law. Let a copy of this decision be included in his personal life. Costs against private
respondents.
PRODUCERS BANK v. CA
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791 and of
its Resolution2 dated May 5, 1994, denying the motion for reconsideration of said decision filed by petitioner Producers Bank of the
Philippines.

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11

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and
townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity).
Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of Sterela for
purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within a months
time. Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchezs request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas private secretary, met and
discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, private respondent issued
a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in the Buendia,
Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the
check. They had with them an authorization letter from Doronilla authorizing Sanchez and her companions, "in coordination with
Mr. Rufo Atienza," to open an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter
issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to him. Alarmed,
he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them to Mr. Rufo Atienza, the
assistant manager, who informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla,
and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened
Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings
Account No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof, Doronilla issued three
postdated checks, all of which were dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings
Account No. 10-1567 because he was the sole proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a letter from Doronilla,
assuring him that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated check for
Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment thereof by private
respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent to present the same check on
September 15, 1979 but when the latter presented the check, it was again dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his clients money.
Doronilla issued another check for P212,000.00 in private respondents favor but the check was again dishonored for insufficiency
of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro Manila
against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal actions
against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was pending
before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25, 1991, the appellate court
affirmed in toto the decision of the RTC.9 It likewise denied with finality petitioners motion for reconsideration in its Resolution
dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE DEFENDANT DORONILLA
AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;

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12

II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK MANAGER, MR. RUFO ATIENZA,
CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL COURT AND
AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A
MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA
745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT HEREIN PETITIONER
BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING
THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR
ATTORNEYS FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on September 25, 1995. The Court
then required private respondent to submit a rejoinder to the reply. However, said rejoinder was filed only on April 21, 1997, due to
petitioners delay in furnishing private respondent with copy of the reply 12 and several substitutions of counsel on the part of
private respondent.13 On January 17, 2001, the Court resolved to give due course to the petition and required the parties to submit
their respective memoranda.14 Petitioner filed its memorandum on April 16, 2001 while private respondent submitted his
memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the elements
of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second,
the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount
of P212,000.00, or P12,000 more than what private respondent deposited in Sterelas bank account.15 Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to recover his money from Doronilla shows that the transaction was not
merely gratuitous but "had a business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondents P200,000.00 because it is not privy to the transaction between the latter and Doronilla.16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing Doronilla to withdraw from
the savings account of Sterela since the latter was the sole proprietor of said company. Petitioner asserts that Doronillas May 8,
1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain any
authorization for these two to withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively with
Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings account. 17 Petitioner points out that no
evidence other than the testimonies of private respondent and Mrs. Vives was presented during trial to prove that private
respondent deposited his P200,000.00 in Sterelas account for purposes of its incorporation. 18 Hence, petitioner should not be held
liable for allowing Doronilla to withdraw from Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since the findings of fact therein were
not accord with the evidence presented by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterelas savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the actual damages suffered by
private respondent, and neither may it be held liable for moral and exemplary damages as well as attorneys fees.20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an
accommodation,21 since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to deposit said
amount in the account of Sterela so that a certification can be issued to the effect that Sterela had sufficient funds for purposes of its
incorporation but at the same time, he retained some degree of control over his money through his wife who was made a signatory
to the savings account and in whose possession the savings account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is liable for the return of his money.
He insists that Atienza, petitioners assistant manager, connived with Doronilla in defrauding private respondent since it was
Atienza who facilitated the opening of Sterelas current account three days after Mrs. Vives and Sanchez opened a savings account
with petitioner for said company, as well as the approval of the authority to debit Sterelas savings account to cover any
overdrawings in its current account.23

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13

There is no merit in the petition.


At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed with this Court. The Court
has repeatedly held that it is not its function to analyze and weigh all over again the evidence presented by the parties during
trial.24 The Courts jurisdiction is in principle limited to reviewing errors of law that might have been committed by the Court of
Appeals.25 Moreover, factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this
Court unless these findings are not supported by the evidence on record. 26 There is no showing of any misapprehension of facts on
the part of the Court of Appeals in the case at bar that would require this Court to review and overturn the factual findings of that
court, especially since the conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also amply
supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and Doronilla was a
commodatum and not a mutuum. A circumspect examination of the records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same
for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would
be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of
the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it
is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable
goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of
a contract.27 In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed to
deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days." 29 Private respondent
merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was
however clear to the parties to the transaction that the money would not be removed from Sterelas savings account and would be
returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterelas account
together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a
commodatum into a mutuum because such was not the intent of the parties and because the additional P12,000.00 corresponds to
the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum
acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the
interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private respondents money
because it was not privy to the transaction between Doronilla and private respondent. The nature of said transaction, that is,
whether it is a mutuum or a commodatum, has no bearing on the question of petitioners liability for the return of private
respondents money because the factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza,
was partly responsible for the loss of private respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for Savings Account No. 101567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated, and
neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings bank book in which will be
entered by the Bank the amount deposited or withdrawn."30

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Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch Manager for the Buendia
Branch of petitioner, to withdraw therefrom even without presenting the passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court found that Atienza allowed
said withdrawals because he was party to Doronillas "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo Atienza, assistant
manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence indicates that Atienza had not only
facilitated the commission of the fraud but he likewise helped in devising the means by which it can be done in such manner as to
make it appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key officer therein. The records
show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking Corporation, but Doronilla and
Dumagpi insisted that it must be in defendants branch in Makati for "it will be easier for them to get a certification". In fact before
he was introduced to plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch manager authorizing
Angeles B. Sanchez and company to open a savings account for Sterela in the amount of P200,000.00, as "per coordination with Mr.
Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that the other defendants had been in
consultation with Atienza from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the
brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla and Atienza, the latter knew
before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly
told by Inocencia Vives that the money belonged to her and her husband and the deposit was merely to accommodate Doronilla.
Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered to withdraw the
same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account (Exh. J), the authorized
signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of
savings deposits could only be made by persons whose authorized signatures are in the signature cards on file with the bank. He,
however, said that this procedure was not followed here because Sterela was owned by Doronilla. He explained that Doronilla had
the full authority to withdraw by virtue of such ownership. The Court is not inclined to agree with Atienza. In the first place, he was
all the time aware that the money came from Vives and did not belong to Sterela. He was also told by Mrs. Vives that they were only
accommodating Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much amount to be sued
in the incorporation of the firm. In the second place, the signature of Doronilla was not authorized in so far as that account is
concerned inasmuch as he had not signed the signature card provided by the bank whenever a deposit is opened. In the third place,
neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that whenever a
withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this case, such recognized practice
was dispensed with. The transfer from the savings account to the current account was without the submission of the passbook
which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella Dumagpi that a duplicate
passbook was issued to Sterela because the original passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification,
was aware that the contents of the same are not true. He knew that the passbook was in the hands of Mrs. Vives for he was the one
who gave it to her. Besides, as assistant manager of the branch and the bank official servicing the savings and current accounts in
question, he also was aware that the original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not
among those authorized to withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienzas active participation in the
perpetration of the fraud and deception that caused the loss. The records indicate that this account was opened three days later
after the P200,000.00 was deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and posted regarding the
opening of the current account considering that Doronilla was all the while in "coordination" with him. That it was he who
facilitated the approval of the authority to debit the savings account to cover any overdrawings in the current account (Exh. 2) is not
hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their employees
acting within the scope of their assigned tasks. To hold the employer liable under this provision, it must be shown that an employeremployee relationship exists, and that the employee was acting within the scope of his assigned task when the act complained of
was committed.32 Case law in the United States of America has it that a corporation that entrusts a general duty to its employee is
responsible to the injured party for damages flowing from the employees wrongful act done in the course of his general authority,
even though in doing such act, the employee may have failed in its duty to the employer and disobeyed the latters instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that Atienza was acting within
the scope of his authority as Assistant Branch Manager when he assisted Doronilla in withdrawing funds from Sterelas Savings
Account No. 10-1567, in which account private respondents money was deposited, and in transferring the money withdrawn to
Sterelas Current Account with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were obviously done in

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furtherance of petitioners interests34 even though in the process, Atienza violated some of petitioners rules such as those stipulated
in its savings account passbook.35 It was established that the transfer of funds from Sterelas savings account to its current account
could not have been accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which
was the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, petitioner is liable for private
respondents loss and is solidarily liable with Doronilla and Dumagpi for the return of theP200,000.00 since it is clear that petitioner
failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from Sterelas savings account, and that it
was not negligent in the selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in the
award of actual, moral and exemplary damages, attorneys fees and costs of suit to private respondent.
TOLENTINO v. GONZALES SY CHIAM
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a certain amount per
month as rent, may such rent render such a contract usurious when the amount paid as rent, computed upon the
purchase price, amounts to a higher rate of interest upon said amount than that allowed by law?
(c)

May the contract in the present case may be modified by parol evidence?
ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a piece or parcel of land
with the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for the price of P25,000, promising
to pay therefor in three installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the second
installment of P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and
payable on or about the 30th day of November, 1922. One of the conditions of that contract of purchase was that on failure of the
purchaser (plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on the date agreed upon,
the property bought would revert to the original owner.
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record shows upon the due dates.
The balance of P15,000 due on said contract of purchase was paid on or about the 1st day of December, 1922, in the manner which
will be explained below. On the date when the balance of P15,000 with interest was paid, the vendor of said property had issued to
the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate
of title from No. 40, which shows that said land was originally registered in the name of the vendor on the 7th day of November,
1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter to the appellant
Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness was not paid, an action would be
brought for the purpose of recovering the property, together with damages for non compliance with the condition of the contract of
purchase. The pertinent parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos judicialmente contra Vd. para
reclamar la devolucion del camarin y los daos y perjuicios ocasionados a la compaia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable upon said contract
of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of said property of
November 7, 1922, the purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began to make

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an effort to borrow money with which to pay the balance due, began to make an effort to borrow money with which to pay the
balance of their indebtedness on the purchase price of the property involved. Finally an application was made to the defendant for a
loan for the purpose of satisfying their indebtedness to the vendor of said property. After some negotiations the defendants agreed
to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto de
retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of P16,965.09. The defendant, in
addition to said amount paid by check, delivered to the plaintiffs the sum of P354.91 together with the sum of P180 which the
plaintiffs paid to the attorneys for drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and
for the plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was dated the 28th day of November,
1922, and is in the words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad, residentes en el Municipio de
Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito
Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:
Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la cantidad de diecisiete mil
quinientos pesos (P17,500) moneda filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don Benito
Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y
causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de
Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que al incorporarse se donomino y se
denomina "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac. Linda por el O. y N. con
propiedad de Manuel Urquico; por el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de
un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la
Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.;
54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al
punto de partida; midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados (4,216) mas
o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre el terreno los puntos 1 y 2 estan
determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la
orientacion seguida es la verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados desde el dia 1. de diciembre
de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si transcurre
dicho plazo de cinco aos sin ejercitar el derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su
domicilio, era de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como
tambien la prima del seguro contra incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar
dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la terminacion de este
arrendamieno y a la perdida del derecho de retracto que nos hemos reservado, como si naturalmente hubiera
expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y
desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos terminos en que la
dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado en Manila, hoy a 28 de
noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO

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(Fda.) POTENCIANA MANIO


(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows clearly that it is a pacto de retro and not a
mortgage. There is no pretension on the part of the appellant that said contract, standing alone, is a mortgage. The pertinent
language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos contados desde el dia 1. de diciembre
de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre
dicho plazo de cinco (5) aos sin ejercitar al derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can certainly be not doubt
as to the purpose of the plaintiff to sell the property in question, reserving the right only to repurchase the same. The intention to
sell with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of the property, entered
into a contract with the purchaser by virtue of which she became the "tenant" of the purchaser. That contract of rent appears in said
quoted document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio,
sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como tambien la
prima del seguro contra incendios, si le conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an absolute sale of the
property with the right to repurchase and not a mortgage; and, second, that by virtue of the said contract the vendor became the
tenant of the purchaser, under the conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the same to be a mortgage
and not a sale whenever the interpretation of such a contract justifies that conclusion. There must be something, however, in the
language of the contract or in the conduct of the parties which shows clearly and beyond doubt that they intended the contract to be
a "mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil.,
65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46
Phil., 757; Villavs. Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not construe an instrument to
one of sale with pacto de retro, with the stringent and onerous effect which follows, unless the terms of the document and the
surrounding circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a contract, but when an issue is
squarely presented that a contract does not express the intention of the parties, courts will, when a proper foundation is laid
therefor, hear evidence for the purpose of ascertaining the true intention of the parties.
In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They admit that they
signed it. They admit they sold the property in question with the right to repurchase it. The terms of the contract quoted by the
plaintiffs to the defendant was a "sale" with pacto de retro, and the plaintiffs have shown no circumstance whatever which would
justify us in construing said contract to be a mere "loan" with guaranty. In every case in which this court has construed a contract to
be a mortgage or a loan instead of a sale with pacto de retro, it has done so, either because the terms of such contract were
incompatible or inconsistent with the theory that said contract was one of purchase and sale. (Olino vs. Medina, supra;
Padilla vs. Linsangan,supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the conveyance of the land was
"pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while the vendor used to the terms "sale and transfer with the right

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to repurchase," yet in said contract he described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage".
In the case of Rodriguez vs. Pamintuan and De Jesusthe person who executed the instrument, purporting on its face to be a deed of
sale of certain parcels of land, had merely acted under a power of attorney from the owner of said land, "authorizing him to borrow
money in such amount and upon such terms and conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was executed, the
supposed vendor remained in possession of the land and invested the money he had obtained from the supposed vendee in making
improvements thereon, which fact justified the court in holding that the transaction was a mere loan and not a sale. In the case
of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor, and such acceptance of partial
payments is absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser at the expiration of the
term stipulated in the original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting opinion of Chief Justice
Cayetano S. Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar Estates Development Co., which case
was appealed to the Supreme Court of the United States and the contention of the Chief Justice in his dissenting opinion was
affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See decision of the Supreme Court of the
United States, June 3, 1918.)1 The Chief Justice said in discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties, consideration must chiefly be
paid to those acts executed by said parties which are contemporary with and subsequent to the contract. And according to article
1283, however general the terms of a contract may be, they must not be held to include things and cases different from those with
regard to which the interested parties agreed to contract. "The Supreme Court of the Philippine Islands held the parol evidence was
admissible in that case to vary the terms of the contract between the Government of the Philippine Islands and the Philippine Sugar
Estates Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the
court, said:
It is well settled that courts of equity will reform a written contract where, owing to mutual mistake, the language used
therein did not fully or accurately express the agreement and intention of the parties. The fact that interpretation or
construction of a contract presents a question of law and that, therefore, the mistake was one of law is not a bar to
granting relief. . . . This court is always disposed to accept the construction which the highest court of a territory or
possession has placed upon a local statute. But that disposition may not be yielded to where the lower court has clearly
erred. Here the construction adopted was rested upon a clearly erroneous assumption as to an established rule of equity. .
. . The burden of proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence. It is settled
that relief by way of reformation will not be granted unless the proof of mutual mistake be of the clearest and most
satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that stringent requirement. There is not a word, a
phrase, a sentence or a paragraph in the entire record, which justifies this court in holding that the said contract of pacto de retro is a
mortgage and not a sale with the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed." Article 1282
provides: "in order to judge as to the intention of the contracting parties, attention must be paid principally to their conduct at the
time of making the contract and subsequently thereto."
We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that very well reasoned
decision of the late Chief Justice Arellano, one of the greatest jurists of his time. He said, in discussing the question whether or not
the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was apacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares and states that he is the
proprietor in fee simple of two parcels of fallow unappropriated crown land situated within the district of his pueblo. The
first has an area of 73 quiones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The
second is in the sitio of Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is
bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells the said properties to the aforementioned
Doa Cornelia Laochangco for P4,000 and upon the following conditions: First, the sale stipulated shall be for
the period of two years, counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall, during the term of the present
contract, be held in lease by the undersigned who shall pay, as rental therefor, the sum of 400 pesos per
annum, or the equivalent in sugar at the option of the vendor; third, all the fruits of the said lands shall be
deposited in the sugar depository of the vendee, situated in the district of Quiapo of this city, and the value of
which shall be applied on account of the price of this sale; fourth, the deponent acknowledges that he has
received from the vendor the purchase price of P4,000 already paid, and in legal tender currency of this
country . . .; fifth, all the taxes which may be assessed against the lands surveyed by competent authority, shall
be payable by and constitute a charge against the vendor; sixth, if, through any unusual event, such as flood,
tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in part, it shall be
incumbent upon the vendor to repair the damage thereto at his own expense and to put them into a good state
of cultivation, and should he fail to do so he binds himself to give to the vendee other lands of the same area,
quality and value.'

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xxx

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xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's contract with Laochangco was
not one of sale with right of repurchase, but merely one of loan secured by those properties, and, consequently, that the
ownership of the lands in questions could not have been conveyed to Laochangco, inasmuch as it continued to be held by
Berenguer, as well as their possession, which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario Berenguer, the text of which
has been transcribed in this decision, is very clear. Berenguer's heirs may not go counter to the literal tenor of the
obligation, the exact expression of the consent of the contracting contained in the instrument, Exhibit C. Not because the
lands may have continued in possession of the vendor, not because the latter may have assumed the payment of the taxes
on such properties, nor yet because the same party may have bound himself to substitute by another any one of the
properties which might be destroyed, does the contract cease to be what it is, as set forth in detail in the public
instrument. The vendor continued in the possession of the lands, not as the owner thereof as before their sale, but as the
lessee which he became after its consummation, by virtue of a contract executed in his favor by the vendee in the deed
itself, Exhibit C. Right of ownership is not implied by the circumstance of the lessee's assuming the responsibility of the
payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the owner, nor is such
right implied by the obligation to substitute the thing sold for another while in his possession under lease, since that
obligation came from him and he continues under another character in its possessiona reason why he guarantees its
integrity and obligates himself to return the thing even in a case of force majeure. Such liability, as a general rule, is
foreign to contracts of lease and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and such
agreement does not on this account involve any sign of ownership, nor other meaning than the will to impose upon
oneself scrupulous diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers the ownership and other rights in
the thing sold. A pacto de retro, or sale with right to repurchase, is nothing but a personal right stipulated between the
vendee and the vendor, to the end that the latter may again acquire the ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is likewise true that
in practice many cases occur where the consummation of a pacto de retro sale means the financial ruin of a person; it is
also, unquestionable that in pacto de retro sales very important interests often intervene, in the form of the price of the
lease of the thing sold, which is stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the sale with right of repurchase, made by
Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is, stating the same in another form: May a tenant
charge his landlord with a violation of the Usury Law upon the ground that the amount of rent he pays, based upon the real value of
the property, amounts to a usurious rate of interest? When the vendor of property under a pacto de retro rents the property and
agrees to pay a rental value for the property during the period of his right to repurchase, he thereby becomes a "tenant" and in all
respects stands in the same relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of the right to repurchase, or the sum of P375
per month, based upon the value of the property, amounted to usury. Usury, generally speaking, may be defined as contracting for or
receiving something in excess of the amount allowed by law for the loan or forbearance of moneythe taking of more interest for
the use of money than the law allows. It seems that the taking of interest for the loan of money, at least the taking of excessive
interest has been regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle
ages the people of England, and especially the English Church, entertained the opinion, then, current in Europe, that the taking of
any interest for the loan of money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's Institute, 150;
Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we shall find that there is scarcely any
people, ancient or modern, that have not had usury laws. . . . The Romans, through the greater part of their history, had the deepest
abhorrence of usury. . . . It will be deemed a little singular, that the same voice against usury should have been raised in the laws of
China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations that we know of,
whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature (Acts Nos. 2655, 2662
and 2992). But is it unlawful for the owner of a property to enter into a contract with the tenant for the payment of a specific
amount of rent for the use and occupation of said property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has never been decided in this jurisdiction. It is one of first
impression. No cases have been found in this jurisdiction answering that question. Act No. 2655 is "An Act fixing rates of interest
upon 'loans' and declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money, goods, chattels or credits, etc. The
central idea of said statute is to prohibit a rate of interest on "loans." A contract of "loan," is very different contract from that of
"rent". A "loan," as that term is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise
to repay, but not a promise to return the same thing. To "loan," in general parlance, is to deliver to another for temporary use, on
condition that the thing or its equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind shall be

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returned with a compensation for its use. The word "loan," however, as used in the statute, has a technical meaning. It never means
the return of the same thing. It means the return of an equivalent only, but never the same thing loaned. A "loan" has been properly
defined as an advance payment of money, goods or credits upon a contract or stipulation to repay, not to return, the thing loaned at
some future day in accordance with the terms of the contract. Under the contract of "loan," as used in said statute, the moment the
contract is completed the money, goods or chattels given cease to be the property of the former owner and becomes the property of
the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific use of the same.
At all events, the money, goods or chattels, the moment the contract is executed, cease to be the property of the former owner and
becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the property does not lose his
ownership. He simply loses his control over the property rented during the period of the contract. In a contract of "loan" the thing
loaned becomes the property of the obligor. In a contract of "rent" the thing still remains the property of the lessor. He simply loses
control of the same in a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the relation between
the contractors is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the relation between the
parties is that of obligor and obligee. "Rent" may be defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. It is defined as the return or compensation for the possession of some
corporeal inheritance, and is a profit issuing out of lands or tenements, in return for their use. It is that, which is to paid for the use
of land, whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which one of the parties delivers to
the other some nonconsumable thing, in order that the latter may use it during a certain period and return it to the former; whereas
a contract of "loan", as that word is used in the statute, signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases it is called merely a "loan." In the case of a contract of
"rent," under the civil law, it is called a "commodatum."
From the foregoing it will be seen that there is a while distinction between a contract of "loan," as that word is used in the statute,
and a contract of "rent" even though those words are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and occupation of the
property may depend upon a thousand different conditions; as for example, farm lands of exactly equal productive capacity and of
the same physical value may have a different rental value, depending upon location, prices of commodities, proximity to the market,
etc. Houses may have a different rental value due to location, conditions of business, general prosperity or depression, adaptability
to particular purposes, even though they have exactly the same original cost. A store on the Escolta, in the center of business,
constructed exactly like a store located outside of the business center, will have a much higher rental value than the other. Two
places of business located in different sections of the city may be constructed exactly on the same architectural plan and yet one, due
to particular location or adaptability to a particular business which the lessor desires to conduct, may have a very much higher
rental value than one not so located and not so well adapted to the particular business. A very cheap building on the carnival ground
may rent for more money, due to the particular circumstances and surroundings, than a much more valuable property located
elsewhere. It will thus be seen that the rent to be paid for the use and occupation of property is not necessarily fixed upon the value
of the property. The amount of rent is fixed, based upon a thousand different conditions and may or may not have any direct
reference to the value of the property rented. To hold that "usury" can be based upon the comparative actual rental value and the
actual value of the property, is to subject every landlord to an annoyance not contemplated by the law, and would create a very great
disturbance in every business or rural community. We cannot bring ourselves to believe that the Legislature contemplated any such
disturbance in the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale with the right only to repurchase. During the period of
redemption the purchaser was the absolute owner of the property. During the period of redemption the vendor was not the owner
of the property. During the period of redemption the vendor was a tenant of the purchaser. During the period of redemption the
relation which existed between the vendor and the vendee was that of landlord and tenant. That relation can only be terminated by
a repurchase of the property by the vendor in accordance with the terms of the said contract. The contract was one of rent. The
contract was not a loan, as that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts for parties. They made
their own contract in the present case. There is not a word, a phrase, a sentence or paragraph, which in the slightest way indicates
that the parties to the contract in question did not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence, sufficiently answers the third questions
presented above. The language of the contract is explicit, clear, unambiguous and beyond question. It expresses the exact intention
of the parties at the time it was made. There is not a word, a phrase, a sentence or paragraph found in said contract which needs
explanation. The parties thereto entered into said contract with the full understanding of its terms and should not now be permitted
to change or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during the life of the contract, Exhibit C, there is
hereby reserved to the plaintiffs the right to exercise in a separate action the right guaranteed to them under article 361 of the Civil
Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law applicable thereto, that
the judgment appealed from should be and is hereby affirmed, with costs. So ordered.
LIWANAG v CA

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Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon City, in an information
which reads as follows.
That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and within the
jurisdiction of this Honorable Court, the said accused, with intent of gain, with unfaithfulness, and abuse of
confidence, did then and there, willfully, unlawfully and feloniously defraud one ISIDORA ROSALES, in the
following manner, to wit: on the date and in the place aforementioned, said accused received in trust from the
offended party cash money amounting toP536,650.00, Philippine Currency, with the express obligation
involving the duty to act as complainant's agent in purchasing local cigarettes (Philip Morris and Marlboro
cigarettes), to resell them to several stores, to give her commission corresponding to 40% of the profits; and to
return the aforesaid amount of offended party, but said accused, far from complying her aforesaid obligation,
and once in possession thereof, misapplied, misappropriated and converted the same to her personal use and
benefit, despite repeated demands made upon her, accused failed and refused and still fails and refuses to
deliver and/or return the same to the damage and prejudice of the said ISIDORA ROSALES, in the
aforementioned amount and in such other amount as may be awarded under the provision of the Civil Code.
CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant Isidora Rosales (Rosales)
and asked her to join them in the business of buying and selling cigarettes. Convinced of the feasibility of the venture, Rosales
readily agreed. Under their agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and Tabligan
would act as her agents, with a corresponding 40% commission to her if the goods are sold; otherwise the money would be returned
to Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to P633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the progress of the transactions. The
visits, however, suddenly stopped, and all efforts by Rosales to obtain information regarding their business proved futile.
Alarmed by this development and believing that the amounts she advanced were being misappropriated, Rosales filed a case of
estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty as charged. The dispositive
portion of the decision reads thus:
WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused, beyond reasonable
doubt, and therefore, imposes upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6) YEARS,
EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS
AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00, without
subsidiary imprisonment, in case of insolvency.
SO ORDERED.
Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29, 1993, the decretal portion of
which reads:
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the correction of
the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21)
DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS of reclusion temporal,
as maximum. In all other respects, the decision is AFFIRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the instant petition,
submitting the following assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE CONVICTION OF THE
ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST (sic)
BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF
A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF THE COMPLAINANT IS
PURELY CIVIL IN NATURE AND NOT CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-PETITIONER ON
GROUNDS OF REASONABLE DOUBT BY APPLYING THE "EQUIPOISE RULE".

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Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership, wherein Rosales would
contribute the funds while she would buy and sell the cigarettes, and later divide the profits between
them. 1 She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending to her the amount stated
on an installment basis. 2
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court, and carry
more weight when these affirm the factual findings of the trial court, 3 we deem it more expedient to resolve the instant petition on
its merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means of unfaithfulness or abuse
of confidence, or of false pretenses of fraudulent acts. 4
From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded another by abuse of confidence or
deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third party, 5 and it is
essential that there be a fiduciary relation between them either in the form of a trust, commission or administration. 6
The receipt signed by Liwanag states thus:
May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED
FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to
customers. In the event the said cigarrets (sic) are not sold, the proceeds of the sale or the said products (shall)
be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said items on or before
August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was for a specific purpose,
that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold, the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we have ruled that when
money or property have been received by a partner for a specific purpose (such as that obtaining
in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7
Neither can the transaction be considered a loan, since in a contract of loan once the money is received by the debtor, ownership
over the same is transferred. 8 Being the owner, the borrower can dispose of it for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only
delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to return the money to
Rosales. Since in this case there was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art.
315, par. l(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29, 1993, is AFFIRMED. Costs
against petitioner.
SAURA IMPORT AND EXPORT CO., INC. v. DBP
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant
Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in
the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of
P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its
conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory
building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and
equipment; and P9,100.00 as additional working capital.

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Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of
credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without
first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage
on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other
terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign
the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the
construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been
informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu
of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.)
sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to
such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of
Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference
as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to
submit his findings thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that
the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection
with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named
their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although
in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its)
part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and
conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as
one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736
proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was
present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00
to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the
Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of
jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of
the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that
releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation:
PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and
severally with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it
was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.

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In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC,
which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ...
from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any
time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that
China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following
proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the Department of
Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the
immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the requirements of the
factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that
the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of
the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds
light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the
manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by
and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate
aKenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this
country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao
where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its
Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw
materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its
letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in
sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates
will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that
releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:

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This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000.
As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time,
subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able
to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials
needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately
the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of
sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute
and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be
necessary for the operation of your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested
RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to
Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954,
over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the
same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the
said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter
commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation
to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the
defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that
assuming there was, the plaintiff itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon
the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of
the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by
resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving
the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed
would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such
assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of
P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of
the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down
in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall be utilizedexclusively for the
following purposes: for construction of factory building P250,000.00; for payment of the balance of purchase price of machinery
and equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet the
conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity
this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials
and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying
as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the
implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which
was done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance what Manresa terms
"mutuo disenso" 1 which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual
agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or
even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of
whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another
loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement
had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond

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doubt that the said agreement had been extinguished by mutual desistance and that on the initiative of the plaintiff-appellee
itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of
the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee.
RONO v. GOMEZ
This petition to review a decision of the Court of Appeals was admitted mainly because it involves one phase of the vital
contemporary question: the repayment of loans given in Japanese fiat currency during the last war of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat money from Jose L. Gomez. He informed
the later that he would use the money to purchase a jitney; and he agreed to pay that debt one year after date in the currency then
prevailing. He signed a promissory note of the following tenor:
For value received, I promise to pay one year after date the sum of four thousand pesos (4,000) to Jose L. Gomez. It is
agreed that this will not earn any interest and the payment It is agreed that this will not earn any interest and the
payment prevailing by the end of the stipulated period of one year.
In consideration of this generous loan, I renounce any right that may come to me by reason of any postwar arrangement,
of privilege that may come to me by legislation wherein this sum may be devalued. I renounce flatly and absolutely any
condition, term right or privilege which in any way will prejudice the right engendered by this agreement wherein Atty.
Jose L. Gomez will receive by right his money in the amount of P4,000. I affirm the legal tender, currency or any medium
of exchange, or money in this sum of P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.
On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court of First Instance. His main defense
was his liability should not exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be 4,000 pesos Philippine
currency, because the contract would be void as contrary to law, public order and good morals.
After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the defendant Roo to pay four thousand
pesos in Philippine currency with legal interest from the presentation of the complaint plus costs.
On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with costs. It declared being a
mechanic who knew English was not deceived into signing the promissory note, and that the contents of the same had not been
misrepresented to him. It pronounced the contract valid and enforceable according to its terms and conditions.
One basic principle of the law on contracts of the Civil Code is that "the contracting parties may establish any pacts, clauses and
conditions they may deem advisable, provided they are not contrary to law, morals or public order." (Article 1255.) Another
principle is that "obligations arising from contracts shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because on the basis of calculations by
Government experts he only received the equivalent of one hundred Philippine pesos and now he is required to disgorge four
thousand pesos or interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received "will not earn any interest." Furthermore, he
received four thousand pesos; and he is required to pay four thousand pesos exactly. The increased intrinsic value and purchasing
power of the current money is consequence of an event (change of currency) which at the time of the contract neither party knew
would certainly happen within the period of one year. They both elected to subject their rights and obligations to that contingency. If
within one year another kind of currency became legal tender, Gomez would probably get more for his money. If the same Japanese
currency continued, he would get less, the value of Japanese money being then on the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see art. 1790 and Manresa's
comment thereon) on a par with insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest is some additional money
to be paid in any event, which is not the case herein, because Gomez might have gotten less if the Japanese occupation had extended
to the end of 1945 or if the liberation forces had chosen to permit the circulation of the Japanese notes.
Moreover, Roo argues, the deal was immoral because taking advantage of his superior knowledge of war developments Gomez
imposed on him this onerous obligation. In the first place, the Court of Appeals found that he voluntary agreed to sign and signed the
document without having been misled as to its contents and "in so far as knowledge of war events was concerned" both parties
were on "equal footing". In the second place although on October 5, 1944 it was possible to surmise the impending American
invasion, the date of victory or liberation was anybody's guess. In the third place there was the possibility that upon-re-occupation
the Philippine Government would not invalidate the Japanese currency, which after all had been forced upon the people in exchange

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for valuable goods and property. The odds were about even when Roo and Gomez played their bargaining game. There was no
overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four thousand pesos in return for an investment of
forty pesos (his estimate of the value of the Japanese money he borrowed). According to his line of reasoning it would be immoral
for the homeowner to recover ten thousand pesos (P10,000, when his house is burned, because he invested only about one hundred
pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains the first prize
of one hundred thousand pesos or over, the whole business is immoral or against public order.
In this connection we should explain that this decision does not cover situations where borrowers of Japanese fiat currency
promised to repay "the same amount" or promised to return the same number of pesos "in Philippines currency" or "in the currency
prevailing after the war." There may be room for argument when those litigations come up for adjudication. All we say here and now
is that the contract in question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the Court of Appeals that the matter
involve a defect in procedure which does not amount to prejudicial error.
NEPOMUCENO v. NARCISO
On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the appellees on a parcel of land situated in
the municipality of Angeles, Province of Pampanga, to secure the payment within the period of seven years from the date of the
mortgage of the sum of P24,000 together with interest thereon at the rate of 8 per cent per annum.
On September 30, 1943, that is to say, more than two years before the maturity of said mortgage, the parties executed a notarial
document entitled "Partial Novation of Contract" whereby they modified the terms of said mortgage as follows:
(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at 6 per cent per annum, unpaid
interest also paying interest also paying interest at the same rate.
(2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear interest at 6 per cent. Unpaid
interest during this period shall however not bear any interest.
(3) At the end of the war the interest shall again become 8 per cent in accordance with the original contract of mortgage.
(4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem the property mortgaged.
(5) When the mortgage lapses on November 14, 1945, the mortgage may continue for another ten years if the mortgagor
so chooses, but during this period he may pay only one half of the capital.
On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno filed their complaint in this case
against the mortgagees, which compplaint, as amended on September 7, 1944, alleged the execution of the contract of mortgage and
its principal novation as above indicated, and
7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the property mortgaged while the war goes
on; and that notwithstanding the said provision the herein plaintiffs-mortgagors are now willing to pay the amount of the
indebtedness together with the corresponding interest due thereon;
8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-defendants to tender payment of
the balance of the mortgage debt with their corresponding interest, but said spouses defendants refuse and still refuse to
accept payment;
9. That because of this refusal of the defendants to accept tender of payment on the mortgage consideration, the plaintiffs
suffered and still suffer damages in the amount of P5,000;
10. That the plaintiffs are now and have deposited with the Clerk of Court of First Instance of Pampanga the amount of
P22,356 for the payment of the mortgage debt and the interest due thereon;
Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in the following tenor:
(a) Ordering the defendants to accept tender of payment from the plaintiffs;
(b) Ordering defendants to execute the corresponding deed of release of mortgage;
(c) Ordering defendants to pay damages in the amount of P5,000; and

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(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs of suit and any other remedy just and
equitable in the premises.
After the trial the court sustained the defense that the complaint had been prematurely presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30, 1943, that "while the war goes on the mortgagor, his
administrators or assigns cannot redeem the property mortgaged," is against public policy and therefore null and void. They cite
and rely on article 1255 of the Civil Code, which provides:
ART. 1255. The contracting parties may establish any pacts, clauses, and conditions they may deem advisable,
provided they are not contrary to law, morals, or public order.
They argue that "it would certainly be against public policy and a restraint on the freedom of commerce to compel a debtor not to
release his property from a lien even if he wanted to by the payment of the indebtedness while the war goes on, which was
undoubtedly of a very uncertain duration."
The first two paragraphs of article 1125 of the Civil Code provide:
ART. 1125. Obligation for the performance of which a day certain has been fixed shall be demandable only when the
day arrives.
A day certain is understood to be one which must necessarily arrive, even though its date be unknown.
Article 1127 says:
ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed to have been established for the
benefit of the creditor and that of the debtor, unless from its tenor or from other circumstances it should appear that the
term was established for the benefit of one or the other.
It will be noted that the original contract of mortgage provided for interest at 8 per cent per annum and that the principal together
with the interest was payable within the period of seven years from November 14, 1938. But by mutual agreement of the parties
that term was modified on September 30, 1943, by reducing the interest to 6 per cent per annum from December 8, 1941, until the
end of the war and by stipulating that the mortgagor shall not pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The mortgagees apparently did not want to have their
prewar credit paid with Japanese military notes, and the mortgagor voluntarily agreed not to do so in consideration of the reduction
of the rate of interest.
It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated to receive the payment before it was due. Hence the latter
had reason not to accept the tender of payment made to them by the former.
The judgment is affirmed, with costs against the appellants.
EQUITABLE PCI BANK v. NG SHEUNG NGOR
This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin E. Go filed an action for annulment
and/or reformation of documents and contracts5 against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and
Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City. 6 They claimed that Equitable induced them to avail of
its peso and dollar credit facilities by offering low interest rates7 so they accepted Equitable's proposal and signed the bank's preprinted promissory notes on various dates beginning 1996. They, however, were unaware that the documents contained identical
escalation clauses granting Equitable authority to increase interest rates without their consent. 8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions contained in the promissory
notes.9 In fact, they continuously availed of and benefited from Equitable's credit facilities for five years. 10
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable restructured
respondents' loans amounting to US$228,200 and P1,000,000.11 The trial court, however, invalidated the escalation clause
contained therein because it violated the principle of mutuality of contracts. 12 Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period13 and declared the existence of extraordinary deflation.14 Consequently, the
RTC ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-denominated loans.15 Lastly, because the

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business reputation of respondentswas (allegedly) severely damaged when Equitable froze their accounts, 16 the trial court awarded
moral and exemplary damages to them.17
The dispositive portion of the February 5, 2004 RTC decision18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay [respondents'] attorney's fees in
the sum of P300,000; litigation expenses in the sum of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid principal obligation for the peso
loan as well as the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the payment of the dollar obligation is the conversion rate
of P26.50 per dollar availed of at the time of incurring of the obligation in accordance with Article 1250 of the
Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid principal loan obligations and
interest.
SO ORDERED.19
Equitable and respondents filed their respective notices of appeal. 20
In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and respondents "failed to submit
proof that they paid their respective appeal fees."21
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in the above-entitled case
is DENIED due course. As of February 27, 2004, the Decision dated February 5, 2004, is considered final and executory in so
far as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on the ground that it did in fact pay the appeal fees.
Respondents, on the other hand, prayed for the issuance of a writ of execution. 24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration for lack of merit 25 and ordered
the issuance of a writ of execution in favor of respondents. 26 According to the RTC, because respondents did not move for the
reconsideration of the previous order (denying due course to the parties notices of appeal), 27 the February 5, 2004 decision became
final and executory as to both parties and a writ of execution against Equitable was in order. 28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied upon.30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.31 It, however, withdrew that
petition on March 30, 200432 and instead filed a petition for certiorari with an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004 omnibus order. 33
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction was correspondingly
issued.34
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a public auction on July 1,
2004. Respondents were the highest bidders and certificates of sale were issued to them.35

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On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who conducted the sale in
contempt for proceeding with the auction despite the injunction order of the CA. 36
On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found Equitable guilty of forum shopping because the bank
filed its petition for certiorari in the CA several hours before withdrawing its petition for relief in the RTC.38 Moreover, Equitable
failed to disclose, both in the statement of material dates and certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the RTC. 39
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for relief was withdrawn on thesame day the petition
for certiorari was filed.42 It likewise avers that its petition for certiorari was meritorious because the RTC committed grave abuse of
discretion in issuing the March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1, 2004 order
denying its notice of appeal for non payment of appeal fees was erroneous because it had in fact paid the required fees.43 Thus, the
RTC, by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from appealing the patently wrong February 5,
2004 decision.44
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances are filed and
those actions raise identical issues, subject matter and causes of action.45 The test is whether, in two or more pending cases, there is
identity of parties, rights or causes of actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical causes of action. The petition
for relief from the denial of its notice of appeal was based on the RTCs judgment or final order preventing it from taking an appeal
by "fraud, accident, mistake or excusable negligence."47 On the other hand, its petition for certiorari in the CA, a special civil action,
sought to correct the grave abuse of discretion amounting to lack of jurisdiction committed by the RTC. 48
In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction. In a petition for certiorari, the
order is rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved to withdraw its petition for relief
in the RTC on the same day (in fact just four hours and forty minutes after) it filed the petition for certiorari in the CA. Even if
Equitable failed to disclose that it had a pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight
by withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the CA a clear indication that it had
no intention of maintaining the two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or quasi-judicial function has acted
without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction,
and there is no appeal, nor any plain, speedy or adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered annulling or
modifying the proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies of all
pleadings and documents relevant and pertinent thereto, and a sworn certificate of non-forum shopping as provided in the third
paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:
1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that the public respondent
patently and grossly abused his discretion and that abuse amounted to an evasion of positive duty or a virtual refusal to perform a
duty enjoined by law or to act at all in contemplation of law, as where the power was exercised in an arbitrary and despotic manner
by reason of passion or hostility.49

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The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents. However, it declared that
the February 5, 2004 decision was final and executory only with respect to Equitable. 50 As expected, the March 24, 2004
omnibus order denied Equitable's motion for reconsideration and granted respondents' motion for the issuance of a writ of
execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent Equitable, et al. from appealing the
February 5, 2004 decision. Not only that. The execution of the decision was undertaken with indecent haste, effectively obviating or
defeating Equitable's right to avail of possible legal remedies. No matter how we look at it, the RTC committed grave abuse of
discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law, we hold that there was
none. The RTC denied due course to its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March 24, 2004
omnibus order. Hence, there was no way Equitable could have possibly appealed the February 5, 2004 decision.52
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain, speedy and adequate
remedy in the ordinary course of law.53 A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional
circumstances or where there is no other available or adequate remedy.54
Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law. 55 There is a question of law "when the doubt or
controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for the
probative value of the evidence presented, the truth or falsehood of facts being admitted." 56
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the nullity of the RTCs February 5,
2004 decision. Equitable points out that that decision was patently erroneous, specially the exorbitant award of damages, as it
was inconsistent with existing law and jurisprudence.57
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite respondents assertion that those documents were contracts of
adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party. 58 The participation of the other
party is limited to affixing his signature or his "adhesion" to the contract. 59 For this reason, contracts of adhesion are strictly
construed against the party who drafted it.60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of adhesion becomes void only when the dominant party takes
advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another bank at the first available instance. But they did not. Instead,
they continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans with Equitable, it,
however, failed to ascertain the total amount due (principal, interest and penalties, if any) as of July 9, 2001. The trial court did not
explain how it arrived at the amounts of US$228,200 and P1,000,000.62 In Metro Manila Transit Corporation v. D.M. Consunji,63 we
reiterated that this Court is not a trier of facts and it shall pass upon them only for compelling reasons which unfortunately are not
present in this case.64 Hence, we ordered the partial remand of the case for the sole purpose of determining the amount of actual
damages.65
Escalation Clause Violated The Principle Of Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement"
is void. Clauses of that nature violate the principle of mutuality of contracts. 66Article 130867 of the Civil Code holds that a contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. 68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary
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2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary
Board (de-escalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the
bank.70
Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended. Respondents had no choice but
to accept them. This was a violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain the
necessary provisions for validity, that is, it neither provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank71 we held that, because the
escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated rate of interest. Upon
maturity, the amount due was subject to legal interest at the rate of 12% per annum. 72
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-denominated loans and 20% p.a.
for their peso-denominated loans from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12%
p.a. on all amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that is, beyond the common
fluctuation in the value of currency) and such decrease could not be reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at
the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);74
2. that the obligation was contractual in nature; 75 and
3. that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation. 76
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although the obligation
in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation (or
deflation).77 The RTC never mentioned that there was a such stipulation either in the promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered, not to impose a
penalty to the wrongdoer.79 To be entitled to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or psychological suffering sustained by the
claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the damages the claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned by Article 2219 80 and 222081 .82
In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted fraudulently or in bad faith or
in wanton disregard of his contractual obligations. 83 The breach must be wanton, reckless, malicious or in bad faith, and oppressive
or abusive.84

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The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any month thereafter prior to the
maturity of the loan)85 or the amount due (principal plus interest) due on July 9, 2001. 86Consequently, Equitable applied
respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor. 87 For this reason, a bank has the right to set-off the
deposits in its hands for the payment of a depositor's indebtedness. 88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears, deliberately) concluded that Equitable acted "fraudulently or in
bad faith or in wanton disregard" of its contractual obligations despite the absence of proof. The undeniable fact was that, whatever
damage respondents sustained was purely the consequence of their failure to pay their loans. There was therefore absolutely
no basis for the award of moral damages to them.
Neither was there reason to award exemplary damages. Since respondents were not entitled to moral damages, neither should they
be awarded exemplary damages.89 And if respondents were not entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No. CEB-26983 is
hereby ANNULLED for being rendered with grave abuse of discretion amounting to lack or excess of jurisdiction. All proceedings
undertaken pursuant thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The
appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due course.1avvphi1
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is accordingly SET
ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken Appliance
Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank the principal amount of their dollar- and pesodenominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken Appliance
Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total amount due on July 9, 2001
shall earn legal interest at 12% p.a. from the time petitioner Equitable PCI Bank demanded payment, whether
judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts due on the respective dollardenominated and peso-denominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing business under the name and
style of "Ken Marketing," Ken Appliance Division and Benjamin E. Go.
PAN PACIFIC SERVICE CONTRACTORS, INC. v. EQUITABLE CI BANK
PAN PACIFIC SERVICE CONTRACTORS, INC. AND RICARDO F. DEL ROSARIO (PETITIONERS) FILED THIS PETITION FOR
REVIEW[1] ASSAILING THE COURT OF APPEALS (CA) DECISION[2] DATED 30 JUNE 2005 IN CA-G.R. CV NO. 63966 AS WELL AS THE
RESOLUTION[3] DATED 5 OCTOBER 2005 DENYING THE MOTION FOR RECONSIDERATION. IN THE ASSAILED DECISION, THE CA
MODIFIED THE 12 APRIL 1999 DECISION[4] OF THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 59 (RTC) BY ORDERING
EQUITABLE PCI BANK[5] (RESPONDENT) TO PAY PETITIONERS P1,516,015.07 WITH INTEREST AT THE LEGAL RATE OF 12% PER
ANNUM STARTING 6 MAY 1994 UNTIL THE AMOUNT IS FULLY PAID.
The Facts

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Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning system. On 24
November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of mechanical works
(Contract) with respondent for P20,688,800. Pan Pacific and respondent also agreed on nine change orders for P2,622,610.30. Thus,
the total consideration for the whole project was P23,311,410.30.[6] The Contract stipulated, among others, that Pan Pacific shall be
entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 [7] and 70.2[8] of the
General Conditions for the Construction of PCIB Tower II Extension (the escalation clause). [9]
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II extension
building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9 July 1992. [10]
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed
a price adjustment of P5,165,945.52. Respondents appointed project engineer, TCGI Engineers, asked for a reduction in the price
adjustment. To show goodwill, Pan Pacific reduced the price adjustment toP4,858,548.67.[11]
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged
at P3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2. PRICE INDEX OF THE NATIONAL STATISTICS OFFICE.
PD 1594 AND ITS IMPLEMENTING RULES AND REGULATIONS AS AMENDED, 15 MARCH 1991.
SHIPPING DOCUMENTS SUBMITTED BY PPSCI.
SUB-CLAUSE 70.1 OF THE GENERAL CONDITIONS OF THE CONTRACT DOCUMENTS.[12]

Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of at
least P3,730,957.07 in accordance with the escalation clause.[13]
Due to the extraordinary increases in the costs of labor and materials, Pan Pacifics operational capital was becoming inadequate for
the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacifics
repeated demands.[14] Instead, respondent offered Pan Pacific a loan of P1.8 million. Against its will and on the strength of
respondents promise that the price adjustment would be released soon, Pan Pacific, through Del Rosario, was constrained to
execute a promissory note in the amount of P1.8 million as a requirement for the loan. Pan Pacific also posted a surety bond.
The P1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific. [15]
Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the
same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused
to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time.
Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the P1.8
million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning.[16]
Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price
adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and collection
charges.[17]
Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the TCGI
Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments.[18]

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and
damages against the respondent with the RTC ofMakati City, Branch 59. On 12 April 1999, the RTC rendered its decision,
the dispositive portion of which reads:
WHEREFORE, PREMISES CONSIDERED, JUDGMENT IS HEREBY RENDERED IN FAVOR OF THE
PLAINTIFFS AND AGAINST THE DEFENDANT AS FOLLOWS:
1.

DECLARING THE PROMISSORY NOTE (EXHIBIT B) NULL AND VOID;

ORDERING THE DEFENDANT TO PAY THE PLAINTIFFS THE FOLLOWING AMOUNTS:


A. P1,389,111.10 REPRESENTING UNPAID BALANCE OF THE ADJUSTMENT PRICE, WITH INTEREST THEREON AT
THE LEGAL RATE OF TWELVE (12%) PERCENT PER ANNUM STARTING MAY 6, 1994, THE DATE WHEN THE
COMPLAINT WAS FILED, UNTIL THE AMOUNT IS FULLY PAID; P100,000.00 REPRESENTING MORAL DAMAGES;
P50,000.00 REPRESENTING EXEMPLARY DAMAGES; AND
P50,000.00 AS AND FOR ATTORNEYS FEES.
2. DISMISSING DEFENDANTS COUNTERCLAIM, FOR LACK OF MERIT; AND WITH COSTS AGAINST THE
DEFENDANT.
SO ORDERED.[19]

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On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed the
entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are as follows:
1. WITH RESPECT TO THE PETITIONERS, WHETHER THE RTC ERRED IN DEDUCTING THE AMOUNT
OF P126,903.97 FROM THE BALANCE OF THE ADJUSTED PRICE AND IN AWARDING ONLY 12%
ANNUAL INTEREST ON THE AMOUNT DUE, INSTEAD OF THE BANK LOAN RATE OF 18%
COMPOUNDED ANNUALLY BEGINNING SEPTEMBER 1992.
2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding
moral and exemplary damages and attorneys fees in favor of petitioners and in dismissing its
counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to
petitioners. The CA removed the deduction ofP126,903.97 because it represented the final payment on the basic contract price.
Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6
May 1994.[20]
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CAs Decision
imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18% bank lending rate.
Respondent likewise filed a Motion for Reconsideration of the CAs decision. In a Resolution dated 5 October 2005, the CA denied
both motions.
AGGRIEVED BY THE CAS DECISION, PETITIONERS ELEVATED THE CASE BEFORE THIS COURT.
The Issue

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.

Ruling of the Court


We grant the petition.
This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to the
principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at P1,516,015.07. The only
remaining issue is the interest rate applicable for respondents delay in the payment of the balance of the price adjustment.

wit:

The CA denied petitioners claim for the application of the bank lending rate of 18% compounded annually reasoning, to

Anent the 18% interest rate compounded annually, while it is true that the contract provides for an
interest at the current bank lending rate in case of delay in payment by the Owner, and the promissory note
charged an interest of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the interest rate
without the other partys consent. Unlike their request for price adjustment on the basic contract price,
plaintiffs never informed nor sought the approval of defendant for the imposition of 18% interest on the
adjusted price. To unilaterally increase the interest rate of the adjusted price would be violative of the principle
of mutuality of contracts. Thus, the Court maintains the legal rate of twelve percent per annum starting from
the date of judicial demand. Although the contract provides for the period when the recommendation of the
TCGI Engineers as to the price adjustment would be binding on the parties, it was established, however, that
part of the adjusted price demanded by plaintiffs was already disbursed as early as 28 February 1992 by
defendant bank to their suppliers and laborers for their account.[21]

In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement [22] and the
General Conditions,[23] both of which provide for interest at the bank lending rate on any unpaid amount due under the contract.
Petitioners further claim that there is nothing in the contract which requires the consent of the respondent to be given in order that
petitioners can charge the bank lending rate.[24] Specifically, petitioners invoke Section 2.5 of the Agreement and Section 60.10 of the
General Conditions as follows:
Agreement

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2.5 IF ANY PAYMENT IS DELAYED, THE CONTRACTOR MAY CHARGE INTEREST THEREON AT
THE CURRENT BANK LENDING RATES, WITHOUT PREJUDICE TO OWNERS RECOURSE TO
ANY OTHER REMEDY AVAILABLE UNDER EXISTING LAW.[25]
GENERAL CONDITIONS
60.10 TIME FOR PAYMENT
THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY INTERIM CERTIFICATE ISSUED BY THE ENGINEER PURSUANT TO THIS
CLAUSE, OR TO ANY TERM OF THE CONTRACT, SHALL, SUBJECT TO CLAUSE 47, BE PAID BY THE OWNER TO THE CONTRACTOR
WITHIN 28 DAYS AFTER SUCH INTERIM CERTIFICATE HAS BEEN DELIVERED TO THE OWNER, OR, IN THE CASE OF THE FINAL
CERTIFICATE REFERRED TO IN SUB-CLAUSE 60.8, WITHIN 56 DAYS, AFTER SUCH FINAL CERTIFICATE HAS BEEN DELIVERED TO
THE OWNER. IN THE EVENT OF THE FAILURE OF THE OWNER TO MAKE PAYMENT WITHIN THE TIMES STATED, THE OWNER
SHALL PAY TO THE CONTRACTOR INTEREST AT THE RATE BASED ON BANKING LOAN RATES PREVAILING AT THE TIME OF THE
SIGNING OF THE CONTRACT UPON ALL SUMS UNPAID FROM THE DATE BY WHICH THE SAME SHOULD HAVE BEEN PAID. THE
PROVISIONS OF THIS SUB-CLAUSE ARE WITHOUT PREJUDICE TO THE CONTRACTORS ENTITLEMENT UNDER CLAUSE
69.[26] (EMPHASIS SUPPLIED)

Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount is
determined to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven their entitlement
to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be applied. [27]
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is stipulated that any
additional cost shall be determined by the Engineer and shall be added to the contract price after due consultation with the Owner,
herein respondent. Hence, there being no prior consultation with the respondent regarding the additional cost to the basic contract
price, it naturally follows that respondent was never consulted or informed of the imposition of 18% interest rate compounded
annually on the adjusted price.[28]
A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of the project for
the liability for the price adjustments, and the consent for the imposition of the bank lending rate. Thus, while the CA held that
petitioners consulted respondent for price adjustment on the basic contract price, petitioners, nonetheless, are not entitled to the
imposition of 18% interest on the adjusted price, as petitioners never informed or sought the approval of respondent for such
imposition.[29]
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression of the parties rights, duties,
and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement. [30]

The escalation clause of the contract provides:


CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor and/or materials
or any other matters affecting the cost of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country in which the
Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or other Law or any regulation or
bye-law (sic) of any local or other duly constituted authority, or the introduction of any such State Statute, Ordinance, Decree, Law,
regulation or bye-law (sic) which causes additional or reduced cost to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall, after due consultation with the Owner and Contractor, be
determined by the Engineer and shall be added to or deducted from the Contract Price and the Engineer shall notify the Contractor
accordingly, with a copy to the Owner.[31]

In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment, and
held respondent liable for the balance ofP1,516,015.07. Respondent did not appeal from the decision of the CA; hence, respondent
is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of
interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of
Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not needed for
the imposition of interest at the current bank lending rate, which occurs upon any delay in payment.

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When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs. In these cases, courts have no authority to alter a contract by construction or to make a new
contract for the parties. The Courts duty is confined to the interpretation of the contract which the parties have made for
themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words
which it does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to construction of
its terms and determine the intention of the parties.[32]
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the General
Conditions which pertain to the time of payment. Once the parties agree on the price adjustment after due consultation in
compliance with the provisions of the escalation clause, the agreement is in effect an amendment to the original contract, and gives
rise to the liability of respondent to pay the adjusted costs. Under Section 60.10 of the General Conditions, the respondent shall pay
such liability to the petitioner within 28 days from issuance of the interim certificate. Upon respondents failure to pay within the
time provided (28 days), then it shall be liable to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary interpretation,
as one requiring a separate consent for the imposition of the stipulated interest, would render the intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing.Therefore, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required
for the payment of monetary interest.[33]
We agree with petitioners interpretation that in case of default, the consent of the respondent is not needed in order to
impose interest at the current bank lending rate.

Applicable Interest Rate


Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation
consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties.
In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular
monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the
damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per
annum.[34] It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the
Court will apply the 12% interest per annum on a loan or forbearance of money. [35]
The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in
case of delay in payment and the promissory note charged an interest of 18%.
To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory
note[36] prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did not
express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum.
Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest
rate agreed upon is binding on them.[37]
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 63966. We ORDER respondent to pay petitioners P1,516,015.07 with interest at the bank lending rate of 18% per annum
starting 6 May 1994 until the amount is fully paid.

ESPIRITU v. LANDRITO
This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals,1 dated
31 August 2005, reversing the Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in its assailed
Decision, fixed the interest rate of the loan between the parties at 12% per annum, and ordered the Spouses Zoilo and Primitiva
Espiritu (Spouses Espiritu) to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan.
Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU, are the only children and legal
heirs of the Spouses Zoilo and Primitiva Espiritu, who both died during the pendency of the case before the Honorable Court of
Appeals.2
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by their son and attorney-in-fact, Zoilo
Landrito.3
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00 payable in three months. To
secure the loan, the Spouses Landrito executed a real estate mortgage over a five hundred forty (540) square meter lot located in
Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the P350,000.00
that the Landritos were supposed to receive, P17,500.00 was deducted as interest for the first month which was equivalent to five

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percent of the principal debt, andP7,500.00 was further deducted as service fee. Thus, they actually received a net amount
of P325,000.00. The agreement, however, provided that the principal indebtedness earns "interest at the legal rate." 4
After three months, when the debt became due and demandable, the Spouses Landrito were unable to pay the principal, and had not
been able to make any interest payments other than the amount initially deducted from the proceeds of the loan. On 29 December
1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real Estate Mortgage. The loan was
restructured in such a way that the unpaid interest became part of the principal, thus increasing the principal to P385,000. The new
loan agreement adopted all other terms and conditions contained in first agreement. 5
Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses Espiritu, the loan agreement was
renewed three more times. In all these subsequent renewals, the same terms and conditions found in the first agreement were
retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March 1988, it was
increased to P647,000.00. And on 21 October 1988, the principal was increased to P874,125.00.6 At the hearing before the trial
court, Zoilo Espiritu testified that the increase in the principal in each amendment of the loan agreement did not correspond to the
amount delivered to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid interest and other charges.7
The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged property on 31 October 1990. During
the auction sale, the property was sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale
was annotated on the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to redeem the property. 8
The Spouses Landrito failed to redeem the subject property although they alleged that they negotiated for the redemption of the
property as early as 30 October 1991. While the negotiated price for the land started atP1,595,392.79, it was allegedly increased by
the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two managers checks and some cash,
totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to accept the same. They also alleged that
the Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until July 1992 to pay the said amount.
However, upon inquiry, they found out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of
Consolidation of Ownership and registered the mortgaged property in their name, and that the Register of Deeds of Makati had
already issued Transfer Certificate of Title No. 179802 in the name of the Spouses Espiritu. On 9 October 1992, the Spouses
Landrito, represented by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against the
Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.9 Among the allegations in their Complaint, they stated that
the Spouses Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to ones moral senses."10
The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial court ordered in its Decision, dated
13 December 1995:11
WHEREFORE, all the foregoing premises considered, the herein complaint is hereby dismissed forthwith.
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997 Rules of Court. In its Decision dated 31
August 2005, the Court of Appeals reversed the trial courts decision, decreeing that the five percent (5%) interest imposed by the
Spouses Espiritu on the first month and the varying interest rates imposed for the succeeding months contravened the provisions of
the Real Estate Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum, would be imposed. It also ruled
that although the Usury Law had been rendered ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling
rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of
interest rates which are found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of the loan at the
legal rate, or 12% per annum.12
Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses Landrito, is still a proper remedy.
Even if the Spouses Landrito failed to redeem the property within the one-year redemption period provided by law, the action for
reconveyance remained as a remedy available to a landowner whose property was wrongfully registered in anothers name since
the subject property has not yet passed to an innocent purchaser for value. 13
In the decretal portion of its Decision, the Court of Appeals ruled 14:
WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated December 13, 1995 of the Regional Trial Court of
Makati, Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1)
The legal rate of 12% per annum is hereby FIXED to be applied as the interest of the loan; and (2) Conditioned upon the payment of
the loan, defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer Certificate of Title No.
S-48948 to appellant spouses Maximo and Paz Landrito.
The case is REMANDED to the Trial Court for the above determination.
Hence, the present petition. The following issues were raised: 15
I

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THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE THE DECISION OF THE TRIAL COURT AND
ORDERING HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN RESPONDENTS,
WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN
RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN RESPONDENTS ATTORNEY-IN-FACT IS NOT
ARMED WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE.
The petition is without merit.
The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn interest at the legal
rate." The agreement contained no other provision on interest or any fees or charges incident to the debt. In at least three contracts,
all designated as Amendment of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During his testimony,
Zoilo Espiritu admitted that the increase in the principal in each of the Amendments of the Real Estate Mortgage consists of interest
and charges. The Spouses Espiritu alleged that the parties had agreed on the interest and charges imposed in connection with the
loan, hereunder enumerated:
1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the Real Estate Mortgage dated 5
September 1986 and the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986 and the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July
1987.
4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 July 1987 and the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the Amendment of the Real Estate
Mortgage dated 11 March 1988 and the P874,125 principal in the Amendment of the Real Estate Mortgage dated 21 October 1988.
The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was accumulated over only two years
and one month. These charges are not found in any written agreement between the parties. The records fail to show any
computation on how much interest was charged and what other fees were imposed. Not only did lack of transparency characterize
the aforementioned agreements, the interest rates and the service charge imposed, at an average of 6.39% per month, are excessive.
In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its citizens from a lack of
awareness of the true cost of credit by assuring the full disclosure of such costs. Section 4, in connection with Section 3(3) 16 of the
said law, gives a detailed enumeration of the specific information required to be disclosed, among which are the interest and other
charges incident to the extension of credit. Section 617 of the same law imposes on anyone who willfully violates these provisions,
sanctions which include civil liability, and a fine and/or imprisonment.
Although any action seeking to impose either civil or criminal liability had already prescribed, this Court frowns upon the
underhanded manner in which the Spouses Espiritu imposed interest and charges, in connection with the loan. This is aggravated by
the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the law in
connection with the transparency of credit transactions. In addition, the Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in writing.
The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in contravention of
the law, manifested bad faith.
In several cases, this Court has been known to declare null and void stipulations on interest and charges that were found excessive,
iniquitous, and unconscionable. In the case of Medel v. Court of Appeals, 18 the Court declared an interest rate of 5.5% per month on
a P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on the interest
rate and stipulated the same in a written agreement, it nevertheless declared such stipulation as void and ordered the imposition of
a 12% yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise equitably
reduced to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly interest imposed

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on four separate loans with a total of P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per
annum.
In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the Usury Law was
suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide latitude
to agree on any interest rate, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets.21
Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. Under Article 1409 of
the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their
illegality as a defense be waived.22 The nullity of the stipulation on the usurious interest does not, however, affect the lenders right
to recover the principal of the loan.23 Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage
remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be
considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed.
While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings held on 31 Ocotber 1990 cannot be given
effect. In the Notice of Sheriffs Sale24 dated 5 October 1990, and in the Certificate of Sale25 dated 31 October 1990, the amount
designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter26 dated 12 December 1989, Zoilo
Espiritu demanded from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the debt due is limited to the
principal of P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the amount of P874,125.00
cannot be considered as a valid demand for payment. For an obligation to become due, there must be a valid demand. 27Nor can the
foreclosure proceedings be considered valid since the total amount of the indebtedness during the foreclosure proceedings was
pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous and exorbitant. If
the foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the Spouses Landrito will
have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated to pay.
Moreover, it is evident from the facts of the case that despite considerable effort on their part, the Spouses Landrito failed to redeem
the mortgaged property because they were unable to raise the total amount, which was grossly inflated by the excessive interest
imposed. Their attempt to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October 1991, is
reflected in a letter, which creditor-mortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein.28 They
also attached in their Complaint copies of two checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992,
which were allegedly refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a copy of a
handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former offered
to pay the latter the sum of P2,000,000.00.30 In all these instances, the Spouses Landrito had tried, but failed, to pay an amount way
over the indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it is only proper that the
Spouses Landrito be given the opportunity to repay the real amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct amount and
without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the said amount.31 In
this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct amount of the debt and,
therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid debt. The foreclosure sale conducted upon their
failure to payP874,125 in 1990 should be nullified since the amount demanded as the outstanding loan was overstated;
consequently it has not been shown that the mortgagors the Spouses Landrito, have failed to pay their outstanding obligation.
Moreover, if the proceeds of the sale together with its reasonable rates of interest were applied to the obligation, only a small part of
its original loans would actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded
to said excessive and iniquitous interest.
As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged property to the
Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property. The
Torrens system does not create or vest title where one does not have a rightful claim over a real property. It only confirms and
records title already existing and vested. It does not permit one to enrich oneself at the expense of another.32 Thus, the decree of
registration, even after the lapse of one (1) year, cannot attain the status of indefeasibility.
Significantly, the records show that the property mortgaged was purchased by the Spouses Espiritu and had not been transferred to
an innocent purchaser for value. This means that an action for reconveyance may still be availed of in this case. 33
Registration of property by one person in his or her name, whether by mistake or fraud, the real owner being another person,
impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for
reconveyance.34 This is based on Article 1465 of the Civil Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of law, considered a trustee of an
implied trust for benefit of the person from whom the property comes.
The action for reconveyance does not prescribe until after a period of ten years from the date of the registration of the certificate of
sale since the action would be based on implied trust. 35 Thus, the action for reconveyance filed on 31 October 1992, more than one
year after the Sheriffs Certificate of Sale was registered on 9 January 1991, was filed within the prescription period.

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It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled and the principal obligation
stands. In addition, the interest is not completely removed; rather, it is set by this Court at 12% per annum. Should the Spouses
Landrito fail to pay the principal, with its recomputed interest which runs from the time the loan agreement was entered into on 5
September 1986 until the present, there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing the
mortgaged property.
The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file the action for reconveyance filed
before the trial court or even to file the appeal from the judgment of the trial court, by virtue of the Special Power of Attorney dated
30 September 1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue. 36
The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo Landrito, Jr., with the conformity of Paz
Landrito, in connection with the mortgaged property. It authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent contracts, documents, agreements and other writings of whatever
nature or kind and to sue or file legal action in any court of the Philippines, to collect, ask demands, encash checks, and recover any
and all sum of monies, proceeds, interest and other due accruing, owning, payable or belonging to me as such owner of the aforementioned property. (Emphasis provided.)
Zoilo Landritos authority to file the case is clearly set forth in the Special Power of Attorney. Furthermore, the records of the case
unequivocally show that Zoilo Landrito filed the reconveyance case with the full authority of his mother, Paz Landrito, who attended
the hearings of the case, filed in her behalf, without making any protest.38She even testified in the same case on 30 August 1995.
From the acts of Paz Landrito, there is no doubt that she had authorized her son to file the action for reconveyance, in her behalf,
before the trial court.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the assailed Decision of the Court of Appeals,
promulgated on 31 August 2005, fixing the interest rate of the loan between the parties at 12% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan together with
herein fixed rate of interest. Costs against the petitioners.
NACAR v. GALLERY FRAMES
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP
No. 98591, and the Resolution2 dated October 9, 2009 denying petitioners motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor Relations
Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-0051997.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was dismissed from
employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement in
the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant was dismissed
from employment for a just or valid cause. All the more, it is clear from the records that complainant was never afforded due process
before he was terminated. As such, we are perforce constrained to grant complainants prayer for the payments of separation pay in
lieu of reinstatement to his former position, considering the strained relationship between the parties, and his apparent reluctance
to be reinstated, computed only up to promulgation of this decision as follows:
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal and are
therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100
(P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and 36/100
(P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4

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Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000. Accordingly,
the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a Resolution
dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a Resolution dated May 8,
2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error on the part of
the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002.9 The case was,
thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled, but respondents failed to
appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of
his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon recomputation,
the Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from respondents the
total amount of P471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among other things, that since the
Labor Arbiter awarded separation pay of P62,986.56 and limited backwages ofP95,933.36, no more recomputation is required to be
made of the said awards. They claimed that after the decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying the motion. Thus, an Alias Writ of Execution16 was
issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 granting the appeal in favor of the
respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and executory. Consequently,
another pre-execution conference was held, but respondents failed to appear on time. Meanwhile, petitioner moved that an Alias
Writ of Execution be issued to enforce the earlier recomputed judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where the judgment
award of petitioner was reassessed to be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as determined by the
Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due to petitioner in
the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the appropriate
interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount ofP11,459.73. The Labor
Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final
and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since
petitioner already receivedP147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated September 27, 2006.
Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner no longer appealed
the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction thereof is no
longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment. Consequently, it can no
longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I

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WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION AND
DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE
MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF
LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiters decision, the same
is not final until reinstatement is made or until finality of the decision, in case of an award of separation pay. Petitioner maintains
that considering that the October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the reckoning point for the
computation of the backwages and separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of the
decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner by the October
15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards. Respondents insist that since
the decision clearly stated that the separation pay and backwages are "computed only up to [the] promulgation of this decision," and
considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as computed by the Labor
Arbiter in the total amount ofP158,919.92. Respondents added that it was only during the execution proceedings that the petitioner
questioned the award, long after the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would substantially vary the decision
of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth Division), 27 wherein
the issue submitted to the Court for resolution was the propriety of the computation of the awards made, and whether this violated
the principle of immutability of judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable separation pay and backwages due and
did not further order the computation of the monetary awards up to the time of the finality of the judgment. Also in Session Delights,
the dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original computation of
the awards made, pegged as of the time the decision was rendered and confirmed with modification by a final CA decision, is legally
proper. The question is posed, given that the petitioner did not immediately pay the awards stated in the original labor arbiter's
decision; it delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor arbiter
framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is the finding of
the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages, attorney's fees, and legal
interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows that it was timebound as can be seen from the figures used in the computation. This part, being merely a computation of what the first part of the
decision established and declared, can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA had affirmed. The public and
private respondents, on the other hand, posit that a re-computation is necessary because the relief in an illegal dismissal decision
goes all the way up to reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be
given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a computation of
the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure which requires that a computation
be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody in any such
decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we noted above,
this implication is apparent from the terms of the computation itself, and no question would have arisen had the parties terminated
the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as well as on all the
consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision.
By law, the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.

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The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule 65 petition for
certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th month pay and indemnity,
lapsed to finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor arbiter's decision,
the implementing labor arbiter ordered the award re-computed; he apparently read the figures originally ordered to be paid to be
the computation due had the case been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed
the award to include the separation pay and the backwages due up to the finality of the CA decision that fully terminated the case on
the merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of the CA decision (July 29, 2003) and
included as well the payment for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and the
indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the labor arbiter's
original decision in accordance with its basic component parts as we discussed above. To reiterate, the first part contains the finding
of illegality and its monetary consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the petitioner, no
essential change is made by a recomputation as this step is a necessary consequence that flows from the nature of the illegality of
dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law specifically, Article 279 of the Labor Code and the established jurisprudence on this provision
that is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction, as
expressed under Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon execution of the
decision does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands;
only the computation of monetary consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the risk that it ran
when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the consequences of illegal
dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement
is allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead of the reinstatement
that the law decrees. In allowing separation pay, the final decision effectively declares that the employment relationship ended so
that separation pay and backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, 32 the Court laid
down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013,
approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of
2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in
the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

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Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and Sections 4305Q.1,37 4305S.338 and
4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum - as reflected in the case of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary
Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce Circulars when it ruled that
"the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different
types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said judgments shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed
to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the
Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when
the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30,
2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.

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The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and due to petitioner
in accordance with this Decision.
JARDENIL v. SOLAS
This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay the
stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is effected? This
question is, in our opinion controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS (P2,4000.00), moneda filipina,
que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil
novecientos treintaicuarto (1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde
fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la
presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y
causahabientes, la parcela de terreno descrita en el parrafo primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934. As the
contract is silent as to whether after that date, in the event of non-payment, the debtor would continue to pay interest, we cannot in
law, indulge in any presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation that the parties
have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly
stipulated." (Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now section 58, Rule 123),
and only when the wording of the written instrument appears to be contrary to the evident intention of the parties that such
intention must prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms employed by the
parties thereto are at war with their evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the
same date of execution of the deed of mortgage, an extension of one year from the date of maturity within which to make payment,
without making any mention of any interest which the mortgagor should pay during the additional period (see Exhibit B attached to
the complaint), indicates that the true intention of the parties was that no interest should be paid during the period of grace. What
reason the parties may have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express their agreement, for if such
mistake existed, plaintiff would have undoubtedly adduced evidence to establish it and asked that the deed be reformed accordingly,
under the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have not been shown to belie or
otherwise fail to express the true intention of the parties and that the deed has not been assailed on the ground of mutual mistake
which would require its reformation, same should be given its full force and effect. When a party sues on a written contract and no
attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His
omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what
their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March
31, 1934. And it being a fact that extra judicial demands have been made which we may assume to have been so made on the
expiration of the year of grace, he shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935,
until full payment.
PRISMA CONSTRUCTION & DEVT CORP v. MANCHAVEZ
We resolve in this Decision the petition for review on certiorari 1 filed by petitioners Prisma Construction & Development
Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the
Decision2 dated May 5, 2003 and the Resolution3 dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA)
in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City
in Civil Case No. 97-4552 that held the petitioners liable for payment of P3,526,117.00 to respondent Arthur F. Menchavez
(respondent), but modified the interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to
full payment. The assailed CA Resolution denied the petitioners Motion for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained aP1,000,000.004 loan from the
respondent, with a monthly interest of P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid within
six (6) months,5 under the following schedule of payments:
January 8, 1994 .

P40,000.00

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February 8, 1994 ...

P40,000.00

March 8, 1994 ...

P40,000.00

April 8, 1994 .

P40,000.00

May 8, 1994 ..

P40,000.00

June 8, 1994
Total

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P1,040,000.006
P1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note7 that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000),
Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable according to the following schedule:
January 8, 1994 .

P40,000.00

February 8, 1994 ...

P40,000.00

March 8, 1994 ...

P40,000.00

April 8, 1994 .

P40,000.00

May 8, 1994 ..

P40,000.00

June 8, 1994

P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged. 8


and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in his personal
capacity,9 and as duly authorized by the Board of Directors of PRISMA.10 The petitioners failed to completely pay the loan within the
stipulated six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:
September 8, 1994

P320,000.00

October 8, 1995.

P600,000.00

November 8, 1995.

P158,772.00

January 4, 1997 .

P30,000.0011

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the respondent found that the petitioners
still had an outstanding balance of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly interest. 12 Thus, on August
28, 1997, the respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.13
In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4%
monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself
personally liable and that he made representations that the loan would be repaid within six (6) months. 14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for P1,000,000.00 in favor of the
petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total ofP240,000.00 for a 6-month period. It
noted that the petitioners made several payments amounting toP1,228,772.00, but they were still indebted to the respondent
for P3,526,117.00 as of February 11,15 1999 after considering the 4% monthly interest. The RTC observed that PRISMA was a oneman corporation of Pantaleon and used this circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC
ordered the petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from
February 11, 1999 until fully paid.16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that there was no
express stipulation on the 4% monthly interest.
THE CA RULING

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The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally based on the
board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per month. The
appellate court, however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to
12% per annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that justified the piercing
of the veil of corporate fiction. Thus, the CA modified the RTC Decision by imposing a 12% per annum interest, computed from the
filing of the complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17
After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the present petition for review on certiorari under
Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a 4% monthly
interest because the board resolution was not an evidence of a loan or forbearance of money, but merely an authorization for
Pantaleon to perform certain acts, including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the
Civil Code is that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the loan is subject
to 4% monthly interest, the interest covers the six (6)-month period only and cannot be interpreted to apply beyond it. The
petitioners also point out the glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per
annum to 12% per annum, but failed to consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the board resolution
is attached to, and an integral part of, the promissory note based on which the petitioners obtained the loan. The respondent further
contends that the petitioners are estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest
on the principal amount under the promissory note and the board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply
to the 6-month payment period only or until full payment of the loan?
OUR RULING
We find the petition meritorious.
Interest due should be stipulated in writing; otherwise, 12% per annum
Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith.20 When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of
its stipulations governs.21 In such cases, courts have no authority to alter the contract by construction or to make a new contract for
the parties; a court's duty is confined to the interpretation of the contract the parties made for themselves without regard to its
wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain.22 It is
only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine
the parties intent.
In the present case, the respondent issued a check for P1,000,000.00.23 In turn, Pantaleon, in his personal capacity and as authorized
by the Board, executed the promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or
from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total
obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month,
but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed
upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been expressly stipulated in writing."
Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence
of the two conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza24 and Ching v.
Nicdao25 that collection of interest without any stipulation in writing is prohibited by law.1avvphi1
Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-month period of the loan,
or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan
should be at the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:26
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from

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49

default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code." (Emphasis
supplied)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit v. Court of Appeals,28Crismina Garments, Inc. v.
Court of Appeals, 29 Eastern Assurance and Surety Corporation v. Court of Appeals,30 Sps. Catungal v. Hao, 31 Yong v. Tiu,32 and Sps.
Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties agreed
to a 4% interest, compounded by the application of this interest beyond the promissory notes six (6)-month period. The facts show
that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.
Medel v. Court of Appeals not applicable
The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per month was unconscionable.
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of 2% per annum,
and a penalty charge of 1% per month, plus attorneys fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in
conjunction with the stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar 35 of 6% per month or 72% per
annum interest on a P60,000.00 loan; in Ruiz v. Court of Appeals,36 of 3% per month or 36% per annum interest on a P3,000,000.00
loan; in Imperial v. Jaucian,37 of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v. Quio,38 of 7%
interest per month or 84% per annum interest on aP15,000.00 loan; in Bulos, Jr. v. Yasuma,39 of 4% per month or 48% per annum
interest on a P2,500,000.00 loan; and in Chua v. Timan,40 of 7% and 5% per month for loans totalling P964,000.00. We note that in
all these cases, the terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount except
a specific sum of P40,000.00 per month on the principal of a loan payable within six months. Additionally, no issue on the
excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners; 41 they only assailed the
application of a 4% interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they
have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are
not contrary to law, morals, public order or public policy. 42 The payment of the specific sum of money of P40,000.00 per month was
voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation
showing that petitioners were victims of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month for a period of six (6) months, or
from December 8, 1993 to June 8, 1994, for a total principal and interest amount ofP1,240,000.00. Thereafter, interest at the rate of
12% per annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting
to P1,228,772.00 as of February 12, 1999,43 should be deducted from the total amount due, computed as indicated above. We
remand the case to the trial court for the actual computation of the total amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-month stipulated
period, since they agreed to pay this interest on the principal amount under the promissory note and the board resolution.
We disagree with the respondents contention.
We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by the record, negate
its application. Under the promissory note,44 what the petitioners agreed to was the payment of a specific sum of P40,000.00 per
month for six months not a 4% rate of interest per month for six (6) months on a loan whose principal is P1,000,000.00,
for the total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them from raising their
present defenses against a 4% per month interest after the six-month period of the agreement. The board resolution,45 on the other
hand, simply authorizes Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely
embodies the extent of Pantaleons authority to contract and does not create any right or obligation except as between Pantaleon
and the board. Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct
corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used
in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where

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the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.46 In the absence of malice, bad faith, or a specific provision of law making a corporate officer
liable, such corporate officer cannot be made personally liable for corporate liabilities.47
In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the part of PRISMA
to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he made himself accountable in the
promissory note "in his personal capacity and as authorized by the Board Resolution" of PRISMA.48 With this statement of personal
liability and in the absence of any representation on the part of PRISMA that the obligation is all its own because of its separate
corporate identity, we see no occasion to consider piercing the corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003 of the Court of
Appeals in CA-G.R. CV No. 69627. The petitioners loan of P1,000,000.00 shall bear interest ofP40,000.00 per month for six (6)
months from December 8, 1993 as indicated in the promissory note. Any portion of this loan, unpaid as of the end of the six-month
payment period, shall thereafter bear interest at 12% per annum. The total amount due and unpaid, including accrued interests,
shall bear interest at 12% per annum from the finality of this Decision. Let this case be REMANDED to the Regional Trial Court,
Branch 73, Antipolo City for the proper computation of the amount due as herein directed, with due regard to the payments the
petitioners have already remitted. Costs against the respondent.
SIGA-AN v. VILLANUEVA
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision, 2 dated 16
December 2005, and Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the
Decision,4 dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money against petitioner Sebastian Siga-an before the
Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a
businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio,
Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the amount
of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. 6
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On 31 October 1993,
she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told
her that since she paid a total amount of P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest.
Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As all her
transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might
block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not necessary as
there was mutual trust and confidence between them. According to her computation, the total amount she paid to petitioner for the
loan and interest accumulated to P1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of agreement to
that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no agreement between
her and petitioner regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00
worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to
petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her
claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal interest from
the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to
25% of P660,000.00 as attorneys fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the PNO. At first,
he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However, since
respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous loan in full, he agreed
to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could not give full
payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the payment of her
obligation. Upon his approval of respondents request for restructuring of the loan, respondent executed a promissory note dated 12

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September 1994 wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from petitioner and that
she would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00 as
guarantee of compliance with her obligation. Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for
Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that her monetary
obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that respondent was already
estopped from complaining that she should not have paid any interest, because she was given several times to settle her obligation
but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given interestfree. Based on the foregoing averments, he asked the RTC to dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her loan obligation to
petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondents obligation was only to
pay the loaned amount of P540,000.00, and that the alleged interests due should not be included in the computation of respondents
total monetary debt because there was no agreement between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return the said
amount to respondent pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced by
respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorneys
fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on the matter, judgment
is hereby rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per annum computed from 3
March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision affirming in
toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied. 16 Hence, petitioner lodged the
instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest
may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest.18 The right to
interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is
demanded.19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only
if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced

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in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that
collection of interest without any stipulation therefor in writing is prohibited by law. 21
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing proof
of written agreement between the two regarding the payment of interest. Respondent testified that although she accepted
petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest
on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 1994 23 wherein respondent purportedly admitted owing
petitioner "capital and interest." Respondent, however, explained that it was petitioner who made a promissory note and she was
told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that
being unaware of the law on interest and fearing that petitioner would make good of his threats if she would not obey his
instruction to copy the promissory note, she copied the promissory note in her own handwriting; and that such was the same
promissory note presented by petitioner as alleged proof of their written agreement on interest. 24 Petitioner did not rebut the
foregoing testimony. It is evident that respondent did not really consent to the payment of interest for the loan and that she was
merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an
express stipulation of interest or written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed on the payment of
7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in the Batas
Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was not reduced
in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the application of such
provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and that
it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner and respondent
agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and respondent
entered into a valid oral contract of loan amounting toP540,000.00, they, nonetheless, never intended the payment of interest
thereon.26 While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and respondent
agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier elucidated,
both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that
factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court. 27 We found no
compelling reason to disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed on the payment of
interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying the total
amount of loan, petitioner ordered her to pay interest. 28 Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed, monetary
interest is due only if there was anexpress stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding
payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the
debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment
of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two instances apply
only to compensatory interest and not to monetary interest. 29 The case at bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent defaulted
in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards
payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the instant case. Thus, he
cannot be compelled to return the alleged excess amount paid by respondent as interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person
who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself unjustly at the expense of another. 31 The principle of solutio indebitiapplies
where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who

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received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. 32 We have held
that the principle of solutio indebiti applies in case of erroneous payment of undue interest. 33
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment because
there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as
regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from petitioner.34 Respondent issued two checks with a
total worth of P700,000.00 in favor of petitioner as payment of the loan.35 These checks were subsequently encashed by
petitioner.36 Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess
of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid
cash in the total amount of P175,000.00 to petitioner as interest.37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit38 in the Batas Pambansa Blg.
22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the
Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the
amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess amount of P160,000.00 and P175,000.00 or
the total amount ofP335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals
should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent. In the said cases,
the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless,
respondents conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the loan
by reason of the interest which the latter paid to petitioner. 39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount
of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the result
of prejudice or corruption on the part of the trial court. 40 To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be imposed if the
defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite lack
of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious
wrongdoings.41
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable justification for
awarding the same.42 In the case under consideration, the RTC stated in its Decision that the award of attorneys fees equivalent to
25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work rendered
by respondents lawyer in the instant case and the fact that it dragged on for several years. 43 Further, respondent testified that she
agreed to compensate her lawyer handling the instant case such amount. 44 The award, therefore, of attorneys fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to respondent computed
from 3 March 1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an obligation, not constituting a loan or forbearance of money
is breached, an interest on the amount of damages awarded may be imposed at the rate of 6% per annum. We further declared that
when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed
equivalent to a forbearance of credit.
In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not from a loan or forbearance of
money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the damages awarded and
on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March 1998,46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to its satisfaction.

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WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is hereby AFFIRMED with
the following MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED
THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount ofP300,000.00 imposed as moral damages is reduced to ONE
HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on the P335,000.00, on the
damages awarded and on the attorneys fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the
finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction.
Costs against petitioner.
CIR v. ISABELA CULTURAL CORPORATION
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of the Court of Appeals in CA-G.R. SP
No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and
set aside the Assessment Notices for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No. FAS-1-86-90000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency
expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services billed to and paid
by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May
1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services. 7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it received a final notice
before seizure demanding payment of the amounts stated in the said notices. Hence, it brought the case to the CTA which held that
the petition is premature because the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts
to a final decision on the protested assessment and may therefore be questioned before the CTA. This conclusion was sustained by
this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. It held
that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the
said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to
ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at
that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which
made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of
Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security services as
shown by the various payment orders and confirmation receipts it presented as evidence. The dispositive portion of the CTAs
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9

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Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision, 10 holding that although the
professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since ICC is using the accrual
method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the
taxable year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for professional and
security services from ICCs gross income; and (2) held that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal
and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the
taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers. 11
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in
which paid or accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. 12 In
the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed
as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year
but failed to do so cannot deduct the same for the next year. 13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to actual receipt
or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become
fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that
the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been
met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined
exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have
known, at the closing of its books for the taxable year.[16] Accrual method of accounting presents largely a question of fact;
such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed. 18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the 1960s. 19 From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as
well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year
when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the

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firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer
fees owing to its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing
the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firms performance of its services
in connection with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the
firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly
claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing that even with only "reasonable
accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC in 198620and could therefore be
properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc., we sustain the
findings of the CTA and the Court of Appeals that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the application
of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not
further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR is supported by payment order and confirmation
receipts.22 Hence, the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should be cancelled
and set aside but only insofar as the claimed deductions of ICC for security services. Said Assessment is valid as to the BIRs
disallowance of ICCs expenses for professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of Appeals in CA-G.R. SP No.
78426, is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense
deduction of Isabela Cultural Corporation for professional and security services, is declared valid only insofar as the expenses for
the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned.
The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under Assessment Notice No. FAS-186-90-000680.
CARPO v. CHUA
Before this Court are two consolidated petitions for review. The first, docketed as G.R. No. 150773, assails theDecision1 of the
Regional Trial Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint2 for annulment of real estate mortgage and consequent foreclosure proceedings filed by the
spouses David B. Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals Decision3 dated 30 April 2002 in CA-G.R. SP No. 57297.
The Court of Appeals Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriffs
enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from Eleanor Chua and Elma Dy Ng
(respondents) the amount of One Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months with an
interest rate of six percent (6%) per month. To secure the payment of the loan, petitioners mortgaged their residential house and lot
situated at San Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No. 23180. Petitioners
failed to pay the loan upon demand. Consequently, the real estate mortgage was extrajudicially foreclosed and the mortgaged
property sold at a public auction on 8 July 1996. The house and lot was awarded to respondents, who were the only bidders, for the
amount of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

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Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5 September 1997 by Sheriff
Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting respondents to file a petition for
writ of possession with the RTC docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel
issued an Order4 for the issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the consequent foreclosure proceedings,
docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand One
Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3 August 1999, enjoining the enforcement
of the writ of possession. In an Order5 dated 6 January 2000, the RTC suspended the enforcement of the writ of possession pending
the final disposition of Civil Case No. 99-4376. Against this Order, respondents filed a petition for certiorari and mandamus before
the Court of Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B. Montenegro dismissed the complaint in Civil
Case No. 99-4376 on the ground that it was filed out of time and barred by laches. The RTC proceeded from the premise that the
complaint was one for annulment of a voidable contract and thus barred by the four-year prescriptive period. Hence, the first
petition for review now under consideration was filed with this Court, assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on 30 April 2002 annulled and set aside the RTC
orders in SP No. 98-1665 on the ground that it was the ministerial duty of the lower court to issue the writ of possession when title
over the mortgaged property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of Appeals6 the rate of interest stipulated in
the principal loan agreement is clearly null and void. Consequently, they also argue that the nullity of the agreed interest rate affects
the validity of the real estate mortgage. Notably, while petitioners were silent in their petition on the issues of prescription and
laches on which the RTC grounded the dismissal of the complaint, they belatedly raised the matters in their Memorandum.
Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any grave abuse of discretion when it issued
the orders dated 3 August 1999 and 6 January 2000, and that these orders could not have been "the proper subjects of a petition for
certiorari and mandamus". More accurately, the justiciable issues before us are whether the Court of Appeals could properly
entertain the petition for certiorari from the timeliness aspect, and whether the appellate court correctly concluded that the writ of
possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so excessive, iniquitous, unconscionable
and exorbitant that it should have been declared null and void. Instead of dismissing their complaint, they aver that the lower court
should have declared them liable to respondents for the original amount of the loan plus 12% interest per annum and 1% monthly
penalty charge as liquidated damages,7 in view of the ruling in Medel v. Court of Appeals.8
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum was so iniquitous or unconscionable as
to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note
iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void.
The Court shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable.9
In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable
and exorbitant. In Solangon v. Salazar,10 we annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00
loan. In Imperial v. Jaucian,11 we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of
Appeals,12 we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum interest.
The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.13 Recently,
this Court, in Arrofo v. Quino,14 reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per annum to
18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated
interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle
embodied in Article 1306 of the Civil Code, contracting parties 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. In the ordinary
course, the codal provision may be invoked to annul the excessive stipulated interest.

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In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this
stipulation is similarly invalid. However, the RTC refused to apply the principle cited and employed in Medel on the ground
that Medel did not pertain to the annulment of a real estate mortgage, 15 as it was a case for annulment of the loan contract itself. The
question thus sensibly arises whether the invalidity of the stipulation on interest carries with it the invalidity of the principal
obligation.
The question is crucial to the present petition even if the subject thereof is not the annulment of the loan contract but that of the
mortgage contract. The consideration of the mortgage contract is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract. Being a mere accessory contract, the validity of the mortgage
contract would depend on the validity of the loan secured by it. 16
Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the stipulated interest, but
instead reduced the rate of interest to the more reasonable rate of 12% per annum. The same remedial approach to the wrongful
interest rates involved was employed or affirmed by the Court in Solangon,Imperial, Ruiz, Cuaton, and Arrofo.
The Courts ultimate affirmation in the cases cited of the validity of the principal loan obligation side by side with the invalidation of
the interest rates thereupon is congruent with the rule that a usurious loan transaction is not a complete nullity but defective only
with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly null and void both as to the
loan and as to the usurious interest.17 However, this Court adopted the contrary rule,
as comprehensively discussed in Briones v. Cammayo:18
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of
loan should pay the creditor the amount which he justly owes him, citing in support of this ruling its previous decisions in Go
Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.
....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the standing jurisprudence of this Court on the
question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his
right to recover from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to say that the
Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture
might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved
on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10
SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with usury "the only right of the
respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957
of the new Civil Code a subsequent law provides that contracts and stipulations, under any cloak or device whatever, intended
to circumvent the laws against usury, shall be void, and that in such cases "the borrower may recover in accordance with the laws on
usury." From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover
not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in the preceding
paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of
whether a creditor in a usurious contract may or may not recover the principal of the loan, and, in the affirmative, whether or not he
may also recover interest thereon at the legal rate, We said the following:
". . . .
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the
principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in
Article 1411, supra, applies, so that neither party can bring action against each other. Said rule, however, appellants add, is modified
as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in
excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the
contract. So they continue the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not inconsistent with this Code."

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We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil
Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No.
2655, as amended), a loan with usurious interest is not totally void only as to the interest.
. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil
Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of
the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal
terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the
cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the
stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.
....
The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of
such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision
of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate,
from the date of filing of the complaint."19
The Courts wholehearted affirmation of the rule that the principal obligation subsists despite the nullity of the stipulated interest is
evinced by its subsequent rulings, cited above, in all of which the main obligation was upheld and the offending interest rate merely
corrected. Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By the same token, since the
mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rate is similarly
insufficient to render void the ancillary mortgage contract.
It should be noted that had the Court declared the loan and mortgage agreements void for being contrary to public policy, no
prescriptive period could have run.20 Such benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period provided in Article 1391 of the Civil
Code, which governs voidable contracts. This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are hard put to conclude in this case that there was any undue influence in the
first place.
There is ultimately no showing that petitioners consent to the loan and mortgage agreements was vitiated by undue influence. The
financial condition of petitioners may have motivated them to contract with respondents, but undue influence cannot be attributed
to respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved
party the right to obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the concept of
undue influence, as follows:
There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress.
While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free agency. In other
words, for undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than his own.21 The alleged lingering financial
woes of petitioners per se cannot be equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the real estate mortgage. We
wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the agreement, they should have raised this issue as
early as in the foreclosure proceedings. It was only when the writ of possession was issued did petitioners challenge the stipulations
in the loan contract in their action for annulment of mortgage. Evidently, petitioners slept on their rights. The Court of Appeals
succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by the issuance of a provisional certificate of sale; then the definite
certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the writ

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of possession in favor of the defendants, there is no showing that plaintiffs questioned the validity of these proceedings. It was only
after the issuance of the writ of possession in favor of the defendants, that plaintiffs allegedly tendered to the defendants the amount
of P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs sleep on their rights? 22
Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue influence vitiated their
consent to the loan contract, their action would already be barred by prescription when they filed it. Moreover, petitioners had
clearly slept on their rights as they failed to timely assail the validity of the mortgage agreement. The denial of the petition in G.R.
No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could no longer be questioned in a special
civil action for certiorari and mandamus as the reglementary period for such action had already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of possession had a period of effectivity
of only twenty (20) days from 3 August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-day period, the
said Order became functus officio. Thus, there is really no sense in assailing the validity of this Order, mooted as it was. For the same
reason, the validity of the order need not have been assailed by respondents in their special civil action before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction whose period of efficacy is indefinite. It
may be properly assailed by way of the special civil action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty (60) days from notice of the judgment
or order.23 Petitioners argue that the 3 August 1999 Order could no longer be assailed by respondents in a special civil action for
certiorari before the Court of Appeals, as the petition was filed beyond sixty (60) days following respondents receipt of the Order.
Considering that the 3 August 1999 Order had become functus officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise been the subject of a special civil action for
certiorari, as it is according to them a final order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its effects would only be provisional in character and
would still leave substantial proceedings to be further had by the issuing court in order to put the controversy to rest. 24 The
injunctive relief granted by the order is definitely final, but merely provisional, its effectivity hinging on the ultimate outcome of the
then pending action for annulment of real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or disposes of, a
case or a disputed issue leaving nothing else to be done by the court in respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we cannot agree with petitioners who insist
that it may be assailed only through an appeal perfected within fifteen (15) days from receipt thereof by respondents. It is axiomatic
that an interlocutory order cannot be challenged by an appeal,
but is susceptible to review only through the special civil action of certiorari. 25 The sixty (60)-day reglementary period for special
civil actions under Rule 65 applies, and respondents petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition for certiorari and mandamus. As pointed out
by respondents, the remedy of mandamus lies to compel the performance of a ministerial duty. The issuance of a writ of possession
to a purchaser in an extrajudicial foreclosure is merely a ministerial function. 26
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining the enforcement of the writ of
possession.27 The purchaser in a foreclosure sale is entitled as a matter of right to a writ of possession, regardless of whether or not
there is a pending suit for annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance or
enforcement of the writ is entirely out of place.28
One final note. The issue on the validity of the stipulated interest rates, regrettably for petitioners, was not raised at the earliest
possible opportunity. It should be pointed out though that since an excessive stipulated interest rate may be void for being contrary
to public policy, an action to annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action for annulment
of the ancillary real estate mortgage. Despite the nullity of the stipulated interest rate, the principal loan obligation subsists, and
along with it the mortgage that serves as collateral security for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.
SENTINEL INSURANCE Co, INC. v. CA
Before us is a petition seeking the amendment and modification of the dispositive portion of respondent court's decision in CA-G.R.
No. SP-09331, 1 allegedly to make it conform with the findings, arguments and observations embodied in said decision which relief
was denied by respondent court in its resolution, dated January 15, 1980, 2 rejecting petitioner's ex parte motion filed for that
purpose. 3

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While not involving the main issues in the case threshed out in the court a quo, the judgment in which had already become final and
executory, the factual backdrop of the present petition is summarized by respondent court as follows:
Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship entered into on November 15, 1974 with
Nemesio Azcueta, Sr., who is doing business under the name and style of 'Malayan Trading as reflected in SICO Bond No.
G(16)00278 where both of them bound themselves, 'jointly and severally, to fully and religiously guarantee the compliance
with the terms and stipulations of the credit line granted by private respondent Rose Industries, Inc., in favor of Nemesio
Azcueta, Sr., in the amount of P180,00.00.' Between November 23 to December 23, 1974, Azcueta made various purchases of
tires, batteries and tire tubes from the private respondent but failed to pay therefor, prompting the latter to demand payment
but because Azcueta failed to settle his accounts, the case was referred to the Insurance Commissioner who invited the
attention of the petitioner on the matter and the latter cancelled the Suretyship Agreement on May 13, 1975 with due notice
to the private respondent. Meanwhile, private respondent filed with the respondent court of Makati a complaint for collection
of sum of money against herein petitioner and Azcueta, docketed as Civil Case No. 21248 alleging the foregoing antecedents
and praying that said defendants be ordered to pay jointly and severally unto the plaintiff.
a) The amount of P198,602.41 as its principal obligation, including interest and damage dues as of April 29, 1975;
b) To pay interest at 14% per annum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975
up to the time the full amount is fully paid:
xxx xxx xxx
After petitioner filed its answer with counterclaim, the case, upon agreement of the parties, was submitted for
summary judgment and on December 29, 1975, respondent court rendered its decision with the following dispositive
portion:
xxx xxx xxx
a) To pay interest on the principal obligation at the rate of 14% per annum at the rate of 2% every 45
days commencing from April 30, 1975 until the amount is fully paid.
The decision having become final and executory, the prevailing party moved for its execution which respondent judge
granted and pursuant thereto, a notice of attachment and levy was served by respondent Provincial Sheriff upon the
petitioner. On the same day, however, the latter filed a motion for 'clarification of the judgment as to its real and true
import because on its face, it would appear that aside from the 14% interest imposed on the principal obligation, an
additional 2% every 45 days corresponding to the additional penalty has been imposed against the petitioner which
imposition would be usurious and could not have been the intention of respondent Judge.' But the move did nor prosper
because oil May 22, 1971, the judge denied the motion on the theory that the judgment, having become final and
executory, it can no longer be amended or corrected. 4
Contending that the order was issued with grave abuse of discretion, petitioner went to respondent court on a petition for certiorari
and mandamus to compel the court below to clarify its decision, particularly Paragraph l(a) of the dispositive portion thereof.
Respondent court granted tile petition in its decision dated December 3, 1979, the disquisition and dispositive portion whereof
read:
While it is an elementary rule of procedure that after a decision, order or ruling has become final, the court loses its
jurisdiction orderover the same and can no longer be subjected to any modification or alteration, it is likewise well-settled
that courts are empowered even after such finality, to correct clerical errors or mistakes in the decisions (Potenciano vs. CA,
L-11569, 55 O.G. 2895). A clerical error is one that is visible to the eyes or obvious to the understanding (Black vs. Republic,
104 Phil. 849).
That there was a mistake in the dispositive portion of the decision cannot be denied considering that in the complaint filed
against the petitioner, the prayer as specifically stated in paragraph (b) was to 'order the latter, to pay interest at 14% per
annum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the amount is fully
paid.' But this notwithstanding the respondent court in its questioned decision decreed the petitioner to pay the interest on the
principal obligation at the rate of 14% per annum and 2% every 45 days commencing from April 30, 1975 until the amount is
fully paid,' so that, as petitioner correctly observes, it would appear that on top of the 14% per annum on the principal
obligation, another 2% interest every 45 days commencing from April 30, 1975 until the amount is fully paid has been imposed
against him (petitioner). In other words, 365 days in one year divided by 45 days equals 8-1/9 which, multiplied by 2% as
ordered by respondent-judge would amount to a little more than 16%. Adding 16% per annum to the 14% interest imposed on
the principal obligation would be 30% which is veritably usurious and this cannot be countenanced, much less sanctioned by
any court of justice.
We agree with this observation and what is more, it is likewise a settled rule that although a court may grant any relief allowed
by law, such prerogative is delimited by the cardinal principle that it cannot grant anything more than what is prayed for, for
certainly, the relief to be dispensed cannot rise above its source. (Potenciano vs. CA, supra.)

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WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is ordered to clarify its judgment complained of
in the following manner:
xxx xxx xxx
a) to pay interest at 14% per annum on the principal obligation and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full amount is fully paid; 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted decretal portion which respondent court
denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said decision would conform with the body thereof, is the
sole issue for resolution by the Court. Petitioner itself cites authorities in support of its contention that it is entitled to a correct and
clear expression of a judgment to avoid substantial injustice. 6 In amplification of its plaint, petitioner further asseverates that
respondent court should not have made an award for "damage dues" at such late stage of the proceeding since said dues were not
the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the pleadings filed by the parties, the
findings of fact and the conclusions of law expressed in the text or body of the decision. 8
Indeed, this was what respondent court did in resolving the original petition. It examined the complaint filed against the petitioner
and noted that the prayer as stated in Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and damage
dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid." 9
Insofar as the findings and the dispositive portion set forth in respondent court's decision are concerned, there is really no
inconsistency as wittingly or unwittingly asserted by petitioner.
The findings made by respondent court did not actually nullify the judgment of the trial court. More specifically, the statement that
the imposition of 2% interest every 45 days commencing from April 30, 1975 on top of the 14% per annum (as would be the
impression from a superficial reading of the dispositive portion of the trial court's decision) would be usurious is a sound
observation. It should, however, be stressed that such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.
Certainly, the damage dues in this case do not include and are not included in the computation of interest as the two are of different
categories and are distinct claims which may be demanded separately, in the same manner that commissions, fines and penalties are
excluded in the computation of interest where the loan or forbearance is not secured in whole or in part by real estate or an interest
therein. 10
While interest forms part of the consideration of the contract itself, damage dues (penalties, and so forth) are usually made payable
only in case of default or non-performance of the contract. 11 Also, although interest is subject to the provisions of the Usury
Law, 12 there is no policy or provision in such law preventing the enforcement of damage dues although the effect may be to increase
the sum payable beyond the prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in appending the award of damage dues to the judgment of the
trial court should be rejected. As correctly pointed out by private respondent, the opening sentence of Paragraph l(a) of the
dispositive portion of the lower court's decision explicitly ordered petitioner to pay private respondent the amount of P198,602.41
as principal obligation including interest and damage dues, which is a clear and unequivocal indication of the lower court's intent to
award both interest and damage dues. 13
Significantly, it bears mention that on several occasions before petitioner moved for a clarificatory judgment, it offered to settle its
account with private respondent without assailing the imposition of the aforementioned damage dues. 14 As ramified by private
respondent:
2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and Atty. Teodulfo L. Reyes, petitioner's Assistant VicePresident for Operations, had a conference with the undersigned attorneys as to how petitioner will settle its account to avoid
execution. During the conference, both parties arrived at almost the same computation and the amount due from petitioner, which
includes 2% damage dues every 45 days from 30 April 1975 until the amount is fully paid, under the judgment. No question was ever
raised as regards same.
xxx xxx xxx

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5. The very face of Annex 'D' shows that the '2%' damage dues being questioned by the present counsel of petitioner had been
mentioned no less than TEN (10) TIMES and was clearly and distinctly defined by petitioner and included in the computation of its
obligation to herein petitioner as '2% penalty for every 45 days.'
xxx xxx xxx
Petitioner's pretense that it was not the intent of the court to award the damage dues of 2% every 45 days commencing 30 April 1975
is belied by the fact (and this is admitted by petitioner) that upon agreement of the parties, the case before the lower court was
submitted for summary judgment; in other words, the case was submitted upon the facts as appear in the pleadings with no other
evidence presented and a fact that appears clearly in the pleadings is that the defendants in the case before the lower court were under
contract to pay private respondent, among others, the damage dues of 2% every 45 days commencing on 30 April 1975 until the
obligation is fully paid; .... 15
Respondent court demonstrably did not err in ordering the clarification of the decision of the trial court by amending the
questioned part of its dispositive portion to include therein the phrase damage dues to modify the stated rate of 2%, and thereby
obviate any misconception that it is being imposed as interest.
ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of Appeals is hereby AFFIRMED.
GOPOCO GROCERY v. PACIFIC COAST BISCUIT CO.
n petition of the Bank Commissioner who alleged to have found, after an investigation, that the Mercantile Bank of China could not
continue operating as such without running the risk of suffering losses and prejudice its depositors and customers; and that with the
requisite approval of the corresponding authorities, he had taken charge of all the assets thereof; the Court of First Instance of
Manila declared the said bank in liquidation; approved all the acts theretofore executed by the commissioner; prohibited the officers
and agents of the bank from interfering with said commissioner in the possession of the assets thereof, its documents, deed,
vouchers, books of account, papers, memorandum, notes, bond, bonds and accounts, obligations or securities and its real and
personal properties; required its creditors and all those who had any claim against it, to present the same in writing before the
commissioner within ninety days; and ordered the publication, as was in fact done, of the order containing all these provisions, for
the two consecutive weeks in two news-papers of general circulation in the City of Manila, at the expenses of the aforesaid bank.
After these publications, and within the period of ninety days, the following creditors, among others, presented their presented their
claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea.
I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said sum in the bank under
liquidation on current account.
II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its claim as follows:
Balance due on open account subject
to check
Interest on c/a

P4,927.95
4,53
4,932.48

Surety deposit

460.00

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows:
Balance due on open account subject
to check L-759
Savings account No. 156 (foreign)
with Mercantile Bank of China L1611 Amoy $15,000,00 Interest on
said Savings Account No. 156
Interest on checking a/c

P7,610.44

8.22
10.54
7,624.20

IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim appearing in the record on
appeal as follows:
Balance due on open subject to check
L-845

P6,961.01

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11.37
6,972.83

V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows:
Balance due on open account subject
to check L-718
Interest on checking a/c

P6,224.34
8.54
6,232.88

VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows:
Balance due on open account subject
to check
Interest on account

P1910.59
2.20
1,912.79

To better resolve not only these claims but also the many others which were presented against the bank, the lower court, on July 15,
1932, appointed Fulgencio Borromeo as commissioner and referee to receive the evidence which the interested parties may desire
to present; and the commissioner and referee thus named, after qualifying for the office and receiving the evidence presented to
him, resolved the aforesaid six claims by recommending that the same be considered as an ordinary credit only, and not as a
preferred credit as the interested parties wanted, because they were at the same time debtors of the bank.
The evidence adduced and the very admissions of the said interested parties in fact show that (a) the claimant Tiong Chui Gion,
while he was a creditor of the Mercantile Bank of China in the sum of P10,285.27 which he deposited on current account, was also a
debtor not only in the sum of P633.76 but also in the sum of P664.77, the amount of a draft which he accepted, plus interest thereon
and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a current account in the bank in the sum of
P5,392.48, but it is indebted to it, in Turn, in the sum of $2,334.80, the amount of certain drafts which it had accepted; (c) the
claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d) the
claimant Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the amount also of certain drafts
accepted by it; (e) the claimants Sy Guan Huat and Sy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two
drafts accepted by them and already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of P1,912.79, but it was, in
turn, indebted in the sum of $565.40 including interest and other expenses, the amount of two drafts drawn upon and accepted by it.
The lower court approved all the recommendations of The commissioner and referee as to claims of the six appellants as follows;
(1) To approve the claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit, minus the amount of the draft for P664.77;
(2) to approve the claim of Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee), minus
its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit only (P7,610.44
according to the referee), deducting therefrom his obligation amounting to $1,378.90 or P2,757.80; to approve the claim of Woo &
Lo & Co. but only as an ordinary credit (P6,961.01 according to the referee). after deducting its obligation to the bank, amounting to
$3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an ordinary credit (P6,224.34 according to the
referee), after deducting his obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la Bella
Tondea but also as an ordinary credit only (1,917.50 according to the referee), after deducting it obligation amounting to $565.40
or P1,130.80; but he expressly refused to authorize the payment of the interest by reason of impossibility upon the ground set out in
the decision. Not agreeable to the decision of the lower court, each of the interested parties appealed therefrom and thereafter filed
their respective briefs.
Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred:
1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes an ordinary credit only and not a
preferred credit.
2. In holding as preferred credits the drafts and checks issued by the bank under liquidation in payment of the drafts
remitted to it for collection from merchants residing in the country, by foreign entities or banks; and in not holding that
the deposits on current account in said bank should enjoy preference over said drafts and checks; and
3. In holding that the amount of P633.76 (which should be understood as P664.77), which the claimant owes to the bank
under liquidation, be deducted from his current account deposit therein, amounting to P10,285.27, upon the distribution
of the assets of the bank among its various creditors, instead of holding that, after deducting the aforesaid sum of P633.76
(should be P664.77) from his aforesaid deposit, there be turned over to him the balance together with the dividends or
shares then corresponding to him, on the basis of said amount.

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The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea, in turn argue in
the brief they jointly filed in case G. R. No. 43697, that the lower court erred:
1. In not first deducting from their respective deposits in the bank under liquidation, whose payment they claim, their
respective obligation thereto.
2. In not holding that their claims constitute a preferred credit.
3. In holding that the drafts and checks issued by the bank under liquidation in payment of the drafts remitted to it by
foreign entitles and banks for collection from the certain merchant residing in the country, are preferred credits; and in
not holding that the deposits made by each of them enjoy preference over said drafts and checks, and
4. In denying their motion for a new trial base on the proposition that the appealed decision is not in accordance with law
and is contrary to the evidence adduced at the trial.
The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R. 43697 being identical in nature, we
believe it practical and proper to resolve said questions jointly in one decision. Before proceeding, however, it is convenient to note
that the commissioner and referee, classifying the various claims presented against the bank, placed under one group those
partaking of the same nature, the classification having resulted in six groups.
In the first group he included all the claims for current account, savings and fixed deposits.
In the second group he included the claims for checks or drafts sold by the bank under liquidation and not paid by the agents or
banks in whose favor they had been issued.
In the third group he included the claims checks or drafts issued by the bank under liquidation in payment or reimbursement of the
drafts or goods remitted to it for collection, from resident merchants and entitles, by foreign banks and entities.
In the fourth group he included the claims for drafts or securities to be collected from resident merchants and entities to be
collected from resident merchants and entities which were pending collection on the date payments were suspended.
In the fifth group he included the claims of certain depositors or creditors of the bank who were at the same time debtors thereof;
and he considered of this class the claims of the appellants in these two cases, and
In the sixth group he included the other claims different in nature from the of the aforesaid five claims.
I. Now, then, should the appellants' deposits on current account in the bank now under liquidation be considered preferred credits,
and not otherwise, or should they be considered ordinary credits only? The appellants contend that they are preferred credits only?
The appellants contend that they are preferred credits because they are deposits in contemplation of law, and as such should be
returned with the corresponding interest thereon. In support thereof they cite Manresa (11 Manresa, Civil Code, page 663), and
what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator who maintains that,
notwithstanding the provisions of articles 1767 and 1768 and others of the aforesaid Code, from which it is inferred that the socalled irregular deposits no longer exist, the fact is that said deposits still exist. And they contend and argue that what they had in
the bank should be considered as of this character. But it happens that they themselves admit that the bank owes them interest
which should have been paid to them before it was declared in a state of liquidation. This fact undoubtedly destroys the character
which they nullifies their contention that the same be considered as irregular deposits, because the payment of interest only takes
place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile
Bank of China, G.R. No. 43682), the provisions of the Code of Commerce, and not those of the Civil Code, are applicable to cases of the
nature of those at bar, which have to do with parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We there
said, and it is not amiss to repeat now, that the so-called current account and savings deposits have lost their character of deposits,
properly so-called and are convertible into simple commercial loans because, in cases of such deposits, the bank has made use
thereof in the ordinary course of its transactions as an institution engaged in the banking business, not because it so wishes, but
precisely because of the authority deemed to have been granted to it by the appellants to enable them to collect the interest which
they had been and they are now collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law
(Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without considering of
course the provisions of article 1768 of the Civil Code. Wherefore, it is held that the deposits on current account of the appellants in
the bank under liquidation, with the right on their right on their part to collect interest, have not created and could not create a
juridical relation between them except that of creditors and debtor, they being the creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the appellants, the question raised in the first and second assigned
errors Tiong Chui Gion in case G. R. No. 44200, and the appellants' second and third assigned errors in case G. R. No. 43697.
II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by the other appellants in theirs,
respectively, it should be stated that the question of set-off raised by them cannot be resolved a like question in the said case, G. R.
No. 43682, entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be made,
inasmuch as the appellants and the bank being reciprocally debtors and creditors, the same is only just and according to law (art.

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1195, Civil Code), particularly as none of the appellants falls within the exceptions mentioned in section 58 of the Insolvency Law
(Act No. 1956), reading:
SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt
set off against the other, and the balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in
its nature not provable against the estate: Provided, That no set-off on counterclaim shall be allowed in favor of any debtor to the
insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing
of the petition by or against the insolvent.
It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1, pages 776 and 784) that:
The rules of law as to the right of set-off between the bank and its depositors are not different from those applicable to other parties.
(Page 776.)
Where the bank itself stops payment and becomes insolvent, the customer may avail himself in set-off against his indebtedness to
the bank of any indebtedness of the bank to himself, as, for example, the balance due him on his deposit account. (Page 784.)
But if set-offs are proper in these cases, when and how should they be made, considering that the appellants ask for the payment of
interest? Are they by any chance entitled to interest? If they are, when and until what time should they be paid the same?
The question of whether they are entitled to interest should be resolved in the same way that we resolved the case of the claimant
Tan Tiong Tick in the said case, G. R. No. 43682. The circumstances in these two cases are certainly the same as those in the said case
with reference to the said question. The Mercantile Bank of China owes to each of the appellants the interest claimed by them,
corresponding to the year ending December 4, 1931, the date it was declared in a state of liquidation, but not which the appellants
claim should be earned by their deposits after said date and until the full amounts thereof are paid to them. And with respect to the
question of set-off, this should be deemed made, of course, as of the date when the Mercantile Bank of China was declared in a state
of liquidation, that is, on December 4, 1931, for then there was already a reciprocal concurrence of debts, with respect to said bank
and the appellants. (Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)
III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold, in view of the considerations set out
in resolving the other assignments of errors, that the lower court properly denied the motion for new trial of said appellants.
In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed by the appellants, and declared by
the lower court to be ordinary credits are for the following amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery
(Gopoco); P7,610.44 of Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La Bella Tondea, plus
their corresponding interest up to December 4, 1931; that their obligations to the bank under liquidation which should be set off
against said deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery
(Gopoco); P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we
order that the set-offs in question be made in the manner stated in this decision, that is, as of the date already indicated, December 4,
1931. In all other respects, we affirm the aforesaid judgments, without special pronouncement as to costs. So ordered.
CENTRAL BANK OF THE PHIL v. MORFE
This case involves the question of whether a final judgment for the payment of a time deposit in a savings bank which judgment was
obtained after the bank was declared insolvent, is a preferred claim against the bank. The question arises under the following facts:
On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the Superintendent of
Banks to take charge of its assets, forbade it to do business and instructed the Central Bank Legal Counsel to take legal actions
(Resolution No. 350).
On December 9, 1969 the Board involved to seek the court's assistant and supervision in the liquidation of the ban The resolution
implemented only on January 25, 1972, when his Central Bank of the Philippines filed the corresponding petition for assistance and
supervision in the Court of First Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically, sometime in March,
1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the Fidelity
Savings Bank for the recovery of the sum of P50, 584 as the balance of their time deposits (Civil Case No. 82520 assigned to Branch
I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered to pay the Elizes spouses the
sum of P50,584 plus accumulated interest.
In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A. Padilla and Adelaida Padilla
secured on April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time deposits,
plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action was
filed on September 6, 1971).

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In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having cognizance of the liquidation
proceeding), upon motions of the Elizes and Padilla spouses and over the opposition of the Central Bank, directed the latter as
liquidator, to pay their time deposits as preferred judgments, evidenced by final judgments, within the meaning of article 2244(14)(b)
of the Civil Code, if there are enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the
Central Bank Law in relation to articles 2244 and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final judgments secured by the Elizes
and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings Bank was declared
insolvent and (b) under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained
against an insolvent bank.
Republic Act No. 265 provides:t.hqw
SEC. 29. Proceeding upon insolvency.Whenever upon examination by the Superintendent or his examiners or agents into the
condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the Superintendent
forthwith, in writing to inform the Monetary Board of the facts, and the Board, upon finding the statements of the Superintendent
to be true, shall forthwith forbid the institution to do business in the Philippines and shall take charge of its assets and proceeds
according to law.
The Monetary Board shall thereupon determine within thirty days whether the institution may be reorganized or otherwise
placed in such a condition so that it may be permitted to resume business with safety to its creditors and shall prescribe the
conditions under which such resumption of business shall take place. In such case the expenses and fees in the administration of
the institution shall be determined by the Board and shall be paid to the Central Bank out of the assets of such banking institution.
At any time within ten days after the Monetary Board has taken charge of the assets of any banking institution, such institution
may apply to the Court of First Instance for an order requiring the Monetary Board to show cause why it should not be enjoined
from continuing such charge of its assets, and the court may direct the Board to refrain from further proceedings and to surrender
charge of its assets.
If the Monetary Board shall determine that the banking institution cannot resume business with safety to its creditors, it shall, by
the Office of the Solicitor General, file a petition in the Court of First Instance reciting the proceedings which have been taken and
praying the assistance and supervision of the court in the liquidation of the affairs of the same. The Superintendent shall thereafter,
upon order of the Monetary Board and under the supervision of the court and with all convenient speed, convert the assets of the
banking institution to money.
SEC. 30. Distribution of assets.In case of liquidation of a banking institution, after payment of the costs of the proceedings,
including reasonable expenses and fees of the Central Bank to be allowed by the court, the Central Bank shall pay the debts of such
institution, under the order of the court, in accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides:t.hqw
SEC. 85. Any director or officer of any banking institution who receives or permits or causes to be received in
said bank any deposit, or who pays out or permits or causes to be paid out any funds of said bank, or who
transfers or permits or causes to be transferred any securities or property of said bank, after said bank
becomes insolvent, shall be punished by fine of not less than one thousand nor more than ten thousand pesos
and by imprisonment for not less than two nor more than ten years.
The Civil Code provides:t.hqw
ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits
shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if
they have been the subject of litigation. These credits shall have preference among themselves in the order of
priority of the dates of the instruments and of the judgments, respectively. (1924a)
ART. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:
(1) In the order established in article 2244;

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(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates. (1929a)
The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of the Central Bank in the General
Banking Law (Republic Acts Nos. 265 and 337, respectively) which suspends or abates civil actions against an insolvent bank
pending in courts other than the liquidation court. It reasoned out that, because such actions are not suspended, judgments against
insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in
contrast with the Central Act, section 18 of the Insolvency Law provides that upon the issuance by the court of an order declaring a
person insolvent "all civil proceedings against the said insolvent shall be stayed."
The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I and XXX for the enforcement of
the judgments obtained by the Elizes and Padilla spouses. It suggested that, after satisfaction of the judgment the Central Bank, as
liquidator, should include said judgments in the list of preferred credits contained in the "Project of Distribution" "with the notation
"already paid" "
On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to
cease operations, the Board becomes the trustee of its assets "for the equal benefit of all the creditors, including the depositors". The
Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors,
and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise"
(Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file their actions with the liquidation
court. In support of that view it cites the provision that the Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No.
1956).
It also invokes the provision penalizing a director officer of a bank who disburses, or allows disbursement, of the funds of the bank
after it becomes insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the ruling that "a creditor of an insolvent
state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a preference for (by) the mere fact that
he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver Liquidation of Financial
Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are
considered simple loans and, as such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China:
Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375;
Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil.
429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent, the Monetary
Board shall forbid it to do business and shall take charge of its assets. The Board in its Resolution No. 350 dated February 18,1969
banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets. Evidently, one purpose in prohibiting the
insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent preference over other
creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained
and judgments would be rendered for the payment of their deposits and then such judgments would be considered preferred credits
under article 2244 (14) (b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments
for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to
priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that it can no
longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush
to the courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be default
judgments. Depositors armed with such judgments would pester the liquidation court with claims for preference on the basis of
article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not have been contemplated by the
framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in that case that the Stanton Trust
& Savings Bank of Great Falls closed its doors to business on July 9, 1923. On November 7,1924 the bank (then already under
liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the bank $1,191.72 and that he was
entitled to dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to the complaint. The trial
court sustained the demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the Supreme Court of Montana
said:t.hqw
The general principle of equity that the assets of an insolvent are to he distributed ratably among general
creditors applies with full force to the distribution of the assets of a bank. A general depositor of a bank is

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merely a general creditor, and, as such, is not entitled to any preference or priority over other general
creditors.
The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors, and one
cannot be permitted to obtain an advantage or preference over another by an attachment, execution or
otherwise. A disputed claim of a creditor may be adjudicated, but those whose claims are recognized and
admitted may not successfully maintain action thereon. So to permit would defeat the very purpose of the
liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so conserved that each depositor or other creditor
shall receive payment or dividend according to the amount of his debt, and that none of equal class shall
receive any advantage or preference over another.
And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of such a bank
"become a trust fund, to be administered for the benefit of all creditors pro rata and, while the bank retains its corporate existence,
and may be sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien
which will give him any preference or advantage over other general creditors. (245 Pac. 249). *
Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and just that they
should be raised to the category of preferred credits simply because the depositors, taking advantage of the long interval between
the declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure judgments for
the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as indisputably they were due, could not have given
the Elizes and Padilla spouses a priority over the other depositors whose deposits were likewise indisputably due and owing from
the insolvent bank but who did not want to incur litigation expenses in securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden to do business
(and that ban would include the payment of time deposits) implies that suits for the payment of such deposits were prohibited.
What was directly prohibited should not be encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson 176
Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank Liquidation Rules and Regulations, it
indicated in step III the procedure for processing the claims against the insolvent bank. In Step IV, the court directed the Central
Bank, as liquidator, to submit a Project of Distribution which should include "a list of the preferred credits to be paid in full in the
order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article 2244 was not
mentioned). There is no cogent reason why the Elizes and Padilla spouses should not adhere to the procedure outlined in the said
rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and set aside. No costs.
SERRANO v. CENTRAL BANK OF THE PHIL.
Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint and solidary liability to the
amount of Three Hundred Fifty Thousand Pesos, with interest, against respondent Central Bank of the Philippines and Overseas
Bank of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits made by
petitioner and assigned to him, on the ground that respondent Central Bank failed in its duty to exercise strict supervision over
respondent Overseas Bank of Manila to protect depositors and the general public. 1 Petitioner also prays that both respondent banks
be ordered to execute the proper and necessary documents to constitute all properties fisted in Annex "7" of the Answer of
respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the
Philippines," into a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed
that the respondents be prohibited permanently from honoring, implementing, or doing any act predicated upon the validity or
efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in Annex
"7" of the Answer of respondent Central Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks was not given by this Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of One Hundred Fifty
Thousand Pesos (P150,000.00) with the respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for
one year with 6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent
Overseas Bank of Manila. 4

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On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to petitioner Manuel M. Serrano,
her time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits from the respondent Overseas Bank of
Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the time deposit certificates was honored by
respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking system of the Republic and it
exercises supervision over all doing business in the Philippines, but denies the petitioner's allegation that the Central Bank has the
duty to exercise a most rigid and stringent supervision of banks, implying that respondent Central Bank has to watch every move or
activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965, the
Overseas Bank of Manila, while operating, was only on a limited degree of banking operations since the Monetary Board decided in
its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and investments in
view of its chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila
continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking institution as claimed by
petitioner. It claims that neither the law nor sound banking supervision requires respondent Central Bank to advertise or represent
to the public any remedial measures it may impose upon chronic delinquent banks as such action may inevitably result to panic or
bank "runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and his predecessor in interest
Concepcion Maneja when their time deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila as during
that time the latter was not an insolvent bank and its operation as a banking institution was being salvaged by the respondent
Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent Overseas Bank of Manila
as additional collaterals to respondent Central Bank of the Philippines for the former's overdrafts and emergency loans were
acquired through the use of depositors' money, including that of the petitioner and Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed by the petitioner Ramos,
wherein respondent Overseas Bank of Manila sought to prevent respondent Central Bank from closing, declaring the former
insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R.
No. L-29352, on the ground that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the matter in
litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that
case, on the ground that his claim as depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First
Instance, and if this Court were to allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors would
follow and thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's,
motion to intervene. The contents of said motion to intervene are substantially the same as those of the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on March 3, 1972, favorable
to the respondent Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's resolution
Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of said bank) are hereby annulled and set aside; and
said respondent Central Bank of the Philippines is directed to comply with its obligations under the Voting
Trust Agreement, and to desist from taking action in violation therefor. Costs against respondent Central Bank
of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a decision on the merits,
adjudging respondent Central Bank jointly and severally liable with respondent Overseas Bank of Manila to the petitioner for the
P350,000 time deposit made with the latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by
the respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit of
petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents, they in reality are recovery of time deposits plus interest
from respondent Overseas Bank of Manila, and recovery of damages against respondent Central Bank for its alleged failure to
strictly supervise the acts of the other respondent Bank and protect the interests of its depositors by virtue of the constructive trust
created when respondent Central Bank required the other respondent to increase its collaterals for its overdrafts said emergency
loans, said collaterals allegedly acquired through the use of depositors money. These claims shoud be ventilated in the Court of First
Instance of proper jurisdiction as We already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L29352. Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown clear abuse of discretion
by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila, and if there was, petitioner
here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is
there anything to prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of dissolving and
liquidating the Overseas Bank of Manila), which petitioner here intends to use as his basis for claims of damages against respondent
Central Bank, had been accomplished a long time ago.

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Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the petitioner claimed that
there should be created a constructive trust in his favor when the respondent Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by the use
of depositors' money.
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. 14 Current and savings
deposit are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests with
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 he respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and
not a breach of trust arising from depositary's failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
GUINGONA v. CITY FISCAL OF MANILA
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:t.hqw
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"):t.hqw
"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.t.hqw
"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

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stockholders of NSLA had filed Special Proceedings No. 82-1695 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:t.hqw
"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:t.hqw

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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:t.hqw
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:t.hqw
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:t.hqw
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 receivedPetitioners 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.t.hqw
"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.

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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:t.hqw
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 creditor-debtor 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:t.hqw
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:t.hqw

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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:t.hqw
"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:t.hqw
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. In Dimayuga 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 inArevalo 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.
PEOPLE v. PUIG
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the Philippines,
represented by the Office of the Solicitor General, praying for the reversal of the Orders dated 30 January 2006 and 9 June 2006 of
the Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft
filed against respondents Teresita Puig and Romeo Porras, and denying petitioners Motion for Reconsideration, in Criminal Cases
No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC in Dumangas, Iloilo, 112
cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and Bookkeeper,
respectively, of private complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations[1] filed before the RTC were uniform and pro-forma, except for the amounts, date and
time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents], conspiring,
confederating,
and
helping
one
another, with
grave
abuse
of
confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or
consent of the management of the Bank and with intent of gain, did then and there willfully, unlawfully and
feloniously take, steal and carry away the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine
Currency, to the damage and prejudice of the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable cause that would have
necessitated the issuance of a warrant of arrest based on the following grounds:
(1)

the element of taking without the consent of the owners was missing on the ground that it is the
depositors-clients, and not the Bank, which filed the complaint in these cases, who are the owners of the
money allegedly taken by respondents and hence, are the real parties-in-interest; and

(2)

the Informations are bereft of the phrase alleging dependence, guardianship or vigilance between the
respondents and the offended party that would have created a high degree of confidence between
them which the respondents could have abused.

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It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would be violative of the right
of the respondents under Section 14(2), Article III of the 1987 Constitution which states that in all criminal prosecutions, the
accused shall enjoy the right to be informed of the nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant of arrest
against Puig and Porras.
A Motion for Reconsideration[2] was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order[3] denying petitioners Motion for Reconsideration was issued by the RTC, finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The Order
dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE ELEMENT
OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF GRAVE
ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006 and 9 June
2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loans. Corollary thereto, Article 1953 of the same Code
provides that 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. Thus, it posits that the depositors who place their money with
the bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified theft, citing that a
perusal of the Informations will show that they specifically allege that the respondents were the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., respectively, and that they took various amounts of money with grave abuse of confidence, and without
the knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a Petition for Review
on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the issuance of a warrant of arrest
presupposes evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the principal party to file a
Petition for Review on Certiorari,considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and, therefore, because of
this defect, there is no basis for the existence of probable cause which will justify the issuance of the warrant of arrest. Petitioner
assails the dismissal contending that the Informations for Qualified Theft sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence; and (b) the element of taking, with intent to gain and without the consent of the
owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the allegations in the
Information inadequate. He ruled that the Information failed to state facts constituting the qualifying circumstance of grave abuse of
confidence and the element of taking without the consent of the owner, since the owner of the money is not the Bank, but the
depositors therein. He also cites People v. Koc Song,[4] in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence, guardianship or
vigilance, between the respondents and the offended party that has created a high degree of confidence
between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause simply on the insufficiency of
the allegations in the Informations concerning the facts constitutive of the elements of the offense charged. This, therefore, makes the
issue of sufficiency of the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by two
degrees than those respectively specified in the next preceding article, if committed by a domestic servant, or
with grave abuse of confidence, or if the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish taken from a fishpond or fishery or if
property is taken on the occasion of fire, earthquake, typhoon, volcanic eruption, or any other calamity,
vehicular accident or civil disturbance. (Emphasis supplied.)

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Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of anothers property without violence
or intimidation against persons or force upon things. The elements of the crime under this Article are:
1.

Intent to gain;

2.

Unlawful taking;

3.

Personal property belonging to another;

4.

Absence of violence or intimidation against persons or force upon things.

To fall under the crime of Qualified Theft, the following elements must concur:
1.

Taking of personal property;

2.

That the said property belongs to another;

3.

That the said taking be done with intent to gain;

4.

That it be done without the owners consent;

5. That it be accomplished without the use of violence or intimidation against persons, nor of force upon
things;
6.

That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the information must
state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense and
the qualifying and aggravating circumstances must be stated in ordinary and concise language and not
necessarily in the language used in the statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as its qualifying and aggravating circumstances
and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or omissions complained of
as constituting the offense. The test is whether it enables a person of common understanding to know the charge against him, and
the court to render judgment properly.[5]
The portion of the Information relevant to this discussion reads:
[A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into possession of the monies
deposited therein enjoy the confidence reposed in them by their employer. Banks, on the other hand, where monies are deposited,
are considered the owners thereof. This is very clear not only from the express provisions of the law, but from established
jurisprudence. The relationship between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and
1980 of the New Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 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.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession by the Bank of the
money deposits therein, and the duties being performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the Information that such employees acted with grave
abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to it as owner of the money deposits, as
sufficient to make out a case of Qualified Theft. For a graphic illustration, we cite Roque v. People,[6] where the accused teller was
convicted for Qualified Theft based on this Information:

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That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of
Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named accused
ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base Savings and Loan Association
Inc. (BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital contributions from its member/contributors of
said corporation, and having collected and received in her capacity as teller of the BABSLA the sum of TEN
THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with grave abuse of confidenceand
without the knowledge and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine currency, by making it appear that
a certain depositor by the name of Antonio Salazar withdrew from his Savings Account No. 1359, when in truth
and in fact said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the damage and prejudice
of BABSLA in the total amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the tellers possession due to
the confidence reposed on the teller, the felony of qualified theft would be committed. [7]
Also in People v. Sison,[8] the Branch Operations Officer was convicted of the crime of Qualified Theft based on the Information
as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13, 1992,
both dates inclusive, in the City of Manila, Philippines, the said accused did then and there wilfully, unlawfully
and feloniously, with intent of gain and without the knowledge and consent of the owner thereof, take, steal
and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by its Branch
Manager, HELEN U. FARGAS, to the damage and prejudice of the said owner in the aforesaid amount
of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence and
unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he had free access
to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and Industrial
Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he not been holding the
position of Luneta Branch Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its Luneta Branch Operation
Officer, and it was this trust and confidence which he exploited to enrich himself to the damage and prejudice
of PCIB x x x.[9]
From another end, People v. Locson,[10] in addition to People v. Sison, described the nature of possession by the Bank. The
money in this case was in the possession of the defendant as receiving teller of the bank, and the possession of the defendant was
the possession of the Bank. The Court held therein that when the defendant, with grave abuse of confidence, removed the money
and appropriated it to his own use without the consent of the Bank, there was taking as contemplated in the crime of Qualified
Theft.[11]
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the respondents; that the
crime was committed with grave abuse of confidence, with intent to gain and without the knowledge and consent of the Bank,
without necessarily stating the phrase being assiduously insisted upon by respondents, of a relation by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a high degree of confidence
between them, which respondents abused,[12] and without employing the word owner in lieu of the Bank were considered to
have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case, there is even no reason to
quibble on the allegation in the Informations that they acted with grave abuse of confidence. In fact, the Information which alleged
grave abuse of confidence by accused herein is even more precise, as this is exactly the requirement of the law in qualifying the
crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the Bank, who are
entrusted with the possession of money of the Bank due to the confidence reposed in them, occupy positions of confidence. The
Informations, therefore, sufficiently allege all the essential elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling in Mobilia Products,
Inc. v. Hajime Umezawa[13] is instructive. The Court thus enunciated:

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In a criminal case in which the offended party is the State, the interest of the private complainant or the
offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is dismissed by the
trial court or if there is an acquittal, a reconsideration of the order of dismissal or acquittal may be undertaken,
whenever legally feasible, insofar as the criminal aspect thereof is concerned and may be made only by the
public prosecutor; or in the case of an appeal, by the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in appeals
by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised, [14] and herein petitioner certainly raised a
question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the records of the
preliminary investigation conducted will show that, indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest only upon a finding of
probable cause after personally evaluating the resolution of the prosecutor and its supporting evidence. Soliven v. Makasiar,[15] as
reiterated in Allado v. Driokno,[16]explained that probable cause for the issuance of a warrant of arrest is the existence of such facts
and circumstances that would lead a reasonably discreet and prudent person to believe that an offense has been committed by the
person sought to be arrested.[17] The records reasonably indicate that the respondents may have, indeed, committed the offense
charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may be, to relieve the
respondents from the pain of going through a trial once it is ascertained that no probable cause exists to form a sufficient belief as to
the guilt of the respondents, conversely, it is also equally imperative upon the judge to proceed with the case upon a showing that
there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders dated 30
January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE. Let
the corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of
Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with
reasonable dispatch. No pronouncement as to costs.