1.

CATHOLIC VICAR APOSTOLIC VS. CA

G.R. NO. 80294-95/Sept. 21, 1988/J. Gancayco

Facts:

The whole controversy started when the herein petitioner filed an application for
registration of lands 1, 2, 3 and 4 in La Trinidad, Benguet on September 5, 1962.
The heirs of Juan Valdez and the heirs of Egmidio Octaviano filed an opposition on
lots 2 and 3, respectively.
On November 17, 1965, the land registration court confirmed the registrable title
of the petitioner.
On appeal by the private respondent heirs, the Court of Appeals reversed the
decision and cancelled Vicars title for lots 2 and 3.
The heirs filed a motion for reconsideration, praying that the lots be ordered
registered under their names. The Court of Appeals denied the motion for lack of
sufficient merit. Both parties then came before the Supreme Court, however, the
SC, in a minute resolution, denied both petitions. The heirs then filed cases for
the recovery and possession of the lots.
During trial, Vicar contended that it has been in possession of the subject lots for
75 years continuously and peacefully and has constructed permanent structures
thereon.
On the other hand, respondents argue that the petitioner is barred from setting
up the defense of ownership or long and continuous possession by the prior
judgment of the Court of Appeals under the principle of res judicata.

Issues:
Wether Vicar had been in possession of the subject lots merely as bailee-borrower in
commodatum, a gratuitous loan for use.
Held:
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.

2.

REPUBLIC VS. JOSE V. BAGTAS

G.R. NO. L-17474/Oct. 25, 1962/J. Padilla

Facts:

On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls
for 1 year for breeding purposes, subject to breeding fee for 10% of the book
value of the bulls.
Upon the expiration of the contract, Bagtas asked for a renewal for another year.
The renewal granted was only for 1 bull. Bagtas offered to buy the bulls at its
book value less depreciation, but the Bureau told him that he should either return
the bulls or buy it at book value.
Bagtas failed to pay the book value, and so the Republic commenced an action
with the CFI Manila to order the return of the bulls or the payment of its book
value.
During trial, Jose Bagtas died and his wife, Feliciana Bagtas, having succeeded
and appointed as the administratix of his estate, proved that two of the bulls
have already been returned in 1952, and that the remaining one died of gunshot
during a Huk raid, thus, their obligation have already been extinguished since the
contract is a commodatum, hence, the loss through fortuitous event should be
borne by the owner.

Issue:
Whether, depending on the nature of the contract, the respondent is liable for the
death of the bull.
Held:
Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10%
charge. If this is considered compensation, then the contract would be a lease
contract. Under Article 1671 of the Civil Code, the lessee is liable as possessor in
bad faith because he had continuous possession of the bull even after the expiry of
the contract. And even if the contract be a commodatum, Bagtas is still liable
because Art. 1942 of the Civil Code provides that a bailee in a contract of
commodatum is liable for loss of the thing even if it should be through a fortuitous
event; if he keeps it longer than the period stipulated; and if the thing loaned has
been delivered with appraisal value, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event.

3. SAURA IMPORT & EXPORT CO. VS. DBP

G.R. NO. L-24968/April 27, 1972/J. Makalintal
Facts:

Saura Inc. applied for an industrial loan in the amount of P500,000.00 from the
Rehabilitation Finance Corp. (DBP) to finance for the construction of a jute mill
factory and to pay the balance of the purchase price of the machineries and
equipments to be used therein and as additional working capital.
RFC accepted and approved the loan application to be secured by a first
mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipments to be installed therein.
However, despite the formal execution of the loan agreement and upon reexamination, RFC decided to reduce the loan from P500,000.00 to P300,000.00.
On December 17, 1954, RFC passed another resolution restoring the loan to the
original amount of P500,000.00, however subject to a certification from the Dept.
of Agriculture and Natural Resources as to the availability of local raw materials
to provide adequately for the requirements of the factory.
Without having received the amount being loaned, and sensing that it could not,
in any way obtain the full amount of loan, Saura then asked for the cancellation
of the mortgage which RFC also approved.
Nine years after the cancellation of the mortgage, Saura sued RFC for damages
alleging failure of RFC to comply with its obligations 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 ruled in favor of the petitioner holding that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof.

Issue:
Whether there was a perfected contract between the parties?
Held:
There was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides, An accepted promise to deliver something, by way
of commodatum or simple loan is binding upon the parties, but the commodatum or
simple loan itself shall not be perfected until the delivery of the object of the
contract.

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 second issue and the basic claim that the defendant failed to fulfill
its obligation and the plaintiff is therefore entitled to recover damages.
The action thus taken by both partiesSaura's request for cancellation and RFC's
subsequent approval of such cancellationwas in the nature of mutual desistance
what Manresa terms "mutuo disenso" which is a mode of extinguishing
obligations. It is a concept derived from the principle that since mutual agreement
can create a contract, mutual disagreement by the parties can cause its
extinguishment. In view of such extinguishment, said perfected consensual contract
to deliver did not constitute a real contract of loan.

4.

FRANCISCO HERRERA VS. PETROPHIL

G.R. NO. L-48349/Dec. 29, 1986/J. Cruz

Facts:
On December 5, 1969, Herrera and Petrophil entered into a lease agreement
whereby the former leased to the latter a portion of his property for a period of
20 years, subject to the condition that monthly rentals of P2,930.20 should be
paid and there should be an advance payment of rentals for the first eight (8)
years of the contract based on P2,930.70 per month discounted at 12% interest
per annum before registration of lease.
Petrophil paid the advance rentals for the first 8 years, subtracting the amount of
P101,010.73, the amount it computed as constituting the interest or discount for
the first 8 years, in the total sum of P180,288.47.
On August 20, 1970, Petrophil informed Herrera that there had been a mistake in
the computation of the interest, and thereby reduced the amount to P98,828.03.
Herrera sued Petrophil for the sum of P98,828.03, with interest, claiming this had
been illegally deducted from him in violation of the Usury Law.
Petrophil argued that the amount deducted was not usurious interest but was
given for paying the rentals in advance for 8 years.
The trial court ruled in favor of Petrophil. On appeal, Herrera insisted that such
interest is violative of the Usury Law, and that he had neither agreed to nor
accepted Petrophils computation of the total amount to be deducted for the 8
years advance rentals.
Issue:
Whether the contract between the parties of one of loan or lease.
Held:
The contract between the parties is one of lease, and not of loan. It is clearly
denominated a Lease Agreement. Nowhere in the contract is there any showing
that the parties intended a loan rather than a lease. The provision for the payment
of rentals in advance cannot be construed as a repayment of a loan because there
was no grant or forbearance of money as to constitute an indebtedness on the part
of the lessor. On the contrary, the defendant was discharging is obligation in
advance by paying the eight years rentals, and it was for this advance payment that
it was getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its validity, it is
settled that the parties may establish such stipulations, clauses, terms and
conditions, as they may want to include, and as long as such agreements are not
contrary to law, morals, good customs, public policy or public order, they shall have
the force of law between them.
5.

INTEGRATED REALTY CORP. VS. PNB

G.R. NO. L-60705/June 28, 1989/J. Regalado

Facts:
Raul Santos made a time deposit with Overseas Bank of Manila in the amount of
P500,000.00 and he was issued a certificate thereto. On another date, Santos
again made a time deposit with OBM in the amount of P200,000.00, wherein he
was issued another certificate of time deposit.
The petitioner Integrated Realty Corp., thru its president Raul Santos, applied for
a loan and/or credit line with PNB. To secure the said loan, Santos executed a
Deed of Assignment of the two (2) time deposits in favor of PNB, which the OBM
gave its conformity thru a letter dated August 11, 1987.
However, after the due dates of the time deposit certificates, OBM did not pay
PNB, which prompted the latter to file a complaint to collect from IRC and Santos
the loan of P700,000.00. It impleaded OBM as a defendant to compel it to
redeem and pay to it Santos time deposit certificates with interest plus
damages.
In their Answer to the complaint, IRC and Santos alleged that PNB has no cause
of action against them because their obligation to PNB was fully paid or
extinguished upon the irrevocable assignment of the time deposit certificates.
On the other hand, OBM denied knowledge of the time deposit certificates
alleging that the same does not appear in its books of account.
On January 30, 1976, the trial court rendered judgment in favor of the plaintiff
PNB.
On appeal, the Court of Appeals, modified the decision of the lower court and
deleted the portion of the judgment ordering OBM to pay IRC and Santos
whatever amounts they will pay to PNB.
Issue:
Whether the liability of IRC and Santos with PNB should be deemed to have been
paid by virtue of the deed of assignment made by the former in favor of PNB.
Held:
The facts and circumstances leading to the execution of the deed of assignment, as
found by the court a quo and the respondent court, yield said conclusion that it is in
fact a pledge. The deed of assignment has satisfied the requirements of a contract
of pledge: (1) that it be constituted to secure the fulfilment of a principal obligation;
(2) that the pledgor be the absolute owner of the thing pledged; (3) that eh persons
constituting the pledge have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose. The further requirement
that the thing pledged be placed in the possession of the creditor, or of a third
person by common agreement was complied with by the execution of the deed of
assignment in favor of PNB.

6.

REPUBLIC VS. CA

G.R. NO. L-46145/Nov. 26, 1986/J. Paras

Facts:

The heirs of Domingo Baloy applied for a registration of title for their land. Their
claim is anchored on their possessory information title acquired by Domingo
Baloy though the Spanish Mortgage Law, coupled with their continuous, adverse
and public possession over the land in question.
The Director of Lands opposed the registration alleging that such land became
public land through the operation of Act No. 827 of the Philippine Commission.
On November 26, 1902, pursuant to the executive order of the President of the
U.S., the area was declared within the U.S. Naval Reservation.
The trial court denied the application for registration, thus the heirs elevated the
case to the Court of Appeals. The appellate court reversed the decision of the
lower court approving the application for registration pursuant to Sec. 19 of Act
496 (possessory information secured regularly so long ago by payment of taxes
since 1965).

Issue:
Whether the occupancy of the US Navy over the subject land is in the concept of an
owner, hence, such possession cannot be acquired by prescription.
Held:
Clearly, the occupancy of the US Navy was not in the concept of owner. It partakes
of the character of a commodatum. It cannot therefore militate against the title of
Domingo Baloy and his successors-in-interest. Ones ownership of a thing may be
lost by prescription by reason of anothers possession if such possession be under
claim of ownership, not where the possession is only intended to be transient, as in
the case of the US Navys occupation of the land concerned, in which case, the
owner is not divested of his title, although it cannot be exercised in the meantime.

7.

MARGARITA QUINTOS VS. BECK

G.R. NO. L-46240/Nov. 3, 1938/J. Imperial

Facts:

Plaintiff Quintos and defendant Beck entered into a contract of lease, whereby
the latter occupied the formers house in M.H. Del Pilar St., Manila.
On January 14, 1936, the contract of lease was novated, wherein Quintos
gratuitously granted to Beck the use of furnitures, subject to the condition that
Beck would return them to the plaintiff upon demand.
Thereafter, Quintos sold the property to Maria and Rosario Lopez.
Beck was notified of the conveyance and given 60 days to vacate the premises.
In addition, Quintos required Beck to return all the furniture transferred to him,
but Beck wrote a letter informing plaintiff that he could not give up the 3 gas
heaters and 4 electric lamps because he would use them until the lease is due to
expire. 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 15, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they were deposited in the
warehouse, in the custody of the sheriff.
Thus, plaintiff brought this action to compel the defendant to return the furniture
which she lent him for his use and to appeal from the judgment of the CFI of
Manila ordering that plaintiff call for the other furniture from the Sheriff 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.

Issue:
Whether defendant Beck complied with his obligation of returning the furniture to
Quintos when it deposited the furniture to the sheriff.
Held:
The contract entered into between the parties is one of commodatum, 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. The
obligation voluntarily assumed by the defendant to return the furniture upon the
plaintiffs demand, means that he should return all of them to the plaintiff at the
latters 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 electric lamps.

The provisions of Art. 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 latters 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.
The costs in both instances should be borne by the defendant because the plaintiff
is the prevailing party. 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 plaintiffs 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.

8.

REPUBLIC VS. JOSE GRIJALDO

G.R. NO. L-20240/Dec. 31, 1965/J. Zaldivar

Facts:

In the year 1943, Jose Grijaldo obtained five loans from the Bank of Taiwan, Ltd.,
in Bacolod City in the total sum of P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are evidenced by five promissory
notes executed by the appellant in favor of the Bank of Taiwan.
To secure the payment of the loans, the appellant executed a chattel mortgaged
on the standing crops on his land known as Hacienda Campugas in Hinigiran,
Negros Occidental.
By virtue of Vesting Order P-4 and under the authority provided for in the Trading
with the Enemy Act, the assets in the Philippines of the Bank of Taiwan were
vested in the Government of the United States. These assets, including the loans
in question, were subsequently transferred to the Republic of the Philippines by
the US Government by way of a transfer agreement.
Thereafter, the Republic of the Philippines, represented by the Chairman of the
Board of Liquidators demanded for the payment of the account in question.
Failing to pay the obligation despite written demand, a complaint was filed
against the appellant before the Justice of the Peace Court in Hinigiran, Negros
Occidental.
The inferior court, after hearing, dismissed the case on the ground that the
action had prescribed. However, on appeal to the CFI of Negros Occidental, the
trial court ruled in favor of the Republic ordering the appellant to pay the
appellee the sum of P2,377.23 plus corresponding interest.

Issue:
Whether the Republic can collect from appellant Grijaldo.
Held:
The obligation of the appellant under the five promissory notes was not to deliver a
determinate thing namely, the crops to be harvested from his land, or the value of
the crops that would be harvested from his land. Rather, his obligation was to pay a
generic thing the amount of money representing the total sum of the five loans,
with interest. The transaction between the appellant and the Bank of Taiwan was a
series of five contracts of simple loan of sums of money. By a contact of (simple)
loan, one of the parties delivers to another...money or other consumable thing upon
the condition that the same amount of the same kind and quality shall be paid.
(Article 1933, Civil Code) The obligation of the appellant under the five promissory
notes evidencing the loans in question is to pay the value thereof, that is, to deliver
a sum of money a clear case of an obligation to deliver, a generic thing. Article
1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of

anything of the same kind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellants land simply stood as a
security for the fulfilment of appellants obligation covered by the five promissory
notes, and the loss of the crops did not extinguish his obligation to pay, because the
account could still be paid from other sources aside from the mortgaged crops.

9.

FELIX DELOS SANTOS VS. AGUSTINA JARRA

G.R. NO. L-4150/Feb. 10, 1910/J. Torres

Facts:

In the latter part of 1901, Magdaleno Jimenea borrowed and obtained from
plaintiff Felix De los Santos ten first-class carabaos to be used at the animalpower mill of his hacienda without recompense or remuneration but under the

sole condition that they should be returned to him as soon as the work at the mill
was terminated.
However, Jimenea did not return the carabaos notwithstanding the fact that the
plaintiff claimed their return after the work at the mill was finished.
Subsequently, Jimenea died and Agustina jarra was appointed by the court as
administratix of Jimeneas estate.
Plaintiff presented his claim to the commissioners of Jimeneas estate for the
return of his ten carabaos but the commissioners rejected his claim, hence, he
was prompted to file an action against Agustina Jarra for the return of the ten
first-class carabaos loaned to the late Jimenea, or their present value, and to pay
the costs.
In her Answer, defendant Jarra admitted that the late 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 Jimenea.
After trial on the merits, the trial court ruled in favor of the plaintiff ordering the
defendant to return the remaining 6 second and third class carabaos, or the
value thereof at the rate of P120 each.

Issue:
Whether the contract is one of a commodatum, hence, defendant must return the
carabaos to the plaintiff or pay for their value.
Held:
Yes. The carabaos were loaned or given on commodatum as these were delivered
to be used by defendant. When defendant failed to return the carabaos upon
demand by the plaintiff, there is no doubt that defendant is under the obligation to
indemnify the owner thereof by paying him their value. Since the 8 carabaos were
not the property of the deceased nor of any of his descendants, it is the duty of the
administratix of the estate to return them or to indemnify the owner for their value.

11.

AURELIO BRIONES VS. PRIMITIVO CAMMAYO

G.R. NO. L-23559/Oct. 4, 1971/J. Dizon

Facts:

Aurelio G. Briones filed an action in the Municipal Court of Manila against

Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover

from
them, jointly and severally, the amount of P1,500.00, plus damages.
Defendants executed a real estate mortgage as security for the loan of P1,200.00
given to Primitivo, upon the usurious agreement that defendant pays to the
plaintiff and that the plaintiff as in fact reserved and secured himself out of the
alleged loan an interest of P300.00 for one year.
Although the mortgage contract was executed for securing the payment of
P1,500.00 for a period of one year, without interest, the truth and the real fact is
that
plaintiff delivered to defendant Primitivo only the sum of P1,200.00 and withheld
the sum of P300.00 which was intended as advance interest for one year.
On account of said loan of P1,200.00, Primitivo paid to the plaintiff during the
period from October 1955 to July 1956 the total sum of P330.00 which plaintiff,
illegally and unlawfully refused to acknowledge as part payment of the account
but as in interest of the said loan for an extension of another term of one year.
The trial court ruled in favor of the plaintiff ordering defendant to pay the plaintiff
the sum of P1,180.00 with interest thereon as the legal rate from October 16,
1962 until fully paid.

Issue:
Whether the creditor (plaintiff) is entitled to collect from the debtor (defendant) the
amount representing the principal obligation and the interests due thereon?
Held:
The Court held that even if the contract of loan is declared usurious, the creditor is
entitled to collect the money actually loaned and the legal interest due thereon.
The 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 support of
this ruling its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, and
Delgado vs. Duque.
It was recognized and held that under Act 2655, a usurious contract is void; that the
creditor had no right of action to recover the interest in excess of the lawful rate;
but that this did not mean that the debtor may keep the principal received by him
as loan thus unjustly enriching himself in the damage of the creditor.
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.

Barrredo, J., concurring:

The Usury law is clear that he may recover only all interests, including of course, the
legal part thereof, with legal interests from the date of judicial demand, without
maintaining that he can also recover the principal he has already paid to the lender.
Castro Fernando, and Conception, JJ., dissenting:
In a contract which is tainted with usury, that is, with a stipulation (whether written
or unwritten) to pay usurious interest, the prestation to pay such interest is an
integral part of the cause of the contract. It is also the controlling cause, for a usurer
lends his money not just to have it returned but indeed, to acquire in coordinate
gain. Article l957, which declares the contract itself not merely the stipulation to
pay usurious interest -- void, necessarily regards the prestation to pay usurious
interest as an integral part of the cause, making it illegal.

15.

LIAM LAW VS. OLYMPIC SAWMILL

G.R. NO. L-30771/May 28, 1984/J. Melencio-Herrera

Facts:

On September 7, 1957, Liam Law loaned P10,000.00 without interest to Olympic

Sawmill and Ellino Lee Chi, as the latters managing partner.

The loan became ultimately due on January 31, 1960, but was not paid on that
date with the debtors asking for an extention of three months, or up to April 30,
1960.
On March 17, the parties executed another loan document where it included
payment of the P10,000.00 was extended to April 30, but the obligation was
increased by P6,000.00 which formed part of the principal obligation to answer
for the attorneys fees, legal interest, and other cost incident thereto to be paid
unto the creditor and his successors-in-interest upon the termination of the
agreement. The defendant again failed to pay their obligation.
On September 23, 1960, the plaintiff instituted a collection case before the CFI of
Bulacan. The defendants admitted the P10,000.00 principal obligation but
claimed that the additional P6,000.00 constituted usurious interest.
On June 26, 1961, The trial court ruled in favor of the plaintiff ordering
defendants to pay the plaintiff the amount of P10,000.00 plus the additional sum
of P6,000.00.

Issue:
Whether the allegation that the P6,000.00 constituted usurious interest should have
been admitted by plaintiff as it was not denied specifically and under oath.
Held:
Section 9 of the Usury Law provides that, the person or corporation sued shall filed
its answer in writing under oath to any complaint brought or filed against said
person or corporation before competent court to recover the money or other
personal or real property, seeds or agricultural products, charged or received in
violation of the provisions of this Act. The lack of taking an oath to an answer to a
complaint will mean the admission of the facts contained in the latter.

16.

BANCO FILIPINO VS. HON. MIGUEL NAVARRO

G.R. NO. L-46591/July 28, 1987/J. Melencio-Herrera

Facts:

On May 20, 1975, respondent Florante Del Valle (the borrower), obtained a loan
from petitioner Banco Filipino in the sum of P41,300.00 secured by a real estate
mortgage, payable and to be amortized within 15 years at 12% interest annually.
Stamped on the promissory notate evidencing the loan is an Escalation Clause
which is based upon Central Bank Circular No. 494. Said clause authorizes Banco
Filipino to correspondingly increase the interest rate stipulated in the contract
without advance notice to the borrower in the event law should be enacted
increasing the lawful rates of interest that may be charged on this particular kind
of loan.
On the strength of said circular, the bank gave notice to the borrower of the
increase of interest rate on the loan from 12% to 17% per annum effective March
1, 1976.
Contending that Circular No. 494 is not the law contemplated in the Escalation
Clause of the promissory note, the borrower filed suit against Banco Filipino for
declaratory relief, praying that the Escalation Clause be declared null and void.
In its judgment, the trial court nullified the Escalation Clause and ordered the
bank to desist from enforcing the increased rate of interest on the borrowers
loan. it reasoned out that Banco Filipino cannot legally impose a higher rate of
interest before the expiration of the 15-year period in which the loan is to be paid
other than the 12% per annum in force at the time of the execution of the loan.

Issue:
Whether Banco Filipino can increase the interest rate on the loan from 12% to 17%
per annum under the Escalation Clause.
Held:
No. While an Escalation Clause like the one in question can ordinarily be held valid,
nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on
the borrowers loan from 12% to 17% per annum because Circular No. 494 of the
Monetary Board was not the law contemplated by the parties, nor should said
circular be held as applicable to loans secured by registered real estate in the
absence of any such specific indication and in contravention of the policy behind the
Usury Law.

17.

PNB VS. IAC & SPS. MAGLASANG

G.R. NO. 75223/March 14, 1990/J. Paras

Facts:
The petitioner bank extended financial assistance to the private respondents in
the form of loans, the total amount of which is P82,682.39 as embodied in the

promissory notes that the latter have executed on various dates, the payment of
which to come from the proceeds of sugar sales of the private respondents. The
promissory notes bore 12% interest per annum plus 1% interest as penalty
charge of default in the payments.
The private respondents likewise mortgaged several real estate properties in
favor of the petitioner bank as security of their loans.
However, when the price of sugar went down in 1977, the private respondents
incurred deficits in the payment of their loans.
On December 1, 1979, the Monetary Board of the Central Bank, by virtue of PD
116, issued CB Circular No. 705 increasing the ceiling on the rate of interest on
both secured and unsecured loans up to no more than 21% per annum. In view
of this development, PNB revised it lending interest rates on the medium and
long term loans.
For failure of the private respondents to settle their obligation, the petitioner
foreclosed the mortgage. The proceeds of the auction sale was not enough to
satisfy private respondents outstanding obligation, thus, PNB filed an action for
deficiency judgment with the CFI of Leyte.
After due trial, the trial court ruled in favor of the petitioner.

Issue:
Whether or not the revised rate of interest imposed on the loans of the private
respondents is legal.
Held:
Escalation Clause is a valid provision in the loan agreement provided that (1) the
increased rate imposed or charged does not exceed the ceiling fixed by law of the
Monetary Board; (2) the increase is made effective not earlier than the effectivity of
the law or regulation authorizing such an increase; and (3) the remaining maturities
of the loans are more than 730 days as of the effectivity of the law or regulation
authorizing such an increase.
For an Escalation Clause to be valid, it must include a de-escalation clause. There
can be an increase in interest if increased by law or by the Monetary Board; and in
order for such stipulation to be valid, it must include a provision for reduction of the
stipulated interest in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board, as provide for in PD No. 1684,
promulgated on March 17, 1980. There is no question that PNB board resolution
dated May 28, 1980 contains such de-escalation clause.
18. PNB VS. CA & AMBROSIO PADILLA
G.R. NO. 88880/April 30, 1991/J. Grio-Aquino
Facts:

Private respondent Ambrosio Padilla applied for and was granted a credit line
of P321.8 Million by petitioner PNB. This loan was for a term of 2 years at 18%

interest per annum and was secured by real estate mortgage and two promissory
notes executed in favor of petitioner bank by the private respondent.
The credit agreement and the promissory notes, in effect, provide that private
respondent agrees to be bound by increases to the interest rate stipulated,
provided it is within the limits provided for by law.
Conflict in this case arose when petitioner bank unilaterally increased the interest
rate from 18% to: 32% on July 1984; 41% on October 1984; and 48% on
November 1984, or three (3) times within the span of one year.
This was done despite the numerous letters of request made by the private
respondent that the interest rate be increased only to 21% or 24%.
Thus, private respondent filed a complaint against petitioner with the RTC which,
however, dismissed the case for lack of merit.
On appeal, the Court of Appeals rendered a decision in favor of the private
respondent reversing the trial courts decision.

Issue:
Whether the bank, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it
pleased.
Ruling:
NO. Although under Sec. 2 of PD 116, the Monetary Board is authorized to prescribe
the maximum rate of interest for loans and to change such rates whenever
warranted by prevailing economic and social conditions, by express provision, it
may not do so oftener than once every 12 months. If the Monetary Board cannot,
much less can PNB, effect increases on the interest rates more than once a year.
Based on the credit agreement and promissory notes executed between the parties,
although private respondent did agree to increase on the interest rates allowed by
law, no law was passed warranting petitioner to effect increase on the interest rates
on the existing loan of private respondent for the months of July to November of
1984. Neither there being any document executed and delivered by private
respondent to effect such increase.
For escalation clauses to be valid and warrant the increase of the interest rates on
loans, there must be: (1) increase was made by law or by the Monetary Board; (2)
stipulation must include a clause for the reduction of the stipulated interest rate in
the event that the maximum interest is lowered by law or by the Monetary board. In
this case, PNB merely relied on its own Board Resolutions, which are not laws
nor resolutions of the Monetary Board. Despite the suspension of the Usury Law,
imposing a ceiling on interest rates, this does not authorize banks to unilaterally and
successively increase interest rates in violation of Sec. 2 PD 116. Increase
unilaterally effected by PNB was in violation of the Mutuality of Contracts under Art.
1308. This provides that the validity and compliance of the parties to the contract
cannot be left to the will of one of the contracting parties. Increases made

are therefore void. Increase on the stipulated interest

contravenes Art. 1956, which provides that, no interest
been expressly stipulated in writing. PR never agreed
imposed by PNB in excess of 24% per annum. Interest
correctly found by CA, is indubitably excessive.
```

rates made by PNB also

shall be due unless it has
in writing to pay interest
rate imposed by PNB, as